January 2014

Some captive “experts” argue that captives should be managed as much as possible like third party, commercial insurers in order to increase the odds of surviving IRS attack.  Specifically, they argue that captives should look to the standards of third party, commercial insurers when making such decisions as setting premiums, establishing reserves, deploying assets, etc.

We have long maintained that comparing the management decisions of captives to third party insurers is to compare apples to oranges.  Captives are formed for unique purposes

Tax avoidance is perfectly legal and encouraged by the IRS,

but tax evasion is against the law.

–         Internal Revenue Service Website

Business owners across America mailed checks to the IRS last week.  Parting with hard earned profits certainly isn’t easy.   Which begs the question, to what lengths should business owners and professionals go to reduce their taxes and keep more of their hard earned money?

Last week, we noted that the Internal Revenue Service suffered another defeat on January 14, 2014 as the U.S. Tax Court handed down its ruling which upheld that payments by Rent-A-Center to its Bermuda-domiciled captive insurance company, Legacy Insurance Co. Ltd., were deductible as an insurance expense.

This ruling is particularly informative to captive owners and captive managers as Rent-A-Center and its captive insurance company, Legacy, employed some practices that many in the industry have traditionally regarded as “aggressive.”  In losing this case, the I.R.S. (The Service) “lost some ground” in a manner of speaking. 

We’ve seen this movie before.

Tax Man, The IRS Loses Its Challenge Against A Captive.

Tax Man 2 – The Sequel – The IRS Loses Again In A Captive Challenge.

Tax Man 3, The IRS Strikes Back… And Loses Again.

Tax Man 4, This Time It’s For Keeps But The Captive Owner Wins Yet Again.