Reserve Tax Case Brief Argues Transactions Did Constitute Insurance

A reply brief filed in the US Tenth Circuit Court of Appeals on behalf of Reserve Mechanical Corp. in Reserve's tax case with the Internal Revenue Service (IRS) argues that its captive insurance arrangements did meet the requirements to constitute insurance for federal tax purposes.

The reply brief was filed by the Feldman Law Firm LLP and Foley Gardere. Capstone Associated Services Ltd., Reserve's captive manager, noted that the appeal challenges the US Tax Court's 2018 ruling in the Reserve Mech. Corp. v. Commissioner, T.C. Memo 2018-86, captive insurance tax case.

The Tax Court concluded that Reserve's transactions did not constitute insurance for federal tax purposes. But Reserve contends that the Tax Court based its findings on an erroneous application of longstanding and well-accepted law and argues that it satisfied the four-part test for insurance.

In a statement, Capstone said that in analyzing the four factors, the Tax Court employed reasoning that was contradictory to decades-old case law and also went outside the record in making findings that were not supported by the evidence presented at trial.

The brief argues that Reserve's transactions were insurance "in the commonly accepted sense." It argues that the IRS concedes that the Tax Court acknowledged that Reserve was adequately capitalized, that its "direct-written policies 'contained that necessary terms to make them valid and binding insurance' and … were properly executed," and that Reserve paid claims.

"Accordingly, only two factors remain in dispute—whether Reserve was operated like an insurance company and whether Reserve's premiums were reasonable and negotiated at arm's length," the brief says. "Reserve satisfied both factors, and Appellee's arguments to the contrary are wrong on both accounts."

Oral arguments in Reserve's appeal are expected to take place in early 2021, with a decision expected during the second or third quarter of next year.

"The Tenth Circuit's decision in the Reserve appeal is expected to carry significant implications for the captive insurance industry," Capstone said in its statement. "Indeed, the appeal has attracted the attention of ten different state associations and one national captive insurance association which have jointly filed briefing in support of Reserve with the appellate court."