12 Brother / Sister Subsidiary Requirement

Revenue Ruling 2002-90 (163 KB)Issued December 11, 2002:ﾠ

The IRS concluded that the premiums paid by 12 operating subsidiaries to a captive insurance subsidiary owned by a common parent are deductible. The facts in Revenue Ruling 2002-90 are similar to the brother-sister subsidiary arrangement as outlined in the 5th Circuit’s ruling in Humana.ﾠThe IRS concluded that the transaction contained adequate risk shift and risk distribution and that the amounts paid for insurance by domestic operating subsidiaries to an insurance subsidiary of a common parent are deductible as “insurance premiums.”ﾠ

The IRS also based their position on several facts as follows:ﾠ

• The premiums of the operating subsidiaries were determined at arms-length. The premiums were pooled such that a loss by one operating subsidiary is borne, in substantial part, by the premiums paid by others.ﾠ
• It is important to note that the IRS analyzed each of the subsidiaries to ascertain:ﾠ
• If they conducted themselves in all respects as would unrelated parties to a traditional relationship;ﾠ
• Whether the insurance company is regulated as an insurance company in the jurisdiction(s) where it does business;ﾠ
• Whether an adequate amount of capital was present within the insurance company;ﾠ
• If the insurance company was able to pay claims;ﾠ
• The adequacy of the insurance company’s financial performance; andﾠ
• If separate financial reporting was maintained on behalf of the insurance company.