On January 14, 2014, the United States Tax Court overruled the IRS, holding that Rent-A-Center's subsidiaries may deduct payments made to their affiliated wholly-owned Bermuda captive insurer, Legacy Insurance Co. Ltd., during the years 2003-07. Rent A Center, Inc. and Affiliated Subsidiaries v. Commissioner, 142 T.C. No. 1 (Jan. 14, 2014). In a split decision (11-6), the majority found that Legacy was a legitimate, bona fide insurance company that was created based on "a myriad of significant and legitimate nontax considerations."
Legacy insured affiliate subsidiary risks in the workers' comp, auto liability and general liability areas. The Tax Court rejected the IRS' argument that Legacy was a sham created primarily to generate tax savings. The majority explained that the arrangement properly distributed risk because of the numerous stores (2623-3081), employees (14,300-19,740) and vehicles (7143-8027) insured during the applicable policies and properly shifted risk between Rent-A-Center's subsidiaries and Legacy, thus allowing the subsidiaries to deduct for tax purposes the premiums they paid to Legacy.
Of significant interest, the majority's view was not affected by the presence of a parental guaranty that was never drawn (said to be for regulatory requirements only for Legacy to meet Bermuda's solvency requirements), the purchase by Legacy of treasury stock of its U.S. parent, and the various IRS published rulings requiring "12" subsidiary/insureds each with between 5 percent and 15 percent of the risks for a valid "brother/sister" captive structure to exist for tax purposes. Note that a lengthy dissent, however, questions the legitimacy of Legacy's "adequate capitalization" which required the parental guaranty of up to $25 million to meet Bermuda's "extremely thin capitalization" requirements, and the fact that if "outsized losses occurred," Legacy's liabilities would increase at the same time that the value of its sizable holding of Rent-A-Center's treasury stock ($108 million) decreased. The decision is appealable to the Fifth Circuit.
- Vermont has introduced legislation authorizing a "dormant" captive insurance company license that would be a way for captives to maintain registration in Vermont while putting their operations on hold. If and when the captive is ready to resume business, it could re-establish an active license more expediently than starting over from square one.
- The Securities and Exchange Commission (SEC) is seeking disclosure from large life insurers regarding the potential impact on their financials in the event state insurance regulators prohibit the use of captives. Fitch Ratings, however, warns that although the SEC is mostly concerned with life reinsurance captives, traditional captives could get swept up in the frenzy due to "mission creep" or if the regulators do not fully appreciate the difference.
- 2013 continued the trend of increased IRS scrutiny of 831(b) captives, highlighted by its Chief Counsel in mid-December reaching the conclusion that it could not rule on a series of private letter ruling requests by an offshore insurance company. The IRS continues its analysis movement toward substance and away from form.
- The Bermuda Monetary Authority's 2014 business plan includes the implementation of group supervision for Bermuda's largest insurance groups and a full NAIC qualified jurisdiction assessment. The 2014 business plan also contemplates rolling out electronic reporting for captive insurers this year.
- In 2013, Vermont celebrated its 1,000th new captive, licensing 29 new captives.
- Captive Review magazine named Delaware as U.S. Onshore Captive Domicile of the Year.