Tax Court - Payments to Bermuda-based captive insurance subsidiary are deductible 

January 14: The U.S. Tax Court today—in a “reviewed opinion”—held that payments to the taxpayer’s wholly owned (captive) insurance subsidiary, located in Bermuda, were deductible under section 162 as insurance expenses. Rent-a-Center Inc. v. Commissioner, 142 T.C. No. 1 (January 14, 2014)

Read the majority’s opinion [PDF 262 KB] that also includes concurring and dissenting opinions.


The following, very brief summary is based on an initial review of the 75-page opinion, given that the Tax Court releases its opinions late in the afternoon.

The taxpayer is the parent company of a group of approximately 15 subsidiaries.

After an insurance company withdrew its offer to provide insurance for the taxpayer’s directors and officers and after the taxpayer was dissatisfied on receiving a $3 million invoice for “claims handling” with respect to worker’s compensation, automobile, and general liability insurance, the taxpayer eventually established a captive insurance company as a wholly owned Bermudian subsidiary.

The taxpayer paid the insurance premiums for each subsidiary’s portion of the costs based on three factors (the number of employees, the number of vehicles, and the total number of stores).

The Tax Court majority found that the Bermuda-based captive insurance company was a “bona fide” insurance company because: (1) it was created for significant, non-tax reasons; (2) there was no impermissible circular flow of funds; (3) the premium-to-surplus ratios did not indicate the captive insurance company was a sham.

The opinion of the Tax Court majority next turned to address whether the policies at issue involved insurance risk and concluded that the premium payments made by the taxpayer’s subsidiaries to the captive insurance subsidiary were deductible.

The majority’s opinion relies for a significant portion of its analysis on the Humana Inc. v. Commissioner, 881 F.2d 247 (6th Cir. 1989).

KPMG observation

Tax professionals have been anticipating the release of this opinion, in that this case is among a number of “what constitutes insurance” cases in the judicial pipeline.

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