Beckett G. Cantley, Relearning the Lesson: IRS Judicial Doctrine Attacks on the Captive Insurance Company Pre-Planned Tax Deductible Life Insurance Tax Shelter, 14 Hous. Bus. & Tax L.J. 181 (2014).
Summary: There are certain members of the life insurance industry that are in perpetual pursuit of the ultimate potential driver of life insurance sales—tax-deductible life insurance premiums. Some in this industry have previously used aggressive retirement plan funding, and numerous other tax vehicles for these purposes, but in the end the IRS has always succeeded in defeating such strategies through administrative enforcement and litigation. The latest attempt to achieve tax-deductible premiums is the formation of a small business captive insurance company (“CIC”) for the pre-planned purpose of using the CIC funds to invest in life insurance. The owner of a small business forms an IRC § 831(b) CIC, and pays a presumably tax- deductible premium to the CIC for business risk insurance issued by the CIC. Subsequently, the CIC uses a significant part of the tax-free premium immediately to purchase life insurance on the common owner of the small business and CIC. In general, life insurance premiums are not deductible as ordinary and necessary business expenses, and tax-deducted funds should not be used to purchase life insurance. The IRS is likely to view the CIC created and funded for the primary purpose of purchasing personal life insurance for its owner, as an abusive tax shelter.