The Captive Insurance Companies Association ("CICA"), a trade association representing the captive insurance industry, has issued a statement on section 831(b) companies with cautionary language: The traditional captive insurance company industry and CICA are extremely concerned about the misuse of small captives utilizing the IRC 831(b) election and the attendant publicity about "captives" being a tax avoidance device. Although there is nothing wrong with the utilization of the 831(b) election when a small captive insurance company is truly engaged in insuring the risk of its parent company/owner(s), the traditional captive insurance industry strongly opposes the utilization of small 831(b) captives primarily for tax sheltering purposes. In simple language, do 831(b)s right or don't do them at all!
The IRS recently dropped The Big One on the small captive insurance company sector, being captives that have made the election under section 831(b), by way of Notice 2016-66 (you’ll note that last three digits are “666″ — who says the IRS doesn’t have a sense of humor?). You can find the notice here. The Notice listed some, but by no means all, 831(b) captives as “Transactions of Interest”, which is best thought of as a yellow flag (“caution on the track”), but not a red one.
ReplyDeleteIn the last week, I have received numerous e-mails to the effect of “What does this all mean?” For those not familiar with the tax lingo of captive insurance, I offer the following translation; all errors in translation are mine and mine alone. I make no claim that it is strictly accurate, but rather it is offered to give readers an ordinary English interpretation of what the IRS is trying to say.
Oh, and don’t shoot the messenger. I’ll write in a subsequent article about my analysis of the provisions of the Notice. What follows is nothing more-or-less than what I perceive the IRS to be saying in the Notice, mostly just reading the lines, but occasionally reading between them based on what the IRS has said before.
Rather obviously, between my interpretation below, and the actual text of the Notice, the Notice controls.
Transaction of Interest — Section 831(b) Micro-Captive Transactions
Notice 2016-66
Captive insurance companies that make an election under section 831(b) have been so heavily marketed as a tax shelter, that we can no longer ignore them.
This transaction involves the business owner setting up an insurance company, to which his own insured businesses makes premium payments, and take the deduction for those payments.
Small captives must file under IRS 6707A or be fined and audited, 5842 views, 139 likes
ReplyDeleteEdit article
Published on Novem