Captive Insurance Appeal in Reserve Mechanical Will Likely
Fail
The line between legitimate tax planning and unsuccessful tax
avoidance is indistinct. Courts routinely grapple with whether a
taxpayer has crossed the line from legitimate tax planning to
unsuccessful tax avoidance. Legislated exemptions, such as the one
provided under section 501(c)(15) for some insurance
companies, are a public and open invitation to tax planning.
This kind of tax planning runs the risk, however, of being
considered unsuccessful tax avoidance in circumstances in which the
taxpayer has a weak or nonexistent business purpose for an
insurance arrangement. In examining the bona fides of an insurance
arrangement, courts will look behind the formal structure and
scrutinize its reasonableness and business purpose to determine if
the taxpayer has met the requirements for the insurance
exemption.
