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WE A L T H P L A N N IN G
CAPTIVE INSURANCE
What Closely Held Business Owners Need to Know
OVERVIEW
Risk is a fact of business. Insuring risk is frequently on the minds of business owners. Increasingly
small and mid-size business owners are considering a strategy from the business plans of their
larger corporate counterparts – captive insurance.
Suzanne L. Shier,
Wealth Planning Practice
Executive and Chief Tax
Strategist/Tax Counsel
December 2015
A captive insurance company is a corporation formed for the purpose of writing insurance or
reinsurance for a small, usually related, group of insureds, providing property, casualty and other
types of insurance or reinsurance coverage. The entity is “captive” in that the ownership of the
insurance or reinsurance company is affiliated with the ownership of the insured companies. To
reduce its risk exposure, a captive can enter into reinsurance agreements with reinsurers. A captive
can also enter into reinsurance agreements with other insurance companies providing coverage for
types of insurance a captive cannot directly write, due to state law restrictions, with the captive
then reinsuring a retained portion of that risk.
Once established, a captive insurance company operates like any commercial insurance
provider – it provides coverage, collects premiums and pays claims. Unlike commercial insurance
arrangements, a captive permits a business to manage its risks while potentially providing
substantial benefits to the related business. For example, the premiums received by the captive are
invested and thus are not “lost” if not used to pay claims. Captives do not provide insurance to the
general insurance marketplace. Although subject to the insurance laws, regulations and oversight
of the jurisdiction in which they are formed, captive insurance company laws tend to be more
relaxed than those that apply to insurance companies providing insurance to the general
marketplace.
A number of different types of captive insurance companies exist, including pure captives,
group captives, risk retention groups, fronting reinsurance captives and producer-owned
reinsurance companies. Pure captives, also known as single parent captives, are most common and
insure only risks of business entities related by ownership to the captive. 1
Business Reasons to Form a Captive
The focus of the pure captive is to: more effectively manage risk; assume the economic risk that is
otherwise self-insured, including increasing deductibles on existing policies; assume all or some of
the risk of traditional insurance; or, take on the risks of existing deductibles and exclusions. Risks
that are already inherent in the business that are not currently being insured are effectively selfinsured. Captives may issue property or casualty insurance coverage against a wide variety of
possible perils. Additionally, captives provide an opportunity to insure against risks that are
generally uninsurable or hard to insure due to the lack of coverage available in the commercial
market or the excessive cost of such coverage. One must realize that the captive is a licensed
insurance company and therefore, claims must be expected periodically, or at least there must be a
reasonable expectation of losses based on actuarial modeling.
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The primary reasons that private, middle-market companies form captive insurance companies
include the ability to:






Increase control of the risk management for a business or a related group of businesses;
Lower the cost of insurance or obtain coverage not otherwise available;
Custom design insurance policies;
Retain and invest the insurance company underwriting profits;
Control the claims process; and
Access the reinsurance market.
Representative benefits include:
 Greater access to coverage. Certain types of coverage may be unavailable, difficult, or
expensive to obtain, often due to historic loss experience for a sector or industry. With a
captive insurance arrangement a business owner can insure such risks and obtain access
to wholesale reinsurance markets that may have greater risk appetite. Additionally, a
captive can enter into a fronting reinsurance arrangement with another insurance
company in order to provide coverage for types of insurance a captive cannot directly
write due to state law restrictions.

Control of policy terms. As the business owner controls the captive insurer or reinsurer,
policies can be custom designed, allowing the captive owner to craft policies to meet the
specific needs of the business from time to time in terms of deductibles, scope of
coverage, levels of risk and premiums.

Improved claims management. The ability to control the claims management process
will reduce the risk of costly litigation regarding coverage issues, as is common with
commercial insurers and reinsurers. Captive managers generally engage third-party
administrators to handle claims management.

