Auto Dealerships - Audit Technique Guide - Uncle Fed's Tax*Board

Appendix D
An Analysis of the Wright Case
No discussion of the dealer owned offshore reinsurance company would be complete without an
analysis of the William Wright and Lynne L. Wright v. Commissioner case, Docket Nos.
18407-90, 27968-90, 26402-91. T.C. Memo. 1993-328, CCH 49,174(M), amended by order
dated October 29, 1993, 67 TCM (CCH) 3095 (1993).
Wright is the first case that addressed the concept of dealer owned reinsurance companies.
Previously, the concept was addressed through case law in a piece meal approach. Even if the
case may be distinguishable from what your dealer entered into, the transaction analysis contained
within this case should be considered whenever the revenue agent finds a similar issue. The court
sided with the IRS.
The overriding issue concerned allocation of income. Specifically, should income of a closely held
offshore small life reinsurance company be allocated to the (sole) controlling shareholder? The
subsidiary issues concerned allocation of annuity interest, reasonable compensation, estimated
warranty expense, and penalties.
Dealer (D) owned multiple automobile dealerships (DLRS). (D) was an active participant in the
management of (DLRS). (DLRS) sold single premium credit life and credit (accident and health)
disability insurance in connection with loans extended by (DLRS). (CBL) was the direct insurer.
(DLRS) also sold extended warranty service contracts administered by various entities. (DLRS)
retained the amount paid by the consumer over the amount required to be forwarded to the
administrator (ADM). The price paid to (ADM) was fixed. The price paid by the consumer was
subject to negotiation.
During 1983, (D) decided to enter into reinsurance agreements. It was brought out during trial
that (D)’s reasoning for involvement with these schemes was to avoid tax and to create a liquid
fund which he could use to "retire" on. (D) used (M) as his reinsurance promoter. (D) nor (M)
had formal training or experience in the areas of insurance or reinsurance. (M) represented to (D)
that "minimizing or deferring the tax event is the cornerstone of his operational plan." (M)
recommended that (D) incorporate a small casualty company (FIR) in the Turks and Caicos
Islands. Being offshore would allow (FIR) to escape state regulation and capital requirements.
(M) also recommended that (FIR) become authorized to do business in the state of Nevada to
avoid state corporate income taxes.
(D) was advised by his retained C.P.A. and attorney, who indicated a lack of expertise in these
areas, to obtain a formal tax opinion from a "Big 8" firm to ratify or deny the validity of and tax
consequences surrounding these contemplated reinsurance agreements. (D) declined and went
forward.
(CBL) was involved in the credit life reinsurance plans because it desired to retain its volume of
business with (D).
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