- U.S. Tax Court Rules Reserve Mechanical Was Not a Bona Fide Insurer
- Court Rules Insurance Transactions Over Three Years Were Not Legitimate
Once again, the U.S. Tax Court has ruled against another small captive alternative risk financing arrangement, opening the old argument about what constitutes an insurance company.
In “Reserve Mechanical Corp. v. Commissioner of Internal Revenue,” the tax court ruled that Reserve Mechanical’s risk pool entity, Pool Re Insurance, operated by Capstone Associated Services, was not a “bona fide insurance company” because it did not distribute risk. Thus, when Reserve Mechanical Corporation used Pool Re as its stop-loss insurance company from 2008 through 2010, it did not constitute insurance transactions as initially thought.
Capstone issued a statement on its website, disputing the tax court’s comparison of this case to the Avrahami opinion, in which the captive was also ruled against. It stated numerous reasons, from Pool Re’s payment of substantial claims and inclusion of unaffiliated third-part reinsurance to its legitimate insuring of a mining business, why Reserve Mechanical’s insurance transactions were legitimate and clearly different from the comparison made.
“It would seem that this tax court case bears no resemblance to the Avrahami case, as Reserve Mechanical cites numerous reasons and transactions showing how its business was insurance-related,” says JLT Insurance Management Captive Practice Leader Anne Marie Towle. “If the court gave no weight to more than three dozen previous rulings in favor of captives and similar arrangements, as it seems to have happened, I expect this will not be the last we hear of this case.”
Towle added that even as the captive insurance industry continues to mature, captives and the people that serve them should continue to follow best practices in using a risk financing arrangement that has overwhelmingly proved legitimate and necessary for business.
Anne Marie Towle
Tel: +1 317 922 4390
Tel: +1 802 391 3081
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Any statements concerning tax, accounting, legal or regulatory matters should be understood to be general observations based solely on our experience as captive insurance management and captive consultants. We are not tax, accounting, legal or regulatory professionals and any such information provided is not professional advice. These matters should be reviewed with your own qualified advisors in these areas.