Leaving a Legacy: Divided Tax Court Allows Deductions for Insurance Premiums Paid to Captive Insurance Affiliate

by Eversheds Sutherland (US) LLP

On January 14, the United States Tax Court issued a reviewed opinion in Rent-A-Center Inc. v. Commissioner, 142 T.C. 1 (2014), which held that subsidiaries of Rent-A-Center Inc. (RAC) were entitled to claim deductions for insurance premiums paid to a Bermuda captive insurance company – Legacy Insurance Co. (Legacy) – that (i) was wholly owned by RAC and (ii) had made an election under IRC § 953(d) to be treated as a U.S. corporation for federal tax purposes.  In so holding, the Tax Court’s majority opinion concluded that:

  • Legacy was created for significant and legitimate non-federal-tax reasons; specifically, to provide otherwise unavailable insurance to the subsidiaries at a reduced cost.
  • There was no impermissible circular flow of funds between RAC and Legacy, even though Legacy used a significant portion of the premiums that it received to invest in treasury shares of RAC, i.e., hook stock of its parent company.
  • Legacy’s premium-to-surplus ratios during the years in issue (2003-2007) did not indicate that it was a sham, and a comparison of such ratios to those of commercial property and casualty insurance companies in the United States or Bermuda was “not instructive.”
  • Legacy was a bona fide insurance company for federal tax purposes even though it was capitalized in part with a parent guaranty.  Notably, the parent guaranty was for a fixed amount that was small in comparison to the amount of annual premiums paid to Legacy.
  • The premiums paid to Legacy were deductible under IRC § 162 by the insured subsidiaries based on an analysis demonstrating the existence of (i) insurance risk, (ii) risk shifting, (iii) risk distribution, and (iv) insurance in the commonly accepted sense.  In this analysis, the Tax Court focused on the independence of the risks assumed, i.e., that the risks were unaffected by the same event, not on the number of subsidiaries insured.

Of note, seven judges agreed with the conclusions reached in the majority opinion, and another four concurred with the majority in a separate opinion, while five judges dissented from the conclusions reached in the majority opinion, and a sixth judge dissented on the grounds that there was “insufficient depth” in the majority opinion to join in its findings.

Sutherland Observations

  1. Overall, the Rent-A-Center opinion is a favorable development for companies with captive insurance arrangements that fall outside of the “safe harbor” parameters described by the IRS in authorities such as Rev. Rul. 2002-90, 2002-2 C.B. 985, and Rev. Rul. 2005-40, 2005-2 C.B. 4.  Although the case could be appealed (presumably to the U.S. Court of Appeals for the Fifth Circuit), the Rent-A-Center opinion nonetheless could have an immediate impact on current IRS examinations and appeals involving captive insurance programs.
  2. The case involved the interesting side issue of whether the Tax Court should revisit its opinion in Humana Inc. v. Commissioner, 88 T.C. 197 (1987), aff’d in part, rev’d in part, and remanded, 881 F.2d 247 (6th Cir. 1989), even though the IRS abandoned its “economic family theory” with respect to brother-sister captive insurance arrangements more than a decade ago in Rev. Rul. 2001-31, 2001-1 C.B. 1348.  Ultimately, the majority opinion concluded that the “Court of Appeals for the Sixth Circuit’s critique of our analysis of the brother-sister arrangement in Humana” was “persuasive,” thus signaling its agreement with the Sixth Circuit’s reversal of its analysis on that issue.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Eversheds Sutherland (US) LLP | Attorney Advertising

Written by:

Eversheds Sutherland (US) LLP

Eversheds Sutherland (US) LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.