The Internal Revenue Service and Captives
Ever since the establishment of captives in this country, the IRS has been aware of them, and the potential they poise for tax abuse, fraud and avoidance. While the IRS does not address the right to establish a captive, they are diligent in their monitoring of captives. This monitoring, and challenging of the right of a parent company to deduct the premiums paid into a captive, has continued to evolve over the past several years. (Please note that if premiums are not to be deducted, then the reach of the IRS is severely limited, as the purpose of the IRS is to monitor and prevent tax fraud and abuse.)
When the IRS feels that there has been improper use of the tax code by a captive, then they often file a challenge. As the years have passed, several of these cases resulted in the IRS losing their challenge in federal tax court. Some landmark cases are listed below that you may wish to read. You can also refer to the IRS’s own website (www.irs.gov) for further guidance on captives and the current tax code.
This area of the law is evolving, but a professionally designed and established captive that encompasses the principles of risk transfer and risk distribution, will meet the current IRS guidelines.