Access to reinsurance. As an insurance company, the captive may access the reinsurance
market, enabling a business to access a wider array of insurance products at more
effective rates. Thus, the captive can either retain all the risk it has taken on or it can shift
some risk above a specific dollar threshold to another insurance company through
reinsurance arrangements. The ability of a captive to access the reinsurance market may
be more advantageous than “self-insuring” by using a higher deductible on its insurance
coverage because reinsurance may be less expensive than utilizing the discount offered
for increasing the deductible limit on a conventional insurance policy.

Increased risk management control. As conventional insurance is typically provided on
a guaranteed cost basis, there is little incentive to improve risk management due to lack
of participation in the profitability of the insurance program. However, as illustrated
below, with a captive insurance company, the parent or related companies will benefit
from good claims experience, and surplus premiums in the captive insurance company
may be available for distribution to shareholders as dividends.
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
Cash flow management. A captive provides a cash flow benefit to its owner that is not
available with a policy from the general commercial insurance company. A commercial
insurance company receives premiums in advance of the coverage it provides. It can then
take these funds and invest them. If it has a claim, it may be several years before it has to
pay the claim. Therefore, it can use the time value of those funds. If the commercial
insurer produces a profit, it can distribute its profit to its owners via dividends. None of
these benefits are available to an insured that buys its insurance form a commercial
insurer. Once an insured pays its premium, those funds are no longer available to the
insured to provide these benefits. A captive can allow its owner to receive these cash flow
benefits.

Expense reduction. Commercial insurers typically pay commissions to its sales force.
These commissions may make up a substantial part of an insurance premium. In a
published commission schedule of a major commercial insurer, commissions on
commercial, multi-peril insurance ranged from 10% to 27.8% of the premium, with 90%
of the premiums falling in a range of 14% to 27.8%. 2 Another way a captive provides its
owner with a benefit is related to commissions paid to its sales force. A captive does not
typically have a sales force and therefore it may not need to pay commissions. This may
result in either: (1) lower premiums or (2) more profit for the captive. A captive must
have commercially reasonable premiums and so it may choose to lower its premiums
because it does not have to pay a sales force. Alternatively, it may choose to charge a
premium similar to what the commercial market will charge (including the commission).
If it does that, the portion of the premium related to the commission can become profit
available, subject to regulatory approval, for future distribution to the captive’s owners.

Possible insurance tax and accounting benefits. Significant income tax benefits may
available for captive insurance companies that are formed and administered in
compliance with the Internal Revenue Code (the “Code”) and related regulations, as
discussed below. Compliance with the Code is key to the deductibility of the insurance
premiums and for the ability of the captive entity to utilize the special tax rules available
to insurance companies under Chapter L of the Code. However, it is essential that captive
insurance companies be formed for risk management and associated business reasons and
not solely for tax reasons.
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Candidates for Captives
Possible candidates for captive insurance companies are:
 Businesses seeking greater control over risk management.
 Businesses with multiple separate tax entities or that can create multiple operating
subsidiaries or affiliates.
 Businesses with insurable risk that is currently uninsured or underinsured.
 Businesses with sufficient premium volume, typically at least $500,000 in premiums
annually.
 Businesses with at least $500,000 in sustainable operating profits.
A Brief History of Captives
Captive insurance companies may be formed either domestically or in foreign jurisdictions.
Currently, at least 31 states, the District of Columbia and a number of foreign jurisdictions have
statutes and/or regulations that allow for the formation of captive insurance companies. There are
over 7,000 captives operating in the world today. 3 However, this paper will not address captives in
foreign jurisdictions.
While risk management using insurance companies has been around for centuries, 4 the use of
modern captive insurance companies started in 1957 5 and has been used by large companies since.
Most of the Fortune 500 and other large global companies utilize captive insurance companies to
supplement and often replace commercial insurance market products. In the past 30 years, middle
market and smaller companies have used captives as part of their risk management.
