In a long-awaited ruling, a divided U.S. Tax Court this week ruled that subsidiaries of Rent-A-Center Inc. are entitled to deduct premiums paid to the company's captive insurance company from federal taxes.

The Internal Revenue Service had argued that Rent-A-Center's captive was a sham entity created to generate federal income tax benefits. But in its ruling Tuesday, the court held that Rent-A-Center's Legacy Insurance Co. Ltd. captive was a genuine insurance company with real risk transfer taking place between the subsidiaries and the captive.

“It's a great taxpayer victory,” said Charles J. Lavelle, a partner with the Bingham Greenebaum Doll L.L.P. law firm in Louisville, Ky. “But it was a 10-6 decision, so if the courts are going to look at it for facts and circumstances, it was kind of a narrow victory.”

Rent-A-Center formed its Legacy Insurance Co. Ltd. captive in Bermuda in 2002, with the captive electing to be treated as a U.S. company for federal income tax purposes.

After the IRS sent the company notices of tax deficiencies for a number of years contending the subsidiaries' premiums to the captive were not tax deductible, Rent-A-Center took the issue to the tax court, where the case was tried in November 2011.

“The policies at issue shifted risk from RAC’s insured subsidiaries to Legacy, which was formed for a valid business purpose; was a separate, independent, and viable entity; was financially capable of meeting its obligations; and reimbursed RAC’s subsidiaries when they suffered an insurable loss,” the court’s majority held.

The court’s majority also held that with Rent-A-Center’s subsidiaries operating between 2,623 and 3,081 stores with between 14,300 and 19,740 employees and 7,143 and 8,027 vehicles during the years in question, genuine risk distribution was achieved in the Legacy captive’s workers compensation, automobile and general liability insurance programs.

In terms of risk distribution, the ruling is “focusing on the number of risks rather than the number of entities,” said Thomas M. Jones, a partner with McDermott Will & Emery L.L.P. in Chicago.