By Andrew Appleby and Dmitrii Gabrielov

The New York State Tax Appeals Tribunal released its precedential decision in Stewart’s Shops, affirming an Administrative Law Judge’s determination that payments by a corporation to its captive insurance company did not qualify as deductible insurance premiums because the arrangement did not constitute insurance for federal income tax purposes. (see prior coverage here).

The taxpayer owned and operated convenience stores and gas stations. It insured risk related to these operations with its captive insurance company, which it did not treat as an insurance company for federal tax purposes. The Tax Appeals Tribunal determined that because the transactions did not constitute “insurance” for federal income tax purposes—because they lacked risk shifting and risk distribution—the premiums were not deductible for New York State corporate franchise tax purposes. The Tax Appeals Tribunal also found that neither the 2009 nor 2014 amendments to New York’s captive insurance combination regime authorized the taxpayer to deduct its premiums in the tax years at issue (2006 through 2009). The outcome may have been different if the taxpayer had a parent holding company with multiple subsidiaries (including the captive) below it, as the arrangement may have qualified as insurance under federal tax law. In re Stewart’s Shops Corp., DTA No. 825745 (N.Y. Tax App. Trib. July 27, 2017).