IRS Filling The Pipeline With Captive Insurance Cases And Focusing On Dubious Practices

Forbes:

Jay Adkisson, Contributor

I write about asset protection.

Logo of the Internal Revenue Service (Photo credit: Wikipedia)

Mr. John Glover of the IRS General Counsel’s office spoke about captive insurance arrangements Friday in San Francisco at a meeting of the American Bar Association’s Tax Section, which was hosted by that Section’s Insurance Companies Committee and co-sponsored by the Business Law Section’s Committee on Captive Insurance (of which I am the current Chair).

By agreement, the program was not recorded, Mr. Glover’s remarks were not “on the record”, and what follows comes from my notes and should not be taken as anything like a transcript of his remarks.

Mr. Glover has long been instrumental in IRS rule-making with regard to captive insurance companies, and so many tax practitioners in the field hang on to his every syllable and nuance as if he were the Fed Chairman.

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The IRS has concerns about risk pooling arrangements and is beginning to focus on such arrangements, stated Mr. Glover, especially in cases where there is nominal laying and assuming of risks, but in the end reconciliation there really isn’t any risk-shift because the captive or business owner will reimburse the pool for significant losses. But there is also concern where the risk pool is simply an account where money comes in, and money goes out, and it is called “insurance” when it is really anything but.

Another concern that the IRS is starting to focus on, stated Mr. Glover, are dubious risks. The example he gave was of a widget shop in Nebraska that purchases tsunami insurance. The IRS has an increased interest in the pricing of captive insurance policies for such things as terrorism, cyber-liability, etc., which may be the subject of abuse.

Notably, Mr. Glover addressed the lack of IRS enforcement in the area of captives, noting that it has taken some time to get cases into the pipeline, but making a special point that the IRS now has more cases pending in tax court against captives than ever before — and the growth of the sector means that the IRS will be tasking more resources towards abusive practices. (This is not to be read that the IRS is challenging captives generally; to the contrary, the IRS now recognizes the legitimacy of proper captive insurance arrangements, and Mr. Glover has himself drafted much of the guidance for that purpose).

Captive insurance cases currently pending before the U.S. Tax Court include:

• Rent-A-Center, Inc. & Affiliated Subs. (Dkt. Nos. 8320-09, 6909-10 & 21627-10)
• YRC Worldwide & Subs. (Dkt No. 6714-10)
• Securitas Holdings, Inc. & Subs. (Dkt. No. 21206-10)
• Dielco Crane Service (Dkt. No. 21726-10)
• Pilgrim’s Pride (Dkt. No. 16972-10)
• Vincent Enterprises, Inc. & Subs. (Dkt. No. 2759-10

Other cases in other courts include:

• Proliance Surgeons (Dkt. No. 1:09-cv680) (Court of Federal Claims)
• Salty Brine (Dkt. No. 5:10-CV-00108-C); K&T Farm Ltd. (Dkt. No. 5:10-CV-00109-C); Wasson Solid Waste Disposal System (Dkt. No. 5:10-CV-00110-C); Five Star Consolidated Companies (Dkt. No. 5:10-CV-00111-C); Thomas & Kidd Oil Production (Dkt. No. 5:10-CV-00141-C) (U.S. District Court for the Northern District of Texas) (consolidated cases).

Mr. Glover also stated that IRS agent Steve Henson is maintaining a resource well that is available to answer questions for field agents and assist them with particular issues as they increasingly run across captive insurance arrangements.

But Mr. Glover also noted that in attempting to provide guidance for captive insurance practitioners, the IRS is hamstrung by the lack of case law as to many issues, and at this point can only set out various buoys (his term) to help practitioners stay in the safe waters and away from the shoals.

Aside from Mr. Glover’s remarks, other discussion focused on the importance of following NAIC reserving standards, which the tax court has found to be among the most persuasive evidence in whether the reserves were fair and reasonable. It is also very important for the Board of Directors of a captive to carefully review and approve an actuary’s recommendations.

There was a good deal of discussion at the meeting about so-called “Micro Captive” qualifying for special treatment under Tax Code section 831(b) and about the proliferation of promoters who sell captives as essentially a tax shelter with little or no consideration of the true insurance function of such companies.