CAPTIVE FORMATION AND INSURANCE REQUIREMENTS
Forming a captive insurance company is a lengthy process. Feasibility studies, actuarial and
financial projections, and determining domicile are key points to consider in determining whether
a captive is appropriate. As captive arrangements commonly augment and provide additional
support to existing commercial property and casualty insurance policies, it is critical to identify the
risks to be insured by the captive. Selecting the proper risks to insure is not only important to
qualification as “insurance” for Federal/state income tax purposes, but also to minimize, but not
eliminate, claims experience so that excess premiums can be available for investment activities.
Because the formation process is complex, it is very important to have a qualified insurance
manager on the planning team.
As licensed insurance companies, captive insurers are subject to the particular insurance
regulations of the state in which they are domiciled. Several states have enacted captive insurance
statutes as discussed above, including Nevada, Utah, Vermont, Arizona and Delaware. Selecting a
domicile for the captive entity depends on a number of factors, such as the:
 Tax and regulatory environment;
 Quality and availability of service providers such as insurance managers, auditors and
legal counsel;
 Administrative complexity and costs;
 Capitalization minimums and surplus requirements;6
 Investment restrictions, requirements and oversight;
 Distribution procedures and requirements; and
 Wind down and/or re-domestication requirements.
“Insurance” for Federal Income Tax Purposes
In order to benefit from a Federal income tax deduction for a premium payment to a captive
insurance company, the captive insurance arrangement must constitute insurance for Federal
income tax purposes. Although it is understood that insurance premiums constitute deductible
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business expenses, 7 amounts placed in reserve as self-insurance cannot be deducted currently and
must await an actual payment out of that reserve. 8
The captive must be formed as a C corporation or a limited liability company (“LLC”) that
elects to be taxed as a C corporation and is subject to Chapter L and Chapter C of the Code. The
Code defines an “insurance company” as “any company more than half of the business of which
during the taxable year is the issuing of insurance or annuity contracts or the reinsuring of risks
underwritten by insurance companies.”9 Neither the Code nor Treasury Regulations define the
terms “insurance” or “insurance contract.” However, the Supreme Court has stated that
“historically and commonly insurance involves risk-shifting and risk-distributing.”10 Over time,
courts have looked primarily to four criteria in determining whether an arrangement constitutes
insurance for Federal income tax purposes:
 The arrangement must involve insurable risk.
 The arrangement must shift the risk of loss to the insurer.
 The insurer must distribute the risks among its policyholders.
 The arrangement must be insurance in the commonly accepted sense. 11
 All facts and circumstances are considered in determining whether an arrangement
qualifies as insurance. 12
The Three Risk Requirements: Insurable, Shifted, and Distributed
Not all risk is insurable risk and not all contracts that transfer risk are insurance policies even
where then primary purpose of the contract is to transfer risk. 13 Insurance risk is the risk of an
economic loss suffered as a result of a fortuitous event or hazard, rather than a mere timing or
investment risk. 14 For example, a contract that protects against the failure to achieve a desired
investment return protects against investment risk, not insurance risk. In determining whether a
contract involves insurance risk, the IRS will consider all of the facts and circumstances associated
with the parties in the context of the arrangement. 15
A sampling of risks that a captive could insure includes:
 Property/casualty
 General liability
 Employee benefits
 Business interruption
 Workman’s compensation
 Warranty/extended warranty
 Directors and officers insurance
 Other self-insured items
An insurance arrangement must shift the risk of loss from the insured to the insurer. 16 In
considering this criterion, courts have applied a balance sheet and net worth analysis. Under that
analysis, a determination of whether risk has shifted depends on whether a covered loss affects the
balance sheet and net worth of the insured. 17 In other words, in looking only at the insured’s
assets, has the insured divested itself of the adverse economic consequences of a claim covered by
the insurance policy? If the insured has shifted its risk to the insurer, then a loss by or a claim
against the insured does not affect it because the loss is offset by the proceeds of an insurance
payment. In evaluating whether risk shifting occurred, separate but related insurance contracts,
such as insurance and reinsurance, are considered together. 18
Risk distribution, on the other hand, looks to the actions of the insurer. An insurer achieves risk
distribution when it pools a large enough collection of unrelated risks (i.e., those that are not
