February 05, 2012
Although we think that the first important legal battle for captive insurance occurred during the economic substance cases that started in the 1970s, the reality is two cases from the 1950s (US. v. Weber and Consumers Oil Corp v. US) have all the hallmarks of modern-day captive insurance programs. Most importantly, at their conclusion, these cases offered the IRS the opportunity to clearly outline specific rules and regulations related to captives. However, the IRS declined to do so, instead issuing a Revenue Ruling stating they would not follow the conclusion of the cases and instead continue to litigate captive insurance cases.
First, let's set the stage by explaining what caused the need to create one of these captives in the first place: the Trenton Flood of 1955
- The worst natural catastrophe to befall Trenton was the flood of 1955.
- City streets were turned into rivers and hundreds of families were evacuated as the normally placid Delaware River surged over its banks.
- Flood damage totaled $100 million in New Jersey, mostly in property damage, with $500,000 coming from the destruction of Mercer County roads.
- In the weeks leading up to the flood, the area had been scorched with temperatures hitting the 90s nearly every day in July and early August.
- Worse yet, there had been little rain to ease the record-setting temperatures, as most towns considered water rationing measures.
- The earth became parched, reservoirs dried up, and sewers backed up due to a loss of water pressure.
- Area residents, especially Burlington County farmers who had suffered severe crop damage due to the heat, were probably praying for rain, ignoring the adage, "Be careful what you wish for."
- After the drought came the deluge, as Mother Nature flashed her fickle side.
- The drought broke on August 7, when 2.9 inches of rain fell on Trenton.