Finally, there was a discussion of state taxes as they related to captives after the passage of Dodd-Frank, with some practitioners, notably captive tax attorney Bruce Wright, observing that there has been an significant uptick in the actions by various states to collect these taxes, particularly for businesses in California, New York and Texas. Captive tax attorney Chaz Lavelle pointed out that with rare exceptions the states often win these challenges in the state courts, and, despite there sometimes being good arguments why the taxes should not apply under the Todd Shipyards and Dow Chemical opinions, they are often more costly for captive insurance companies to fight than to just pay the taxes to begin with.

The bottom line is that the captive insurance tax world continues to evolve, and that certain dubious practices that did not merit much attention in the past are now almost certain to receive much stricter attention in the future. That somebody has gotten away with these practices in years before is essentially meaningless, or as the SEC requires in prospectuses:

“Past performance is no guarantee of future returns.”

This article at http://onforb.es/1byPmYO and http://goo.gl/byuZLR

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How Small Businesses Should Plan for Disasters

Photograph by Blake Sell/AP Images

Sveinn Storm pumping water out of his flooded store, Storm Bros. Ice Cream Factory, in October 2012 in Annapolis, Md.

Businessweek:
By Karen E. Klein September 06, 2013

Question: After Hurricane Sandy, I didn’t even have time to think about preparing for the next disaster. Now that my business is finally running smoothly again, I’d like to prepare in case another major storm hits. What should I be doing?

Image via CrunchBase

Answer: You’re ahead of the game, since your business has survived one major disaster and you’re familiar with what it takes to recover and reopen. The U.S. Small Business Administration estimates that one-quarter of businesses that are hit by disaster fail as a result.

Even after coming through a catastrophe—whether it be a hurricane, fire, or terrorist attack—some small business owners don’t prepare for the next one, says Bob Risk (yes, it’s his real name), who owned a 65-employee disaster cleanup business for 18 years and now works as a safety expert for Staples (SPLS). “I’ve seen people get hit with a flood, fight to get back into business, talk about how terrible it was, and then three months or three years go by and the exact same thing happens—and they haven’t taken any measures to deal with it.”

BLOG: What Happened to Small Businesses Walloped by Hurricane Sandy?

SBA opens Disaster Loan Center in Austell, GA, October 26, 2009 (Photo credit: Wikipedia)

If you’re worried that disaster prep will be costly and time-consuming, those fears are unfounded, says Bob Boyd, president and chief executive of Agility Recovery, based in Charlotte, N.C. Small steps can make a big difference. “Don’t get paralyzed by worrying about big solutions that are expensive when it’s easy to knock off the low-hanging fruit,” he says.

English: Martinsville, IN, June 13, 2008 -- U.S. Small Business Administration (SBA), Deputy Administrator, Jovita Carranza, offers aid and advice to a Hoosier family after flooding in southern Indiana, at a Disaster Recovery Center (DRC). Barry Bahler/FEMA (Photo credit: Wikipedia)

Boyd recommends you start at the SBA’s disaster planning site and think through the three major problems that result from disasters: loss of power, loss of communications, and loss of property. “If you can take phone calls and keep production going, you’ll be light years ahead of your competitors. Your customers will never come back to you if your business fails them. But everyone will come to you—and they’ll never leave—if you prove your business to be successful and trustworthy,” he says.

Here’s what to do:

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English: Goldsboro, NC, October 6, 1999 -- Michael C. Allen of the U.S. Small Business Administration, explains recovery programs at a forum recently held in Goldsboro, NC. The SBA works in partnership with FEMA to assist the victims of disaster. Photo By DAVE SAVILLE/ FEMA News Photo (Photo credit: Wikipedia)

Plan for power loss. Talk to an electrician about what kind of generator you would need to power your business and how to get one in a hurry. “Most business people don’t know what they would need if they had to find a generator someplace,” Boyd says. If you plan ahead, he says, “as soon as you lose power, you can make one call and get one.”

Plan to communicate. With power down, you may not be able to rely on electronic devices or have access to important contact information. “Make sure your employees know how to reach you and how you’ll communicate with them in an

English: Findlay, Ohio, September 20, 2007 -- Small Business Administration (SBA) representative Gilbert YingLing (L) listens to Brian Wilkins, a local business owner whose glass company suffered extensive damage in recent flooding. SBA contacts local business owners as part of their Disaster Outreach Program. John Ficara/FEMA (Photo credit: Wikipedia)

emergency, whether it’s on Facebook (FB), Twitter, or through text messages,” Boyd says. Print out important phone numbers, bank account numbers, credit-card numbers, and any other information that is critical to your operation and update it regularly. Then put hard copies in several locations and make sure your staff knows where they are located.

