Publication Date

Spring 5-7-2022

Document Type

Article

First Advisor

Mantzke, Kate

Degree Name

B.S. (Bachelor of Science)

Department

Department of Accountancy| Department of Political Science

Abstract

What is insurance for the purposes of a tax deduction? The Internal Revenue Code does not define insurance. Without this definition, taxpayers using alternative insurance products to manage their risks must look to case law to determine whether their arrangements count as tax deductible insurance or non-deductible self-insurance. This paper dives into the four prongs of insurance: insurance risk, risk shifting, risk distributing, and commonly accepted notions of insurance. This paper looks to cases that have dealt with the deduction of captive insurance premiums to provide better insight into the practical application of this test. After discussing the evolution of case law on this issue, this paper goes on to discuss the current issue in the captive insurance world: the IRS crackdown on microcaptive arrangements. Microcaptives are small captive insurance companies which have special tax advantages. As the IRS attempts to crack down on abuse of these entities, this paper considers the case law defining insurance and offers suggestions to Congress on how to best protect the law it has passed.

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