Proposed Rule2023-07315
Micro-Captive Listed Transactions and Micro-Captive Transactions of Interest
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
April 11, 2023
Issuing agencies
Treasury DepartmentInternal Revenue Service
Abstract
This document contains proposed 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. 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 proposed regulations affect participants in these transactions as well as material advisors. This document also provides notice of a public hearing on the proposed regulations.
Full Text
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<title>Federal Register, Volume 88 Issue 69 (Tuesday, April 11, 2023)</title>
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[Federal Register Volume 88, Number 69 (Tuesday, April 11, 2023)]
[Proposed Rules]
[Pages 21547-21564]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-07315]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-109309-22]
RIN 1545-BQ44
Micro-Captive Listed Transactions and Micro-Captive Transactions
of Interest
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
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SUMMARY: This document contains proposed 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.
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 proposed
regulations affect participants in these transactions as well as
material advisors. This document also provides notice of a public
hearing on the proposed regulations.
DATES: Electronic or written comments must be received by June 12,
2023. The public hearing on these proposed regulations is scheduled to
be held by teleconference on July 19, 2023, at 10 a.m. ET. Requests to
speak and outlines of topics to be discussed at the public hearing must
be received by June 12, 2023. If no outlines are received by June 12,
2023, the public hearing will be cancelled. Requests to attend the
public hearing must be received by 5 p.m. ET on July 17, 2023. The
telephonic public hearing will be made accessible to people with
disabilities. Requests for special assistance during the telephonic
hearing must be received by July 14, 2023.
[[Page 21548]]
ADDRESSES: Commenters are strongly encouraged to submit public comments
electronically. Submit electronic submissions via the Federal
eRulemaking Portal at <a href="https://www.regulations.gov">https://www.regulations.gov</a> (indicate IRS and
REG-109309-22). Once submitted to the Federal eRulemaking Portal,
comments cannot be edited or withdrawn. The Department of the Treasury
(Treasury Department) and the IRS will publish any comments to the
public docket. Send paper submissions to: CC:PA:LPD:PR (REG-109309-22),
Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin
Station, Washington, DC 20044.
For those requesting to speak during the hearing, send an outline
of topic submissions, electronically via the Federal eRulemaking Portal
at <a href="https://www.regulations.gov">https://www.regulations.gov</a> (indicate IRS and REG-109309-22).
Individuals who want to testify (by telephone) at the public
hearing must send an email to <a href="/cdn-cgi/l/email-protection#671712050b0e040f0206150e090014270e151449000811"><span class="__cf_email__" data-cfemail="314144535d585259545043585f5642715843421f565e47">[email protected]</span></a> to receive the
telephone number and access code for the hearing. The subject line of
the email must contain the regulation number REG-109309-22 and the word
TESTIFY. For example, the subject line may say: Request to TESTIFY at
Hearing for REG-109309-22. The email should include a copy of the
speaker's public comments and outline of discussion topics. Individuals
who want to attend (by telephone) the public hearing must also send an
email to <a href="/cdn-cgi/l/email-protection#5d2d283f31343e35383c2f34333a2e1d342f2e733a322b"><span class="__cf_email__" data-cfemail="6e1e1b0c02070d060b0f1c0700091d2e071c1d40090118">[email protected]</span></a> to receive the telephone number and
access code for the hearing. The subject line of the email must contain
the regulation number REG-109309-22 and the word ATTEND. For example,
the subject line may say: Request to ATTEND hearing for REG-109309-22.
To request special assistance during the telephonic hearing, contact
the Publications and Regulations Branch of the Office of Associate
Chief Counsel (Procedure and Administration) by sending an email to
<a href="/cdn-cgi/l/email-protection#1a6a6f78767379727f7b6873747d695a736869347d756c"><span class="__cf_email__" data-cfemail="ddada8bfb1b4beb5b8bcafb4b3baae9db4afaef3bab2ab">[email protected]</span></a> (preferred) or by telephone at (202) 317-6901
(not a toll-free number).
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
Elizabeth M. Hill of the Office of Associate Chief Counsel (Financial
Institutions & Products), (202) 317-4458; concerning the submission of
comments or the hearing, Vivian Hayes at (202) 317-6901 (not toll-free
numbers) or by email at <a href="/cdn-cgi/l/email-protection#601015020c090308050112090e0713200912134e070f16"><span class="__cf_email__" data-cfemail="28585d4a44414b404d495a41464f5b68415a5b064f475e">[email protected]</span></a> (preferred).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed additions to 26 CFR part 1 (Income
Tax Regulations) under section 6011 of the Internal Revenue Code (Code)
regarding transactions identified as listed transactions and
transactions of interest for purposes of section 6011.
I. Overview of the Reportable Transaction Regime
Section 6011(a) generally provides that, when required by
regulations prescribed by the Secretary of the Treasury or her delegate
(Secretary), ``any person made liable for any tax imposed by this
title, or with respect to the collection thereof, shall make a return
or statement according to the forms and regulations prescribed by the
Secretary. Every person required to make a return or statement shall
include therein the information required by such forms or
regulations.''
On February 28, 2000, the Treasury Department and the IRS issued a
series of temporary regulations (TD 8877; TD 8876; TD 8875) and cross-
referencing notices of proposed rulemaking (REG-103735-00; REG-110311-
98; REG-103736-00) under sections 6011, 6111, and 6112. The temporary
regulations and cross-referencing notices of proposed rulemaking were
published in the Federal Register (65 FR 11205, 65 FR 11269; 65 FR
11215, 65 FR 11272; 65 FR 11211, 65 FR 11271) on March 2, 2000 (2000
Temporary Regulations). The 2000 Temporary Regulations were modified
several times before March 4, 2003, the date on which the Treasury
Department and the IRS, after providing notice and opportunity for
public comment and considering the comments received, published final
regulations (TD 9046) in the Federal Register (68 FR 10161) under
sections 6011, 6111, and 6112 (2003 Final Regulations). The 2000
Temporary Regulations and 2003 Final Regulations consistently provided
that reportable transactions include listed transactions and that a
listed transaction is a transaction that is the same as or
substantially similar to one of the types of transactions that the IRS
has determined to be a tax avoidance transaction and has identified by
notice, regulation, or other form of published guidance as a listed
transaction.
Following the 2003 promulgation of Sec. 1.6011-4, Congress passed
the American Jobs Creation Act of 2004 (AJCA), Public Law 108-357, 118
Stat. 1418 (October 22, 2004), which added sections 6707A, 6662A, and
6501(c)(10) to the Code, and revised sections 6111, 6112, 6707, and
6708 of the Code. See sections 811-812 and 814-817 of the AJCA. The
AJCA's legislative history explains that Congress incorporated in the
statute the method that the Treasury Department and the IRS had been
using to identify reportable transactions, and provided incentives, via
penalties, to encourage taxpayer compliance with the new disclosure
reporting obligations. As the Committee on Ways and Means explained in
its report accompanying H.R. 4520, which became the AJCA:
The Committee believes that the best way to combat tax shelters
is to be aware of them. The Treasury Department, using the tools
available, issued regulations requiring disclosure of certain
transactions and requiring organizers and promoters of tax-
engineered transactions to maintain customer lists and make these
lists available to the IRS. Nevertheless, the Committee believes
that additional legislation is needed to provide the Treasury
Department with additional tools to assist its efforts to curtail
abusive transactions. Moreover, the Committee believes that a
penalty for failing to make the required disclosures, when the
imposition of such penalty is not dependent on the tax treatment of
the underlying transaction ultimately being sustained, will provide
an additional incentive for taxpayers to satisfy their reporting
obligations under the new disclosure provisions.
House Report 108-548(I), 108th Cong., 2nd Sess. 2004, at 261 (June 16,
2004) (House Report).
In Footnote 232 of the House Report, the Committee on Ways and
Means notes that the statutory definitions of ``reportable
transaction'' and ``listed transaction'' were intended to incorporate
the pre-AJCA regulatory definitions while providing the Secretary with
leeway to make changes to those definitions:
The provision states that, except as provided in regulations, a
listed transaction means a reportable transaction, which is the same
as, or substantially similar to, a transaction specifically
identified by the Secretary as a tax avoidance transaction for
purposes of section 6011. For this purpose, it is expected that the
definition of ``substantially similar'' will be the definition used
in Treas. Reg. sec. 1.6011-4(c)(4). However, the Secretary may
modify this definition (as well as the definitions of ``listed
transaction'' and ``reportable transactions'') as appropriate.
Id. at 261 n.232.
Section 6707A(c)(1) defines a ``reportable transaction'' as ``any
transaction with respect to which information is required to be
included with a return or statement because, as determined under
regulations prescribed under section 6011, such transaction is of a
type which the Secretary determines as having a potential for tax
avoidance or evasion.'' A ``listed transaction'' is defined by section
6707A(c)(2) as ``a reportable
[[Page 21549]]
transaction which is the same as, or substantially similar to, a
transaction specifically identified by the Secretary as a tax avoidance
transaction for purposes of section 6011.''
Section 6111(a), as revised by the AJCA, provides that each
material advisor with respect to any reportable transaction must make a
return setting forth (1) information identifying and describing the
transaction, (2) information describing any potential tax benefits
expected to result from the transaction, and (3) such other information
as the Secretary may prescribe. Such return must be filed not later
than the date specified by the Secretary. Section 6111(b)(2) provides
that a reportable transaction has the meaning given to such term by
section 6707A(c).
Section 6112(a), as revised by the AJCA, provides that each
material advisor with respect to any reportable transaction (as defined
in section 6707A(c)) must (whether or not required to file a return
under section 6111 with respect to such transaction) maintain a list
(1) identifying each person with respect to whom such advisor acted as
a material advisor, and (2) containing such other information as the
Secretary may by regulations require.
