US Tax Court cases have been the biggest challenge for captives in 2019, according to nearly half of the respondents to Captive International’s end of year survey.
Asked what the biggest challenge for the industry had been this year, 45 percent of respondents indicated the ongoing attentions of the US tax courts.
The captive industry has made unwelcome headlines in 2019, notably when the US tax court it ruled in favour of the IRS in the case of Syzygy Insurance v Commissioner in April. In September the IRS offered out of court settlements to up to 200 taxpayers, which observers said reflected the IRS’s deep mistrust of captive insurance companies.
The industry has long been in the crosshairs of the US tax authorities. The Internal Revenue Service (IRS) put microcaptives on its “Dirty Dozen” list of tax scams for the fifth consecutive time this year. The Syzygy case was only the latest in a series of court cases, following Reserve Mechanical in 2018 and Avrahami in 2017.
One anonymous respondent said the tax cases “have stymied the flow of potential new captives being formed in the US,” with medium size companies, in particular, afraid of the prospect of IRS audits.
Jeff Kehler, director of captive consulting at Somers Risk Consulting, stressed the IRS had been reasonable to pursue “egregious actions taken by promoters to abuse the IRC 8312(b) tax election, and turn an insurance company into a passive investment vehicle.” However, he noted, this had unfortunately “painted the entire industry with the same negative reputation.”
The IRS has not been the only tax authority going after captives. This year some states have sought to extract taxes from captives that did business in their jurisdictions but were not based there. In September Washington state ordered Alaska Air’s captive, ASA Assurance, to pay more than $2.5 million in unpaid premium tax and penalties.
Taxes were not the only issues on respondents’ minds, however. Nearly a quarter (24 percent) said the hardening market represented the biggest challenge of the year, though where one person reads challenge, another sees opportunity.
Aidan Kelly, director at Aon, said: “The hardening of rates across all industries and lines of business has energized the captive market and created more conversations and opportunities than ever before.”
Regulation is always a nagging concern and 2019 was no different in that respect, with 18 percent of respondents saying new regulations and Solvency II were their biggest challenge of the year.
One Australasian-based anonymous respondent said regulations in that part of the world have never encouraged captives and are therefore relatively unknown. “On this basis the largest challenge has been educating clients about captives,” the respondent said.
831(b), Syzygy Insurance