Corporation Challenges Disallowance of Captive Insurance Premiums

A. Respondent erred in disallowing Petitioner's insurance expense as claimed in the amounts of $197,500 and $108,500 for the years at issue.

B. Respondent erroneously adjusted Petitioner's other expenses — Business Relations in the amount of $3,018 for the year ended December 31, 2017.

C. Respondent erroneously adjusted Petitioner's travel expense in the amount of $17,060 for the year ended December 31, 2017.

D. Respondent erroneously adjusted Petitioner's Other expense — storage fees in the amount of $45,500 for the year ended December 31, 2018.

E. Respondent erroneously determined that the purported underpayment of tax asserted for each of the years at issue is subject to the imposition of a penalty under IRC section 6662(a).

F. Respondent erroneously determined that the purported underpayment of tax asserted for each of the years at issue is subject to the imposition of a penalty under IRC section 6662(h).

A. Respondent's case challenges the deductibility of captive insurance premiums paid by Petitioner to Coaction Insurance (the “Captive”).

B. Petitioner faced insurable risk in the year at issue.

C. Petitioner has no ownership interest in the Captive.

D. The Captive was incorporated in Nevis.

E. The Captive is a separate legal entity apart from Petitioner.

F. The Captive was licensed to engage in the captive insurance business within or from Nevis.

G. The Captive was regulated under Nevis's insurance laws.

H. The Captive met the solvency requirements established by the Nevis Financial Services Regulatory Commission.

I. The Captive met the capitalization requirements established by the Nevis Financial Services Regulatory Commission.

J. The Captive maintained its holdings in allowable assets.

K. Written agreements were entered into between Petitioner and the Captive.

L. The written agreements between Petitioner and the Captive were intended between the parties to be recognized as contracts for insurance (“Policies”).

M. Policies issued by the Captive identify the insured.

N. Policies issued by the Captive contain the effective period for the respective Policy.

O. Policies issued by the Captive specify what is covered by the Policy.

P. Policies issued by the Captive state the Policy limit.

Q. Policies issued by the Captive state the premium.

R. Policies issued by the Captive are signed by an authorized representative of the Captive.

S. Policies written by the Captive constitute insurance for the purposes of the Nevis International Insurance Ordinance.

T. Policies issued by the Captive are enforceable.

U. Prior to issuing the Policies, the Captive engaged Mam Rivelle of Rivelle Consulting Services.

V. Mam Rivelle, AC AS, MAAA, FCA is a licensed actuary.

W. Mam Rivelle opined on Petitioner's uninsured risks.

X. Mam Rivelle opined on the premium pricing for the Policies issued by the Captive to Petitioner.

Y. The Captive selected a confidence level for pricing provided by Mam Rivelle.

Z. The Captive collected premiums from Petitioner in exchange for the grants of coverage.

AA. The Captive derived in excess of 50% of net premium revenue through a Quota Share Reinsurance Agreement.

BB. In conjunction with the Quota Share Reinsurance Agreement, the Captive entered into a Reinsurance Security Agreement.

CC. Consistent with the terms of the Quota Share Reinsurance Agreement, the Captive paid its share of risk pool claims.

DD. The Captive's insurance business provides a sufficient pool of insureds and unrelated risks to provide risk distribution.

EE. In exchange for payments made in the year at issue, Petitioner received the coverages provided for in the Policies.

FF. The purchase of the Policies meaningfully changed the economic position of each party to the Policies, including Petitioner.

GG. Following the purchase of the Policies, Petitioner had contractual coverages in place as provided by the Policies and was obligated to pay premiums to the Captive.

HH. Following the purchase of the Policies, the Captive had an additional asset on its books, premium income, and was contractually obligated to pay Petitioner if a covered event occurred.

II. The exchange of policy premiums for the contractual obligation to pay if a covered event occurred, changed the economic position (apart from tax effects) of the parties.

JJ. The captive policy premiums paid by Petitioner were paid to an insurance company and are deductible as insurance for federal tax purposes.

KK. The captive policy premiums paid by Petitioner are deductible ordinary and necessary business expenses.

LL. In the alternative, if the policy premiums are not deductible as insurance for federal income tax purposes, the payments at issue are otherwise deductible under the Internal Revenue Code.

MM. Petitioner properly claimed $3,018 in business relations expenses for the year ended December 31, 2017.

NN. Petitioner properly claimed $17,060 for travel expenses for the year ended December 31, 2017.

OO. Petitioner properly claimed $45,500 for storage fees for the year ended December 31, 2018.

PP. Petitioner's returns at issue are correct as filed.

QQ. Alternatively, if the policy premiums are not deductible, the payments made by Petitioner to the Captive constitute contributions to capital by Petitioner's shareholder.

RR. Petitioner cooperated with respondent's requests for information and documentation made during the examination of the years at issue.

SS. Petitioner acted in good faith and made a reasonable attempt to comply with the provisions of the Internal Revenue Code.

TT. Petitioner kept proper books and records.

UU. Petitioner substantiated the items claimed on petitioner's tax returns.

VV. Petitioner relied in good faith upon professional advice.

WW. Petitioner's reliance on professionals' advice was reasonable.

XX. Petitioner's advisers were competent tax professionals.

YY. Petitioner provided all necessary and accurate information to its professionals.

ZZ. Petitioner met all disclosure obligations in place for the years at issue.

AAA. Petitioner was not negligent and did not disregard applicable rules and regulations

BBB. Petitioner is not subject to any of the penalties proposed by Respondent under I.R.C. §6662.

CCC. Respondent failed to secure written managerial approval prior to asserting a penalty against Petitioner

DDD. No underpayment of tax due for the year at issue is attributable to one or more non-disclosed, non-economic substance transactions.