Or Maybe They Were Right All Along

It’s our old chum Securitas Holdings Inc., and Subsidiaries, 2014 T. C. Memo.225, filed 10/29/14.

Surely you remember Securitas, with or without subsidiaries? No? Then check out my blogposts “Closing the Buch”, 7/2/13, and “Privilege Lost”, 5/29/13.

Both of the foregoing were jousts about the privileged communications between Securitas, its tax advisers PricewaterhouseCoopers, and its attorneys, who worked out the strategy. IRS got the communications, but Securitas gets the win, as Judge Buch tells us.

The issue is deductibility of insurance premiums to a captive. Two more old friends make the scene, Rent-A-Center and Acuity. For Rent-A-Center, see my blogpost “Insurance – Are You Sure?”, 1/14/14. For Acuity, see my blogpost “Say “Hello” To Judge Nega”, 9/4/13.

Securitas is a Swedish company that goes into the US security business (not stocks-and-bonds, uniformed guards with guns). They buy up Pinkerton’s and Burns Detective. This means tons of vehicles, personnel (workers’ comp and employer liability, cash galore, and all kinds of whatever other liability plaintiffs’ counsel can come up with). Insurance costs a mint in the free world, so Securitas sets up a captive in VT.

Costs cut, but Securitas has a better idea. It gets the VT regulators to allow the captive to lend all but $1 million of its capital to its parent (Securitas). Then, to make sure it’s covered (and has a great tax dodge), it sets up a captive reinsurer. Guess where? [Cue the Kerry Pipers]. The Emerald Isle, now Emerald because of all the cash stashed there. Now Securitas can take the insurance premiums for its onshore cover, wash them through VT, and deposit them at the end of the rainbow (and Ireland has great rainbows). And benefit from the Irish corporate tax rate, which is a pittance, on the millions stashed in the land of céad míle fáilte.

OK, we have shifting of risk, does it look like insurance, balance sheet, risk distribution (spreading the risk), and reasonableness of premiums and capitalization.

Now remember our old chum Centaur, the IL Section 501(c)(15)? The whole jumpball, or rather both jumpballs involving Securitas discussed in my blogposts abovecited, was about selling Centaur stock to preserve its Section 501(c)(15) status undefiled by control group attribution. Securitas picked up Centaur when it bought Burns Detective.

Well, by creating the reinsurance dodge and sterilizing the VT captive with a guaranty of performance, so that the VT captive wasn’t an insurance company for US tax purposes, Centaur wasn’t part of a US insurance control group and could keep its Section 501(c)(15) virtue intact. And Securitas could keep its Centaur stock, and save it for a rainy day.

So the whole confidentiality fight was a sideshow.

At the close of play, the Irish Re turns out to be real. Capitalized enough; Securitas’s plenteous activities furnish diversified risk; the premiums are reasonable (IRS concedes that); the policies are real on their face, and the fact that some were signed after the stated effective date doesn’t invalidate them; the risks are insurable risks; the guaranty from Securitas to the VT captive doesn’t by itself invalidate the shifting of risk; and the bookkeeping arrangements of paying by ledger entry doesn’t prevent risk-shifting, because it is unrealistic to expect members of a control group to cut checks to one another, and such payment arrangements are commonplace.

Of course, both the VT captive and the Irish Re kept separate books, had their own directors’ meetings, and had their own bank accounts.

Securitas wins, third time out. And a Taishoff “good job”, first class, to Michael Francis Kelleher, Esq., and his team.

Full disclosure: I worked for Burns Detective Agency, as it was then, one summer fifty years ago, as an unarmed guard at a Brooklyn brewery (now defunct). But that’s definitely another story.