captive taxation update - eversheds sutherland · webinar, january 28, 2015. distribution and use....

Captive Taxation UpdateWebinar, January 28, 2015

Captive Taxation Update

Web Seminar – January 28, 2015

PanelistsBruce Wright Sutherland Asbill & Brennan LLPDavid Aughtry Chamberlain, Hrdlicka, White, Williams & AughtryBrady Young Strategic Risk Solutions (moderator)


Distribution and Use

This material has been developed by Strategic Risk

Solutions, Sutherland Asbill & Brennan LLP and

Chamberlain, Hrdlicka, White, Williams & Aughtry. This

information may be distributed to third parties in its current

form as long as attribution is provided to Strategic Risk

Solutions, Sutherland Asbill & Brennan LLP and

Chamberlain, Hrdlicka, White, Williams & Aughtry.

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Presentation Outline

Captive Taxation Environment

Recent Tax Caseso Rent-a-Centero Securitaso Validus

Medical stop loss and Revenue Ruling 2014-15

Residual value insurance and the definition of insurance

State specific tax developments

Defenses at audit

Questions and answers

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Respect for the Rule of Law

Statutory support for remarkable benefits

Heightened scrutiny

Must be prepared to defend

Premium on making sureo Formed properlyo Operated properlyo Reasonably priced coverage for genuine business risk

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Standard IRS Attacks on Captives

Sham and/or step transaction

Not insurance because no risk shifting and no risk distribution: insufficient unrelated insured

Not a deductible business expense paid by premium-payor (I.R.C. § 162)

Not “insurance” premiums and therefore taxable to would-be captive

Penalties

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Rent-A-Center v. Commissioner

RENT-A- CENTER

CAPTIVE

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Rent-A-Center v. Commissioner

Factso W/C, AL, CLo Sale of Treasury stock subject to a puto Guaranteeso Appx 60% premium attributable to 1 sub

Holding (divided court)o Recognize Humanao Recognize significantly relevant exposure unitso Guarantee OKo Sales of Treasury stock OK

IRS decision not to appeal

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Securitas Holdings, Inc. & Subsidiariesv. Commissioner

Case involves corporate group as follows:

SECURITASHOLDINGS, INC.

IRISHCAPTIVE

NON U.S. SUBSIDIARIES

VERMONT CAPTIVE

U.S. OPERATING SUBSIDIARIES

SECURITAS AB

APPEAL PENDING

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Rent-A-Center/Securitas

IRS likely to comment or appeal Securitas

Now

o Follow Safe Harbor rulings

o Cases are clearly helpful backstop

o But, what of court’s reference to statistically relevant exposure units?

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Validus

INSURER

NON-EXEMPTFOREIGN

REINSURER

VALIDUS NON-EXEMPT FOREIGN

REINSURER

Reinsurance

Retrocession

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Validus

Trial court determined retrocession is not subject to cascading FET

Observationso US insured, foreign S/L insurer, foreign reinsurero US insured, US insurer, US reinsurer, foreign reinsurero Identify who (i) bears economic burden of tax; (ii) pays; (iii)

files protective claims

Appealo Briefo Amicus Brief

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Revenue Ruling 2014-15

RETIREES

EMPLOYERVEBA

COMMERCIAL INSURER

CAPTIVECONTRIBUTION INSURES

STOP LOSS

RETIREE MEDICALBENEFITS

100%

Facts

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Revenue Ruling 2014-15

IRS looked through and treated retirees as the individual risks

Comments re: Medical Stop Loss

Is Medical Stop Loss unrelated businesso Pro arguments

• Rev. Ruls. 92-93, 92-94• Rev. Rul. 2009-26• Rev. Rul. 2014-15

o Possible con arguments• Rev. Ruls 92-93, 92-94, 2014-15 individual rights• Rev. Rul 2009-26 deals only with insurance in the first place• Advisory opinion 92-02A

o What if it is not unrelated business

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Residual Value Insurance

IRS position that residual value insurance is notinsurance for tax purposes as there is no fortuitous event

Case argued September 2014

Final briefs due February 2015

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State Income Tax & Self Procurement Tax

State income tax

o Imposition of state income tax

APPORTIONMENT FACTOR

COMBINED INCOME RATEX X

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State Income Tax & Self Procurement Tax

State income taxo NYS proposed captive income (without regards to captive

location) included in combined income of parent doing business in NY

o Proposal defeated so NYS remains essentially the same and requires inclusion only if, in general, investment income exceeds premium income but now premium determination based on Federal principals

Industrial insured provision in Illinoiso Passed 3.5% taxo Changed definition of industrial insured

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Standard Defenses

Fulfilling Congressional purpose behind inducement statute

Decision driven in large part by uninsured (or uneconomically insured) business risk

Registered insurance company: exceeds capital and reserve requirements

Premiums properly priced by qualified actuary or insurance specialist based on feasibility study

Risk shifting and distribution through pool of unrelated insureds

Points of exposure

Reasonable cause via reliance upon qualified advisors; open questions of law

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Triggers for Heightened Scrutiny

Loan back (query timing and premium percent)

No claims or failure to file a claim on an existing casualty (query nature of coverage)

Majority of reserves invested in life insurance on shareholder (I.R.C. § 264: timing, percentage, purpose, pricing on P&C coverage)

Exotic coverage such as terrorism (TRIA Treas. Dept. defense)

At what point does business risk exceed insurable risk? (Lloyd’s defense)

Disregarded entities (Rev. Rul. 2005-40 may be withdrawn)

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Defending Captives Against the Guards

Audit

o To educate or not educate

o Determining agent’s authority and pre-disposition

o Dealing with standard (abusive) IDR: payor and captive

o Handling interview request (I.R.C. § 7521(c))

o Summons defense (Powell, I.R.C. §§ 7602 et seq., F. R. CIV. PROC.)

o Limitations period (I.R.C. § 6501)

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Defending Captives Against the Guards

Appeals – Front-door vs. back-door

Petition Tax Court, District Court, or Court of Federal Claims

o Choice of forum

o Access to Appeals

o Settlement or trial

o Timing

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Questions and Answers

Contacts

P. Bruce WrightPartnerSutherland Asbill & Brennan LLP [email protected]: 212-389-5054

David AughtryShareholderChamberlain, Hrdlicka, White, Williams & [email protected]: 404-658-5486

Brady Young (Moderator)PresidentStrategic Risk Solutions [email protected]: 781-264-1398

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mailto:[email protected]




Strategic Risk Solutions

SRS is an independently owned captive management and consulting firm. The company is owned by its senior management and focused 100% on the captive insurance industry. SRS is the 55h

largest captive manager by number of captives managed and 2nd largest “independent” captive manager as ranked by Business Insurance.

The company is differentiated by its Captive Management Plus servicing approach, comprising three core service components:

1. Delivering outstanding service in our core captive management services

2. Helping our clients succeed through the provision of value added strategic and technical consulting services

3. Providing depth of expertise through the hiring and retention of experienced staff

Captive Management General management services Financial reporting Regulatory complianceCaptive Consulting Feasibility studies Strategic reviews and re-feasibility studies Run-off and closure servicesProgram Management Underwriting and technical insurance consulting Loss analysis Fronting, reinsurance and collateral negotiation

www.strategicrisks.com Contact: [email protected]

http://www.strategicrisks.com/


captive taxation update - eversheds sutherland · webinar, january 28, 2015. distribution and use....

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