On November 2, 2006, the Treasury Department and the IRS published
a notice of proposed rulemaking (REG-103038-05) in the Federal Register
(71 FR 64488) under section 6011 (November 2006 Transaction of Interest
(TOI) Regulations) proposing to add a new category of reportable
transaction requiring disclosure under section 6011. The preamble to
the November 2006 TOI Regulations (71 FR 64488) explains that these
transactions, referred to as transactions of interest, are transactions
that the Treasury Department and the IRS believe have the potential for
tax avoidance or evasion, but for which the Treasury Department and the
IRS lack enough information to determine whether the transaction should
be identified as a listed transaction. The November 2006 TOI
Regulations proposed that transactions of interest would be identified
by the IRS via notice, regulation, or other form of published guidance.
On the same date that the November 2006 TOI Regulations were
published, the Treasury Department and the IRS also published two
separate notices of proposed rulemaking (REG-103039-05; REG-103043-05)
in the Federal Register (71 FR 64496, 71 FR 64501) under sections 6111
and 6112, respectively (November 2006 Regulations). The November 2006
Regulations proposed to modify the then-existing regulations relating
to the disclosure of reportable transactions by material advisors under
section 6111, and the list maintenance requirements of material
advisors with respect to reportable transactions under section 6112, in
part, to account for the changes made by the AJCA and, in part, to make
corresponding updates to the material advisor rules to account for the
treatment of transactions of interest as reportable transactions as
proposed by the November 2006 TOI Regulations.
After providing notice and opportunity for public comment and
considering the comments received, on August 3, 2007, the Treasury
Department and the IRS published the November 2006 Regulations and the
November 2006 TOI Regulations as final regulations (TD 9350, TD 9351,
and TD 9352) in the Federal Register (72 FR 43146, 72 FR 43157, and 72
FR 43154) under sections 6011, 6111, and 6112.
II. Disclosure of Reportable Transactions by Participants and Penalties
for Failure To Disclose
Section 1.6011-4(a) provides that every taxpayer that has
participated in a reportable transaction within the meaning of Sec.
1.6011-4(b) and who is required to file a tax return must file a
disclosure statement within the time prescribed in Sec. 1.6011-4(e).
Sections 1.6011-4(d) and (e) provide that the disclosure
statement--Form 8886, Reportable Transaction Disclosure Statement (or
successor form)--must be attached to the taxpayer's tax return for each
taxable year for which a taxpayer participates in a reportable
transaction. A copy of the disclosure statement must be sent to IRS's
Office of Tax Shelter Analysis (OTSA) at the same time that any
disclosure statement is first filed by the taxpayer pertaining to a
particular reportable transaction.
Reportable transactions include listed transactions, confidential
transactions, transactions with contractual protection, loss
transactions, and transactions of interest. See Sec. 1.6011-4(b)(2)
through (6). Consistent with the definitions previously provided in the
2000 Temporary Regulations and later in the 2003 Final Regulations, as
promulgated in 2007, Sec. 1.6011-4(b)(2) continues to define a
``listed transaction'' as a transaction that is the same as or
substantially similar to one of the types of transactions that the IRS
has determined to be a tax avoidance transaction and identified by
notice, regulation, or other form of published guidance as a listed
transaction. Section 1.6011-4(b)(6) defines a ``transaction of
interest'' as a transaction that is the same as or substantially
similar to one of the types of transactions that the IRS has identified
by notice, regulation, or other form of published guidance as a
transaction of interest.
Section 1.6011-4(c)(4) provides that a transaction is
``substantially similar'' if it is expected to obtain the same or
similar types of tax consequences and is either factually similar or
based on the same or similar tax strategy. Receipt of an opinion
regarding the tax consequences of the transaction is not relevant to
the determination of whether the transaction is the same as or
substantially similar to another transaction. Further, the term
substantially similar must be broadly construed in favor of disclosure.
For example, a transaction may be substantially similar to a listed
transaction or a transaction of interest even though it may involve
different entities or use different Code provisions.
Section 1.6011-4(c)(3)(i)(A) provides that a taxpayer has
participated in a listed transaction if the taxpayer's tax return
reflects tax consequences or a tax strategy described in the published
guidance that lists the transaction under Sec. 1.6011-4(b)(2).
Published guidance also may identify other types or classes of persons
that will be treated as participants in a listed transaction. Published
guidance may identify types or classes of persons that will not be
treated as participants in a listed transaction. Section 1.6011-
4(c)(3)(i)(E) provides that a taxpayer has participated in a
transaction of interest if the taxpayer is one of the types or classes
of persons identified as participants in the transaction in the
published guidance describing the transaction of interest.
Section 1.6011-4(e)(2)(i) provides that if a transaction becomes a
listed transaction or a transaction of interest after the filing of a
taxpayer's tax return reflecting the taxpayer's participation in the
transaction and before the end of the period of limitations for
assessment for any taxable year in which the taxpayer participated in
the transaction, then a disclosure statement must be filed with OTSA
within 90 calendar days after the date on which the transaction becomes
a listed transaction or transaction of interest. This requirement
extends to an amended return and exists regardless of whether the
taxpayer participated in the transaction in the year the transaction
became a listed transaction or transaction of interest. The
Commissioner of Internal Revenue may also determine the time for
disclosure of listed transactions and transactions of interest in the
published guidance identifying the transaction.
[[Page 21550]]
Participants required to disclose these transactions under Sec.
1.6011-4 who fail to do so are subject to penalties under section
6707A. Section 6707A(b) provides that the amount of the penalty is 75
percent of the decrease in tax shown on the return as a result of the
reportable transaction (or which would have resulted from such
transaction if such transaction were respected for Federal tax
purposes), subject to minimum and maximum penalty amounts. The minimum
penalty amount is $5,000 in the case of a natural person and $10,000 in
any other case. For listed transactions, the maximum penalty amount is
$100,000 in the case of a natural person and $200,000 in any other
case. For other reportable transactions, including transactions of
interest, the maximum penalty is $10,000 in the case of a natural
person and $50,000 in any other case.
Additional penalties may also apply. In general, section 6662A
imposes a 20 percent accuracy-related penalty on any understatement (as
defined in section 6662A(b)(1)) attributable to an adequately disclosed
reportable transaction. If the taxpayer had a requirement to disclose
participation in the reportable transaction but did not adequately
disclose the transaction in accordance with the regulations under
section 6011, the taxpayer is subject to an increased penalty rate
equal to 30 percent of the understatement. See section 6662A(c).
Section 6662A(b)(2) provides that section 6662A applies to any item
which is attributable to any listed transaction and any reportable
transaction (other than a listed transaction) if a significant purpose
of such transaction is the avoidance or evasion of Federal income tax.
Participants required to disclose listed transactions who fail to
do so are also subject to an extended period of limitations under
section 6501(c)(10). That section provides that the time for assessment
of any tax with respect to the transaction shall not expire before the
date that is one year after the earlier of the date the participant
discloses the transaction or the date a material advisor discloses the
participation pursuant to a written request under section
6112(b)(1)(A).
III. Disclosure of Reportable Transactions by Material Advisors and
Penalties for Failure To Disclose
Section 301.6111-3(a) of the Procedure and Administration
Regulations provides that each material advisor with respect to any
reportable transaction, as defined in Sec. 1.6011-4(b), must file a
return as described in Sec. 301.6111-3(d) by the date described in
Sec. 301.6111-3(e).
Section 301.6111-3(b)(1) provides that a person is a material
advisor with respect to a transaction if the person provides any
material aid, assistance, or advice with respect to organizing,
managing, promoting, selling, implementing, insuring, or carrying out
any reportable transaction, and directly or indirectly derives gross
income in excess of the threshold amount as defined in Sec. 301.6111-
3(b)(3) for the material aid, assistance, or advice. Under Sec.
301.6111-3(b)(2)(i) and (ii), a person provides material aid,
assistance, or advice if the person provides a tax statement, which is
any statement (including another person's statement), oral or written,
that relates to a tax aspect of a transaction that causes the
transaction to be a reportable transaction as defined in Sec. 1.6011-
4(b)(2) through (7).
Material advisors must disclose transactions on Form 8918, Material
Advisor Disclosure Statement (or successor form), as provided in Sec.
301.6111-3(d) and (e). Section 301.6111-3(e) provides that the material
advisor's disclosure statement for a reportable transaction must be
filed with OTSA by the last day of the month that follows the end of
the calendar quarter in which the advisor becomes a material advisor
with respect to a reportable transaction or in which the circumstances
necessitating an amended disclosure statement occur. A person may
become a material advisor with respect to transactions that are later
identified as listed transactions or transactions of interest. See
Sec. 301.6111-3(b)(4). The disclosure statement must be sent to OTSA
at the address provided in the Instructions for Form 8918 (or successor
form).
Section 301.6111-3(d)(2) provides that the IRS will issue to a
material advisor a reportable transaction number with respect to the
disclosed reportable transaction. Receipt of a reportable transaction
number does not indicate that the disclosure statement is complete, nor
does it indicate that the transaction has been reviewed, examined, or
approved by the IRS. Material advisors must provide the reportable
transaction number to all taxpayers and material advisors for whom the
material advisor acts as a material advisor as defined in Sec.
301.6111-3(b). The reportable transaction number must be provided at
the time the transaction is entered into, or, if the transaction is
entered into prior to the material advisor receiving the reportable
transaction number, within 60 calendar days from the date the
reportable transaction number is mailed to the material advisor.
Additionally, material advisors must prepare and maintain lists
identifying each person with respect to whom the advisor acted as a
material advisor with respect to the reportable transaction in
accordance with Sec. 301.6112-1(b) and furnish such lists to the IRS
in accordance with Sec. 301.6112-1(e).
Section 6707(a) provides that a material advisor who fails to file
a timely disclosure, or files an incomplete or false disclosure
statement, is subject to a penalty. Pursuant to section 6707(b)(2), for
listed transactions, the penalty is the greater of (A) $200,000, or (B)
50 percent of the gross income derived by such person with respect to
aid, assistance, or advice which is provided with respect to the listed
transaction before the date the return is filed under section 6111.
