22 June 2023Analysis

TCIA submits comments to IRS on microcaptives

The Tennessee Captive Insurance Association (TCIA) has sent in comments to the Internal Revenue Service’s (IRS) proposed regulation to treat microcaptives as an abusive tax transaction.

The TCIA said that the IRS notice of proposed regulations unfairly discriminate between insurance companies because of a voluntary tax election.

“On its face, the proposed micro-captive listed transaction discriminates between similarly situated insurance companies simply because of a voluntary election, an election that is permissible under the Internal Revenue Code,” the TCIA said in a statement.

“Two unrelated insurance companies will receive vastly different treatment by the IRS if one elects to be taxed under IRC § 831(b) and the other does not. Under the proposed micro-captive listed transaction, if both insurance companies have loss ratios less than 65% over a ten-year period, then the company electing to be taxed under IRC § 831(b) will be a listed transaction and the other will not.”

The TCIA further pointed out that the IRS can investigate whether the premium is proper for the amount of risk the captive has assumed, but a loss ratio is a pale proxy for this, particularly when it is used to invalidate insurance status. Losses are evidence of risk, but lack of losses is not evidence of lack of risk.

“If my car wrecks and my neighbour’s car does not, I have a loss; however, my neighbour and I had the identical risk,” said Tony Greer of TCIA's Government Relations Committee. “The IRS must look at the method used to compute premiums, not arbitrary loss ratios.”

The TCIA has submitted a response within the IRS public comment period and expects the IRS to respond to all comments before the end of the year.