The US Tax Court case involving PoolRe, a risk pool entity operated by Capstone Services, bears “no resemblance to the Avrahami case”, according to Anne Marie Towle, JLT Insurance Management captive practice leader.
In the Reserve Mechanical Corporation v Commissioner of Internal Revenue case, the court opinion was that PoolRe was not a “bona fide insurance company” and did not effectively provide risk distribution.
This absence of risk distribution meant that the transactions of Reserve Mechanical, for whom PoolRe was listed as the stop-loss insurer, in the tax years in issue (2008, 2009 and 2010) were not insurance transactions.
In a statement, Capstone disagreed with the court’s opinion, specifically the court’s use of the Avrahami opinion in makings its decision.
Towle also disagreed with the court’s use of the Avrahami opinion.
She commented: “It would seem that this tax court case bears no resemblance to the Avrahami case, as Reserve Mechanical cites numerous reasons and transactions showing how its business was insurance-related.”
“If the court gave no weight to more than three dozen previous rulings in favor of captives and similar arrangements, as it seems to have happened, I expect this will not be the last we hear of this case.”
Towle added that as the industry continues to mature it is important that those in the captive industry follow best practices in using a risk financing arrangement that has overwhelmingly provided legitimate and necessary for business.
