The New York Division of Tax Appeals recently ruled that a corporation could not deduct payments made to its wholly owned captive insurance company.
The Facts
The petitioner, Stewart’s Shops Corporation, owned and operated convenience stores and gas stations in New York and Vermont, forming Black Ridge Insurance Corporation (BRIC) to insure various risks related to its business. The petitioner deducted insurance payments made to BRIC from the tax years of 2006 through 2009, but the Division of Taxation disallowed the deductions and assessed deficiencies. Stewart’s Shops petitioned for redetermination of the deficiency to the New York Division of Tax Appeals.
The Ruling
The Division of Tax Appeals looked to federal law for the definition of insurance for tax purposes and identified four criteria: 1) the arrangement must involve insurable risk, 2) the arrangement must meet commonly accepted notions of insurance, 3) the arrangement must shift the risk of loss to the insurer and 4) the insurer must distribute the risks among its policyholders. The division held that the arrangement involved insurable risks and that the arrangement met commonly accepted notions of insurance. However, the division also found that the arrangement did not shift the risk of loss to the insurer since the insurer was wholly owned by the parent. Therefore, any payment by the insurance company would affect the parent’s net worth. Additionally, there was no risk distribution found as the risk was concentrated in the petitioner and was not spread among several different companies.
Accordingly, the division upheld the deficiency. Click here to read the opinion.
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