2 March 2020Law & regulation

Reserve Mechanical files brief with Court of Appeals over US Tax Court captive ruling


Reserve Mechanical Corp has filed an  opening brief with the Tenth Circuit Court of Appeals challenging the US Tax Court’s rulings related to its captive insurance case.

In June 2018 the Tax Court had concluded that Reserve Mechanical’s transactions did not constitute insurance for federal income tax purposes. The brief identifies the specific ways in which Reserve Mechanical believes the Tax Court erred in this assessment.

In particular, the Tax Court argued that Reserve Mechanical’s insurance arrangements did not meet two of the four necessary insurance criteria: it failed to satisfy adequate risk distribution and its arrangement with its affiliated company, Peak Mechanical & Components, was not “insurance in the commonly accepted sense.”

The brief counters that Reserve Mechanical satisfied the risk distribution test by receiving more than 30 percent of its gross premiums from reinsuring pooled and blended risks of more than 150 insureds, under more than 500 direct-written policies, issued by PoolRe Insurance.

The brief stated: “Reserve’s direct-written policies provided real insurance: when Peak suffered a covered loss and made a claim, Reserve paid. Reserve’s risk distributing arrangements imposed real contractual rights and obligations. If Peak suffered a large covered loss, a substantial portion of the loss over a predetermined amount would be borne by the fifty-plus insurers participating in the risk pool. By the same token, if one of those insurers responded to a large loss, Reserve would also be called upon to pay its proportionate share of the loss.”

Captone, of which Reserve Mechanical is a client, argued the Tax Court’s legal reasoning “was contradictory to decades of existing case law,” while it made “findings that were not supported by the evidence at trial.”

The Tenth Circuit’s decision in the Reserve appeal is likely to carry enormous implications for the captive insurance industry, Capstone added.

Reserve Mechanical is being represented by The Feldman Law Firm and Foley Gardere.


More on this story

Analysis
26 January 2018   Capstone Associated Services has appointed Jeff Carlson as its head of operations, who will go onto become the firm's president as Charles Earls, the founding president, will step down after 20 years.
Analysis
19 October 2017   Capstone Associated Services has expanded its reach in the Northeast and Mid-Atlantic regions of the US with the appointment of David Osbourn as director of business development for the region.
Accounting & tax analysis
7 September 2017   The US Tax Court ruled against captive owners and jewellers Benyamin & Orna Avrahami on August 21 in a case long-anticipated by the captive industry.

More on this story

Analysis
26 January 2018   Capstone Associated Services has appointed Jeff Carlson as its head of operations, who will go onto become the firm's president as Charles Earls, the founding president, will step down after 20 years.
Analysis
19 October 2017   Capstone Associated Services has expanded its reach in the Northeast and Mid-Atlantic regions of the US with the appointment of David Osbourn as director of business development for the region.
Accounting & tax analysis
7 September 2017   The US Tax Court ruled against captive owners and jewellers Benyamin & Orna Avrahami on August 21 in a case long-anticipated by the captive industry.