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.