Will the IRS Now Target Captive Insurance Companies? – Los Angeles Income Tax Planning and Income Tax Litigation Attorney Bruce Givner

by Bruce Givner on November 11, 2013

A U.S. District Court in Texas recently held that a captive insurance entity was actually not such, but instead was one of many vehicles used to help its owners avoid paying income tax. As such, the companies paying the premiums could not take a deduction for insurance payments made to the captive. Salty Brine I, Ltd. et al v. United States, 111 AFTR 2d 2013-2308.

The Internal Revenue Service (IRS) has strict guidelines on creating a captive insurance company. These guidelines include showing there are sufficient risk shifting and distribution facets. The formed captive must also have a genuine insurance purpose and not just be a tax shelter or formed solely for estate planning purposes. Once properly formed, a small captive, which is generally designed to protect against business risks, that receives no more than $1.2 million in premiums can elect to pay tax only on its investment income. IRC Section 831(b). Other benefits of the captive include financial savings, a creation of surplus assets, and asset protection. Further, if the shareholders of the parent and captive are family members, the premium paid by the operating business is, effectively, a gift tax free transfer to the heirs.

Whether the IRS will now more closely look at captives formed by small businesses is not known. However, companies that have formed captives need to make sure they have complied with IRC guidelines before the IRS cometh and taketh away.

Givner & Kaye focuses on sophisticated income tax planning and compliance, tax litigation and procedure, estate planning, and asset protection plans for individuals and businesses in Beverly Hills, Calabasas, West Los Angeles, Hollywood, and other areas of Los Angeles, Orange, Ventura, San Bernardino, Riverside and Santa Barbara Counties. Call Los Angeles Estate Planning and Asset Protection Plan Attorneys Givner & Kaye at (310) 207-8008 today.

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