Pursuant to section 6707(b)(1), the penalty for other reportable
transactions, including transactions of interest, is $50,000.
A material advisor may also be subject to a penalty under section
6708 for failing to maintain a list under section 6112(a) and failing
to make the list available upon written request to the Secretary in
accordance with section 6112(b) within 20 business days after the date
of such request. Section 6708(a) provides that the penalty is $10,000
per day for each day of the failure after the 20th day. However, no
penalty will be imposed with respect to the failure on any day if such
failure is due to reasonable cause.
IV. Micro-Captive Transactions and Notice 2016-66
As enacted by section 1024 of the Tax Reform Act of 1986, Public
Law 99-514, 100 Stat. 2085, 2405 (October 22, 1986), section 831(a)
generally imposes tax on the taxable income (determined under the
special rules for calculating taxable income of insurance companies in
part II of subchapter L of chapter 1 of the Code) of every insurance
company other than a life insurance company (nonlife insurance
company), for each taxable year computed as provided in section 11 of
the Code. However, certain small nonlife insurance companies may elect
to be subject to the alternative tax imposed by section 831(b).
Upon election by an eligible nonlife insurance company (eligible
electing company) to be taxed under section 831(b), in lieu of the tax
otherwise imposed by section 831(a), section 831(b) imposes tax on the
company's income computed by multiplying the taxable investment income
of the eligible electing company (determined under section 834 of the
Code) for the
[[Page 21551]]
taxable year by the rates provided in section 11(b) of the Code.
Premium income of a nonlife insurance company is included in taxable
income under section 831(a), but not taxable investment income under
section 834. Thus, an eligible electing company pays no tax on premium
income for taxable years for which its election is in effect.
Congress enacted section 333 of the Protecting Americans from Tax
Hikes Act of 2015 (PATH Act), div. Q. of Public Law 114-113, 129 Stat.
2242, 3040 (December 18, 2015), to both tighten and expand the
requirements for qualifying under section 831(b), effective for taxable
years beginning after December 31, 2016. As amended by the PATH Act,
section 831(b) requires an eligible electing company to be an insurance
company (within the meaning of section 816(a) of the Code) having net
written premiums or, if greater, direct written premiums, for the
taxable year not exceeding $2.2 million as adjusted for inflation (net
written premium limitation) and to meet the diversification
requirements of section 831(b)(2)(B). The last sentence of section
831(b)(2)(A) provides that an election under section 831(b) applies to
the taxable year for which it is made and all subsequent taxable years
for which the net written premium limitation and the diversification
requirements are met and may be revoked only with the Secretary's
consent. In addition, section 831(d) requires every eligible electing
company that has a section 831(b) election in effect to furnish to the
Secretary ``at such time and in such manner as the Secretary shall
prescribe such information for such taxable year as the Secretary may
require with respect to'' the diversification requirements of section
831(b)(2)(B).
On November 21, 2016, the Treasury Department and the IRS published
Notice 2016-66, 2016-47 I.R.B 745, which identified certain micro-
captive transactions as transactions of interest. On January 17, 2017,
the IRS published Notice 2017-08, 2017-3 I.R.B. 423, which modified
Notice 2016-66 by providing for an extension of time for participants
and material advisors to file their disclosures.
Notice 2016-66 alerted taxpayers and their representatives pursuant
to Sec. 1.6011-4(b)(6) and for purposes of Sec. 1.6011-4(b)(6) and
sections 6111 and 6112, that the Treasury Department and the IRS
identified as transactions of interest certain micro-captive
transactions in which a taxpayer attempts to reduce the aggregate
taxable income of the taxpayer, related persons, or both, using
contracts that the parties treat as insurance contracts and a related
company that the parties treat as an insurance company. Notice 2016-66
also alerted persons involved with the identified transactions that
certain responsibilities may arise from their involvement.
Notice 2016-66 describes the following micro-captive transaction as
a transaction of interest: (1) a company that the parties treat as an
insurance company (Captive) elects to exclude premiums from taxable
income under section 831(b); (2) at least 20 percent of the voting
power or value of the outstanding stock of Captive is directly or
indirectly owned by the insured entity (Insured), owners of Insured, or
persons related to Insured or its owners (20-percent relationship
factor); and (3) either or both of the following apply: (i) Captive has
at any time during a defined Computation Period (referred to as the
Notice Computation Period) directly or indirectly made available as
financing, or otherwise conveyed or agreed to make available or convey,
to certain related persons in a transaction that did not result in
taxable income or gain to the recipient any portion of the payments
treated as premiums, such as through a guarantee, a loan, or other
transfer of Captive's capital (financing factor), or (ii) the amount of
liabilities incurred by Captive for insured losses and claim
administration expenses during the Notice Computation Period is less
than 70 percent of the amount equal to premiums earned by Captive
during that period less policyholder dividends paid by Captive during
that period (70-percent loss ratio factor).
Notice 2016-66 defines the Notice Computation Period as the most
recent five taxable years of Captive or, if Captive has been in
existence for less than five taxable years, the entire period of
Captive's existence. For purposes of the preceding sentence, if Captive
has been in existence for less than five taxable years and Captive is a
successor to one or more Captives created or availed of in connection
with a transaction described in the notice, taxable years of such
predecessor entities are treated as taxable years of Captive. A short
taxable year is treated as a taxable year.
Notice 2016-66 also provides that the arrangement is not treated as
a transaction of interest if the micro-captive arrangement provides
insurance for employee compensation or benefits and the arrangement is
one for which the Employee Benefits Security Administration of the U.S.
Department of Labor has issued a Prohibited Transaction Exemption. A
Prohibited Transaction Exemption may be granted by the U.S. Department
of Labor on an individual basis or may fall under the class exemption
for captives. The Prohibited Transaction Exemption procedures are
published as final regulations in the Federal Register (76 FR 66637).
The Department of Labor's proposed amendments to the Prohibited
Transaction Exemption procedures were published on March 15, 2022, in
the Federal Register (87 FR 14722).
Notice 2016-66 requires disclosure of the information specified in
Sec. 1.6011-4(d) and the Instructions to Form 8886 (or successor
form), which includes identifying and describing the transaction in
sufficient detail for the IRS to be able to understand the tax
structure of the reportable transaction and identity of all parties
involved in the transaction. Notice 2016-66 provides that for all
participants, describing the transaction in sufficient detail includes,
but is not limited to, describing on Form 8886 (or successor form) when
and how the taxpayer became aware of the transaction. The notice
further provides that for Captive, describing the transaction in
sufficient detail includes, but is not limited to, describing the
following on Form 8886 (or successor form): (1) whether Captive is
reporting because (i) the 70-percent loss ratio factor is met for the
taxable year; (ii) the financing factor is met for the taxable year; or
(iii) both (i) and (ii); (2) under what authority Captive is chartered;
(3) all the type(s) of coverage provided by Captive during the year or
years of participation (if disclosure pertains to multiple years); (4)
how the amounts treated as premiums for coverage provided by Captive
during the year or years of participation (if disclosure pertains to
multiple years) were determined, including the name and contact
information of any actuary or underwriter who assisted in these
determinations; (5) any claims paid by Captive during the year or years
of participation (if disclosure pertains to multiple years), and the
amount of, and reason for, any reserves reported by Captive on the
annual statement; and (6) the assets held by Captive during the year or
years of participation (if disclosure pertains to multiple years).
V. Comments Submitted in Response to Notice 2016-66
Comments submitted in response to Notice 2016-66 were carefully
considered in the development of these proposed regulations. Although
the Administrative Procedure Act (APA), 5 U.S.C. 551-559, does not
require a response to those comments, the comments are described here
in an effort to assist taxpayers in understanding the provisions of the
[[Page 21552]]
proposed regulations described in the Explanation of Provisions
section.
First, some commenters suggested that changes to the Form 1120-PC,
U.S. Property and Casualty Insurance Company Income Tax Return, would
be better suited to capture the information sought by Notice 2016-66.
Other commenters indicated that the information sought could be readily
obtained from the existing Forms 1120-PC being filed, so any additional
reporting would be unnecessarily duplicative and burdensome. However,
changes to the Form 1120-PC would at a minimum impact all nonlife
insurance companies that make section 831(b) elections, not only
participants in the micro-captive transactions described in the
proposed regulations. Also, some of the requested information is not
readily available from filed Forms 1120-PC, such as the descriptions of
the types of coverages provided by a Captive and the name and contact
information of any actuary or underwriter who assisted Captive in the
determination of amounts treated as premiums. Additionally, limiting
the collection of information to only those entities filing the Form
1120-PC would be insufficient to gather relevant information, as
information regarding Insureds and promoters of the transactions would
not be included.
Second, commenters also suggested that the reporting requirements
under Notice 2016-66 are contrary to Congressional intent in enacting
section 333 of the PATH Act, which, as noted earlier, effective for
taxable years beginning after December 31, 2016, modified the section
831(b) eligibility rules for a property and casualty insurance company
to elect to be taxed only on taxable investment income. The provision
increased the limit on net written premiums (or, if greater, direct
written premiums) from $1,200,000 to $2,200,000 and indexed that amount
for inflation. The provision also added diversification requirements to
the eligibility rules. However, nothing in the statutory language or
legislative history of the PATH Act suggests that Congress intended to
provide the benefits of section 831(b) to companies that do not qualify
as insurance companies for Federal income tax purposes. As exemplified
by the transactions described in Avrahami v. Commissioner, 149 T.C. 144
(2017), Syzygy Insurance Co., Inc. v. Commissioner, T.C. Memo. 2019-34,
and Caylor Land & Development, Inc. v. Commissioner, T.C. Memo. 2021-
30, some companies claiming the benefits of section 831(b) do not meet
these basic eligibility requirements for such treatment. See also
Reserve Mechanical Corp. v. Commissioner, 34 F.4th 881 (10th Cir. 2022)
(concluding company filing as a tax-exempt entity under section
501(c)(15) did not qualify as an insurance company for Federal income
tax purposes using similar analysis). The proposed regulations, like
Notice 2016-66, would apply to entities that claim the benefits of
section 831(b) when certain factors indicate that they do not or may
not qualify as insurance companies for Federal income tax purposes.