generally affected by the same circumstance or event). By assuming numerous relatively small,
independent risks that occur randomly over time, the insurer evens out losses to more closely
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match its receipt of premiums. This also allows the insurer to more accurately predict expected
future losses. It is the pooling of the exposures that brings about risk distribution – who owns the
exposures is not crucial. 19
Insurance in the Commonly Accepted Sense
The final factor courts have considered is whether the captive arrangement constitutes insurance in
the commonly accepted sense. Courts have considered factors such as whether:
 The insurer was organized, operated, and regulated as an insurance company;
 The insurer was adequately capitalized;
 The insurance policies were valid and binding;
 The premiums were reasonable; and
 The premiums were paid and the losses were satisfied. 20
Types of Captive Arrangements
A captive insurance arrangement involves the payment of insurance premiums to a related
corporation or to an unrelated corporation which, in turn, pays a premium to a corporation related
to the original premium-payor. Captive arrangements generally come in two varieties: parentsubsidiary arrangements, in which premiums are paid by a parent to a captive, and brother-sister
arrangements, in which premiums are paid by affiliated subsidiaries to a captive. The analysis of
both arrangements hinges on whether, under the particular facts and circumstances, the captive has
economic substance and business purpose, risk shifting and distribution occurs, and insurance
actually exists.
Regarding parent-subsidiary arrangements, courts have consistently denied the parent
corporation deductions for insurance premiums paid to its captive insurance subsidiary. All courts
that have considered the issue have concluded that the underlying transaction lacked sufficient risk
shifting to constitute insurance where the captive insures only its parent or the parent’s other
subsidiaries. Given that a true insurance agreement must remove the risk of loss from the insured
party, no shifting of risk occurs because the parent of a captive insurer, generally, retains an
economic stake in whether a covered loss occurs. As a result, if a parent corporation suffers an
insured loss which the captive subsidiary insurer has to pay, the assets of the captive will be
depleted by the amount of the payment, reducing the value of the captive shares as an asset of the
parent, causing the parent, in effect, to bear the true economic impact of the loss.
Regarding brother-sister arrangements, courts have held that payments to a captive insurer by
its sibling subsidiary were deductible as insurance premiums, unless either the captive entity or the
transaction is a sham. In this type of arrangement payment by the captive on an insured loss does
not have an economic impact on the sibling subsidiary because neither the captive nor the sibling
subsidiary owns stock in the other. Accordingly, courts have held that subsidiaries’ payments to
the captive were deductible when the arrangement shifted risk from the insured subsidiary to the
captive, and the captive: was formed for a valid business purpose; was a separate, independent,
and viable entity; was financially capable of meeting its obligations; and reimbursed the insured
subsidiaries when they suffered an insurable loss. 21
TAXATION OF CAPTIVE INSURANCE COMPANIES
The Code permits property and casualty insurance companies certain deductions against taxable
income, including premium income and investment income, which are not available to regular
corporations. These deductions may significantly reduce an insurance company’s taxable income
from premiums received or investment income earned in a given taxable year.
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In general, the Code imposes a tax on the taxable income of every insurance company other than
a life insurance company. 22 In this context, taxable income is made up of the sum of the combined
gross amount earned during the taxable year, from investment income and from underwriting
income, less the deductions allowed to all corporations plus those specifically allowed to
insurance companies, including an accrual based current income tax deduction for losses that are
incurred but not reported. 23 For example, real estate developers often use captive insurance to set
aside pre-tax dollars from development profits for future claims as defects are reported.
Favorable rules are provided for small insurance companies, commonly referred to as § 831(b)
companies. An insurance company receiving less than $1.2 million of premiums each year may
elect to be taxed only on its investment income. With this election in place, the significant
advantage is that the company is able to accumulate surplus from underwriting profits free from
federal income tax. For example, a small captive having $500,000 in premium income and
$25,000 in portfolio income has taxable income of only $25,000 for the year. Its owners, however,
are still subject to tax on any dividends received from the captive insurance company, similar to
large property and casualty companies.
