Initial Statement on Reserve Mechanical Corp. v. Commissioner of Internal Revenue

June 19, 2018 (Houston, TX) - Reserve and Capstone respectfully disagree with the Court’s opinion and in particular the Court’s reliance in deciding this case on the Avrahami opinion. Reserve had no loans, participated in a diversified pool, assumed unaffiliated, third-party reinsurance, reported and paid substantial losses, and had policies that were designed to meet the needs of the underground mining business that it insured. Additionally, a series of recognized experts, including an insurance commissioner, two credentialed actuaries, an independent auditor, a nationally-renowned insurance economist and an underwriter, all testified on behalf of Reserve with scant testimony from the government’s witness whose testimony the government admitted was discredited on the stand. Oddly, the Court rejected the professionally-administered pooling arrangement which involved hundreds of third party insureds and hundreds of policies as being “circular” evidencing an unexpected rejection of a fundamental industry standard risk sharing mechanism dating back more than a century. The Court rejected Reserve’s third- party reinsurance program which was fully in evidence because the more than one hundred thousand underlying direct written policies from a recognized admitted carrier, were not put into evidence but were only the subject of (unchallenged) testimony. The Court gave no weight to the fact that the IRS had issued 39 favorable rulings involving similar captive insurance arrangements and the same reinsurance arrangements. Of even greater surprise, the Court called out for evidence that an insured had experienced a loss before a company could buy insurance covering such event.

The Court’s opinion does a disservice to the captive insurance industry and the bona fide captive insurance companies like Reserve. We are evaluating the full range of additional relief available to rectify the Court’s opinion.