A New York State Division of Tax Appeals ALJ determined that payments by a corporation to its captive insurance company did not qualify as deductible insurance premiums because the arrangement lacked risk shifting and risk distribution. The taxpayer primarily owned and operated convenience stores and gas stations, and insured risk related to these operations to its captive insurance company.
Notably, the ALJ analyzed federal case law to determine whether the taxpayer’s insurance arrangement constituted “insurance” for state tax purposes. Although there have been several taxpayer-favorable decisions at the federal level recently, the ALJ determined that this taxpayer’s facts did not fall within those decisions. The favorable federal decisions analyzed situations where the taxpayer had several entities that insured risk to an affiliated captive insurance company at the brother-sister level (i.e., the insureds were not the captive’s parents). This taxpayer held all of its operations in one parent corporation, which also owned the captive. Therefore, the ALJ determined that there was not requisite risk shifting and risk distribution, and that the taxpayer could not deduct premiums paid to its captive insurance company for New York corporate franchise tax purposes. The outcome likely would have been different if the taxpayer had a parent holding company with multiple subsidiaries (including the captive) below it. In re Stewart’s Shops Corp., DTA No. 825745 (N.Y. Div. Tax App. Mar. 10, 2016).