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Reserve Files Opening Appeals Brief in Captive Insurance Tax Case

Lawyer working at a table with law books in the background
March 02, 2020

Reserve Mechanical Corp. has filed an opening appeals brief challenging the US Tax Court's rulings in the Reserve captive insurance tax case. The brief identifies what it says are specific ways in which the Tax Court erred in its adverse opinion issued in June 2018.

The Feldman Law Firm LLP and Foley Gardere filed the brief with the Tenth Circuit Court of Appeals, according to Houston-based Capstone Associated Services Ltd., manager for the captive insurance arrangement.

In its opinion, the Tax Court concluded that Reserve's transactions did not constitute insurance for federal income tax purposes. The brief argues that the Tax Court erroneously held that Reserve's insurance arrangements did not meet two of the four necessary insurance criteria, concluding that Reserve failed to satisfy adequate risk distribution and that Reserve's arrangement with its affiliated company (Peak Mechanical & Components, Inc.) was not "insurance in the commonly accepted sense."

Reserve's opening brief explains that Reserve satisfied the risk distribution test by receiving more than 30 percent of its gross premiums from reinsuring pooled and blended risks of more than 150 insureds under more than 500 direct-written policies, issued by PoolRe Insurance Corp.

The brief states as follows.

Reserve's direct-written policies provided real insurance: when Peak suffered a covered loss and made a claim, Reserve paid. Reserve's risk distributing arrangements imposed real contractual rights and obligations. If Peak suffered a large covered loss, a substantial portion of the loss over a predetermined amount would be borne by the fifty-plus insurers participating in the risk pool. By the same token, if one of those insurers responded to a large loss, Reserve would also be called upon to pay its proportionate share of the loss.

The brief also contends that the Tax Court employed legal reasoning that was contradictory to decades of existing case law and that the court went outside the record in making findings that were not supported by the evidence at trial.

The Tenth Circuit's decision in the Reserve appeal is expected to carry enormous implications for the captive insurance industry, according to Capstone.

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