Tax deduction not applicable if entity is “sole client” of captive

Revenue Ruling 2005-40 (21 KB) Issued June 2005

This revenue ruling 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. In this case policyholders are simply insuring themselves.

In other words, the transaction might be considered a deposit, a loan, a contribution to capital, or a non-insurance indemnity arrangement – none of which are tax-deductible – but it wouldn’t be considered insurance.