tomloel /
23 May 2022Law & regulation

Reserve Mechanical court case raises stakes for US captives

The recent decision by the 10th Court in the US to deny an appeal by captive insurer Reserve Mechanical against a court ruling that the Internal Revenue Service (IRS) had won against it, could have an impact on the micro-captive market in the US.

In an analysis posted on LinkedIn David Slenn, a partner at legal firm Akerman, writes that the ruling significantly raises the stakes for taxpayers who wish to challenge the IRS's denial of deduction for premiums paid since the IRS now has a circuit court opinion supporting the captive's taxation for (disallowed) premiums received.

Slenn stated that although many believed the 10th Circuit would affirm the Tax Court's opinion with respect to whether the arrangement reflected insurance for Federal tax purposes, many doubted whether the IRS could deny a deduction to an insured (since the premium was not for insurance) but simultaneously tax the same payment as income to the captive insurance company.

However, the 10th Circuit held that taxpayer must actually intend for the premiums paid to be treated as capital contributions.

According to Slenn: “The 10th Circuit's opinion should provide additional motivation for the masses of taxpayers who are considering accepting the IRS's Micro-Captive Resolution Initiative (MCRI) settlement offer. The MCRI settlement offer permits non-recognition of income for premiums paid to the captive, as well as capital contribution treatment for such premiums. Essentially, the current MCRI settlement offer permits the alternative relief sought in Reserve Mechanical, but without the cost of litigation.”