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
[email protected]
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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