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A current U.S. Tax Court dispute involving a little-discussed line of coverage — residual value insurance — could have broader insurance market implications.
Hamilton, Bermuda-based R.V.I. Guaranty Co. Ltd. is fighting an IRS decision that residual value policies, which cover leasing companies' unexpected losses in the value of equipment or other property they rent, involve investment or business risk and not insurance risk.
Post-trial briefs were filed last month in the case, and a ruling is expected later this year.
“This is probably the most significant single issue up for decision” before the Tax Court now, said Thomas M. Jones, a partner at McDermott Will & Emery L.L.P. in Chicago. The case is the first in which a court has tried to distinguish between insurance risk and business risk for tax purposes, he said.
If the court finds residual value policies are not insurance, it could raise questions about taxation of premiums for other nontraditional coverage, he said.
A ruling against R.V.I. might create uncertainty about other types of insurance, Mr. Jones said.
Microcaptives could be especially vulnerable to an adverse ruling, since they may insure exposures — such as loss of trade credit or key customers — that the IRS might argue are business risks, he said.
The owners of captive insurers have scored major victories in cases against the IRS, but they still face uncertainties on several fronts.