Neither the Code nor the regulations define “insurance”. However, the Supreme Court has stated that “[h]istorically and commonly insurance involves risk-shifting and risk-distributing.” Over time, courts have looked primarily to four criteria in deciding whether an arrangement constitutes insurance for Federal income tax purposes: (1) the arrangement must involve insurable risks; (2) the arrangement must shift the risk of loss to the insurer; (3) the insurer must distribute the risks among its policyholders; and (4) the arrangement must be insurance in the commonly accepted sense. Although these criteria are not independent or exclusive, they establish a framework for determining whether insurance exists under the Federal tax law.
Follow the link to read more of the article, “The Kings River Captive Insurance Case“, featured in the American Bar Association Tax Times, Vol. 36 No. 4, August 2017, authored by David Slenn, partner at Shumaker, Loop & Kendrick, LLP.