Third, other commenters indicated that the reporting requirements
were unduly burdensome, as well as duplicative, because the information
sought could be readily obtained from a smaller subgroup of the
participants in a transaction. However, the reporting and recordkeeping
required for reportable transactions from each participant ensure that
the Service can identify all of the participants of a particular
transaction and that all participants are aware of their participation
in a reportable transaction. Nevertheless, the proposed regulations
significantly narrow the information sought from participants compared
to that required by Notice 2016-66 and provide a disclosure safe harbor
to a significant number of participants, thereby reducing the burden in
reporting to the maximum extent consistent with sound tax
administration. See proposed Sec. 1.6011-10(e)(2) and (f) and proposed
Sec. 1.6011-11(e)(2) and (f).
Fourth, additional commenters on Notice 2016-66 expressed concerns
regarding certain arrangements in which a service provider, automobile
dealer, lender, or retailer (Seller) sells insurance contracts to its
customers in connection with the products or services being sold
(Consumer Coverage). These commenters recommended that such Consumer
Coverage arrangements be excepted from the disclosure requirements. The
proposed regulations provide a limited exception for certain
participants in Consumer Coverage arrangements. See proposed Sec. Sec.
1.6011-10(d)(2) and 1.6011-11(d)(2).
Finally, commenters argued that the 20-percent relationship factor
and the 70-percent loss ratio factor described in sections 2.01(d) and
2.01(e)(2) of Notice 2016-66, respectively, are overly broad and
arbitrary. However, the Treasury Department and the IRS have determined
that the factors are objective and reasonably determined based on
existing statutory provisions and available industry data. The 20-
percent relationship factor was based on the diversification
requirements established by section 333 of the PATH Act. While one part
of the PATH Act diversification requirements is based on the percentage
of premiums from related insureds, requiring that no more than 20
percent of net written premiums (or if greater, direct written
premiums) for a taxable year is attributable to any one policyholder,
the 20-percent threshold in Notice 2016-66 is based on concentration of
ownership of stock in a Captive when Insured or Insured's owner owns
Captive's stock or is related to Captive's owner. Both requirements are
based on a lack of diversification and identify a threshold at which a
lack of diversification may facilitate abuse.
Similarly, the 70-percent loss ratio factor was informed by, but is
less burdensome than, the 85 percent medical loss ratio test enacted by
Congress in section 833(c)(5) of the Code for Blue Cross and Blue
Shield organizations and other health insurers that are entitled to
certain tax benefits that are not available to other nonlife insurance
companies, as well as the medical loss ratio computed under section
2718(b) of the Public Health Service Act, 42 U.S.C. 300gg-18. The loss
ratio factor in Notice 2016-66 compares claims and expenses to premiums
charged in a manner similar to the medical loss ratio test in section
833(c)(5) of the Code and the medical loss ratio computed under section
2718(b) of the Public Health Service Act. However, the medical loss
ratio has a narrower focus than the Notice 2016-66 loss ratio factor
and is computed as a percentage of the total premium revenue (excluding
Federal and State taxes and licensing or regulatory fees) an issuer
expends (1) on reimbursement for clinical services provided to
enrollees under such coverage and (2) for activities that improve
health care quality of enrollees.
The Treasury Department and IRS also considered data from the
National Association of Insurance Commissioners (NAIC) in determining
the applicable loss ratio factor. NAIC, in its 2021 Annual Property &
Casualty and Title Insurance Industries Report (2021 NAIC P&C Report),
indicated that annual loss ratios for property and casualty companies
averaged 72.5 percent for that year. See Insurance Industry Snapshots
and Analysis Reports ((July 21, 2022), <a href="https://content.naic.org/cipr_topics/topic_insurance_industry_snapshots_and_analysis_reports.htm">https://content.naic.org/cipr_topics/topic_insurance_industry_snapshots_and_analysis_reports.htm</a>
(last visited April 3, 2023). The 2021 NAIC P&C Report is ``produced
from insurer statutory filings and represent[s] approximately 99% of
all insurers expected to file the NAIC Financial Data Repository.'' Id.
The single-year average
[[Page 21553]]
loss ratio for property and casualty companies ranged between 67.2 and
76.2 percent per year from 2012 to 2021. See U.S. Property & Casualty
and Title Insurance Industries--2021 Full Year Results (2022), <a href="https://content.naic.org/sites/default/files/inline-files/2021%20Annual%20Property%20%26%20Casualty%20and%20Title%20Insurance%20Industry%20Report.pdf">https://content.naic.org/sites/default/files/inline-files/2021%20Annual%20Property%20%26%20Casualty%20and%20Title%20Insurance%20Industry%20Report.pdf</a> (last visited April 3, 2023).
Commenters indicated that some Captives electing the alternative
tax under section 831(b) have loss ratios that fall below the industry-
wide average during a given year of operation and suggested that the
loss ratio in Notice 2016-66 is set too high. However, the average loss
ratio reported by the NAIC and the loss ratio factor in Notice 2016-66
are computed differently and are not directly comparable. First, the
average loss ratio reported by the NAIC reflects the ratio of net
losses incurred and loss expenses incurred to net premiums earned,
without adjustment for policyholder dividends paid, whereas Captive's
loss ratio factor under Notice 2016-66 subtracts policyholder dividends
paid from premiums earned by Captive. This means that, for an entity
that pays policyholder dividends, the loss ratio factor under Notice
2016-66 would be higher than its NAIC loss ratio. Second, the loss
ratio factor in Notice 2016-66 reflects the ratio of insured losses and
claims administration expenses during the Notice Computation Period,
which may be as long as five years. By contrast, the average loss ratio
reported by the NAIC is a single-year average. Accordingly, even
Captives electing the alternative tax under section 831(b) that have
loss ratios that fall below the industry-wide average for property and
casualty companies in any particular year may not have loss ratio
factors that cause a transaction to be described in Notice 2016-66 or
the proposed regulations. The Treasury Department and the IRS therefore
view the average loss ratio data reported by the NAIC as supportive of
the loss ratio factors provided in Notice 2016-66 and in these proposed
regulations. See proposed Sec. Sec. 1.6011-10(c)(2) and 1.6011-11(c).
Despite commenters' objections to the 20-percent relationship
factor and 70-percent loss ratio factor, the commenters did not
identify different factors or industry-wide standards for small
insurers that would distinguish abusive from non-abusive transactions
or provide examples of non-abusive transactions for which disclosure
was required as a result of these factors. These objective factors in
Notice 2016-66 have been effective in identifying transactions for
which disclosure should be required and are reasonable given existing
statutory provisions and available industry data.
To better ensure non-abusive transactions are not required to be
reported under the proposed regulations, however, the proposed
regulations lower the loss ratio factor for both the micro-captive
transactions identified in proposed Sec. 1.6011-10(a) as listed
transactions (Micro-captive Listed Transactions) and the micro-captive
transactions identified in proposed Sec. 1.6011-11(a) as transactions
of interest (Micro-captive Transactions of Interest) from 70 percent to
65 percent. See proposed Sec. Sec. 1.6011-10(c)(2) and 1.6011-11(c).
Additionally, the computation period used to determine the loss ratio
factor is extended from a Notice Computation Period of up to five
taxable years to a computation period of up to nine taxable years
(referred to as the Transaction of Interest Computation Period) for the
Micro-captive Transaction of Interest. See proposed Sec. 1.6011-
11(b)(2). For the Micro-captive Listed Transaction, the computation
period used to determine the loss ratio factor (referred to as the Loss
Ratio Factor Computation Period) is ten taxable years. See proposed
Sec. 1.6011-10(b)(2)(ii).
For the foregoing reasons, the IRS intends to challenge the
purported tax benefits from transactions identified in proposed Sec.
1.6011-10(c) as listed transactions, and the IRS may challenge the
purported tax benefits from transactions identified in proposed Sec.
1.6011-11(c) as transactions of interest. The IRS may also challenge
the purported tax benefits from these transactions based on the
economic substance, business purpose, or other rules or doctrines if
applicable based on the facts of a particular case.
VI. Purpose of Proposed Regulation
On March 3, 2022, the Sixth Circuit issued an order in Mann
Construction v. United States, 27 F.4th 1138, 1147 (6th Cir. 2022),
holding that Notice 2007-83, 2007-2 C.B. 960, which identified certain
trust arrangements claiming to be welfare benefit funds and involving
cash value life insurance policies as listed transactions, violated the
APA, because the notice was issued without following the notice-and-
comment procedures required by section 553 of the APA. The Sixth
Circuit concluded that Congress did not clearly express an intent to
override the notice-and-comment procedures required by section 553 of
the APA when it enacted the AJCA. 27 F.4th at 1148. The Sixth Circuit
reversed the decision of the district court, which held that Congress
had authorized the IRS to identify listed transactions without notice
and comment. See Mann Construction, Inc. v. United States, 539
F.Supp.3d 745, 763 (E.D. Mich. 2021).
In CIC Services, LLC v. IRS, the United States District Court for
the Eastern District of Tennessee, which is located in the Sixth
Circuit, viewed the analysis in Mann Construction as controlling and
vacated Notice 2016-66, holding that the IRS failed to comply with the
APA's notice-and-comment procedures. The Court also held that the IRS
acted arbitrarily and capriciously based on the administrative record.
