Tenth Circuit Court Of Appeals Hears Captive Insurance Case

Capstone Associated Services, Ltd. announces that The Feldman Law Firm LLP and Foley Gardere have filed a reply brief with the Tenth Circuit Court of Appeals on behalf of Reserve Mechanical Corp. (Case Number 18-9011). Reserve is a client of Capstone.

The appeal challenges the U.S. Tax Court's rulings in the well-publicized Reserve captive insurance case. In its Opinion the Tax Court concluded that Reserve's transactions did not constitute insurance for federal income tax purposes. Reserve contends the Tax Court based its findings in an erroneous application of longstanding and well-accepted law. Reserve Mechanical argues that it satisfied the four-part test for insurance.

In analyzing the four factors, the Tax Court employed reasoning that was contradictory to decades-old caselaw. The Tax Court also went outside the record in making findings that were not supported by the evidence at trial. Reserve's reply brief addresses the issues raised by the IRS in its brief and refocuses the argument on issues the IRS ignored in its briefing.

In addressing the "insurance in the commonly accepted sense" findings of the Tax Court, Reserve Mechanical's reply brief states: "[The IRS] concedes that the tax court, in analyzing whether Reserve's transactions were insurance in the commonly accepted sense, acknowledged that (1) Reserve had adequate capitalization; (2) Reserve's "direct-written policies 'contained the necessary terms to make them valid and binding insurance' and ... were properly executed"; and (3) Reserve paid claims."

Despite expending pages rehashing those settled factors, Appellee does not contend that any were wrongly decided. 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. Reserve satisfied both factors, and Appellee's arguments to the contrary are wrong on both accounts."

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

The next step in the appeal is oral arguments, which are expected to take place early in 2021. A decision in the appeal is expected in the second or third quarter of 2021.

Capstone has previously released a number of commentaries that further explain the Reserve case, along with prior court filings.

Capstone has successfully resolved with no change over 55 captive tax matters over the last two decades. Now in its 22nd year, Capstone continues to serve clients in the alternative risk planning market in a wide range of industries throughout the United States.

Please contact The Feldman Law Firm LLP's Logan Gremillion or Stewart Feldman at 713.850.0700 or Capstone's Jeff Carlson at 713.800.0550 with any questions.