4 November 2016Analysis

Micro-captives have potential for tax avoidance: IRS

The Department of the Treasury and the Internal Revenue Service (IRS) have suggested in a notice published on November 1 that Section 831(b) transactions, or micro-captive transactions, as a Transaction of Interest (TOI).

A TOI means the transaction has the potential for tax avoidance or evasion, but the Treasury Department and IRS lack sufficient information whether the transaction should be identified specifically as a tax avoidance transaction.

In this case, the Treasury Department and the IRS lack sufficient information to identify which 831(b) arrangement should be identified specifically as a tax avoidance transaction and may lack sufficient information to define the characteristic that distinguish the tax avoidance transaction from other 831(b) related-party transactions.

The Treasury Department and the IRS have recognised that related parties may use captive insurance companies that make elections under 831(b) for risk management purposes that do not involve tax avoidance, but believe that there are cases in which the use of such arrangements to claim the tax benefits of treating the contract as an insurance contract is improper.