Captives Cheer Tax Ruling
A reversal of a 1999 ruling that said the United Parcel Service illegally used offshore insurers as tax shelters came as a pleasant surprise to a captive insurer group, which is wondering whether this will be the last word on the controversy.
A three-judge panel of the 11th U.S. Circuit Court of Appeals sent the case back to the U.S. Tax Court. The appeals court said the Internal Revenue Service should analyze any claims against UPS under tax code provisions cited by the shipping company.
"The industry was very surprised at the Court of Appeals decision in the UPS case," said Captive Insurance Companies Association President Carl Modecki, principal of Carl A. Modecki Consulting Services in Tallahassee, Fla. "I guess the issue now is whether the IRS will try to appeal it or whether theyll let it go."
Asked whether the agency intends to appeal the overturned ruling, the IRS had no comment. Last month, the IRS announced that it would stop routinely challenging deductions for insurance premiums paid to an insurer owned by the insured. (See NU, June 11, page 1.)
The 1999 ruling was in reference to a subsidiary created in Bermuda in 1983 by UPS. Its purpose was to reinsure UPS packages insured for more than $100. Called Overseas Partners Ltd., the subsidiary was later spun off, but is still owned by UPS employee-shareholders.
The 11th Circuit said that "the sophistication (of the insurance revisions) does not change the fact that there was real business that served the genuine need for customers."
Mr. Modecki said the 2-1 decision is even "stronger in many ways than it would appear." He said that the "one judge that would have kept the lower court ruling clearly does not understand the terms and what was involved in the issue of fronting."
Mr. Modecki quoted a letter used as evidence in the lower court that was sent to AIG Insurance from UPS. "The letter detailing the plan claimed that AIG would serve in merely a "fronting" capacity and would bear little or no actual risk," he said. "Well, thats what fronters do. They do bear risk because there is reinsurance involved, but its their ability to have admitted paper in all the states that also is a key aspect of fronting."
Herb Martin, chairman of the legislative committee for CICA, and chief risk officer for the Salmon Family Companies in Little Rock, Ark., said: "It looks like things are looking up even more for captives. I think it has to be good news all around, whether youre onshore or offshore. Any time captives win a round it helps all of us."
Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, July 6, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.
© Touchpoint Markets, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.