The Service concluded in Revenue Ruling 2001-3148 that it “will no longer invoke the economic family theory with respect to captive insurance transactions.” It reasoned that no court addressing captive insurance transactions has fully accepted the economic family theory as provided in Revenue Ruling 77-316.
Whether a transaction qualifies as insurance depends on the underlying facts and circumstances. Relevant factors include the amount of related (and unrelated) party risks, the capitalization of a captive and whether related parties provide guaranties or other financial enhancements. The impact of salient factors is addressed below.
