Feldman Law Firm and Foley Gardere have filed a reply brief with the Tenth Circuit Court of Appeals on behalf of Reserve Mechanical Corporation, a client of Capstone Associated Services.
The appeal challenges the US tax court’s rulings in the Reserve captive insurance case.
In its opinion, the tax court concluded that Reserve’s transactions did not constitute insurance for federal income purposes.
However, Reserve contends the tax court based its findings in an erroneous application of longstanding and well-accepted law.
Reserve Mechanical argues that it satisfied the four-part test for insurance.
In analysing the four factors, the tax court employed reasoning that was contradictory to old case law.
In addition, the tax court also went outside the record in making findings that were not supported by the evidence at trial.
Reserve’s reply brief addresses the issues raised by the Internal Revenue Service (IRS) in its brief and refocuses the argument on issues the IRS ignored in its briefing.
In addressing the findings of the tax court, Reserve Mechanical’s reply brief states: “[The IRS] concedes that the tax court, in analysing whether Reserve’s transactions were insurance in the commonly accepted sense, acknowledged that (1) Reserve had adequate capitalisation; (2) Reserve’s “direct-written policies ‘contained the necessary terms to make them valid and binding insurance’ and ... were properly executed”; and (3) Reserve paid claims. Despite expending pages rehashing those settled factors, Appellee does not contend that any were wrongly decided. Accordingly, only two factors remain in dispute – whether Reserve was operated like an insurance company and whether Reserve’s premiums were reasonable and negotiated at arm’s length. Reserve satisfied both factors, and Appellee’s arguments to the contrary are wrong on both accounts.”
Capstone explained that the tenth circuit’s decision in the Reserve appeal is expected to carry “significant implications” for the captive insurance industry.
The appeal has attracted the attention of ten different state associations and one national captive insurance association which have jointly filed briefing in support of Reserve with the appellate court.
The 11 organisations supporting the recent appeal by Reserve, include the Alabama Captive Insurance Association, Arizona Captive Insurance Association, Delaware Captive Insurance Association, Georgia Captive Insurance Association, Hawaii Captives Insurance Council, Kentucky Captive Association, Missouri Captive Insurance Association, Montana Captive Insurance Association, North Carolina Captive Insurance Association, Utah Captive Insurance Association, and the Self-Insurance Institute of America.
The next step in the appeal is oral arguments, which are expected to take place early in 2021.
A decision in the appeal is expected in Q2 or Q3 2021.
Capstone’s previous commentaries can be read here.
