In December 2011, the IRS issued Technical Advice Memorandum 201149021, concluding that a residual value insurance contract that ‘insures against market decline is not a contract of insurance for federal income tax purposes.” On September 21, 2015, in R.V.I. Guaranty Co., LTD. & Subsidiaries, v. Commissioner of Internal Revenue, the Unites States Tax Court disagreed, ruling that the IRS was wrong and residual value insurance is insurance for tax purposes.
In the end, the court concluded that upon analyzing insurance risk, risk transfer, risk distribution and the commonly accepted notion of insurance, the residual value policies were insurance for federal tax purposes. In this process, the IRS took another big hit when it comes to insurance.
For full details on the R.V.I, please take a look at our very own Steven Miller’s breakdown of the case on the alliantNational blog.
We have seen in examinations where we were representing captive managers, captive insurance companies or their related operating companies, in which the IRS has made similar aggressive arguments attempting to limit the definition of insurance. This decision follows other recent court decisions that do not support such a limited view. The IRS remains active in the area however and we will continue to monitor the impact of this ruling on future captive insurance court cases.