IRS Advises Microcaptive Arrangements Are Transactions of Interest

IRS Advises Microcaptive Arrangements Are Transactions of Interest

Internal Revenue Service

In field attorney advice, the IRS concluded that some promoted microcaptive insurance arrangements are the same as or substantially similar to transactions of interest identified in Notice 2016-66 based on five factors specified in the notice.

In field attorney advice, the IRS concluded that some promoted microcaptive insurance arrangements are the same as or substantially similar to transactions of interest identified in Notice 2016-66 based on five factors specified in the notice.

In field attorney advice, the IRS concluded that some promoted microcaptive insurance arrangements are the same as, or substantially similar to, transactions of interest identified in <a href="/lr/resolve//1fxfq">Notice 2016-66</a> based on five factors specified in the notice. A microcaptive transaction is considered a transaction of interest if it involves a person who directly or indirectly owns an interest in an entity conducting a trade or business. The arrangement also must involve a captive insurance company, directly or indirectly owned by the insured or its related parties, that enters into contracts directly with the insureds that is treated as insurance or reinsures risks that the insured initially insured with an intermediary company.   The 2016 notice applies only to captive insurance companies that make an election under <a href="/research/federal/usc26/831#cpkx-0000003" resolve="/lr/resolve//cpkx#cpkx-0000003">section 831(b)</a>. Under that provision, captive insurers — companies wholly owned and controlled by their insureds — that qualify as small insurance companies can elect to exclude some of their annual net premiums from income so that the captive pays tax only on its investment income. Further, for a microcaptive arrangement to constitute a transaction of interest, the insured person or a related party must own at least 20 percent of the voting power or value of the captive insurance company’s outstanding stock. Lastly, if a transaction involves a captive insurance company that satisfies either a 70 percent loss ratio test or a circular flow of funds test, the microcaptive transaction falls within the scope of the notice.  After reviewing each factor, the IRS determined that the promoted microcaptive insurance arrangements are transactions of interest. The advice also summarizes disclosure rules for the transactions under <a href="/research/federal/cfr26/1.6011-4" resolve="/lr/resolve//ctf0">reg. section 1.6011-4</a> for participants and under <a href="/research/federal/usc26/6111" resolve="/lr/resolve//cnzf">sections 6111</a> and <a href="/research/federal/usc26/6112" resolve="/lr/resolve//cp3k">6112</a> for material advisers, as well as associated penalties for failing to comply with the disclosure requirements.

In field attorney advice, the IRS concluded that some promoted microcaptive insurance arrangements are the same as, or substantially similar to, transactions of interest identified in Notice 2016-66 based on five factors specified in the notice. A microcaptive transaction is considered a transaction of interest if it involves a person who directly or indirectly owns an interest in an entity conducting a trade or business. The arrangement also must involve a captive insurance company, directly or indirectly owned by the insured or its related parties, that enters into contracts directly with the insureds that is treated as insurance or reinsures risks that the insured initially insured with an intermediary company.   The 2016 notice applies only to captive insurance companies that make an election under section 831(b). Under that provision, captive insurers — companies wholly owned and controlled by their insureds — that qualify as small insurance companies can elect to exclude some of their annual net premiums from income so that the captive pays tax only on its investment income. Further, for a microcaptive arrangement to constitute a transaction of interest, the insured person or a related party must own at least 20 percent of the voting power or value of the captive insurance company’s outstanding stock. Lastly, if a transaction involves a captive insurance company that satisfies either a 70 percent loss ratio test or a circular flow of funds test, the microcaptive transaction falls within the scope of the notice.  After reviewing each factor, the IRS determined that the promoted microcaptive insurance arrangements are transactions of interest. The advice also summarizes disclosure rules for the transactions under reg. section 1.6011-4 for participants and under sections 6111 and 6112 for material advisers, as well as associated penalties for failing to comply with the disclosure requirements.