Insights Magazine Volume IX - Page 24

Captive Insurance Companies What Qualifies as a Transaction of Interest? Alan Fine, CPA, JD The Protecting Americans from Tax Hikes Act of 2015 (the PATH Act) made significant changes to Section 831(b) of the Internal Revenue Code and also included new annual reporting requirements for electing captive insurance companies. The PATH Act increased the maximum premiums for insurance companies making the election to be taxed solely on investment income from $1.2 million per year to $2.2 million per year and included certain eligibility requirements for making the election. On November 1, 2016, the IRS issued Notice 2016-66, declaring transactions in which captive insurance companies make the 831(b) election to be a “transaction of interest.” The reportable transaction is part of the larger reporting regime created by the American Jobs Creation Act of 2004 and the corresponding regulations to identify tax shelters. It is important to note, however, that a reportable transaction is not the same as a “listed transaction,” and therefore, the 831(b) captive has not been determined to be a listed transaction. Alan Fine CPA, JD Partner in Charge, Captive Insurance Advisory Services Brown Smith Wallace 314.983.1292 afine@bswllc.com 22 The purpose of the Notice is to provide the details for those disclosures, including which taxpayers are required to submit the disclosures, the timing for that submission and the specific information the Internal Revenue Service (IRS) is requiring. Who is required to file these disclosures? Where applicable, owners of the captive, the captive itself and the insureds of the captive are required to prepare and file the disclosures. These participants are to report the required disclosures on Form 8886, “Reportable Transaction Disclosure Statement.” The Notice addresses captive insurance transactions making the 831(b) election if the owner of the insured entities or one or more persons related to the owner of those insureds owns more than 20 percent of the voting power or value of the captive and either of the following apply: 1. The captive’s loss ratio is less than 70 percent (premiums are measured after taking into account any policyholder dividends) 2. The captive has provided financing or otherwise conveyed funds to the owner or related parties from the captive’s surplus in a nontaxable transaction Under the terms of the Notice, the relationship tests are determined utilizing the various attribution rules provided in the Internal Revenue Code, which include ownership through partnerships and trusts as well as that by siblings, ancestors, spouses and lineal descendants. Specifically excluded from the reporting requirements, however, are captive arrangements insuring employee compensation or benefits, which have received a “Prohibited Transaction Exemption” by the Department of Labor. Material advisors, defined as an advisor receiving $50,000 or more in fees resulting from the transaction, also have disclosure