IRS issues micro-captive regulations
The Internal Revenue Service (IRS) in the US has issued a its final rule on micro-captive listed transactions and micro-captive transactions of interest.
The 110-page document lists the final regulations that identify transactions that are the same as, or substantially similar to, certain micro-captive transactions as listed transactions, a type of reportable transaction, and certain other micro-captive transactions as transactions of interest, another type of reportable transaction.
According to the IRS material advisors and certain participants in these listed transactions and transactions of interest are required to file disclosures with the IRS and are subject to penalties for failure to disclose. The final regulations affect participants in these transactions as well as material advisors.
The biggest change from the initial proposed regulations, put forward in April 2023 and subject to heavy criticism from the captive industry, are the loss ratio criteria. In the proposed regulations, if a micro-captive had a loss ratio of less than 65% over the last 10 years it would be a ‘listed transaction’. If the captive had a loss ratio of under 65% over less than 10 years, it would be a ‘transaction of interest’.
However, in the final published regulations, the loss ratio figure has been dropped to less than 30% for listed transactions and less than 60% for transactions of interest.
The proposed regulations has already had a mixed reaction, with at least one lawsuit being filed against the new rules. Ryan LLC has brought a case against the IRS in the US District Court for the Northern District of Texas. In it Ryan claimed that: "The Rule exceeds the statutory authority of the IRS, is arbitrary and capricious, and is otherwise contrary to law. This Court should vacate and set aside the Rule."
In a statement on LinkedIn, Blake Kerr, partner and chief financial officer at Helio Risk, commented that the new rules do at least provide a roadmap for the captive insurance industry. Kerr wrote that: “This provides immense planning opportunities for CPA and law firms. I am sure some of my tax brethren can already ascertain tax planning opportunities depending on the legal/tax structure of the parent (captive owner).
“I have seen a major withdrawal from professional service groups surrounding 831(b) transactions. I do believe my profession is missing out on major opportunities to counsel and guide captives appropriately under these final regulations. Lastly, I want to put an emphasis on the point that your captive manager should be working with qualified tax professionals to guide their clients through these regulations. If they are not - OR if your captive manager is strictly an 831(b) promoter - find a new captive manager.”
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