Avoiding, or at least winning, an IRS challenge

Lance Wallach

Of course, a Captive insurance company can be extremely beneficial in many aspects, as
insurance profits are kept within the group and tax benefits may be obtained. As is true with any
business planning, however, the Captive must be a legitimate business entity and be in
compliance with the law. There are opportunities for the Service to challenge Captive insurance
companies; therefore, proper formation and ongoing administration is essential. The Service may
have given up on the economic family doctrine, but the Service specifically stated in Rev. Rul.
2001-31 that it may continue to challenge Captives based on the facts and circumstances of each

Legitimate business reason. As is true with any business planning, a Captive must possess a
legitimate business reason to avoid being characterized as a sham by the Service. Some
legitimate business reasons are as follows: 

(1) To obtain coverage where insurers are unwilling to do so. 
(2) To reduce premium payments. 
(3) To control risk. 
(4) To increase cash-flow. 
(5) To gain access to the reinsurance market
(6) To create diversification. 
(7) To balance coverage.

 Lance Wallach, CLU, ChFC, CIMC, speaks and writes extensively about financial planning, retirement plans, and tax reduction strategies.  He is an American Institute of CPA’s course developer and instructor and has authored numerous bestselling books about abusive tax shelters, IRS crackdowns and attacks and other tax matters. He speaks at more than 20 national conventions annually and writes for more than 50 national publications.  For more information and additional articles on these subjects, visit www.vebaplan.com, www.taxlibrary.us, lawyer4audits.com or call 516-938-5007.

The information provided herein is not intended as legal, accounting, financial or any type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.

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