Court Denied Tax Deduction for Captive Insurance
A federal court ruled that a business must face trial over disallowed insurance premiums totaling nearly $240,000.
Updated on Oct. 13, 2026 in Insurance
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The U.S. Court of Federal Claims denied a motion for summary judgment in a case involving disputed tax deductions from the 2016 tax year. The court ruled that genuine factual disputes remain regarding whether the insurance arrangements were valid.
Why it matters
This legal action highlights ongoing IRS scrutiny into how businesses use captive insurers to reduce their tax liabilities. Because the court found factual disputes, the taxpayer cannot yet claim these deductions as a matter of law, keeping their ultimate tax liability uncertain.
The taxpayer attempted to deduct $239,773 in premiums during the 2016 tax year. The IRS subsequently disallowed these deductions, initiating a legal battle that remains unresolved.
The players
Capstone Associated Services, Ltd.
A company that provides alternative risk solutions and faced legal scrutiny over its captive insurance tax deductions.
Internal Revenue Service
The federal agency responsible for tax collection and enforcement that disallowed the premium deductions in this case.
U.S. Court of Federal Claims
The federal court that handles monetary claims against the United States and serves as an arbiter in tax-related legal disputes.
The details
The court applied a three-part test to determine if the captive insurance arrangement involved legitimate risk transfer and distribution. Evidence cited in the ruling suggested that claims handling deviated from formal policies and that the captive insurer invested heavily in loans back to the owners. These factors created genuine factual disputes regarding whether the entities functioned as legitimate insurers or as sham entities.
Timeline
The disputed premium deductions occurred during the 2016 tax year.
The U.S. Court of Federal Claims issued its ruling on September 25, 2026.
Money Landscape
This ruling follows the long-standing legal framework established by the Ocean Drilling & Exploration Co. v. United States case to evaluate insurance legitimacy. The decision underscores the continuing judicial reliance on historical precedents to define tax-deductible insurance activities.
Businesses utilizing captive insurance structures should review their operational documentation to ensure claims handling and investments align with standard commercial practices. Consult a tax professional regarding how the IRS evaluates risk transfer and distribution in insurance arrangements.
The takeaway
The court denied summary judgment because the legitimacy of the insurance arrangement requires a deeper factual investigation. Business owners should maintain rigorous, independent documentation for all insurance-related transactions to avoid potential challenges to tax filings.
Further reading
For more on managing business risk, visit our guide to Insurance.
Source note: This article includes information reported by Thomson Reuters.
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