61 Pages Posted: 30 Apr 2018
Date Written: April 12, 2018
This Article examines the technique of converting non-deductible savings into deductible insurance premiums. This savings conversion mechanism is generally labeled “captive insurance,” but as this Article explains, the issue extends beyond the use of related insurance subsidiaries to include insurance contracts that are, in substance, designer investment contracts. This Article explores how moving away from reliance on a particular definition of insurance and towards normative income tax principles provides a clearer path for policing the boundary between savings and insurance contracts for income tax purposes. The governing principle is straightforward: a deduction for an insurance premium should not be allowed until there is a decline in value. The presence of related parties or various timing certainties alters the likelihood that the coverage purchased through captive structures consists of annual, discrete contracts whose value declines during each formal insurance term. Because of the difficulty in implementing the ideal solution—economic valuations that take into account various probabilities and relationships—this Article proposes three bright-line rule categories that could be used to separate deductible from nondeductible property insurance premiums.
Keywords: income tax, captive insurance
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