A convenience store and gas station operator’s payments to its captive insurance company did not meet rules on deductible insurance premiums, a New York tax court has ruled.
The New York State Division of Tax Appeals ruled on 10 March that Stewart’s Shops Corporation’s payments to its captive, Black Ridge Insurance Corporation (BRIC), lacked sufficient risk shifting and distribution to warrant a tax refund.
BRIC was formed as a captive in New York in 2003, under one parent corporation. It wrote crime risk, after the commercial sector withdrew a policy due to a substantial claim, as well as various traditional risks.
The New York Division of Taxation conducted an audit of BRIC for the financial years 2006 to 2010 and found that the captive was not entitled to a refund of the captive premium tax
under Article 33 of the Tax Law, which Stewart’s Shops contended following its dissolution of the captive.
On appeal, the New York State Division of Tax Appeals found that because BRIC was a part of Stewart’s Shops and not a separate subsidiary, insufficient risk shifting and distribution was in place to exempt it from captive premium taxes.
The court ruled: “As the petitioner’s [Stewart’s Shops] wholly owned captive, a payment by BRIC to the petitioner for a covered loss will directly affect the petitioner’s balance sheet and net worth. Thus, risk shifting is not present in this arrangement. The arrangement also lacks risk distribution because the risk is not spread among various subsidiaries and any loss by the parent is not subject to the premiums of any other entity.”
Commenting on the decision in a client note, Charles Capouet and Andrew Appleby of law firm Sutherland Asbill & Brennan wrote: “The outcome likely would have been different if the taxpayer had a parent holding company with multiple subsidiaries (including the captive) below it.”
