Capstone Associated Services has disputed the US Tax Court opinion that PoolRe Insurance, a risk pool operated by Capstone, was not a “bona fide insurance company” and described it as a disservice to the captive industry.
The opinion in the ‘Reserve Mechanical Corporation v Commissioner of Internal Revenue’ was that PoolRe 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 released today, Capstone disagreed with the Court’s opinion, specifically the Court’s use of the Avrahami opinion in making its decision.
The statement added: “Reserve had no loans, participated in a diversified pool, assumed unaffiliated, third-party reinsurance, reported and paid substantial losses, and had policies that were designed to meet the needs of the underground mining business that it insured.”
“Additionally, a series of recognised experts, including an insurance commissioner, two credentialed actuaries, an independent auditor, a nationally-renowned insurance economist and an underwriter, all testified on behalf of Reserve with scant testimony from the government’s witness whose testimony the government admitted was discredited on the stand.”
“Oddly, the Court rejected the professionally-administered pooling arrangement which involved hundreds of third-party insureds and hundreds of policies as being “circular” evidencing an unexpected rejection of a fundamental industry standard risk sharing mechanism dating back more than a century.”
“The Court rejected Reserve’s third-party reinsurance programme which was fully in evidence because the more than one hundred thousand underlying direct written policies from a recognised admitted carrier, were not put into evidence but were only the subject of (unchallenged) testimony.”
In the statement, Capstone said there had been no weight given to 39 previous favourable rulings issued by the Internal Revenue Service (IRS) involving similar captive insurance and reinsurance arrangements.
The statement added: “Of even greater surprise, the Court called out for evidence that an insured had experienced a loss before a company could buy insurance covering such event.
“The Court’s opinion does a disservice to the captive insurance industry and the bona fide captive insurance companies like Reserve. We are evaluating the full range of additional relief available to rectify the Court’s opinion.”
