Micro-captive insurance companies are as the name implies, captive insurance arrangements where a taxpayer decides to self-insure their own risks.[2] Without going into detail on the taxability of insurance companies, Section 831 of the Code provides for taxation of insurance companies other than life insurance companies. A key component of qualifying to be taxed pursuant to Section 831 of the Code requires being an insurance company. Breaking some barriers to entry for smaller taxpayers and giving them a potentially tax-advantageous manner in which to self-insure, we have Section 831(b), allowing micro-captives. Effectively, a micro-captive, under Section 831(b) is a captive qualifying to be taxed as a U.S. insurance company which may pay tax on its investment income only in any year its total written premium amounts are under a stated threshold, $2.2 million. Effectively a taxpayer can pay its insurance premiums to an affiliate entity, deduct the premium, subsequently not recognize the premium receipt by the insurance company as taxable income, and then only pay tax on the investment income and subsequent dividend. Unsurprisingly, there were some bad actors out there peddling a medley of arrangements, some of which not constituting insurance, others pitching unnecessary insurance (think volcano insurance) for the sake of banked and untaxed premiums.
CIC and Notice 2016-66 CIC is a captive insurance company manager and Ryan is a self-identified “broad-based accounting, consulting, and tax services corporation which also manages captive insurance companies.” CIC and Ryan stated that they would be subject to the Notice’s disclosure requirements as material advisors, particularly the filing of Form 8918 with the Office of Tax Shelter Analysis and the list maintenance requirements, and that compliance would be tremendously expensive.
On March 27, 2017, CIC and Ryan filed suit in the United States District Court in the Eastern District of Tennessee seeking, among other things, an injunction, stopping the IRS from enforcing Notice 2016-66, in part due to failure to comply with the notice and comment requirements under the Administrative Procedure Act (“APA”) as it is a “legislative-type rule” (more on that later).[3] In a hearing on April 19, 2017, the parties argued the Plaintiffs’ motion for preliminary injunction. At the hearing, Sean King, principal and founder of CIC, testified about the harm he expected CIC to suffer if forced to comply with the Notice’s onerous reporting requirements. Among these harms were that (1) CIC would incur significant fees and costs to comply with the Notice’s reporting requirements; and (2) that the Notice’s designation of certain micro-captive transactions as reportable transactions has undermined the market value of CIC and caused reputational damage to CIC.
The Second Hearing Unfortunately for the Plaintiffs, the Court believed
are u one are u two happy
ReplyDeleteMicro-captive insurance companies are as the name implies, captive insurance arrangements where a taxpayer decides to self-insure their own risks.[2] Without going into detail on the taxability of insurance companies, Section 831 of the Code provides for taxation of insurance companies other than life insurance companies. A key component of qualifying to be taxed pursuant to Section 831 of the Code requires being an insurance company. Breaking some barriers to entry for smaller taxpayers and giving them a potentially tax-advantageous manner in which to self-insure, we have Section 831(b), allowing micro-captives. Effectively, a micro-captive, under Section 831(b) is a captive qualifying to be taxed as a U.S. insurance company which may pay tax on its investment income only in any year its total written premium amounts are under a stated threshold, $2.2 million. Effectively a taxpayer can pay its insurance premiums to an affiliate entity, deduct the premium, subsequently not recognize the premium receipt by the insurance company as taxable income, and then only pay tax on the investment income and subsequent dividend. Unsurprisingly, there were some bad actors out there peddling a medley of arrangements, some of which not constituting insurance, others pitching unnecessary insurance (think volcano insurance) for the sake of banked and untaxed premiums.
ReplyDeleteCIC and Notice 2016-66
CIC is a captive insurance company manager and Ryan is a self-identified “broad-based accounting, consulting, and tax services corporation which also manages captive insurance companies.” CIC and Ryan stated that they would be subject to the Notice’s disclosure requirements as material advisors, particularly the filing of Form 8918 with the Office of Tax Shelter Analysis and the list maintenance requirements, and that compliance would be tremendously expensive.
On March 27, 2017, CIC and Ryan filed suit in the United States District Court in the Eastern District of Tennessee seeking, among other things, an injunction, stopping the IRS from enforcing Notice 2016-66, in part due to failure to comply with the notice and comment requirements under the Administrative Procedure Act (“APA”) as it is a “legislative-type rule” (more on that later).[3] In a hearing on April 19, 2017, the parties argued the Plaintiffs’ motion for preliminary injunction. At the hearing, Sean King, principal and founder of CIC, testified about the harm he expected CIC to suffer if forced to comply with the Notice’s onerous reporting requirements. Among these harms were that (1) CIC would incur significant fees and costs to comply with the Notice’s reporting requirements; and (2) that the Notice’s designation of certain micro-captive transactions as reportable transactions has undermined the market value of CIC and caused reputational damage to CIC.
The Second Hearing
Unfortunately for the Plaintiffs, the Court believed