Legal Articles & Cases

Certain landmark cases have contributed to the process by which the captive insurance industry operates today. The Harper v. Commissioner case in 1992, The Malone & Hyde, Inc. v. Commissioner case in 1995, and most recently, and the Rent-a-Center v. Commissioner case in January of 2014 shed light on the need for alternative risk management options like captives—and their legitimacy. The growth of 831(b) captives and support entities such as reinsurance companies and captive managers is undeniable. Mid-market companies are seeking more comprehensive methods for insuring their risks and becoming more cost-efficient.

In this section, you will have the opportunity to read the details of each case as well as insightful legal articles. Even as new laws are passed, you will be able to see the progression of how captive insurance came into its own as a viable alternative risk management solution. The court decisions for each case act as a reminder that the ancillary benefits offered by captives combined with the supplemental risk coverage they provide is a powerful combination and option for many business owners and advisors.

We invite you to review these legal articles and cases as part of your due diligence on the captive industry.

State Independently Procured Premium Taxes

• Dow Chemical Company, Appellant v. Carole Keeton Rylander, Comptroller of Public Accounts of the State of Texas; and John Cornyn, Attorney General of the State of Texas, Appellees  - This case again declared Texas' independently procured premium tax unconstitutional

• 370 US 451 State Board of Insurance v. Todd Shipyards Corporation - Landmark U.S. Supreme Court case limiting a state's ability to tax a foreign domiciled insurer

Captive Structuring

• Caylor Land & Development, Inc., et al., v. Commissioner of Internal Revenue, T.C. Memo 2021-30

• Syzygy Insurance Co., Inc., et al. v. Commissioner of Internal Revenue, T.C. Memo 2019-34

• Benyamin Avrahami & Orna Avrahami v. Commissioner of Internal Revenue,  149 T.C. No. 7 (2017)

• Securitas Holdings, Inc. & Subsidiaries v. Commissioner of Internal Revenue, T.C. Memo 2014-225

• Rent-A-Center, Inc. & Affiliated Subsidiaries v. Commissioner of Internal Revenue, 142 T.C. No. 1 (2014)

• Humana, Inc. v. Commissioner 1 881 F.2d 247 (6th Cir. 1989) United States Court of Appeals for the Sixth Circuit Humana Inc., Petitioner-Appellant, v. Commissioner of Internal Revenue Respondent-Appellee - In this landmark case, the Service lost its "economic family" argument

• Gulf Oil Corp. v. Commissioner 914 F.2d 396, 66 A.F.T.R.2d 90-5552, 90-2 USTC P 50,496 (3rd Cir. 1990) United States Court of Appeals, Third Circuit

• Harper v. Commissoner 979 F.2d 1341 (9th Cir. 1992) United States Court of Appeals, Ninth Circuit

• Amerco, Inc. v. Commissioner 979 F.2d 162 (9th Cir. 1992) United States Court of Appeals, Ninth Circuit

• Sears, Roebuck & Co. v. Commissioner 972 F.2d 858 (7th Cir. 1992) United States Court of Appeals, Seventh Circuit

• Ocean Drilling & Exploration Co. v. 988 F.2d 1135 (Fed.Cir. 1993) United States Court of Appeals, Federal Circuit

• Malone & Hyde, Inc. v. Commissioner 62 F.3d 835 (6th Cir. 1995) United States Court of Appeals, Sixth Circuit

• Allgeyer v. Louisiana. No. 446. Supreme Court of the United States

• Connecticut General Life Insurance Co. v. Johnson, Treasurer of California. No. 316. Supreme Court of the United States

• St. Louis Cotton Compress Company v. State of Arkansas. No. 120. Supreme Court of the United States

• Susan Combs, Comptroller of Public Accounts of the State of Texas, and Greg Abbott, Attorney General of the State of Texas, Appellants v.STP Nuclear Operating Company, Appellee

• Kidde Industries, Inc. v. United States 40 Fed.Cl. 42 (Fed.Cl. 1997) - Holds that Humana case applies to brother-sister subsidiaries and not divisions

• United Parcel Service of America, Inc. v. Commissioner of Internal Revenue, 254 F.3d 1014 (11th Cir. 06/20/2001) - In this significant case, the taxpayer's tax motivation for forming a captive was upheld in a $2 billion victory for the taxpayer

• TREAS. REG. Section 1.337(d)-4 abd Exempt Organizations - The IRS issued final regulations generally affecting a taxable corporation that transfers all or substantially all of its assets to a tax-exempt entity or converts from a taxable corporation to a tax-exempt entity in a transaction other than a liquidation

• Rev. Rul. 2001-31, 2001-26 I.R.B. 1348 (6/25/2001) - In this ruling, the IRS abandoned the "economic family" doctrine which the Service used to attack captive planning

• Cumulative Bulletin Notice 2001-51, I.R.B. 2001-34, August 2, 2001 - On February 28, 2000, the Internal Revenue Service issued Notice 2000-15 , 2000-12 I.R.B. 826, identifying certain transactions as "listed transactions" for purposes of §1.6011-4T(b)(2) of the temporary Income Tax Regulations and §301.6111-2T(b)(2) of the temporary Procedure and Administration Regulations. This notice restates the list of transactions identified in Notice 2000-15 as "listed transactions" effective February 28, 2000, and updates the list by adding transactions identified in notices released subsequent to February 28, 2000

