By now, you may have already heard about the recent Tax Court decision regarding action taken by the IRS involving a Vermont captive owned by the Swedish security firm, Securitas. To better manage its insurance costs, Securitas formed a captive insurance company domiciled in Vermont and paid millions in premiums to it over the years. Securitas took deductions for the amounts paid to its captive and, while the IRS is conceding that the premium amounts were reasonable, they disallowed over $80 million of the deductions over a two year period.
What the IRS had a problem with was that Securitas guaranteed the payment of the captive’s claims which is known as a Parental Guarantee. That is, Securitas as the parent company guaranteed the liabilities of its subsidiary captive insurance company. The IRS believed that the existence of Securitas’ Parental Guarantee obviated the captive arrangement because it resulted in circularity: Securitas’ captive was insuring Securitas, and Securitas was insuring the captive in case it failed. The Tax Court rejected the IRS’s arguments for a number of reasons, including the fact that the Parental Guarantee was never called, the IRS’s argument was at best academic, and that Securitas’ captive was adequately capitalized to stand on its own and pay claims.
What I find most interesting is, it seems that due to the deliberation and approval of the Vermont state regulators, the Tax Court felt comfortable with Securitas’ actions. It should be noted that the decision does not validate all Parental Guarantees. Like that in Rent-A-Center, it only validates that Parental Guarantees are not on face value illegitimate, but instead are subject to the facts-and-circumstances that consider such things as whether the captive was adequately capitalized. And, perhaps, where the captive is domiciled.
To learn more about this case, and other recent captive insurance tax issues, please join us for VCIA’s Educational Webinar on December 9, entitled “Captive Taxation: Recent Changes and What’s on the Horizon” with three of the best captive tax experts in the industry: Tom Jones, Chaz Lavelle and Dan Kusaila. Go to www.vcia.com to register today!
Thank you all very much and I look forward to hearing from you!