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IRS Says Currency Fluctuation Cover Is Not Insurance for Tax Purposes

Currency Relationships
April 06, 2015

By P. Bruce Wright, M. Kristan Rizzolo, and Saren R. Goldner
Sutherland Asbill & Brennan LLP

As those working in the captive area are aware, the Internal Revenue Service (IRS) has raised questions as to whether a number of different types of risk qualify as insurance risk that can be transferred by means of an insurance policy as opposed to some other type of risk transfer contract, e.g., a derivative.

In a recently released Chief Counsel Advice (CCA) document, CCA 201511021, the IRS considered a series of insurance policies issued by a captive that provided protection for currency fluctuation.

(a) One type of contract provided indemnification for lost earnings relating to a decrease in foreign currency relative to the U.S. dollar up to a stated limit for a period of 1 year.

(b) The second type of contract provided indemnification for lost earnings relating to an increase in foreign currency relative to the U.S. dollar up to a stated limit for a period of 1 year.

The IRS concluded that the contracts were not insurance because they lack insurance risk (i.e., it was a business or investment-type risk) and are not “insurance in its commonly accepted sense” (because the taxpayer’s obligation “does not arise because of an event that damages or impairs the protected asset or its income stream”). In addition, the IRS determined that there was a lack of risk distribution with respect to the second contract.

Mr. Wright and Ms. Rizzolo are partners and Ms. Goldner is counsel in the tax department of the law firm of Sutherland Asbill & Brennan LLP. Mr. Wright and Ms. Goldner are located in New York and Ms. Rizzolo is located in Washington, DC.

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