CIC Services, LLC v. IRS, 2022 WL 985619 (E.D. Tenn. March 21, 2022),
as modified by 2022 WL 2078036 (E.D. Tenn. June 2, 2022); see also
Green Valley Investors, LLC, et al. v. Commissioner, 159 T.C. No. 5
(Nov. 9, 2022) (relying on Mann Construction in holding that Notice
2017-10, 2017-4 I.R.B. 544 (identifying certain syndicated conservation
easements as listed transactions) was improperly issued because it was
issued without following the APA's notice-and-comment procedures);
Green Rock, LLC v. IRS, No. 2:21-cv-01320-ACA, 2023 U.S. Dist. LEXIS
17670 (N.D. Ala. Feb. 2, 2023) (holding that notice and comment
procedures were required before issuance of Notice 2017-10).
In light of the decision by the district court in CIC Services, the
IRS will not enforce the disclosure requirements or penalties that are
dependent upon the procedural validity of Notice 2016-66. Thus, the
Treasury Department and the IRS are issuing these proposed regulations
to identify certain micro-captive transactions as Micro-captive
Transactions of Interest. In addition, this document obsoletes Notice
2016-66 (as modified by Notice 2017-08). The obsoletion of the notice,
however, has no effect on the merits of the tax benefits claimed from
the transactions themselves and related litigation, or income tax
examinations and promoter investigations relating to micro-captive
transactions.
The Treasury Department and the IRS disagree with the Sixth
Circuit's decision in Mann Construction and the Tax Court's decision in
Green Valley and are continuing to defend the validity of notices
identifying transactions as listed transactions in circuits other than
the Sixth Circuit. However, to help allow for consistent enforcement
throughout the nation, the Treasury Department and the IRS are
proposing to identify certain other
[[Page 21554]]
micro-captive transactions as Micro-captive Listed Transactions by
regulation.
Explanation of Provisions
A. Micro-Captive Listed Transactions and Micro-Captive Transactions of
Interest
This section generally describes the micro-captive transactions
that are the focus of the proposed regulations and why the Micro-
captive Listed Transactions are abusive and the Micro-captive
Transactions of Interest have the potential for abuse. This section
also describes the proposed regulations identifying Micro-captive
Listed Transactions and Micro-captive Transactions of Interest.
1. In General
The Treasury Department and the IRS are aware of a micro-captive
transaction, in which a taxpayer attempts to reduce the aggregate
taxable income of the taxpayer, persons related to the taxpayer, or
both, using contracts that the parties treat as insurance contracts and
a related Captive. In some cases, Captive enters into a contract with a
related entity that the parties treat as an insurance contract. In
other cases, Captive and a related entity enter into separate contracts
with one or more unrelated intermediaries. For example, the related
entity and an intermediary may enter into a contract that the parties
treat as an insurance contract, and Captive may then enter into a
separate contract with the intermediary that the parties treat as a
reinsurance contract covering the ``risks'' under the contract between
the related entity and the intermediary. Each entity that makes
payments to an intermediary or Captive under these contracts treats the
payments as insurance premiums that are within the scope of Sec.
1.162-1(a) and deducts the payments as ordinary and necessary business
expenses under section 162. Captive treats the payments received from
the related entity or intermediary under a contract treated as an
insurance contract or reinsurance contract as premiums for insurance
coverage.
Captive asserts that it is taxable as a nonlife insurance company
under the Code and, if it is not a domestic corporation, makes an
election under section 953(d) of the Code to be treated as a domestic
corporation for purposes of the Code. Captive makes an election under
section 831(b) to be taxed only on taxable investment income (defined
in section 834). Captive accordingly excludes from the computation of
its taxable income the payments received from the related entity or
intermediary treated as premiums. For each taxable year in which the
micro-captive transaction is in effect, the transaction is structured
so that Captive does not have net premiums written (or, if greater,
direct premiums written) that exceed the statutory limit. For taxable
years beginning after December 31, 2016, the statutory limit is
$2,200,000, adjusted annually for inflation ($2,650,000 for taxable
years beginning in 2023).
Since the publication of Notice 2016-66, examinations of taxpayers
and promoters and information received through disclosures filed in
response to Notice 2016-66 have clarified the Treasury Department's and
the IRS's understanding of micro-captive transactions, including the
scope of participation. Further, in the three section 831(b) micro-
captive cases decided on their merits since the publication of Notice
2016-66, the U.S. Tax Court held that the micro-captive transactions at
issue did not meet the requirements for treatment as insurance for
Federal income tax purposes. See Avrahami v. Commissioner, 149 T.C. at
144; Syzygy v. Commissioner, T.C. Memo. 2019-34; and Caylor v.
Commissioner, T.C. Memo. 2021-30; see also Reserve Mechanical Corp. v.
Commissioner, 34 F.4th at 881 (concluding transactions entered into by
company filing as a tax-exempt entity under section 501(c)(15) did not
meet the requirements for treatment as insurance for Federal income tax
purposes using similar analysis). Taking into account only the years in
issue in these decisions, the information included in the Court's
opinions indicates that the transactions at issue had the elements that
would require disclosure under Notice 2016-66. Accordingly, the
Treasury Department and the IRS have determined that certain micro-
captive transactions are abusive tax avoidance transactions and certain
other micro-captive transactions have the potential for tax avoidance
or evasion.
As further discussed in sections B.1. through B.3. of this
Explanation of Provisions, the Treasury Department and the IRS have
determined that two categories of micro-captive transactions, described
in proposed Sec. 1.6011-10(c)(1) and (c)(2), are tax avoidance
transactions, and thus propose to identify such transactions as listed
transactions. The transactions in both categories involve related
parties, including a Captive, at least 20 percent of the voting power
or the value of the outstanding stock or equity interest of which is
owned, directly or indirectly, by an Insured, an Owner, or persons
Related to an Insured or an Owner. See proposed Sec. 1.6011-
10(b)(1)(iii). The first category of these transactions is identified
by the presence of a financing factor, described in proposed Sec.
1.6011-10(c)(1). The second category of these transactions is
identified by a loss ratio factor that falls below 65 percent based on
a Loss Ratio Computation Period of ten taxable years, as described in
proposed Sec. 1.6011-10(c)(2). The proposed regulations therefore
identify transactions that are the same as, or substantially similar
to, the Micro-captive Listed Transaction described in proposed Sec.
1.6011-10(a) as listed transactions for purposes of Sec. 1.6011-4. As
noted previously, a transaction is ``substantially similar'' if it is
expected to obtain the same or similar types of tax consequences and is
either factually similar or based on the same or similar tax strategy,
even though it may involve different entities or use different Code
provisions.
As further discussed in section B.1. and B.3. of this Explanation
of Provisions, the Treasury Department and the IRS have also determined
that a third category of micro-captive transactions, described in
proposed Sec. 1.6011-11(c), has a potential for tax avoidance or
evasion, and thus propose to identify such transactions as transactions
of interest. This category of micro-captive transactions also involves
related parties as described in proposed Sec. 1.6011-10(b)(1)(iii) and
is identified by the presence of a loss ratio factor that falls below
65 percent over a shorter Transaction of Interest Computation Period,
generally because Captives involved have been in operation for a
shorter period of time. With respect to this third category of
transactions, the Treasury Department and the IRS require more
information to determine if the transactions are being used for tax
avoidance or evasion. The proposed regulations therefore identify
transactions that are the same as, or substantially similar to, the
Micro-captive Transaction of Interest described in proposed Sec.
1.6011-11(a) as transactions of interest for purposes of Sec. 1.6011-
4(b)(6).
2. Abuses
In Micro-captive Listed Transactions and Micro-captive Transactions
of Interest, related parties claim the Federal income tax benefits of
treating the contracts as insurance (or reinsurance) contracts. Insured
deducts premiums paid to Captive under section 162, while the related
Captive excludes the premium income from its taxable income by electing
under section 831(b)
[[Page 21555]]
to be taxed only on its taxable investment income.
Neither the Code nor the regulations thereunder define the terms
``insurance'' or ``insurance contract.'' The Supreme Court has
explained that for an arrangement to constitute insurance for federal
income tax purposes, both risk shifting and risk distribution must be
present. Helvering v. Le Gierse, 312 U.S. 531 (1941). The risk
transferred must be risk of economic loss. Allied Fidelity Corp. v.
Commissioner, 572 F.2d 1190, 1193 (7th Cir. 1978). The risk must
contemplate the fortuitous occurrence of a stated contingency,
Commissioner v. Treganowen, 183 F.2d 288, 290-91 (2d Cir. 1950), and
must not be merely an investment or business risk. Rev. Rul. 2007-17,
2007-2 C.B. 127. In addition, the arrangement must constitute insurance
in the commonly accepted sense. See, e.g., Rent-A-Center, Inc. v.
Commissioner, 142 T.C. 1, 10-13 (2014).
In many micro-captive transactions, however, the manner in which
the contracts are interpreted, administered, and applied is
inconsistent with arm's length transactions and sound business
practices. Captive typically does not behave as an insurance company
commonly would, indicating that Captive is not issuing insurance
contracts and the transaction does not constitute insurance for Federal
income tax purposes. For example, Captive may fail to adequately
distribute risk or fail to employ actuarial techniques to establish
premium rates that appropriately reflect the risk of loss and costs of
conducting an insurance business. Captive may also use its premium
income for purposes other than administering and paying claims under
the contract(s), including routing funds that have not been taxed to
the Insured or a person related to the Insured or its owners. A micro-
captive transaction may share other characteristics with the purported
insurance transactions considered by the Tax Court in Avrahami, Syzygy,
and Caylor, or with the transactions considered in other cases in which
the courts determined the transactions were not insurance for Federal
income tax purposes. See, e.g., Reserve Mechanical Corp. v.
Commissioner, 34 F.4th 881 (10th Cir. 2022). The net effect of
participating in this transaction is that the Insured claims a tax
deduction for transferring amounts treated as premiums to Captive,
which is owned by parties related to Insured, and Captive is not taxed
on the corresponding income.
If the transaction does not constitute insurance, Insured is not
entitled to deduct under section 162 as a trade or business expense the
amount treated as an insurance premium. In addition, if Captive does
not actually provide insurance, it does not qualify as an insurance
company and its elections to be taxed only on its taxable investment
income under section 831(b) and to be treated as a domestic insurance
company under section 953(d) are invalid.
