ALJ holds that Insurance Payments to Captive Insurance Company Are not Deductible -

In Matter of Stewart’s Shops Corp., DTA No. 825745 (N.Y.S. Div. of Tax App., Mar. 10, 2016), a New York State Administrative Law Judge concluded that a corporation operating a convenience store chain could not deduct on its New York corporate franchise tax returns the insurance payments that it made to its wholly owned captive insurance company because such payments would not qualify as valid insurance premiums under federal income tax law.

Facts. Stewart’s Shops Corp. (“Stewart’s Shops”) owns and operates over 300 convenience stores in New York and Vermont. In the face of increasing insurance costs for its operations, Stewart’s Shops started self-insuring certain of its risks in 1992. Subsequently, in late 2003 to early 2004, Stewart’s Shops decided to create a captive insurance company, Black Ridge Insurance Corp. (“BRIC”), to insure some of its self-insured risks. BRIC received authorization to operate as a captive insurance company licensed by the New York State Insurance Department (“Insurance Department”) and provided Stewart’s Shops coverage for: (1) losses incurred within the threshold deductible amounts and in excess of the maximum losses covered by its outstanding policies with thirdparty insurance companies; (2) its self-insured risks and claims from periods before the formation of BRIC (“loss portfolio transfer”); and (3) other risks, including pollution, identity theft, and crime, for which it did not have any insurance at the time of the formation of BRIC.