Payments that Stewart’s Shops made to its captive insurance subsidiary Black Ridge Insurance Corporation (BRIC) “were not deductible premiums for determining federal taxable income”, according to the New York Tax Appeals Tribunal.
Stewart’s Shops, the owner and operator of 300 convenience stores and gas stations in New York and Vermont, lost its appeal in July against previous determinations holding that since there was neither risk shifting nor distribution of risk, the payments could not be considered deductible premiums.
The pure captive was formed in 2003 under New York’s captive legislation, which was introduced in 1997. Under those statutes, captive insurance companies would be subject to gross premium taxes.
In 2010 and 2011, the New York Division of Taxation conducted an audit of Stewart’s Shops and concluded that the payments from Stewart’s Shops to BRIC were “not allowable”.
The division asserted that the payments were not deductible premiums for determining federal taxable income because “there was neither risk shifting nor distribution of risk, the payments could not be considered deductible premiums”.
The New York Tax Appeals Tribunal agreed with an administrative law judge who determined that the deduction should be disallowed despite the recognition of BRIC as an insurance company for purposes of New York insurance law.
Commenting on the decision, specialist tax agency Ryan said: “It would appear that Stewart’s Shops did everything right in establishing BRIC, and that BRIC was an insurance company under New York insurance law.”
“But for tax purposes, not only does an insurance company need to meet the requirements of state insurance laws, it must also be considered an insurance company for federal income tax purposes, if the state uses federal tax income as the starting point for determining state income tax.”
“If it had included enough additional parties and their related risks in BRIC, the diversification of risk requirements would have been satisfied, and the deductions would have been allowed.”
