Certain tax and wealth planning benefits provided by CICs have prompted the United States Internal Revenue Service (IRS) to increase scrutiny and examinations of these structures (3); but, as we can see in Rent-A-Center, Inc. v. C.I.R., 142 T.C. No. 1 (2014)., captives are still viable entities when it comes to certain tax deductions. Captive insurance companies (CICs) are defined by the National Association of Insurance Commissioners (NAIC) as legal structures established for the purpose of insuring risks faced by owners of business enterprises (1). A CIC can be formed as a domestic business entity, but interested parties may also go offshore and seek foreign incorporation for this purpose (2).

“CICs can benefit individuals from an estate planning and wealth management point of view, but everything must be treated as a business,” explains Rocco Beatrice, Managing Director of Estate Street Partners, LLC, parent company of UltraTrust.com. “Individuals must pass an income and revenue check as it relates to the business entity they control; in essence, the company must have annual revenues of at least $1 million and net income of $500,000. This is not a matter of individual net worth; it is all about making money from a business enterprise.”

At the heart of Rent-a-Center v. the Commissioner of Internal Revenue, there is a large commercial enterprise that has substantial levels of risk through numerous locations and complex operations (5). This is a brand that operates all over the U.S. and thus must operate with considerable levels of liability. As is often the case with such large commercial enterprises, Rent-a-Center ran into certain operational risks that proved expensive to insure through third-party commercial insurance companies.

Mr. Beatrice commented on this particular CIC strategy before expanding on the case: “We can see the financial reasons for Rent-a-Center to form a CIC in Bermuda. In a way, the millions of dollars the company spent on litigation against the IRS probably came from the savings realized through years of CIC coverage.”

“The Rent-a-Center CIC structure is quite complex, but what the IRS seemingly had an issue with were the large payments made by the company to the CIC they controlled. The IRS determined that these were not tax deductible for insurance premiums, which are normally deemed as trade or business expenses deductible as per Section 162 of the Internal Revenue Code (6).