The taxation of a captive by a state depends upon the state’s law and is usually not an ordinary
income tax. Common types of taxing regimes are a premium tax and a direct placement tax.
Admitted insurance carriers doing business in the state are usually subject to a premium tax levied
on the gross premium income received by the captive. A direct placement tax is usually imposed
on transactions through an in-state broker with a non-admitted insurer in the state. The choice of
domicile should take into account the potential state tax consequences.
WEALTH PLANNING WITH CAPTIVES
Secondary to the fundamental risk management benefits, captive insurance arrangements can
provide wealth planning opportunities. Because a captive is owned within the family of the
business owner, either by the business owner, an affiliated entity, or a trust for the benefit of the
owner’s family, all of the captive’s profits are kept inside that family. Thus, any profit remaining
after the payment of administrative costs and claims remains within the family business structure.
These reserves can be invested and the increased value can be returned to shareholders of the
captive as tax-favored qualified dividends or as a capital gain distribution on the complete
liquidation of the captive. 24 This ownership provides significant wealth preservation opportunities
because funds that otherwise would have been paid to a third-party general insurer to purchase
insurance and “lost” are retained within the family and available for investment. Any wealth
transfer/preservation benefit depends entirely on the financial performance of the captive
insurance company. Diagram A, below, illustrates just one variation on the use of a captive
insurance company as part of a tax-efficient wealth transfer strategy. 25
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Diagram A: Using Captive as Part of Tax-Efficient Wealth Transfer Strategy
Entrepreneur or Professional
Business Owner
Child Trust 1
Child Trust 2
Child Trust 3
Parent Co.
(LP, LLC, S Corp.)
Sub 1
Sub 7
Sub 2
Sub 8
Sub 3
Sub 9
Tax-favored
Qualified
Dividends
Insurance Premiums
(deductible)
Business
Profits
Policies – each sub
comprises 5-15% of
risk
Sub 4
Sub 10
Sub 5
Sub 11
Sub 6
Sub 12
“Micro” Captive
------Insurance premiums, investments,
reserves, and other captial
The structure of the captive’s equity ownership also provides other planning opportunities. If
the captive insurance company is owned by the family members of the owners of the insured
companies or trusts for the benefit of the insured company owners, any retained income or
increased value of the captive would inure to their benefit. As this transaction occurs in the
ordinary course of business, no gift, estate or generation-skipping transfer (GST) tax would attach
to the intrafamily transfer of wealth. 26 With the captive’s assets outside the taxable estate of the
business owner and beyond the scope of the GST tax, additional estate planning opportunities are
available.
Similarly, as a C corporation, the captive can issue multiple classes of stock. For example,
preferred stock of the captive might be distributed to key employees of the operating company and
then redeemed upon retirement. The capital gains tax on the redeemed shares should be less than
the tax on any other form of deferred compensation.
Many of these considerations apply to any new affiliated business ventures and the concepts
and opportunities should be explored with trusted advisors. The planning, formation, and
management of a captive are complex undertakings, and compliance with the formalities of
running a true insurance company is mandatory. Establishing a captive insurance company is not
feasible for all companies but, where appropriate, it can provide substantial tax and nontax
benefits to successful shareholders and their families.
Illustration
The following illustration examines a situation in which a business owner would find it
advantageous to set up a captive insurance company:
 An entrepreneur (e.g., doctor, attorney, architect, manufacturer, etc.) owns a successful
chain of 12 car dealerships with ownership centralized in a limited liability company (the
“Parent Company”). For valid business reasons, each of the entrepreneur’s 12 car
dealerships is incorporated as a subsidiary of the Parent Company in the state in which
the particular dealership operates. The 12 subsidiaries are wholly owned by the Parent
Company (the “Group”).
 The Parent Company consistently nets between $2 million and $4 million after all
operating expenses and payroll, including the entrepreneur’s salary.
