13 March 2024news

Micro-captive court case decisions could impact wider captive ecosystem

Captives, especially small captive owners, need to keep a close eye on the latest decisions in US courts that might impact them. 

That was a key finding from a panel session entitled ‘Tax: The News You Need’ at the Captive Insurance Companies Association 2024 annual conference. The participants were: Bailey Roese, partner, Dentons Bingham Greenebaum; Daniel Kusaila, partner, Crowe; and Mikhail Raybshteyn, partner, EY. 

The panel addressed the issue that from inception, captive owners and advisors need to be intimately aware of the impact of federal and state taxes on their captives. Although there has not been any general captive specific legislation and / or action, attention still needs to be paid to this area. 

The panel looked at the recent case of Keating v Comm’r (Jan 4, 2024) which used Risk Retention, a captive based in Anguilla that had a 953d election and an 831 b election. The panel questioned briefly if the IRS could be going after 953d elections next, but concluded that more information was needed. 

The panel pointed out that in these recent legal cases the courts looked at a wide range of issues including premiums being used in ways that the courts viewed as being different to the normal way that insurance is used, such as to pay for real estate. 

Pooling arrangements now coming under increased legal scrutiny, the panel pointed out, adding that penalties have been upheld in court due to a lack of proven reliance on independent tax advice – the panel urged attendees to make sure that their captive has such tax advice. 

The panel also said that whilst the proposed 831b regulation by the IRS is still not final, a decision by IRS about it, in the wake of many comments from the insurance industry during the public consultation period on it, could soon be announced. 

Micro-captive legal decisions can permeate other legal decisions, the panel warned and urged captive owners to keep a close eye on what is decided and why. 

They also raised the point that whilst new domiciles mean new opportunities for captives, they might also mean subsequent reviews of legal matters around captives might happen in those domiciles as more and more open or move to that domicile. 

Finally, the panel urged captive owners to make sure that they are compliant and to check all US Federal filings for US domiciled captives and non-US domiciled captives. They also urged captive owners to file everything required for any captive and to bear US cross-border tax considerations in mind. 

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