Rent-A-Center, Inc. v. Commissioner
142 T.C. 1
| Tax Ct. | 2014Background
- Rent‑A‑Center, Inc. (RAC) formed Legacy Insurance Co., Ltd. (Legacy), a wholly‑owned Bermuda captive, in December 2002 to insure portions of its workers’ compensation, automobile, and general liability risks for RAC’s subsidiaries; premiums were actuarially determined and allocated to subsidiaries.
- Legacy wrote the lower‑layer coverage while Discover Re (and other unrelated insurers) provided excess coverage; SRS (a third‑party administrator) administered claims and validated losses.
- Legacy elected under §953(d) to be treated as domestic for U.S. tax purposes, kept separate bank accounts, and produced audited statutory financials submitted to the Bermuda Monetary Authority (BMA).
- Legacy’s balance sheet showed large deferred tax assets (DTAs) from timing differences between book and tax recognition of premiums; RAC provided a parental guaranty (up to $25M) so the BMA would allow DTAs to be treated as admissible statutory assets for solvency purposes through 2006.
- The IRS issued notices of deficiency disallowing RAC’s deductions of payments to Legacy as insurance premiums (years 2003–2007); the Tax Court considered whether Legacy was a bona fide insurer and whether the arrangements involved risk‑shifting, risk distribution, and common‑sense insurance.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether payments to Legacy qualify as deductible insurance premiums under §162 | RAC: Legacy was a bona fide insurer; premiums were actuarially set; payments are ordinary and necessary insurance expenses | IRS: Payments were effectively self‑insurance (sham captive), lacking true risk‑shifting/distribution | Court: Payments deductible as insurance expenses under §162; Legacy was a bona fide insurer |
| Was Legacy a sham / created primarily for tax benefits? | RAC: Formed for legitimate nontax business reasons (cost reduction, control, access to markets) | IRS: Captive was an accounting device and circular flow indicates sham | Court: Not a sham — legitimate business purpose, regulatory oversight, arm’s‑length contracts, separate accounts, and adequate capitalization |
| Did the arrangement effect risk‑shifting from insured subsidiaries to Legacy? | RAC: Subsidiaries shifted risk — a covered loss affects Legacy’s balance sheet, not the subsidiaries’ net worth; risk shifted and validated by SRS | IRS: Parent/subsidiary ties, parental guaranty, and structure mean risk remained within economic family | Court: Risk shifted — analysis focused on insured subsidiaries’ balance sheets; parental guaranty did not negate shifting as it did not affect subsidiaries’ net worth |
| Did Legacy provide adequate risk distribution and meet common notions of insurance? | RAC: Legacy insured thousands of stores/employees/vehicles across jurisdictions — statistically independent risks; charged actuarial premiums; regulated by BMA | IRS: Legacy was thinly capitalized, relied on DTAs and parental support, and conducted operations via parent (book entries) — not like unrelated insurers | Court: Risk was sufficiently distributed (many independent risks); Legacy met Bermuda statutory requirements (with BMA approval) and operated in commonly accepted sense of insurance |
Key Cases Cited
- Helvering v. Le Gierse, 312 U.S. 531 (U.S. 1941) (establishes insurance test: risk‑shifting and risk‑distribution)
- Moline Props., Inc. v. Commissioner, 319 U.S. 436 (U.S. 1943) (respect separate corporate existence unless sham or contrary congressional intent)
- Clougherty Packing Co. v. Commissioner, 811 F.2d 1297 (9th Cir. 1987) (parent‑captive arrangements: balance‑sheet/net‑worth analysis to evaluate risk‑shifting)
- Humana Inc. & Subs. v. Commissioner, 881 F.2d 247 (6th Cir. 1989) (distinguishes parent‑captive and brother‑sister payments; brother‑sister payments may shift risk and be deductible)
- Malone & Hyde, Inc. v. Commissioner, 62 F.3d 835 (6th Cir. 1995) (parental guaranty/undercapitalized captive can negate risk‑shifting)
- Beech Aircraft Corp. v. United States, 797 F.2d 920 (10th Cir. 1986) (captures skepticism toward captive arrangements when economic family concept applies)
- Kidde Indus., Inc. v. United States, 40 Fed. Cl. 42 (Fed. Cl. 1997) (parent indemnity to captive undermines existence of risk‑shifting)