Rent-A-Center’s Captive Passes Muster in U.S. Tax Court; IRS Not Likely to Appeal

The U.S. Tax Court Jan. 14 issued its ruling in Rent-A-Center Inc. v. Commissioner, 142 T.C. No. 1, 2014 BL 9532 (1/14/14), holding that payments by Rent-A-Center’s (RAC) wholly owned subsidiaries to RAC’s wholly owned Bermuda captive insurance company, Legacy, were deductible as legitimate insurance expenses.In the split decision, the majority found that Legacy was a legitimate, bona fide insurance company created for ‘‘a myriad of significant and legitimate nontax considerations.’’The captive insurance world of captive owners and service providers has been waiting three years for this decision, and now that the decision is in, the next question is whether the Internal Revenue Service (IRS) will appeal the decision to the Fifth Circuit. While RAC’s captive structure is far from perfect—there may be issues with parental guarantees and some creative accounting positions (all thoroughly covered in the dissenting opinion)—the IRS will most likely forgo an appeal because of what a loss or even a win at the circuit level might mean.