Ensuring that the IRS treats an insurer as an insurer for tax purposes is critically important for captive insurance companies. This may sound simple, but it can get complicated in certain captive situations.
The IRS states that for a transaction to be considered insurance, both “risk shifting” and “risk distribution” must be present.
Revenue Ruling 2005-40 disallows the premium deduction for a company that is the sole client of an insurance company. According to the IRS, such coverage does not spread risk among more than one policyholder and hence is not a bona fide insurance transaction.
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