16 June 2023Analysis

Oxford RMG reveals IRS captive comments

Oxford Risk Management Group (Oxford RMG) has submitted comments on regulations proposed by the Treasury Department and Internal Revenue Service (IRS) with respect to disclosure and reporting obligations for certain captive insurance arrangements.

The comments, filed by Oxford RMG’s attorneys at Caplin & Drysdale, are now available at the following website: https://www.regulations.gov/docket/IRS-2023-0017/comments.

The IRS announced earlier this year that it was asking for comments with regard to its stance on microcaptives.

According to Oxford RMG the proposed regulations would designate some captive arrangements as “listed transactions” within the meaning of the tax laws, and others as “transactions of interest.” Two tests were proposed for these categories, a “loss ratio” test and a “financing” or loan-back test. If finalized, the regulations would require disclosures by captives and certain participants in transactions meeting the two tests.

Oxford RMG recommended that Treasury and the IRS: (1) should not use the “loss ratio” and “financing” tests because of the serious conceptual flaws underlying them, particularly that these approaches are inconsistent with how insurance actually works; (2) entirely abandon the effort to designate captive insurance transactions as per se abusive, listed transactions, because Congress has not empowered the IRS to undermine the statutes it passes; (3) at most, continue to require disclosures by labelling some captive arrangements as transactions of interest, under substantially different criteria subject to notice and comment; and/or (4) provide safe harbours from any reporting for certain captive insurance arrangement meeting alternative, improved criteria.