The IRS may not like or intuit the availability of such deductions, but even though a financial strategy “sounds too good to be true” the “increased use of captive insurance companies by entrepreneurs and small-‐business owners” is a publicly recognized, professionally promoted, lawful way “not only to save money on insurance premiums but also to reduce income taxes and transfer money to heirs free of estate tax.” An Insurer of One’s Own? It’s Possible, With Caveats, New York Times, Wealth Matters, July 13, 2012. The New York Times research noted leading financial advisors recognize “saving on income taxes is a big draw” with captive insurance and universally advised captive insurance as “truly an opportunity that a small-‐business owner has to set aside funds and not get taxed personally and have some operational benefits.” An Insurer of One’s Own? It’s Possible, With Caveats, New York Times, Wealth Matters, July 13, 2012.
At one juncture, IRS agents implied that a captive insurance company could not invest its surplus, purchase real estate assets for investment purposes, or permit company input in the captive’s asset purchases or investment choices or banking means. Even the most conservative members of captive insurance community refute that. As Jay Adkisson, of Riser Adkisson, recognizes, the surplus “can be invested in anything.” Adkisson’s Captive Insurance Companies. Even further, in his public promotional material, Mr. Adkisson, well known for his IRS inclinations with his Quatloos and other associational ties, advises prospective clients and captive users a captive “gives the company the greatest latitude to attempt to make investment profits with its reserves” with domicile-‐dependent but permitted investments in real estate, stock, and a wide range of investment options domestically and internationally. Adkisson’s Captive Insurance Companies.
This approach to captive insurance use pervades throughout the legal, financial and accounting advisory community, both domestically and internationally. See Artex Tribeca, Captive Insurance & Alternative Risk Solutions (recommending under “Why Form A Captive” the ability to “retain premium dollars, tax benefits, estate planning, asset protection and wealth accumulation benefits.”)
Leading business professional publications throughout the insurance industry record the same pervasive advice by the legal, financial and accounting advisory community. Indeed, captives are frequently encouraged to use their investments at the behest and behalf of the parent company so that it “integrates the captive with the parent company’s capital spending program” and “rationalizes the financial management of the consolidated organization.” Captive Insurance Company Parents Can Benefit From Creative Loans, Business Insurance, January 29, 2012.
Even state regulators recognize the propriety of captive owning the parent company’s intellectual property, even their trademark, “becomes an asset of the captive and generates revenue for the captive” as well as ownership of buildings, airplanes and art collections. Captive Insurance Company Parents Can Benefit From Creative Loans, Business Insurance, January 29, 2012.
Captives can eve act as banks for their parents. See Companies Rethink Financing of Captive Insurers, Treasury & Risk: The Future of Finance Today, April 27, 2010.
These commentators’ reports and advisors’ recommendations each note that “captives returning surplus funds to parent companies through the use of intercompany loans, captives investing in parent company commercial paper, and captives setting up lease-‐back deals for fixed assets and equipment of the parent company” prove commonplace and consistently advised. See Companies Rethink Financing of Captive Insurers, Treasury & Risk: The Future of Finance Today, April 27, 2010.
Captives typically accept mere letters of credit from the parent to suffice for the collateral of such loans. See Companies Rethink Financing of Captive Insurers, Treasury & Risk: The Future of Finance Today, April 27, 2010. Such advice – the captive as a bank for the parent – pervades the industry. See Cashing In On Captives, Risk & Insurance Online, March 1, 2011. As these advisors recommend, “remember that premiums paid to a captive aren’t taxed and can be invested in stocks, bonds, mutual funds, real estate and other investments.” How A Business Owner Can Save Money, Your Smart Money Moves, June 22, 2010.
One of the leading captive insurance company promoters and management companies in the world, Marsh Captive Solutions of Marsh USA, recommends such use of the captive’s capital, with one of their most recently and broadly used captive insurance products treating captive insurance as effective tax-‐deductible reserves where the parent could fund the captive and receive back the same cash premium payments within a very short time frame, with few restrictions on the use of said funds. See Declaration of Frank Whelan. Marsh publicly promotes their “specialized expertise and strategic resources” in the captive management. See Marsh USA “Captive Solutions.”
This conforms to all levels of financial advice in the public realm, each and all relevant to both the industry norms the Internal Revenue Manual requires consideration of in any contemplated prosecution and furthered investigation, as well as the objective reliance available for presentation at trial in any contested matter.
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