IAT REINSURANCE AND PETER KELLOGG SUE US REVENUE FOR $186M

Bermuda-based IAT Reinsurance Co, owned by the family of Peter R Kellogg, is, along with Mr Kellogg, suing the US Inland Revenue Service (IRS) for $186m in taxes and interest that they paid the IRS after IAT's tax-exemption status was revoked retroactively, reports Forbes. Mr Kellogg and IAT Re claim that the IRS was unduly prejudiced because it was working in a politically charged atmosphere created by journalists. IAT Re and Mr Kellogg claim that the revocation was timed to maximize the taxes owed and as punishment. The lawsuits, which have just been made public, assert that the IRS knew that Congress had created a loophole when it failed to cap the investment income a tax-exempt company could earn, but that it only acted when public attention was drawn to the matter. The 501(c)(15) exemption was created in 1954, for small mutual insurers. The Tax Reform Act of 1986 amended that exemption so that investor-owned insurers that wrote less than $350,000 a year in premiums. The IRS spotted this and in 1989 published an article on the matter, but the law was not actually changed until 2004. IAT Re's origins were actually back in the 1980s, when Mr Kellogg put $10m into each of two insurance syndicates – IAT and SLK – that were an unsuccessful New York-based attempt to compete with Lloyd's. Forbes report notes that subsequently the syndicates were reincorporated in Bermuda, with SLK being incorporated into IAT in 2000. In the process of reincorporation, Mr Kellogg brought the total capital to $32m, including reserves of $16m. Although the IRS questioned why such large capitalization levels were needed, the 1986 law did not bar overcapitalization. In 2008 the IRS used the argument that, because more than half of IAT's activity was investment rather than insurance, it was not an insurance company, and therefore had not had a tax-exempt right from January 1 2000 to December 2001 (when it bought Harco National Insurance). Kellogg and IAT claim that date was chosen to "punish this taxpayer". The lawsuits assert that IAT and SLK were always insurers and had always intended to reassume writing policies when the market improved. Neither, claim Kellogg and IAT Re, did IAT or SLK mislead the IRS in order to gain exemption.