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

The Parent Company maintains general commercial liability, professional, health, and
workman’s compensation insurance for the Group. Despite the coverage, the Parent
Company self-insures many risks associated with its business.
The entrepreneur retained a captive insurance manager who performed a feasibility study
analyzing the Group’s current insurance coverage to determine risks that are either selfinsured or underinsured. The manager identified ten insurable risks and designed separate
policies for each of those risks. Each dealership will separately purchase coverage from
the captive insurer at arm’s-length prices. Based on industry standards, the insurance
premiums for the Group totaled $1 million (see Diagram A, illustrating the ownership
structure described in this illustration).
Results
After obtaining the necessary state insurance license, the Parent Company formed Captive
Insurance Co. and elected Code § 831(b) treatment. See Diagram A, above. This “micro-captive”
strategy can deliver significant benefits (see Table A, below, for a comparison of the tax benefits
of using a “micro” captive versus not using a captive):
 The premiums paid by the Group’s subsidiaries to the captive are fully deductible for
income tax purposes because there is sufficient risk shifting and risk distribution present
to constitute insurance. 27
 With the Code § 831(b) election, the captive is taxed only on its investment income; it is
not taxed on its premium income.
 The captive’s surplus can be invested and profits distributed to the trusts as qualified
dividends, subject to any state restrictions.
 The captive’s assets are outside the reach of the creditors of the Parent Company and/or
the Group, as well as the entrepreneur’s personal creditors.
 The captive’s assets and all of its growing reserves will not be part of entrepreneur’s
gross estate, and not subject to estate or gift taxes.
Table A: Captive Tax Benefits Over Ten Years 28
(Numbers before Claims)
No Captive
Net Business Income
Income Taxes at (40%)
After-Tax Investment Income*
Total
Year 1
Year 5 (Cum.)
Year 10 (Cum.)
$1,150,000
-$460,000
$20,700
$710,700
$5,750,000
-$2,300,000
$323,203
$3,773,203
$11,500,000
-$4,600,000
$1,247,379
$8,147,379
With “Micro” Captive
Captive Premiums
Operating Expenses
After-Tax Investment Income*
Total
$1,150,000
-$65,000
$32,550
$1,117,550
$5,750,000
-$325,000
$508,225
$5,933,225
$11,500,000
-$650,000
$1,961,458
$12,811,458
Net Gain With Captive
$406,850
*Assumes a 5% pretax rate of return on investments
$2,160,022
$4,664,079
CONCLUSION
In the right circumstances, captive insurance companies can provide a variety of benefits to
business entities. While the captive insurance arrangement is generally associated with very large
corporations, closely held businesses may effectively use the strategy as well. For the owners of
these companies, captive insurance company arrangements may provide additional wealth
planning benefits that are not relevant in the large-corporation context.
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FOR MORE INFORMATION
As a premier financial firm, Northern Trust specializes in life-driven wealth management backed
by innovative technology and a strong fiduciary heritage. For more than 125 years we have
remained true to the same key principles – service, expertise and integrity – that continue to guide
us today. Our Wealth Planning Advisory Services team leverages our collective experience to
provide financial planning, family education and governance, philanthropic advisory services,
business owner services, tax strategy and wealth transfer services to our clients. It is our privilege
to put our expertise and resources to work for you.
If you’d like to learn more, contact a Northern Trust professional at a location near you or visit us
at northerntrust.com.
Special thanks to Benjamin Lavin for his contributions to this piece.
(c) 2015, Northern Trust Corporation. All rights reserved.
Legal, Investment and Tax Notice: This information is not intended to be and should not be treated
as legal advice, investment advice or tax advice. Readers, including professionals, should under no
circumstances rely upon this information as a substitute for their own research or for obtaining
specific legal or tax advice from their own counsel.
1
TOM CIFELLI, NAVIGAT ING CAPT IVE INSURANCE COMPANIES – ST ORM PROOF YOUR RISK VESSEL: W HAT YOU NEED TO
KNOW BEFORE HIRING A CAPT IVE M ANAGER AND FORMING YOUR CAPT IVE loc. 278 (2013) (ebook).