• PLR 200242005 - Ruling on Risk Retention Groups

• PLR 200242023 - Relief for late filed 953 (d) election granted under 301.9100-3(a)

• Tax Shelter Prop - TD 9017 - Tax Shelter Props. Regs.- The IRS has published temporary regulations (T.D. 9017) that revise the categories of transactions that must be disclosed on returns under temporary reg. section 1.6011-4T

• Part III - Administrative, Procedural, and Miscellaneous Certain Reinsurance Arrangements Notice 2002-70  - In this November 2002 pronouncement, the IRS announced that captive transactions utilizing certain reinsurance arrangements (so-called "PORCs") resulting in shifting of income will be "listed transactions" for purposes of Reg. Sec. 1.6011-4

• Internal Revenue Bulletin: 2003-45 November 10, 2003  - In this publication, the IRS announced that it will now consider ruling requests on the tax treatment of captives

• IRS Revenue Ruling 2002-89 - In this ruling, the IRS determined that where a captive derives 50% of its premiums from underwriting its parent's risks (with the other 50% of premium revenue from unrelated parties), there was sufficient risk distribution to constitute "insurance."

• IRS Revenue Ruling 2002-90  - In this pronouncement, the IRS ruled that a captive which insured 12 subsidiaries of a common parent, with no unrelated insurance underwriting, had sufficient risk distribution to constitute "insurance."

• IRS Revenue Ruling 2002-91 - In this ruling, the IRS determined that if within a group captive no one member's covered risks exceeded 15% of the group's total risks, then that captive possessed sufficient risk distribution to constitute "insurance."

• 2003 TNT 40-10 - Final Tax Shelter Regulations

• Insurance Loophole Helps Rich

• Tiny Insurers Face Scrutiny As Tax Shields

• Notice 2003-34 - Notice 2003-34 – Insurance definition – offshore entities in hedge funds
• Notice 2003-35 - Notice 2003-35- The purpose of this notice is to remind taxpayers that an entity must be an insurance company for federal income tax purposes in order to qualify as exempt from federal income tax as an organization described in 501(c)(15)

• Internal Revenue Service (I.R.S.) Revenue Ruling Insurance, Federal Income Tax Purposes - In this pronouncement, the IRS discusses the qualifications of certain arrangements as " insurance" for federal income tax purposes and specifically addresses the risk distribution requirement of a purported insurance contract under four fact scenarios listed in the ruling

• Notice 2005-49 Qualification of Certain Arrangements as Insurance - Notice 2005-49 comments on additional guidance concerning the standards for determining whether an arrangement constitutes insurance for federal income tax purposes

• Section 23. Small Insurance Companies or Associations IRC 501(c)(15) - IRS Manual on 501(c)(15) Insurance Companies

• Determination of Gross Receipts for Purposes of Section 501(c)(15) - Notice 2006-42 comments on The Determination of Gross Receipts for Purposes of Section 501(c)(15)

• Relief under 301.9100-3 - Relief under 301.9100-3 of the Procedure and Administrative Regulations granting an extension of time to file under election under section 831(b)(2))(A)(ii).”

• Rev. Rul 2007-47 was issued buy the US Internal Revenue Service on July 23, 2007 - This ruling holds that an arrangement that provides for the reimbursement of inevitable future costs does not involve the requisite insurance risk for purposes of determining (i) whether the amount paid for the arrangement is deductible as an insurance premium

• IRS Issued Proposed Regulations - IRS issued proposed regulations that provide guidance regarding the treatment of transactions involving obligations between members of a consolidated group and the treatment of transactions involving the provision of insurance between members of a consolidated group

• Internal Revenue Bulletin: 2008-5 February 4, 2008 Rev. Rul. 2008-8 - Revenue Rule 2008-8 explains how arrangements between an individual cell and its owner are analyzed for purposes of determining whether there is adequate risk shifting and risk distribution to constitute insurance

• TAM 200816029 on Partnership Entities Counted For Risk Distribution Purposes - TAM 200816029 on Partnership Entities Counted For Risk Distribution Purposes

• TAM 200827006 - TAM 200827006 - Ruling discusses whether a manufacturer’s original product warranty risks covered by the Reimbursement Policies purchased by Taxpayer constitute insurable risks for federal tax purposes

• Notice 2016-66 - Certain Section 831(b)'s captive arrangements are "Transactions of Interest" to be reported to the Internal Revenue Service

• IR-2019-157 - IR-2019-157 IRS News release dated September 16, 2019 on time-limited settlement offers for certain captive insurance audits.

• IR-2020-26 - IR-2020-26 IRS News release dated January 31, 2020 on Notice 2016-66, settlement offers and captive insurance audits.

• IR-2020-226 – IR-2020-226 IRS New release dated October 1, 2020 on “abusive micro-captive insurance schemes.”