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Home » captive » Captives Taxed

Captive Tax Advantages Recently Take Huge Hit In US Tax Court

July 18, 2018 By JL Risk Management Consultants

Captive Tax Advantages – Tax Court Ruling –  One To Read NOW

Some Captive tax advantages may have been eroded with a recent US Tax Court decision.  The case is   Reserve Mech. Corp. v. Commissioner, 2018 Tax Ct. Memo LEXIS 87.   

picture of Anguilla Captive Tax Advantages Island

Wikimedia Public Use Roy Googin

The three articles that started quite a buzz in the captive world are from: (LexisNexis full article behind paywall)

Captive Insurance Times 

Captive.Com 

LexisNexis

If you are interested in Captives, and you should be if you are involved with any facet of Workers Compensation, the articles are very much worth a read.    If you perform a Google search on  

Reserve Mech. Corp. v. Commissioner

one will find volumes of information.  

Many companies, captive administrators, attorneys, and other people involved with captives have issued statements and opinions on the Reserve Mechanical case.   

Captive Tax Advantage Case Document

The PDF of the entire 66 page US Tax Court decision is here.  You will need a PDF reader to read it.  This decision may be one to download and read for yourself.   The decision is a complicated one.   The bottom line is the owners of the captive could not avoid a 30% tax on the captive insurance agreement.  The captive tax advantages were not allowed.   

Many of the legal, captive, and insurance pundits pointed to the Conclusion Section III (page 62).   The first part of that section is below. 

________________

III. Taxability of Reserve’s Revenue

We concluded that Reserve did not issue insurance or reinsurance contracts during the tax years in issue and therefore it did not receive more than 50% of its gross receipts from insurance premiums. See secs. 501(c)(15), 816(a). 

  —————————–

One has to draw their own conclusions.  The 14 articles on Captives that I wrote can be found here.   The article on rent-a-captive turned out to be one of the most popular ones on this website.  

We shall see what the future holds for onshore and especially offshore captive tax advantages. 

 

©J&L Risk Management Inc Copyright Notice

Filed Under: Captives Taxed Tagged With: LexisNexis, pundits, Reserve Mechanical, US Tax Court

Offshore Captives Could Be Last Haven In Hard Market

January 13, 2009 By JL Risk Management Consultants

Most Offshore Captives Look Much Better In Workers Comp Hard Market

Most offshore Captives look great in a Workers Comp Hard Market. For many years, I did not catch on to the concept of captives in the Workers Compensation market. As insurance and reinsurance markets start to harden quickly, I am of the opinion that all employers should take a look at this “hybrid” insurance.  

Vector Graphic of Insurance Hard Market Captives On Shield Icon

StockUnlimited

Captives are so named as the policyholder owns the insurance company.  This makes the insurance company “captive” to the policyholder.   

There are several types of captives – I will not define all of them here.  If you need a definition or have questions about any of these terms, please email me. 

  • Single Parent Captive
  • Association Captive
  • Group Captive
  • Agency Captive 
  • Rent-a-Captive 

The only one from the list above that I wanted to comment on is the Rent-a- Captive.  These are designed for smaller companies that could not afford a captive on their own.  This makes the captive market appealing to almost any company that is searching for an alternative to their regular insurance policies. 

There are quite a few reasons that captives will become more appealing for Workers Compensation coverage. They are: 

  • Heavy and increasing premium costs in almost every line of insurance coverage.
    Picture Hand Presenting Business Finance Captives Concept

    StockUnlimited

     

  • Difficulties in obtaining coverage for certain types of risk.
  • Inflexible credit rating structures which reflect market trends rather than individual loss experience.
  • Insufficient credit for deductibles and/or loss control efforts.

As you may notice, these are the four concerns that almost all employers now have to deal with on at least a yearly basis. Captives are not the cure-all for what ails companies presently.  They do offer a great alternative 

Interestingly enough, the three top domiciles areRisk Management technique for shifting portfolios of loss. Bermuda, Cayman Islands, and Vermont. Vermont was the first state to involve itself with captives. Those three domiciles represent 47% of all captive domiciles.  The captives’ domiciles is basically its primary jurisdiction. The captives are subject to a yearly audit by a consulting actuary.   

The two best benefits of an offshore captive are cost and flexibility.  I have some reservations about the TPA’s that are used by some of the captives.  They were somewhat lacking in a few areas whenever we audited the TPA’s claims handling and reserving.  The file reserves are more important with a captive than with a regular insurer.  As I commented earlier this week, the captives have to be large enough or well-reserved enough to not violate the Law of Large Numbers.  A captive is a much smaller entity than a regular insurance company.  That is why the file reserves are beyond critical and the actuary must be very accurate on his/her reserve projections for the next 10 years.  Choosing a TPA and actuary are very important to the survival of the captive and its member(s). 

Hand Drawing Captives Upward Arrows With Dollar Sign

StockUnlimited

The most surprising development occurred in 2007 – 2008.  I had thought the IRS was not going to allow the tax-advantaged basis on the reserves in a captive.  The IRS did almost a compete reversal and ruled that captives should retain their tax deductibility.  I think they realized they could crash the whole insurance market if they all of a sudden ruled that captives were to be fully taxed. 

This is much more to captive insurance arrangements.  I tried to provide a quick summary.  If you have any questions, please email us. 

©J&L Risk Management Inc Copyright Notice

Filed Under: Captives Taxed Tagged With: hybrid, insurance coverage

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James J Moore
Raleigh, NC, United States

James founded a Workers’ Compensation consulting firm, J&L Risk Mgmt Consultants, Inc. in 1996. J&L’s mission is to reduce our clients’ Workers Compensation premiums by using time-tested techniques. J&L’s claims, premium, reserve and Experience Mod reviews have saved employers over $9.8 million in earned premiums over the last three years. J&L has saved numerous companies from bankruptcy proceedings as a result of insurance overpayments.

James has over 27 years of experience in insurance claims, audit, and underwriting, specializing in Workers’ Compensation. He has supervised, and managed the administration of Workers’ Compensation claims, and underwriting in over 45 states. His professional experience includes being the Director of Risk Management for the North Carolina School Boards Association. He created a very successful Workers’ Compensation Injury Rehabilitation Unit for school personnel.

James’s educational background, which centered on computer technology, culminated in earning a Masters of Business Administration (MBA); an Associate in Claims designation (AIC); and an Associate in Risk Management designation (ARM). He is a Chartered Financial Consultant (ChFC) and a licensed financial advisor. The NC Department of Insurance has certified him as an insurance instructor. He also possesses a Bachelors’ Degree in Actuarial Science.

LexisNexis has twice recognized his blog as one of the Top 25 Blogs on Workers’ Compensation. J&L has been listed in AM Best’s Preferred Providers Directory for Insurance Experts – Workers Compensation for over eight years. He recently won the prestigious Baucom Shine Lifetime Achievement Award for his volunteer contributions to the area of risk management and safety. James was recently named as an instructor for the prestigious Insurance Academy.

James is on the Board of Directors and Treasurer of the North Carolina Mid-State Safety Council. He has published two manuals on Workers’ Compensation and three different claims processing manuals. He has also written and has been quoted in numerous articles on reducing Workers’ Compensation costs for public and private employers. James publishes a weekly newsletter with 7,000 readers.

He currently possess press credentials and am invited to various national Workers Compensation conferences as a reporter.

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