2
See, e.g., CHUBB GROUP OF INSURANCE COMPANIES, Producer Compensation Practices for U.S. Insurance Transactions
(2013), http://www.chubb.com/marketing/chubb7450.html.
3
TOM CIFELLI, NAVIGAT ING CAPT IVE INSURANCE COMPANIES – ST ORM PROOF YOUR RISK VESSEL: W HAT YOU NEED TO
KNOW BEFORE HIRING A CAPT IVE M ANAGER AND FORMING YOUR CAPT IVE loc. 206 (2013) (ebook).
4
Shanique Hall, Recent Developments in the Captive Insurance Industry, THE CENT ER FOR INSURANCE POLICY AND
RESEARCH NEWSLET T ER (Jan. 2012), http://www.naic.org/cipr_newsletter_archive/vol2_captive.htm.
5
Shanique Hall, Recent Developments in the Captive Insurance Industry, THE CENT ER FOR INSURANCE POLICY AND
RESEARCH NEWSLET T ER (Jan. 2012), http://www.naic.org/cipr_newsletter_archive/vol2_captive.htm.
6
The capitalization requirements vary by state. On the lower end, minimum capital is about $100,000. The start-up costs
for a captive can be expected to range from $50,000 to $100,000, and annual operation costs can be expected to range from
$25,000 to $75,000. These figures represent ranges, and in planning for feasibility more accurate estimates would be
required based on specific facts and circumstances.
7
IRC § 162(a); Treas. Reg. § 1.162-1(a).
8
IRC § 162(a); Treas. Reg. § 1.162-1(a); Clougherty Packing Co. v. Commissioner, 811 F.2d 1297, 1300 (9th Cir. 1987).
9
IRC § 816(a).
10
Helvering v. Le Gierse, 312 U.S. 531, 539 (1941).
11
Securitas Holdings, Inc. v. Commissioner, T.C. Memo. 2014-225, at *7; see also Rent-A-Center, Inc. v. Commissioner,
142 T.C. 1, 7 (2014).
12
Rent-A-Center, Inc., 142 T.C. at 13-14.
13
IRS CCA 201511021 (March 13, 2015) (concluding contractual arrangement transferring foreign currency risk to a
captive insurance company did not result in insurance for Federal income tax purposes because the risk of foreign currency
fluctuation did not qualify as an insurance risk).
14
Id.
15
Id.
16
Securitas Holdings, Inc., T.C. Memo. 2014-225, at *7.
17
See Rent-A-Center, Inc., 142 T.C. at 16.
18
Securitas Holdings, Inc., T.C. Memo. 2014-225, at *7.
19
Securitas Holdings, Inc., T.C. Memo. 2014-225, at *10.
20
Securitas Holdings, Inc., T.C. Memo. 2014-225, at *10; Harper Grp. & Subsidiaries v. Commissioner, 96 T.C. 45
(1991), aff’d 979 F.2d 1341 (9th Cir. 1992).
21
See Rent-A-Center, Inc., 142 T.C. 1 (2014).
22
IRC § 831(a).
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23
IRC § 832(b)(5); IRC § 846.
IRC § 331. Dividends paid by the captive should qualify for the maximum 20% tax rate, and liquidating distributions
should produce long-term capital gain. If, however, a shareholder's net investment income meets a threshold for being
assessed a Medicare tax, dividends received from the captive may be subject to an additional 3.8% Medicare tax under IRC
§ 1411.
25
Rev. Rul. 2002-90.
26
Treas. Reg. § 25.2511-1(g)(1); Treas. Reg. § 25.2512-8.
27
This structure complies with the safe-harbor ruling provided by Rev. Rul. 2002-90.
28
Tax incentives are important and should be considered. However, non-tax business and economic reasons for structuring
transactions must be the primary reasons for business decisions and not the associated tax benefits.
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