Our Steve was interviewed by the New York Times regarding Captive Insurance and IRS scrutiny. The article was published today and you can read it on the NYTimes page.
Until a decade or so ago, most captives, as they are known, were set up by large companies.
But captives have gained in popularity among small-business owners who see another benefit: They can be designed so that the risks they insure are so unlikely that the captives will never pay out a claim and all those premiums will go back to the business owners or their heirs with little or no tax.
Stephen M. Moskowitz, a tax lawyer and certified public accountant in San Francisco who advised the California lawyer, said he also worked with a dentist who set up a captive to insure against a terrorist attack in his dental office.
He said in an interview that he was confident he was following the letter of the law. “All these Fortune 500s that make billions in profits and don’t pay any income taxes? How do they do that? They follow the rules,” he said. “My personal opinion is these rules were put in to benefit the big boys, and the medium boys got a hold of them.”
If a captive were found by the I.R.S. to be abusing the law, the deductions would be denied and back taxes and penalties owed. But the burden of proof seems to be high.
The I.R.S. went after Mr. Moskowitz’s dentist who insured against a terrorist attack in his dental practice but lost, he said.
“At first blush you’d say, ‘No way,'” he said. “The I.R.S. said no. The tax court said yes. We won.”
Other insurance risks that get listed for policies written by captive insurance companies include disability, employment practice liability, business interruption and online attacks.
Yet most business owners who set up captives keep their regular insurance – they also get a deduction for those premiums – and never pay out a claim from their captives. So they keep all that tax-free money in a company they or their heirs own.
“You hope there are no claims,” Mr. Moskowitz said. “I’ve owned my house for 25 years. I’ve never made a claim. But the insurance company keeps taking your premium.”