These proposed regulations inform taxpayers that participate in
transactions described in proposed Sec. Sec. 1.6011-10(c) and 1.6011-
11(c), and substantially similar transactions, and persons who act as
material advisors with respect to these transactions, and substantially
similar transactions, that they must disclose in accordance with the
rules provided in Sec. 1.6011-4(a) and section 6111(a), respectively.
Material advisors must also maintain lists as required by section 6112.
As previously noted, the IRS intends to challenge the claimed tax
benefits from Micro-captive Listed Transactions, and may challenge the
claimed tax benefits from Micro-captive Transactions of Interest.
Examinations of these micro-captive transactions may result in
adjustments including full disallowance of claimed micro-captive
insurance premium deductions, inclusion in income of amounts received
by Captive, imposition of withholding tax liability under section 1461
of the Code for failing to deduct and withhold tax on payments made to
a foreign Captive, imposition of a 20 percent or 40 percent penalty for
lack of economic substance under section 6662(b)(6) or (i)(1) of the
Code, which may not be avoided by a reasonable cause exception, and
imposition of other applicable taxes and penalties.
3. Micro-Captive Listed Transactions
Proposed Sec. 1.6011-10(a) provides that transactions that are the
same as, or substantially similar to, transactions described in
proposed Sec. 1.6011-10(c) are identified as listed transactions for
purposes of Sec. 1.6011-4(b)(2), except as provided in proposed Sec.
1.6011-10(d). Proposed Sec. 1.6011-10(b) provides definitions of terms
used to describe Micro-captive Listed Transactions, including Captive,
Financing Computation Period, Loss Ratio Computation Period, Contract,
Insured, Intermediary, Recipient, and Related. In particular, Captive
is defined as an entity that elects under section 831(b) to be taxed as
an insurance company only on its taxable investment income; issues a
Contract to an Insured, reinsures a Contract of an Insured issued by an
Intermediary, or both; and has at least 20 percent of its assets or
voting power or the value of its outstanding stock or equity interests
directly or indirectly, individually or collectively, owned by an
Insured, an Owner, or persons Related to an Insured or Owner. The term
Related is defined in proposed Sec. 1.6011-10(b)(8) by reference to
sections 267(b), 707(b), 2701(b)(2)(C), and 2704(c)(2). The definition
incorporates the constructive ownership rules in those sections.
Proposed Sec. 1.6011-10(b) also provides the rules for persons that
hold derivatives and for the treatment of beneficiaries of trusts and
estates. The treatment of beneficiaries of trusts in proposed Sec.
1.6011-10(b) does not affect the application of Subpart E of Subchapter
J of Chapter 1 of Subtitle A, which provides rules concerning when a
grantor or another person is treated as the owner of a portion of that
trust.
A transaction is described in proposed Sec. 1.6011-10(c) if it is
described in proposed Sec. 1.6011-10(c)(1), or (c)(2), or both.
Proposed Sec. 1.6011-10(c)(1) describes transactions that involve a
Captive that, at any time during the Financing Computation Period,
directly or indirectly made available as financing or otherwise
conveyed or agreed to make available or convey to a Recipient, in a
transaction that did not result in taxable income or gain to the
Recipient, any portion of the payments under the Contract, such as
through a guarantee, a loan, or other transfer of Captive's capital,
including such financings or conveyances made prior to the Financing
Computation Period that remain outstanding as of the taxable year in
which disclosure is required. Any amounts that a Captive made available
as financing or otherwise conveyed or agreed to make available or
convey to a Recipient are presumed to be portions of the payments under
the Contract to the extent such amounts when conveyed or made available
are in excess of Captive's cumulative after-tax net investment earnings
minus any outstanding financings or conveyances. See section B.2. of
this Explanation of Provisions. The Financing Computation Period is the
most recent five taxable years of Captive, or all taxable years of
Captive, if Captive has been in existence for less than five taxable
years. For purposes of determining the Financing Computation Period,
each short taxable year is a separate taxable year and taxable years of
predecessor entities are treated as taxable years of Captive.
Proposed Sec. 1.6011-10(c)(2) describes transactions that involve
a Captive for which the amount of liabilities incurred for insured
losses and claim administration expenses during a Loss
[[Page 21556]]
Ratio Computation Period is less than 65 percent of the amount equal to
premiums earned by Captive during the Loss Ratio Computation Period
less policyholder dividends paid by Captive during the Loss Ratio
Computation Period. See section B.3. of this Explanation of Provisions.
The Loss Ratio Computation Period is the most recent ten taxable years
of Captive, each short taxable year is a separate taxable year, and the
taxable years of predecessor entities are treated as taxable years of
Captive. Proposed Sec. 1.6011-10(c)(2) does not apply to any Captive
that has been in existence for less than ten taxable years, including
taxable years of predecessor entities.
Proposed Sec. 1.6011-10(d) provides that a transaction described
in proposed Sec. 1.6011-10(c) is not classified as a listed
transaction if the transaction (1) provides insurance for employee
compensation or benefits and is one for which the Employee Benefits
Security Administration of the U.S. Department of Labor has issued a
Prohibited Transaction Exemption, or (2) is a Consumer Coverage
reinsurance arrangement described in proposed Sec. 1.6011-10(d)(2).
See section B.6. of this Explanation of Provisions.
Proposed Sec. 1.6011-10(e)(1) provides the rules for determining
who is a participant in a listed transaction described in proposed
Sec. 1.6011-10(a). Proposed Sec. 1.6011-10(e)(2) provides a safe
harbor from the disclosure requirements for certain persons. See
section B.5. of this Explanation of Provisions.
Proposed Sec. 1.6011-10(f) describes information that participants
must provide to satisfy the disclosure requirements of Sec. 1.6011-
4(d). See section B.4. of this Explanation of Provisions.
Proposed Sec. 1.6011-10(g) provides the applicability date for the
proposed regulations.
4. Micro-Captive Transactions of Interest
Proposed Sec. 1.6011-11(a) provides that transactions that are the
same as, or substantially similar to, transactions described in
proposed Sec. 1.6011-11(c) are identified as transactions of interest
for purposes of Sec. 1.6011-4(b)(6), except as provided in proposed
Sec. 1.6011-11(d). Proposed Sec. 1.6011-11(b) provides definitions of
terms used to describe Micro-captive Transactions of Interest by
reference to the relevant definitions in proposed Sec. 1.6011-10(b),
except for the definition of the computation period. Proposed Sec.
1.6011-11(b)(2) defines the Transaction of Interest Computation Period
for Micro-captive Transactions of Interest as the most recent nine
taxable years, or the entire period of Captive's existence if Captive
has been in existence for less than nine taxable years. For this
purpose, each short taxable year is a separate taxable year, and the
taxable years of predecessor entities are treated as taxable years of
Captive.
A transaction is described in proposed Sec. 1.6011-11(c) if it
involves the issuance of a Contract to an Insured by a Captive, or the
reinsurance by a Captive of a Contract issued to an Insured by an
Intermediary, and involves a Captive for which the amount of
liabilities incurred for insured losses and claim administration
expenses during the Transaction of Interest Computation Period is less
than 65 percent of the amount equal to premiums earned by Captive
during the Transaction of Interest Computation Period less policyholder
dividends paid by Captive during the Transaction of Interest
Computation Period. See section B.3. of this Explanation of Provisions.
Proposed Sec. 1.6011-11(d) provides that a transaction described
in proposed Sec. 1.6011-11(c) is not classified as a ``transaction of
interest'' if the transaction (1) provides insurance for employee
compensation or benefits and is one for which the Employee Benefits
Security Administration of the U.S. Department of Labor has issued a
Prohibited Transaction Exemption, or (2) is a Consumer Coverage
reinsurance arrangement described in proposed Sec. 1.6011-11(d)(2).
See section B.6. of this Explanation of Provisions. Additionally,
proposed Sec. 1.6011-11(d)(3) provides that a transaction described in
proposed Sec. 1.6011-11(c) is not classified as a ``transaction of
interest'' if the transaction is identified as a ``listed transaction''
in proposed Sec. 1.6011-10(a). Under proposed Sec. 1.6011-11(d)(3), a
transaction that would (but for that subsection) be identified as both
a ``listed transaction'' under proposed Sec. 1.6011-10 and a
``transaction of interest'' under proposed Sec. 1.6011-11, is
identified as a ``listed transaction'' only, and participants in the
transaction must disclose it as such. Material advisors that are
uncertain about whether the transaction they are required to disclose
should be reported as a Micro-captive Listed Transaction or as a Micro-
captive Transaction of Interest should disclose the transaction as a
Micro-captive Listed Transaction, and will not be required to disclose
the transaction a second time if it is determined later that the
transaction should have been disclosed as a Micro-captive Transaction
of Interest.
Proposed Sec. 1.6011-11(e)(1) provides the rules for determining
who is a participant in a transaction of interest described in proposed
Sec. 1.6011-11(a). Proposed Sec. 1.6011-11(e)(2) provides a safe
harbor from the disclosure requirements for certain persons. See
section B.5. of this Explanation of Provisions.
Proposed Sec. 1.6011-11(f) describes information that participants
must provide to satisfy the disclosure requirements of Sec. 1.6011-
4(d) by reference to the information described in proposed Sec.
1.6011-10(f). See section B.4. of this Explanation of Provisions.
Proposed Sec. 1.6011-11(g) provides the applicability date for the
proposed regulations.
B. Changes to Transaction Identified in Notice 2016-66
Examinations of taxpayers and promoters and information received
through disclosures filed in response to Notice 2016-66 have clarified
the Treasury Department's and the IRS's understanding of micro-captive
transactions, including the scope of participation. Based on such
information, the Treasury Department and the IRS have determined that
certain changes to the micro-captive transaction identified in Notice
2016-66 are appropriate for the proposed regulations. The transactions
described in proposed Sec. 1.6011-10 and proposed Sec. 1.6011-11
share common features with the micro-captive transactions described in
Notice 2016-66, but with modifications to the scope of the 20-percent
relationship factor and the factors used to distinguish between listed
transactions, transactions of interest, and transactions that are not
reportable transactions under the proposed regulations.
