Matthew Queen, Venture Captive Management
21 November 2019Analysis

Captive industry in recession due to 831(b)s

The death of the 831(b) captive insurance tax shelter has sent the industry into recession, according to Matthew Queen, general counsel at Venture Captive Management.

Tax shelters only work until everyone finds out about them, said Queen. When it comes to 831(b)s, the recent attention of the IRS show the cat it very much out of the bag.

He noted there are still some tax promoters ignoring the warnings from the IRS, attracted by the significant money they made selling the product in recent years. But he warned: “Any promoter continuing to market and sell these products [as a tax shelter] is crazy and a fool.”

Queen said the fact that many domiciles have lost captives over the past three years is closely linked to the death of the 831(b) offering as a tax shelter. But he stressed the 831(b) product itself remains a legitimate and relevant option for small captives, as long as their underlying business is writing legitimate insurance coverage.

Queen said there have been rumours about possible criminal liability for professionals abusing the 831(b) structure ever since the IRS issued Notice 2016-66. “So far, the IRS has been satisfied with taking financial scalps,” he said. “Bringing criminal penalties indicates that there are large promoters that continue to abuse the tax election and will not amend their practices until the possibility of incarceration arises.”

He added: “The 831(b) captive was never designed to provide a single chiropractor with a handful of offices a large tax deduction. At this point the case law is clear and promoters who continue to abuse the election will face criminal penalties.”

Despite talk of recessions, Queen remains upbeat about the industry’s prospects, against a backdrop of a hardening insurance market.

He said: “First party property, commercial auto, and cyber liability are losing markets all over the country. In addition, certain states are becoming very difficult to insure for various lines of professional liability. Reinsurers are starting to actually underwrite again - they’re relearning the word ‘No’. Premiums are increasing in many lines of insurance. When the market hardens the captive solution makes more sense for more insureds.”