Plan to keep working. Your final major hurdle will be finding a place to work if your location is under water or otherwise inaccessible. “Think through where you’re going to go, and don’t just rely on a work-from-home strategy,” Boyd says. “If your office is dark and unconnected, your home may be also. Come up with some remote locations where you can relocate temporarily, perhaps setting up a reciprocal arrangement with a business or a friend in another city.”

BLOG: The SBA’s Role as Home Lender, Post-Oklahoma Tornado

Buy basic supplies. It’s easy to purchase emergency preparedness kits and keep them in your office, your home, and your car. They can be expensive, though, and will probably include many items you don’t really need. “Grabbing an old duffel bag and throwing some basic things in there can meet your requirements just as effectively,” Risk says.

What should be in it? Risk suggests crank-powered radios, flashlights, and cell-phone chargers; heavy-duty extension cords; emergency water; mylar blankets and inexpensive ponchos; and rubber boots that can be pulled over your shoes. Don’t forget easy to carry emergency food, such as high-calorie energy bars with long shelf-lives. And, for 50¢ or $1 each, glow sticks on lanyards provide 12 hours of light in case you need to evacuate your employees or walk home after dark.

Prepare your employees. “Designate a disaster preparedness point person, or team, to spearhead the planning efforts,” Esmail Hozour, chief executive of Palo Alto (Calif.)-based Etón, which sells preparedness products, writes in an e-mail. That team should set up an area for employees to meet in your building or outside it; maintain an updated list of employees to make sure everyone is safe and accounted for after a disaster; display emergency contact information in a central location in your workplace, and encourage your staff to enroll in first aid and CPR classes, paid for by your company.

STORY: The Importance of Disaster Plans

Check out some additional resources: The Independent Community Bankers of America, a trade group representing 7,000 community banks, lists financial preparedness tips on its website. The SBA is hosting three free webinars this month on disaster preparedness for small businesses.

Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues.

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How to Aggregate Risks Across Your Organization

English: Risk management sub processes (Photo credit: Wikipedia)

Companies should develop and maintain strong risk-data aggregation capabilities that take into account correlations within their risk portfolios.

CFO.com:
Kristina Narvaez      
&Larry Warner      

For many organizations, gathering risk information from many business units and departments and then creating a consolidated risk report to share with senior managements and boards can seem daunting.

The sheer volume of risk data to be aggregated can overwhelm even the most astute decision makers. That’s especially true because many organizations still manage their risks in silos, separating them into operational units without understanding their correlations. But concentrations of risk can mean that bad events spread quickly across an organization’s silos.

One difficulty arises in managing risks via a silo-based approach is the inability to aggregate those risks across different business units and operational departments, which makes evaluating those risks from a global perspective hard. As a result, risk managers and CFOs struggle with such issues as unstable and weakly founded risk- correlation assumptions, inconsistent risk metrics and differing time horizons for different types of risks.

English: A flowchart pointing out the different types of risks in Banking (Photo credit: Wikipedia)

Risk have been defined for the financial-services industry by the Basel Committee of Banking Supervision’s 2013 Principles of Effective Risk Data Aggregation and Risk Report published in January 2013 as “the gathering and processing of risk data according to the bank’s reporting requirements to enable the bank to measure its performance against its risk tolerance/appetite.”

Risk aggregation can be applied to more than just an organization’s financial risks. In fact, many organizations outside the financial-services industry have started to use a broader definition of risk aggregation. That definition describes the term as the accumulation of the total risk exposures of various types of risks throughout the organization along with the ability to compare its various risk exposures to the organization’s risk-appetite statement.

Objective Correlatives
While it’s important to understand the effect on the organization of individual risks, it’s rarely the case that two individual risks are either perfectly correlated, and hence can be simply added together, or perfectly independent, allowing the use of a simple approximate formula to combine them.

Because of that, it becomes necessary to design a robust general process enabling the aggregation of risks while allowing for the fact that the outcome for any one risk might depend on other types of risks in the organization.

