In Uncategorized on 01/14/2014 at 18:29

Judge Foley is, Judge Lauber isn’t, but Judge Foley has the votes and Judge Lauber has the arguments. And the arguments don’t help, as Tax Court overrules whatever’s left of Humana (Humana Inc. & Subs. v. Commissioner, 881 F.2d 247,253 (6th Cir. 1989), aff’g in part, rev’g in part and remanding 88 T.C. 197, 206(1987), in Rent-A-Center, Inc. and Affiliated Subsidiaries, 142 T. C. 1, filed 1/14/14.

If you love insurance, you’ll love this case. We all know that non-insurance businesses can’t deduct self-insurance loss reserves, and they can’t deduct “premiums” paid to captive insurers with few or no assets, which don’t insure anyone but their captor.

But how about a captive that insures sibling subsidiaries? IRS used to have an “economic family” argument, but dumped that, post-Humana, which distinguished between parent-sub captives and parent-sibling-sub captives.  “In Rev. Rul. 2001-31, 2001-1 C.B. 1348, 1348, the Internal Revenue Service stated that it would ‘no longer invoke the economic family theory with respect to captive insurance  transactions.’ And in Rauenhorst v. Commissioner, 119 T.C. 157, 173 (2002), we held that we may treat as a concession a position taken by the IRS in a revenue ruling that has not been revoked.” 142 T. C. 1, at p. 41 (Judge Buch concurring).

Even though the captive here barely makes the Bermuda cut for solvency (needing a guarantee from the parent-captor to do so, and Bermuda Monetary Authority approval for some minor accounting shenanigans), that’s enough for Judge Foley and the majority.

Premiums allocated to the sibling subs and paid via the parent are deductible; it’s real insurance.

The sibling subs don’t own stock in the captive, the captive is solvent by local law, and IRS’ expert concedes that the risk of loss, to the extent of the captive’s coverage (they were first-dollar, with a big umbrella held by an unrelated insurer), is off the sibling subs’ balance sheets.

The test, of course, is facts and circumstances (as we march down the aisle to Sir Ed’ard Elgar’s masterpiece), and Moline Properties’ business activity and regarding entities as separate, absent sham (which Judge Lauber finds but Judge Foley doesn’t).

Judge Lauber says the Bermuda requirements are a joke, the captive’s premium-to-surplus ratio was way below what cover a regular insurer would carry, the captive insured no one but the captor, the captive’s assets were nothing like what a real insurer would carry, and the captor’s guarantee of the captive’s solvency, irrespective of whether the captor was ever called upon to perform (and captor was not), sinks the deal.

Anyway, Judge Foley, Ch J Thornton, Vasquez, Wherry, Holmes, Buch, and Nega say it’s OK, it’s real insurance, no sham (Buch concurring, with Judges Foley, Gustafson, Paris, and Kerrigan joining the concurrence).

Judge Halpern has his own dissent, as does Judge Lauber; Judges Colvin, Gale, Kroupa, and Morrison join Judge Lauber’s dissent.

Judge Goeke sits this one out, and Judges Cohen and Marvel are among the missing.

At the end, I agree with Judge Halpern to this extent; it would have been better to forget the whole Humana overrule, treat this as a T. C. Memo. rather than a T.C., and let the Fifth Circuit Court of Appeals, to which this case is Golsen’d, sort this out.

Or, more elegantly: “Nevertheless, had Judge Foley steered clear of Humana, I believe that we could have avoided Conference consideration and have left it to the appellate process (if invoked) to determine whether Judge Foley’s findings are persuasive.” 142 T. C. 1, at p. 53 (Judge Halpern dissenting).

And a lot less reading for the poor blogger who has to digest this stuff.


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