Reserve Mechanical loses IRS/tax court appeal

US insurer Reserve Mechanical has lost its appeal to a court case based on an announcement by the Internal Revenue Service that it is not a captive.

The company appealed a tax court judgment affirming the decision of the Commissioner of Internal Revenue that it did not qualify for an exemption from income tax as a small insurance company and that the purported insurance premiums it received must therefore be taxed at a 30% rate under I.R.C. section 881(a).

After review, the Tenth Circuit held that the record supported the tax court’s decision that the company was not engaged in the business of insurance.

The court had two grounds for deciding that Reserve was not an insurance company: firstly Reserve had not adequately distributed risk among a large number of independent insureds; and secondly the policies issued by Reserve were not insurance in the commonly accepted sense.

In addition, Reserve argued that if it was not an insurance company, the premiums it received should have been treated as nontaxable capital contributions. However, the Tenth Circuit also rejected that argument.