Ideally, organizations should develop and maintain strong risk-data aggregation capabilities that take into account correlations within their risk portfolios to ensure risk reports reflect risks in a reliable way.

Not by Data Alone
Accurate, complete and timely risk information is, after all, a foundation for effective risk management. But risk information alone does not guarantee that the board and senior management team will get the timely and accurate information they need to make effective decisions.

The right risk information needs to be presented to the right people at the right time. Risk reports should contain correct content and be presented to the appropriate decision makers in a timely manner that allows for an appropriate response.

While organizations may have the ability to easily aggregate financial risks, there are other risks, such as hazard, operational and supply-chain exposures, that represent larger opportunities that can sometime be overlooked.

Effective programs need both quantitative and qualitative data and should recognize the need of both tangible and intangible risks. For organizations with multiple locations, divisions, and /or multinational operations, risk aggregation can present more complicated problems.

Some organizations have effectively tackled it by taking an evolutionary approach that builds upon their existing, internal risk-reporting processes. This has often proven to be a more practical and cost-effective approach that trying to aggregate risks all at once.

For organizations that use workshops, surveys or audits in their risk management practices, extracting both quantitative and qualitative information can lead to a much better understanding of risks and more effective aggregation.While quantitative information is easy to extract and useful in itself, a more thorough review of the data may present management with the opportunity to think more comprehensively about risk. Often, organizations that extract common themes among disparate data can more easily identify emerging risks.

English: A qualitative categorization of different risks in terms of scope and severity (Photo credit: Wikipedia)

For intangible or hard-to-quantify risks, such as those involving personnel issues, some companies effectively use a practical approach to risk aggregation. This requires a common set of questions to evaluate the scope and potential impact of each risk. For “scope” organizations evaluate as such questions as: How many business units or countries are affected? How many employees do the risk treatments affect? And, how many business processes or functions are affected?

For “potential impact” they may ask: “What could be the potential outcomes of this risk our employees, vendors, suppliers or customers? What impact could an issue have on our brands and corporate reputation? And, what are the potential impacts on sales, expenses, or profits?

These can be rated on a 4 or 5 level scale basis ( e.g. insignificant, low medium, major, or catastrophic ) to determine how critical the risk is to the business. Some organizations use the additional dimension of complexity as an additional risk evaluation tool. For example, they might ask: Is the issue becoming more widely spread?

English: Prioritizing risk and opportunities based on their risk/opportunity management contribution and cost-effectiveness contribution (Photo credit: Wikipedia)

The output of the evaluation of intangible or difficult-to- quantify risks can provide organizations with major insights when it aggregates risks. For example, the inability to find an adequate number of properly skilled and trained technical staff may show up as a risk in China or in Central and South America countries. The resulting inability to properly staff manufacturing facilities can adversely affect production capabilities. Thus, an issue which may be viewed as a nuisance in the domestic job market may be major when viewed on an aggregated basis. In fact, unexpected correlations may be revealed when reviewing these risks on a more holistic basis.

Such practical approaches increase the effectiveness of both risk identification and aggregation by creating a uniformity of approach. That yields better information and reliability.

When used properly, good risk aggregation can help an organization to effectively assume more risk. That’s because they have a better understanding of the breadth of the risks that they are taking on. Using risk aggregation can also lead to a better understanding of the individual risks being taken, a competitive advantage to an organization, and a more efficient and effective risk management program.

Kristina Narvaez is president and CEO of ERM Strategies LLC and Larry Warner is president of Warner Risk Group.

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The Chairman's Blog: The Fear Factor: How Scared Are People?

Scared child (Photo credit: Wikipedia)

The Chairman's Blog: Gallup:

By Jim Clifton, Gallup Chairman and CEO, and Deepak Chopra, M.D.

Over the past decade the word “fear” has become all too familiar. After 9/11, critics of the war on terror called it fear-mongering. After the financial crash in 2008, living in a climate of fear became the lot of millions of people who lost their jobs, retirement accounts, and homes. But what about the most basic fear, which undermines society itself, the fear of bodily harm, either through crime or terrorism?

