Why has the IRS fought captive insurance for so long?

0:00Matt QueenThe problem I have with the IRS is, that they're a bad faith regulator. They've never liked

0:06Matt Queencaptives, and I can prove it. Captain insurance was invented, as I said, relatively recently, I think insurance can draw its origins from the coffeehouses in London circa 1600 1700s somewhere near. I don't know when Edwin Lloyd actually had his coffee house, but it was isn't the age of exploration. So the way it worked was a sailor would go down to the North Caicos, they would come back and they

0:35Matt Queenwould say, "Oh, some pirates over there, watch out." And a bunch of dukes and lords and barons would sit there and say, "Oh, man, I really like this trade we're in." So if you lose that salt that you're taking down to the North Caicos to pirates, I'll help you out. Like, I'll replace the boat, but I don't want to do it all myself. I'll take like half of it and you take the other half. Let's get this other guy. He'll take another portion, maybe only a third. And then from there, they basically just started pooling money, and they traded off a

1:01Matt Queenrumor. So they would underwrite a contract. They would write their name under the contract if they felt like this was a safe endeavor. And that was the origins of modern insurance. You can trace insurance arguably back to the pirates before that who would indemnify them. Really, it was almost like a life insurance policy. They would give you six pieces of eight if you lost your right hand in battle. And there's an argument that maybe there's like a version of life insurance back in the Roman times where if a man fell

1:31Matt Queenin battle, the Roman soldiers would hand a helmet around, it would take arms for the widow. Kind of like a life insurance policy, but modern insurance definitely for sure got it started with Lloyd's and then hundreds and hundreds of years later in the 1950s, Captain insurance showed up with a guy named Edwin Reese or something. I forget exactly his name. So this guy named Reese, he created a captive insurance company. He named

1:57Matt Queenit a captive because it was captive to a larger company. It was for mining. He was unable to procure insurance for a mining operation. I want to say in Kentucky or West Virginia. And he literally just went out to easy Bermuda or Lloyd's and he procured reinsurance. More or less. Nobody knew what the hell he was doing, but he just did it all on his own. Almost like the way I don't know if you ever saw the big short, but like when the guy with one eye went up to Goldman

2:26Matt QueenSachs and they're like, you want to short the American mortgage industry, like, yeah, sure, we'll take your money and we'll figure it out. So he did like a bespoke deal and he called it a captive insurance company. Well, skip ahead. Skip ahead. In the late 1970s, during the Carter administration, the captives had flourished to the point where the IRS said, this is just part of my French bullshit. But you can't possibly do this. A captive insurance company is basically just a wallet. I mean, like, you're just taking money

2:53Matt Queenfrom the operating account to put in this other operating account. You can't take a business deduction for that. It's all one family, except for this little case called Moline. So there's a case out there where the IRS who makes a big deal about if you have a C corporation, you're going to tax this way. But if you have an S corporation or tax that way, if you have an LLC or tax this way, the IRS decided, well, we're just not going to worry about your corporations. If it's a captive and the, if it's the US Supreme Court or if it was like a district court, but they said, come on

3:23Matt Queen, you can't be breaking and so are the calls when I forget to like carry the one when I have a C corporation seven S corporation. But then ignore a captive insurance company. That's also a corporation. You have to respect these things. They exist. So, and I think that came to a head in the carnation case where in the carnation case, they cited the Moline precedent saying the IRS does have to respect the corporate form. So then the IRS went back to the drawing board and said, okay, it might

3:53Matt Queenbe an actual company, but it's still holistically. Part of my French bullshit. So then I came up with this other idea called the economic family doctrine saying that like if the premiums just being washed around and the citizen corporate entities, it's not really insurance. It's just like a savings account. And they, really leaned into that. They fought that fight until 1989 or so. I think in the humanity case, I actually know the attorney who was able to overrule that

4:22Matt Queenbecause the sixth circuit, I think it was the sixth circuit ruled in favor of the taxpayer saying, no, you can absolutely create your own little insurance company. But the IRS was undeterred and they tried that once again, kind of dressing it up in a different is a different type of economic family argument. And they went after Sears and robot company. Now, back in the old days, Sears was a big company and they

4:52Matt Queenowned another insurance company might have heard of called all state. They challenged whether or not all state was a real insurance company. Their idea being, since the Sears company owns all state and Sears chose to procure its insurance through all state, that can't be real insurance because if there were losses that all comes basically from the same balance sheet. The seventh circuit beat the hell out of the IRS. You can

5:22Matt Queen't, you can't say that all states not insurance. And they like that, was the biggest loss in the history of the, I've ever seen from the IRS. I mean, like open mocking open mocking from the seventh circuit saying you have to get over yourself. You're like, this is like just deal with it. So that was a bet. That was a big loss for them in the early 90s. Now they, had a couple of wins and losses on some very technical issues through the rest of the 90s. And then they kind of reached just a, like a simmering boil with

5:48Matt Queencaptives. They hated them, but they couldn't be much about them until 2015. And then they won this enormous case called the Avrahami case. And it's an 831 B captive. It was a small captive that was engaging in really aggressive practices. They weren't a lot of people I know who actually know the people who put that all together. They all agree these guys were really skirting on the outside of the law. I don

6:16Matt Queen't want to get in trouble here with anyone. I don't know if what they were doing was actually as breathtakingly fraudulent as described by the IRS, but with lots of reasonable people seem to think that's what was going on. And there was a legitimate number of others in the industry who were leveraging captives to ensure cell phones for a million bucks a premium, because there's a very slick tax deduction you can pull off. If you deduct the premium from the parent company

6:44Matt Queen, it goes into the into the captive subsidiary and you never pay any claims because why would you like what's going to happen to your cell phone, you could drop it in toilet. Like, I mean, these were obviously specious insurance policies. And then those cap of insurance companies would in turn not pay income tax because that 831 B election. Because if you wrote a certain de minimis amount of premium, you get this huge tax loophole. And the IRS said, ha, we got you. And they did. They

7:11Matt Queendid. They won like 10 case. They've won 10 cases in a row on that more or less the exact same