Caution needed over abusive micro-captive insurance transactions 6700 penalties

The Treasury Department has issued guidance on false or fraudulent statements for micro-captive insurance transactions. The Chief Counsel Advice memorandum, CCA  202134016, provides clarity over section 6700 penalties against those promoting abusive tax shelters.

As lawyers at RSM US LLP explain, the CCA issued at the end of August defines a typical micro-captive insurance transaction as one where a taxpayer attempts to reduce their taxable income by using contracts the parties treated as insurance and a related company they treat as a captive insurance company.

“Each entity that the parties treat as an insured entity under the contracts can then claim deductions for premiums paid for the insurance coverage,” the note explains. “The captive insurance company elects to be taxed only on investment income under section 831(b) and can exclude the insurance premiums received under the contracts from its taxable income.”

The CCA examined multiple court cases to determine what would constitute a false or fraudulent statement for an abusive micro-captive transaction. It concluded that, where a promoter knows the risks of a tax shelter, it must unambiguously inform its agents, prospective clients and current clients of that risk.

“Promoters of abusive micro-captive insurance transaction and investors in those transactions should be aware of the extensive definition the CCA gives to the term statement,” the lawyers write. “Taxpayers who believe they have made or furnished or caused someone to make or furnish a statement subject to the section 6700 penalty should contact their tax advisor.”