New York: Premiums paid to Captive Insurance Subsidiary are Not Deductible

A New York trial court recently affirmed a Tax Appeals Tribunal decision holding that a taxpayer was not entitled to deduct premiums paid to a captive insurance subsidiary in computing New York entire net income for the 2006 through 2009 tax years at issue. For federal tax purposes, the captive insurance subsidiary was included in the taxpayer’s federal consolidated group. For New York tax purposes, the captive insurance subsidiary was not included in the New York combined reports, but rather filed and paid insurance tax under Article 33 of New York’s Tax law. On audit, the Division disallowed the premiums paid to the captive insurance subsidiary for two reasons: First, they were not allowable deductions under federal tax law, and second, they were not “premiums” paid for bona fide insurance. After the Tribunal, affirming an Administrative Law Judge, held in favor of the Division, the taxpayer appealed. On appeal, the court ruled that the Tribunal “properly” concluded the premiums payments were not deductible.  In reaching this conclusion, the court rejected the taxpayer’s argument that New York’s overall captive insurance regime was intended to provide favorable tax treatment for captive insurance companies, including a deduction for premiums paid. Please contact Russ Levitt at 202-872-6717 with questions on Matter of Stewart’s Shops Corp. v. New York State Tax Appeals Tribunal.