1. Changes to the Definition of Captive
The Treasury Department and the IRS are aware that some promoters
have structured transactions in which Insureds, Owners, or persons
Related to an Insured or an Owner do not have a direct or indirect
interest in Captive's voting power or value of its outstanding stock or
equity interests, but have a relationship with Captive that provides
substantially similar benefits and risks. For example, Captive may
issue various types of instruments representing rights to all or a
portion of the assets held by Captive but not rights to the voting
power or equity interests in Captive. All equity interests and voting
stock are held by individuals or entities related to the promoter, not
the taxpayers. The promoters thereby seek to avoid the 20 percent
related interest in the voting
[[Page 21557]]
stock or equity interests in Captive necessary for a transaction to be
described in Notice 2016-66. The proposed regulations expand the scope
of the definition of Captive to clarify that derivatives and interests
in the assets of Captive are taken into account. See proposed
Sec. Sec. 1.6011-10(b)(1)(A)-(C) and 1.6011-11(b)(1).
2. Changes to the Financing Factor
Transactions in which the financing factor is met based on a
computation period of Captive's most recent five taxable years (or all
years of Captive's existence if Captive has been in existence for less
than five taxable years), referred to as the Financing Computation
Period in the proposed regulations, are identified as transactions of
interest in Notice 2016-66 but are identified as listed transactions in
the proposed regulations. See proposed Sec. 1.6011-10(c)(1). Presence
of the financing factor in related party micro-captive insurance
transactions indicates tax avoidance and abuse of Captive's status as a
section 831(b)-electing insurance company.
3. Changes to the Loss Ratio Factor and Computation Period
Notice 2016-66 identifies transactions in which the loss ratio
factor is less than 70 percent based on a Notice Computation Period of
Captive's most recent five taxable years (or all years of Captive's
existence if it has been in existence for less than five taxable years)
as transactions of interest. The proposed regulations, however,
identify as listed transactions those transactions in which the loss
ratio factor is less than 65 percent for a computation period extended
to Captive's most recent ten taxable years (referred to as the Loss
Ratio Computation Period). See proposed Sec. 1.6011-10(c)(2). Further,
the proposed regulations identify transactions in which the loss ratio
factor is less than 65 percent based on a Transaction of Interest
Computation Period consisting of Captive's most recent nine taxable
years (or all years of Captive's existence if Captive has been in
existence for less than nine taxable years) as transactions of
interest. See proposed Sec. 1.6011-11(c).
Regarding the reduction of the loss ratio threshold from 70 percent
to 65 percent, the Treasury Department and the IRS are not aware of any
non-abusive transactions for which disclosure was required under Notice
2016-66 as a result of the 70-percent loss ratio factor set forth
therein. Nevertheless, for purposes of the proposed regulations and to
ensure that disclosure is not required for non-abusive transactions,
the Treasury Department and the IRS are lowering the applicable loss
ratio factor to 65 percent. See proposed Sec. Sec. 1.6011-10(c)(2) and
1.6011-11(c). The loss ratio factor helps to identify transactions
involving circumstances inconsistent with insurance in the commonly
accepted sense, including excessive pricing of premiums and
artificially low or nonexistent claims activity. The primary purpose of
premium pricing is to ensure funds are available should a claim arise.
The pricing of premiums should naturally reflect the economic reality
of insurance operations. Pricing premiums far in excess of what is
reasonably needed to fund insurance operations results in a lower loss
ratio and is a strong indicator of abuse. Any Captives that would be
required to disclose as a result of the loss ratio factor may consider
paying policyholder dividends to increase the loss ratio and eliminate
the need to disclose.
The Treasury Department and the IRS are considering whether a
combined ratio may be a better indicator for distinguishing abusive
transactions from other captive transactions. A combined ratio is ``an
indication of the profitability of an insurance company, calculated by
adding the loss and expense ratios.'' NAIC Glossary of Insurance Terms,
<a href="https://content.naic.org/consumer_glossary#C">https://content.naic.org/consumer_glossary#C</a> (last visited April 3,
2023). The 2021 NAIC P&C Report provides that the combined ratios for
property and casualty insurance companies ranged from 96 percent to
103.9 percent over the ten-year period from 2012 to 2021, for a ten-
year average of approximately 99.5 percent. See U.S. Property &
Casualty and Title Insurance Industries--2021 Full Year Results (2022),
<a href="https://content.naic.org/sites/default/files/inline-files/2021%20Annual%20Property%20%26%20Casualty%20and%20Title%20Insurance%20Industry%20Report.pdf">https://content.naic.org/sites/default/files/inline-files/2021%20Annual%20Property%20%26%20Casualty%20and%20Title%20Insurance%20Industry%20Report.pdf</a> (last visited April 3, 2023). The combined ratio
would compare losses incurred, plus loss adjustment expenses incurred
and other underwriting expenses incurred by Captive during the relevant
computation period to Captive's earned premiums, less policyholder
dividends, for the relevant computation period. For this purpose,
Captive's other underwriting expenses incurred would equal Captive's
expenses incurred in carrying on an insurance business, other than loss
adjustment expenses and investment-related expenses. Transactions in
which Captive's combined ratio is less than a certain percentage for a
Loss Ratio Computation Period of the most recent ten taxable years of
Captive would be identified as listed transactions. Transactions in
which Captive's combined ratio is less than a certain percentage for a
Transaction of Interest Computation Period of the most recent nine
taxable years (or all years of Captive's existence if it has been in
existence for less than nine taxable years) would be identified as
transactions of interest. The Treasury Department and the IRS invite
comments on whether a combined ratio would better distinguish abusive
transactions than the proposed loss ratio factor, and if so, what
combined ratio threshold would be most effective in distinguishing
abusive transactions.
Regarding the computation periods for the loss ratio factor, the
Treasury Department and the IRS understand that it is possible that a
Captive with a loss history of fewer than ten taxable years could have
a loss ratio that falls below 65 percent solely because Captive
provides coverage for low frequency, high severity losses and Insureds
purchasing policies from such Captive do not incur such losses in every
year. In recognition of this fact, the proposed regulations categorize
transactions as either transactions of interest or listed transactions
based on the length of the computation period on which the loss ratio
is based. The Notice Computation Period used by Notice 2016-66 to
identify transactions of interest based on a loss ratio factor was five
taxable years, and it has been more than five years since Notice 2016-
66 was published. The Treasury Department and the IRS have determined
that extending the computation period by five years to a Loss Ratio
Computation Period of ten taxable years (doubling the Notice
Computation Period) allows Captives significant time to develop a
reasonable loss history that supports the use of Captive for legitimate
insurance purposes, and a loss ratio that remains below 65 percent for
a Loss Ratio Computation Period of ten taxable years indicates a tax
avoidance transaction. Accordingly, the proposed regulations identify
transactions in which the loss ratio is less than 65 percent based on
an extended Loss Ratio Computation Period of Captive's most recent ten
taxable years as listed transactions. See proposed Sec. 1.6011-
10(b)(2).
However, the Treasury Department and the IRS also have determined
that related party transactions in which the loss ratio is less than 65
percent over a shorter period of time have a potential for tax
avoidance or evasion. The proposed regulations therefore identify
transactions in which Captive has a loss
[[Page 21558]]
ratio of less than 65 percent based on a Transaction of Interest
Computation Period of Captive's most recent nine taxable years (or all
years of Captive's existence if it has been in existence for less than
nine taxable years) as transactions of interest, provided such
transactions are not otherwise characterized as listed transactions
(that is, due to the presence of the financing factor described in
proposed Sec. 1.6011-10(c)(1) or due to having a loss ratio factor of
less than 65 percent based on a Loss Ratio Computation Period of
Captive's most recent ten taxable years). See proposed Sec. 1.6011-
11(c) and (d)(3). Identification of these transactions as transactions
of interest will permit the Treasury Department and the IRS to gather
more information to determine if these transactions are being used for
tax avoidance or evasion.
4. Information Sought From Participants
The proposed regulations significantly reduce the information
required to be reported by Captives under Sec. 1.6011-4(d) as compared
to Notice 2016-66. See proposed Sec. Sec. 1.6011-10(f) and 1.6011-
11(f). Unlike Notice 2016-66, the proposed regulations do not require
Captive participants to identify which factors of the proposed
regulations apply, state under what authority Captive is chartered,
describe how amounts treated as premiums for coverage provided by
Captive were determined, provide the amounts of reserves reported by
Captive on its annual statement, or describe the assets held by
Captive. The proposed regulations do, however, require Captive to
identify the types of policies issued or reinsured, the amounts treated
as premiums written, the name and contact information of actuaries and
underwriters involved, and the total amount of claims paid by Captive.
Additionally, proposed Sec. Sec. 1.6011-10(b)(1) and 1.6011-11(b)(1)
include a 20-percent relationship test in the definition of Captive,
and the proposed regulations require Captive participants to identify
the name and percentage of interest held directly or indirectly by each
person whose interest in Captive meets the 20 percent threshold or is
taken into account in meeting the 20 percent threshold under proposed
Sec. 1.6011-10(b)(1)(iii). Also, the proposed regulations require each
Insured (as defined in proposed Sec. Sec. 1.6011-10(b)(4) and 1.6011-
11(b)(4)) subject to the disclosure requirements set forth in Sec.
1.6011-4(d) to provide the amounts treated by Insured as insurance
premiums for coverage provided to Insured, directly or indirectly, by
Captive.
