Lance Wallach

Of course, a Captive insurance company can be extremely beneficial in many aspects, as

insurance profits are kept within the group and tax benefits may be obtained. As is true with any

business planning, however, the Captive must be a legitimate business entity and be in

compliance with the law. There are opportunities for the Service to challenge Captive insurance

companies; therefore, proper formation and ongoing administration is essential. The Service may

have given up on the economic family doctrine, but the Service specifically stated in Rev. Rul.

2001-31 that it may continue to challenge Captives based on the facts and circumstances of each

case.

Legitimate business reason. As is true with any business planning, a Captive must possess a

legitimate business reason to avoid being characterized as a sham by the Service. Some

legitimate business reasons are as follows:

(1) To obtain coverage where insurers are unwilling to do so.

(2) To reduce premium payments.

(3) To control risk.

(4) To increase cash-flow.

(5) To gain access to the reinsurance market

(6) To create diversification.

(7) To balance coverage.

Lance Wallach, CLU, ChFC, CIMC, speaks and writes extensively about financial planning, retirement plans, and tax reduction strategies. He is an American Institute of CPA’s course developer and instructor and has authored numerous bestselling books about abusive tax shelters, IRS crackdowns and attacks and other tax matters. He speaks at more than 20 national conventions annually and writes for more than 50 national publications. For more information and additional articles on these subjects, visit www.vebaplan.com, www.taxlibrary.us, lawyer4audits.com or call 516-938-5007.

The information provided herein is not intended as legal, accounting, financial or any type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.

Captive Insurance Plans, Want to Get Audited? - HG.org

Captive Insurance Plans, Want to Get Audited? - HG.org

The insurance industry have been conjuring ways to make life insurance premiums tax deductible. Over the years we have seen many schemes that have failed IRS scrutiny. Welfare benefit plans set up under I.R.C. section 419, 412(e) plans and Producer Owned Reinsurance Companies (PORCs) are all common examples.

When one scheme fails it isn’t long before a resourceful promoter comes up with a different product. Inevitably promoters find some lawyer or accountant to draft a favorable opinion letter and a new industry is born. In a few years, however, the IRS catches up and declares the arrangement to be a listed transaction and abusive tax shelter. As an expert witness I have never lost a case in this field. It is easy to beat the deep pockets of the insurance companies who provide product to these plans. Even though they have business owners sign fraudulent disclaimers saying that the owners will get their own tax advice. These disclaimers are then used when the inevitable happens, the IRS audits and the business owner sues the insurance company.

The latest entries seeking to find a way to make life insurance premiums deductible is a small business captive insurance company or CIC.