IRS Speaks about Captives at American Bar Association Meeting
By Michael E. Lloyd, Esq.
8/17/17

 

 

Recently, Alexis Maclvor, Chief of the Insurance Branch and John Glover, the author of the IRS Reporting Notice on Captives joined attorneys Kristan Rizzolo and Charles Lavelle at the ABA Tax Section Meeting in Washington, DC.[1]

                   “The LB&I has announced that companies electing section 831(b) are one of its upcoming campaigns”.

Notice 2016-66.  A few bullet points of interest:

• “The Treasury and IRS recognize that transactions with captives electing section 831(b) are proper if they advance risk management purposes that do not involve tax avoidance”.

• “The IRS says it wants to collect information to distinguish between abusive and non-abusive situations”.

• “After analysis, the IRS may determine that transactions involving companies electing section 831(b) will be deleted from Transactions of Interest, designated as “Listed Transactions” or placed in a new category”.

 

IRS Concerns – Formation Concerns.

1. The IRS is concerned when the Captive’s capital is inadequate for the risks assumed.

2. The IRS is concerned if the Captive does not comply with regulatory requirements.

3. The IRS is concerned about premiums that appear to be determined based on reaching a certain deduction amount. For example, if the premiums happen to be exactly equal to the maximum amount that can be deducted.

4. The IRS is concerned about premiums that appear to be determined without underwriting or actuarial analysis that conforms to industry standards.

5. The IRS is concerned when premiums are determined without getting market quotes.

6. The IRS is concerned when premium amounts are excessive.

7. The IRS is concerned when premium amounts are not properly allocated among affiliates.

8. The IRS is concerned when the premiums for pooling do not reflect the risk.

9. The IRS is concerned when the pooling terms result in losses being allocated almost exclusively to related party risk.

 

IRS Concerns – Operation.

1. The IRS is concerned when premiums are not paid according to the policy.

2. The IRS is concerned when policies and binders are issued later than industry standards.

3. The IRS is concerned when captive claims administration is not consistent with industry standards.

4. The IRS is concerned when the insured does not file claims for each loss.

5. The IRS is concerned when the Captive invests in illiquid or speculative assets that are not typical of an insurance company.

6. The IRS is concerned about loans to insureds or affiliates.

 

[1] The information for this news items was obtained from the handout prepared by the speakers listed above.  Please note that the handout included the standard disclaimer that “Nothing in this presentation should be viewed as expressing the view of the IRS or government panelists.”