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Tennessee Captive 2015 Report


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Tennessee Captive 2015 Report

MIJS started forming and managing captive insurance companies for its clients in 2008. Since that time, our captive management practice has grown at a steady and consistent pace because we tailor each captive insurance program to our client’s individual risk protection needs and we form and manage each captive insurance company in compliance with all state Departments of Insurance and Federal laws and regulations. MIJS’ team of experienced liability attorneys and insurance professionals will ensure your captive insurance company provides the protection that your business needs.

Published in: Law
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Tennessee Captive 2015 Report

  1. 1. 6 TENNESSEE REPORT 2015 | WWW.CAPTIVEREVIEW.COM TENNESSEE | MOORE INGRAM JOHNSON & STEELE O n February 3, 2015, the Inter- nal Revenue Service said using abusive tax shelters and struc- tures to avoid paying taxes continues to be a problem and remains on its annual list of tax scams known as the “Dirty Dozen” for the 2015 filing season. Below is an excerpt from the IRS.GOV site, with the author’s comments added in italics below. Another abuse involving a legitimate tax structure involves certain small or “micro” captive insurance companies.” Note that the IRS acknowledges that this is a “legitimate tax structure.” Tax law allows businesses to create “cap- tive” insurance companies to enable those businesses to protect against cer- tain risks. As long as the risks insured are real and fortuitous, each business owner has the legal right to acquire these policies through their own captive. The insured claims deductions under the tax code for premiums paid for the insur- ance policies while the premiums end up with the captive insurance company owned by same owners of the insured or family members. The U.S. Tax Court never agreed with the IRS’ “Economic Family Theory”. This the- ory, abandoned by the IRS in 2001 (Rev. Rul. 2001-31, 2001-26 I.R.B. 1348 (6/25/2001)), argued that the same economic group could not insure its own risks. The captive insurance company, in turn, can elect under a separate section of the tax code to be taxed only on the invest- ment income from the pool of premiums, excluding taxable income of up to $1.2m per year in net written premiums. This Code Section was enacted into law as part of The Tax Reform Act of 1986. In the abusive structure, unscrupulous promoters persuade closely held entities Written by Matthew J. Howard Matthew J. Howard JD, LL.M. serves as senior part- ner in the captive, tax, and estate planning depart- ments of Moore Ingram Johnson & Steele. Matthew specializes in the taxation of micro captives, estate planning and tax controversies. MIJS currently man- ages over 100 micro captives. Matthew J. Howard of Moore Ingram Johnson & Steele, LLP, comments on the IRS “Dirty Dozen” list of tax scams for the 2015 filing season THE IRS’ 2015 “DIRTY DOZEN” LIST OF TAX SCAMS
  2. 2. 7 TENNESSEE REPORT 2015 | WWW.CAPTIVEREVIEW.COM MOORE INGRAM JOHNSON & STEELE | TENNESSEE to participate in this scheme by assist- ing entities to create captive insurance companies onshore or offshore, drafting organizational documents and preparing initial filings to state insurance author- ities and the IRS. The promoters assist with creating and “selling” to the entities often times poorly drafted “insurance” binders and policies to cover ordinary business risks or eso- teric, implausible risks for exorbi- tant “premiums”, while maintaining their economical commercial cover- age with traditional insurers. Micro Captives (captives with lim- ited premiums and elect IRC Sec 831(b) treatment) should only be formed and managed by a team of experienced liability, tax, account- ing and actuarial experts. The pol- icies should cover risks that are real and applicable to the insured paying the premiums. The captive policies should be written to compliment and supplement the insured commercial or group captive policies and not be contradictory or redundant thereto. These captive policies should be annu- ally reviewed for changes to the insured’s business and/or commercial policies and periodically repriced by a competent and independent actuary. Total amounts of annual premiums often equal the amount of deductions business entities need to reduce income for the year; […] This should never happen purposefully nor even be considered when the compe- tent and independent actuary is pricing the policies. […] or, for a wealthy entity, total premi- ums amount to $1.2m annually to take full advantage of the Code provision. In reality, premiums of exactly $1.2m should occur as often as a lightening strike. The captive should be used to secure needed insurance coverages not needed premiums. Underwriting and actuarial substantia- tion for the insurance premiums paid are either missing or insufficient. This is unacceptable in all instances. The promoters manage the entities’ cap- tive insurance companies year after year for hefty fees, assisting taxpayers unso- phisticated in insurance to continue the charade. Everyone has a right to make an honest liv- ing (the operative word is “honest”). The IRS is completely justified in includ- ing micro captives on this tax shelter list. We have assumed management of several captives, which we needed to rehabilitate. The captive industry, including several DOI Departments in the USA domiciles and USA State Captive Associations, is doing a better job lately in not tolerating “unscrupulous promoters” by insisting that micro captives be formed and managed properly. These micro captives can serve a vital role in augmenting the insured’s commercial or group captive program. We have wit- nessed a business that would be defunct today were it not for the coverage they filed a claim on in their captive. It is imperative that every micro cap- tive exemplify a real insurance company by exhibiting, among other indices, risk shiftingandriskdistribution. Theseprin- ciples have been upheld by the Courts. Rent-A-Center, Inc. v. Commissioner, 142 T.C. 1, 21 (2014); Sears, Roebuck & Co. v. Commissioner, 96 T.C. 61, 101 (1991), aff’dinpartandrev’dinpart,972F.2d858 (7th Cir. 1992); AMERCO, Inc. & Subs. v. Commissioner, 96 T.C. 18, 38 (1991), aff’d, 979 F.2d 162 (9th Cir. 1992); Harper Grp. v. Commissioner, 96 T.C. 45, 58 (1991), aff’d, 979F.2d1341(9thCir.1992)andhavebeen echoed by the IRS in Revenue Rulings 2002-89 and 2002-90. In closing, I hope our captive industry continues to weed out the unscrupulous folks and I hope the IRS takes the time and effort to distinguish those of us forming and managing captives properly for our clients from the unscrupulous promoters. Nei- ther task is difficult! “I hope our captive industry continues to weed out the unscrupulous folks and I hope the IRS takes the time and effort to distinguish those of us forming and managing captives properly for our clients from the unscrupulous promoters” 10. The client, in the first discussion about captives, insists that they pay $1.2m in insurance premiums and the promotor responds “no problem” 9. They suggest to their client that a captive can be formed offshore for less capital, regardless of underwriting 8. The promoter agrees with client that premiums paid into the captive can be withdrawn as a loan in any amount and as soon as the premium has been paid 7. Premium levels never change throughout the life of the captive 6. Promoter charges fees based upon a percentage of premiums paid 5. Promoter agrees or even encourages the captive owner to invest most or all of the captive money in a life insurance policy that has little or no cash surrender value in the first few years 4. The promotor has a menu of coverages and pre-written policies to choose from regardless of the insured’s business 3. The promoter tells his client that he never really has to file a claim 2. The promoter does not have one commercial liability insurance broker in his contacts list 1. The promoter has never read or subscribed to Captive Review! TOP 10 REASONS YOU CAN RECOGNIZE AN UNSCRUPULOUS CAPTIVE PROMOTER