Breaking News – IRS Defeated Again In Tax Court

It’s been said that history repeats itself, and this certainly seems to be the case when the Internal Revenue Service challenges captive insurance companies.  After a stinging defeat in early 2014 against Rent-A-Center, the Service challenged Securitas in U.S. Tax Court in late 2014.  On October 29, the Court handed down its ruling in favor of Securitas and its captive insurance arrangement.

Securitas AB is a Swedish publicly owned security company that entered the U.S. market in 1999.  The company had a complex business model that included security forces, electronic security systems and cash handling services including ATMs and cash transport.   The IRS issued notices of deficiency to Securitas for its 2003 and 2004 tax years with the basis for the supposed deficiency largely tied to the company’s captive insurance arrangement.  Securitas’ captive arrangement included three captives.  Protector’s Insurance is a captive insurance company that was established in Vermont in 1986 and become part of the Securitas portfolio in 2000 as part of a larger acquisition.   Securitas also owned SGRL Insurance (domiciled in Ireland in 2002) and XL Insurance (domiciled in the United Kingdom).

The Service alleged that the Securitas captive arrangement did not achieve risk distribution.  The IRS also alleged that the employment of a parental guaranty nullified the captive insursnce arrangement as being “real” insurance.  The U.S. Tax Court was unmoved by these arguments and deferred to the domicile’s regulators to determine what level of parental guaranty is acceptable.  In the specific ruling by the Court, Securitas’ “captive arrangement shifted risks, distributed risks, and constituted insurance in the commonly accepted sense…[t]herefore, the arrangement is insurance for Federal tax purposes, and petitioner is entitled to the [tax] deduction under section 162 for insurance expenses.”

It is interesting that the court repeatedly noted that the captives had no employees and were  completely managed and overseen by third parties specialists.  This is consistent with prior Tax Court  rulings that rejected the Internal Revenue Service’s assertion that captive insurance companies should be run like “real” commercial insurance companies.  This case and the Rent-A-Center case should put all “not run like a real insurance company” arguments to rest.  In both cases, the court gave these facts no credence. It’s worth noting that in Rent-A-Center the court specifically recognized that, in many cases, captives in general should NOT be managed like commercial carriers for very legitimate business reasons.