Captive/Small Insurance Company Court Cases
The court found that there was contemporaneous documentation that the transaction was tax-motivated and concluded that the arrangement was “done for the purposes of avoiding tax” and “had no economic substance or business purpose.”
On appeal, the Eleventh Circuitﾠconcluded that the insurance restructuring had economic substance and business purpose. The Eleventh Circuit reversed the Tax Court decision.
The economic-substance doctrine was defined as a two-pronged analysis.
The first prong was whether the transaction had no other economic effects besides the creation of tax benefits. If a transaction passed the first prong and was found to have economic effects, then, according to the Eleventh Circuit, the analysis proceeded to the second prong.
The second prong of the analysis provided that despite economic effects, the transaction had to be disregarded if it had no business purpose and its motive was tax avoidance.
It was determined that premiums paid to wholly-owned insurance companies were deemed not deductible expenses. Substantial unrelated business, among other tests, was critical. (In this case, only 2% unrelated business was received.)
Humana Inc. & Subsidiaries v. Commissioner (176 KB)
Humana Inc. v. Commissioner (145 KB)
Humana Inc. Flow Chart (10 KB)
- Explicitly rejected the Economic Family Doctrine
- Allowed brother-sister PIC structure; but not parent-child
Neither the Code nor the regulations define the terms “insurance” or “insurance contract.” The United States Supreme Court, however, has explained that in order for an arrangement to constitute insurance for federal income tax purposes, both risk shifting and risk distribution must be present.
AMERCO Inc.; Republic Insurance v. IRS (139 KB)
Ocean Drilling & Exploration Company v. United (132 KB)
Harper v.Commissioner (92 KB)
Three cases decided in January 1991 where it was determined that premiums paid to wholly-owned insurance companies were deemed deductible expenses. Substantial unrelated business, among other tests, was critical.