English: Photographs of the Rally to Restore Sanity and/or Fear. (Photo credit: Wikipedia)

Walking the streets in countries around the world carries a real risk. The incidence of kidnapping has skyrocketed in Mexico and South America. Recently, the shocking rate of rape in India has come to light. Religious factions in the Islamic world wreak havoc and death for ordinary citizens.

In the face of such violence, the prevalence of fear can have a profound effect on the health, wellbeing, and economic development; if a society is in a constant state of fear, it won’t produce anything good.

... Gallup’s World Poll set out to quantify fear of bodily harm. The usual measure, police reports and crime statistics, aren’t particularly reliable, since what they report is how many criminals were pursued or caught. ... (Ironically, if a reform-minded mayor brings in an effective police chief, and the chief does a great job at arresting more criminals, it can present the appearance of an increase in crime.) ... Statistics can’t reveal the large number of victims who don’t go to the police after being robbed, raped, or assaulted on the streets. ...

... Gallup scientists found one survey question that gets to the heart of the matter: “Do you feel safe walking alone at night in the city or area where you live?” ... People who feel unsafe are preoccupied to the point that their wellbeing deteriorates. Over time, fear worsens how their entire lives will turn out.

The results of our research are stark. We found that women in sub-Saharan Africa, for example, don’t feel safe walking just 100 meters from their villages, possibly because they fear being raped or beaten. As a result, they can’t walk to markets to buy or sell goods. In the event that their fear is lifted, these women would increase Africa’s GDP a little or a lot with their lost economic activity.

The same effect can strike closer to home. One of us, Jim Clifton, lives in Georgetown, an affluent neighborhood in Washington, D.C. Several years ago, Georgetown had a serious crime spree, and people started going home directly after work -- once home, they tended to stay in. As fear spread about walking alone after dark, spending on everyday things like shopping and dining out decreased significantly. The neighborhood’s economy suffered until law and order was restored through an ambitious effort by local law enforcement.

These are just two examples of fear’s pernicious reach. ... Here are some of the basic findings:

% AFRAID (to walk alone in their neighborhood at night)
Venezuela 74% 
Afghanistan 60% 
Russia 50%
Congo 50%
Mexico 44%
India 35%
United States 25%
Canada 16%
China 16%
Hong Kong 11%

Americans deserve to be shocked to find that a quarter of their fellow citizens are afraid to walk the streets. Gallup tracks the fear score of U.S. citizens nightly and finds huge variance by city. For instance, in the U.S., the three big metro areas with the least fear are Minneapolis, Denver, and Raleigh -- with about 20% of their citizens reporting they have fear walking alone at night. At the other end are Memphis and New Orleans, where more than a whopping 40% of citizens say they fear walking alone at night.

Fear is sometimes linked with actual danger, but that’s not the real point. Fear is personal and subjective. Fear gains its power, as terrorists well know, through the perception that one is in danger.

We feel any government that believes in open communication should publish the fear index for their city or nation, to start a dialogue about how to reduce the causes of fear. Closing the gap between perception and reality, as far as risks are concerned, is equally important. That 25% of Americans who are afraid to walk alone doesn’t mean that one out of four of us is in danger of bodily harm on any given night.

English: Words associated with Fear (Photo credit: Wikipedia)

... A rigid law and order society like Singapore is very different than life in the United States, as is the enforced conformity of China. On the other hand, the perception of fear, as it arises in the individual, has known causes. People become more afraid when:

• They feel isolated and alone.
• Their surroundings undergo rapid change.
• Minorities and outsiders are labeled “them,” who are totally unlike “us.”
• Support structures begin to deteriorate, including police, fire departments, churches, and designated services for the poor and elderly.

In other words, a negative result on the fear index calls for better solutions than clamping down on civil liberties and sending the police out on random stop-and-search patrols. ... Gallup analysts again found huge variance in the hearts and minds of citizens by region.

Globally, the implications of these data are fascinating. Imagine how much different a person’s peace of mind is in Venezuela, where 74% are afraid to walk alone at night, or in Afghanistan, where nearly 60% are afraid, versus Canada (16%) or Hong Kong (10%). Think about how much more psychological energy a society has when people don’t live with chronic anxiety. In countries like the U.S., under conditions many would consider a climate of fear, one only has to witness how a relatively low anxiety level can impact entrepreneurship, innovation, health, and wellbeing -- all the things that make human development possible.

This post originally appeared in the San Francisco Chronicle.

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