IRS Has Identified “Micro-Captive Transactions” as “Transactions of Interest”
Under Code Section 831(b), nonlife insurance companies with net written premiums (or direct written premiums if greater) not in excess of $1,200,000 in the tax year may elect to be taxed at regular corporate rates only on taxable investment income (instead of being taxed on both investment and underwriting income).
Generally speaking, a micro-captive is a transaction entered into for risk management. Since a taxpayer is able to reduce the aggregate taxable income of the taxpayer, related persons, or both, by using contracts that the parties treat as insurance contracts, and a related company that the parties treat as a captive insurance company, the IRS is concerned about abuses in this area. As such, each entity that the parties treat as an insured entity under the contracts claims deductions for premiums for insurance coverage. The related company that the parties treat as a captive insurance company elects under Code Section 831(b) to be taxed only on investment income, and therefore excludes the payments directly or indirectly received under the contracts from its taxable income.
Persons entering into these types of transactions on or after November 2, 2006, (the effective date of the initial transaction of interest rules) must disclose the transaction. In addition, material advisors who make a tax statement with respect to micro-captive transactions on or November 2, 2006, must comply with disclosure and list maintenance obligations.
For more information or questions, please reach out to our National Tax Services Team at [email protected].
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CJ Stroh, Esq. T (609) 520 1188 [email protected]
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