5. Disclosure Requirement Safe Harbor for Owners
The Treasury Department and the IRS believe that it is now feasible
to generally limit the persons from whom reporting would be required
under the proposed regulations to Captive, Insured, and material
advisors to the transaction. Accordingly, the proposed regulations
provide that any person who, solely by reason of their direct or
indirect ownership interest in Insured, is subject to the disclosure
requirements set forth in Sec. 1.6011-4 as a participant in a Micro-
captive Listed Transaction or a Micro-captive Transaction of Interest,
is not required under Sec. 1.6011-4 to file a disclosure statement
with respect to that transaction provided that person receives written
or electronic acknowledgment that Insured has or will comply with its
separate disclosure obligation under Sec. 1.6011-4(a) with respect to
the transaction. See proposed Sec. Sec. 1.6011-10(e)(2) and 1.6011-
11(e)(2). The acknowledgment can be a copy of the Form 8886, Reportable
Transaction Disclosure Statement (or successor form), filed (or to be
filed) by Insured and must be received by Owner prior to the time set
forth in Sec. 1.6011-4(e) in which Owner would otherwise be required
to provide disclosure. See proposed Sec. Sec. 1.6011-10(e)(2) and
1.6011-11(e)(2). However, the receipt of an acknowledgment that Insured
has or will comply with its disclosure obligation does not relieve the
Owners of Insured of their disclosure obligations if Insured fails to
disclose the transaction in a timely manner.
6. Exception for Consumer Coverage Arrangements
The proposed regulations provide a limited exception from
classification as a Micro-captive Listed Transaction or Micro-captive
Transaction of Interest for certain Consumer Coverage reinsurance
arrangements. See proposed Sec. Sec. 1.6011-10(d)(2) and 1.6011-
11(d)(2). In Consumer Coverage arrangements, a ``Seller'' (that is, a
service provider, automobile dealer, lender, or retailer) sells
products or services to ``Unrelated Customers'' (that is, customers who
do not own an interest in and are not wholly or partially owned by
Seller, an owner of Seller, or individuals or entities related (within
the meaning of one or more of sections 267(b), 707(b), 2701(b)(2)(C),
or 2704(c)(2)) to Seller or owners of Seller). An Unrelated Customer
may also purchase an insurance contract in connection with those
products or services (Consumer Coverage contract). The Consumer
Coverage contract generally provides coverage for repair or replacement
costs if the product breaks down or is lost, stolen, or damaged;
coverage for the customer's payment obligations if the customer dies or
becomes disabled or unemployed; coverage for the difference between all
or a portion of the value of the product and the amount owed on the
product's financing, including a lease, if the product suffers a
covered peril; or a combination of one or more of the foregoing types
of coverage.
An entity related to or affiliated with Seller may issue or
reinsure the Consumer Coverage contracts. In some arrangements, the
Consumer Coverage contracts name an unrelated third party, which may be
referred to as a ``Fronting Company,'' as the provider of the coverage,
and an entity related to or affiliated with Seller reinsures the
Consumer Coverage contracts. In other arrangements, the Consumer
Coverage contracts may name an entity related to or affiliated with
Seller as the provider of the coverage. In these arrangements, an
unrelated third party may reinsure the contracts and may also then
retrocede risk under the contracts to the entity related to or
affiliated with Seller. The parties may treat the entity related to or
affiliated with Seller as an insurance company that elects under
section 831(b) (and section 953(d) if the corporation is foreign) to
exclude premium payments from taxable income.
As a general matter, participation in this type of reinsurance
arrangement is neither a Micro-captive Listed Transaction nor a Micro-
captive Transaction of Interest because the insured is not sufficiently
related to the insurer or any reinsurer. Generally, the Consumer
Coverage contracts insure Unrelated Customers of Seller, and Unrelated
Customers, their owners, and persons related to Unrelated Customers or
their owners do not directly or indirectly own at least 20 percent of
the voting power or value of the outstanding stock of any entity
issuing or reinsuring the Consumer Coverage contract. However, the 20-
percent relationship factor in proposed Sec. Sec. 1.6011-10(b)(1) and
1.6011-11(b)(1) may be met in some of these reinsurance arrangements.
For instance, in ``dealer obligor'' arrangements in which the Seller
would be legally required to pay a claim under certain conditions, such
as a total loss of the covered product within a certain time frame, the
Seller could potentially be considered an Insured under a Contract
issued or reinsured by a Captive, and thus be required to disclose.
The Treasury Department and the IRS have determined that a limited
[[Page 21559]]
exception for taxpayers in Consumer Coverage arrangements is
appropriate, provided commissions paid for Consumer Coverage contracts
issued or reinsured by the Seller's Captive are comparable to the
commissions paid for Consumer Coverage contracts covering Seller's
products or services that are not issued or reinsured by the Seller's
Captive. See proposed Sec. Sec. 1.6011-10(d)(2) and 1.6011-11(d)(2).
C. Effect of Transaction Becoming a Listed Transaction or a Transaction
of Interest Under These Regulations
Participants required to disclose these transactions under Sec.
1.6011-4 who fail to do so are subject to penalties under section
6707A. Participants required to disclose the listed transactions under
Sec. 1.6011-4 who fail to do so are also subject to an extended period
of limitations under section 6501(c)(10). Material advisors required to
disclose these transactions under section 6111 who fail to do so are
subject to the penalty under section 6707. Material advisors required
to maintain lists of investors under section 6112 who fail to do so (or
who fail to provide such lists when requested by the IRS) are subject
to the penalty under section 6708(a). In addition, the IRS may impose
other penalties on persons involved in these transactions or
substantially similar transactions, including accuracy-related
penalties under section 6662 or section 6662A, the section 6694 penalty
for understatements of a taxpayer's liability by a tax return preparer,
the section 6700 penalty for promoting abusive tax shelters, and the
section 6701 penalty for aiding and abetting understatement of a tax
liability.
Taxpayers who have filed a tax return (including an amended return
(or Administrative Adjustment Request (AAR) for certain partnerships))
reflecting their participation in these transactions prior to the date
the Treasury decision adopting these regulations as final regulations
is published in the Federal Register and who have not otherwise
finalized a settlement agreement with the Internal Revenue Service with
respect to the transaction must disclose the transactions as provided
in Sec. 1.6011-4(d) and (e) provided that the period of limitations
for assessment of tax, including any applicable extensions, for any
taxable year in which the taxpayer participated in the transaction has
not ended on or before the date the Treasury decision adopting these
regulations as final regulations is published in the Federal Register.
In addition, material advisors have disclosure requirements with
regard to transactions occurring in prior years. However,
notwithstanding Sec. 301.6111-3(b)(4)(i) and (iii), material advisors
are required to disclose only if they have made a tax statement on or
after six years before the date of the Treasury decision adopting these
regulations as final regulations is published in the Federal Register.
A participant in a transaction that is a Micro-captive Listed
Transaction must file a disclosure statement with OTSA when required to
do so under Sec. 1.6011-4(e), regardless of whether the participant
has previously disclosed the transaction to OTSA pursuant to Notice
2016-66. A participant in a transaction that is a Micro-captive
Transaction of Interest that has previously filed a disclosure
statement with OTSA pursuant to Notice 2016-66 will be treated as
having made the disclosure pursuant to the final regulations for
taxable years for which the taxpayer filed returns before the final
regulations are published in the Federal Register. However, if a
taxpayer described in the preceding sentence participates in the Micro-
captive Transaction of Interest in a taxable year for which the
taxpayer files a return on or after the date the final regulations are
published in the Federal Register, the taxpayer must file a disclosure
statement with OTSA at the same time the taxpayer files their return
for the first such taxable year.
A material advisor with respect to a transaction that is a Micro-
captive Listed Transaction or Micro-captive Transaction of Interest
must file a disclosure statement with OTSA when required to do so under
Sec. 301.6111-3(e), regardless of whether the material advisor has
previously disclosed the transaction to OTSA pursuant to Notice 2016-
66.
The Treasury Department and the IRS recognize that some taxpayers
may have filed tax returns taking the position that they were entitled
to the purported tax benefits of the types of transactions described in
these proposed regulations. Because the IRS will take the position that
taxpayers are not entitled to the purported tax benefits of the listed
transactions described in the proposed regulations, and may take such a
position with respect to the transactions of interest described in the
proposed regulations, taxpayers should consider filing amended returns
or AARs for certain partnerships and ensure that their transactions are
disclosed properly. Taxpayers filing an amended individual return
should write ``Microcaptive'' at the top of the first page of the
amended return and mail the amended return to: Internal Revenue
Service, 2970 Market Street, Philadelphia, PA 19104.
Taxpayers filing amended business returns on paper should write
``Microcaptive'' at the top of the first page of the amended return and
mail to the address listed in the instructions for the amended return.
Taxpayers filing amended business returns electronically should include
``Microcaptive'' when explaining the reason for the changes.
Proposed Applicability Dates
Proposed Sec. 1.6011-10(a) would identify certain micro-captive
transactions described in proposed Sec. 1.6011-10(c) as listed
transactions effective as of the date of publication in the Federal
Register of a Treasury decision adopting these regulations as final
regulations. Similarly, proposed Sec. 1.6011-11(a) would identify
certain micro-captive transactions described in proposed Sec. 1.6011-
11(c) as transactions of interest as of the date of publication in the
Federal Register of a Treasury decision adopting these regulations as
final regulations.
Effect on Other Documents
This document obsoletes Notice 2016-66 (2016-47 I.R.B. 745), as
modified by Notice 2017-08 (2017-3 I.R.B. 423), as of April 11, 2023.
Special Analyses
I. Regulatory Planning and Review
The proposed regulations are not subject to review under section
6(b) of Executive Order 12866 pursuant to the Memorandum of Agreement
(April 11, 2018) between the Treasury Department and the Office of
Management and Budget (OMB) regarding the review of tax regulations.
II. Paperwork Reduction Act
The collection of information contained in these proposed
regulations is reflected in the collection of information for Forms
8886 and 8918 that have been reviewed and approved by OMB in accordance
with the Paperwork Reduction Act (44 U.S.C. 3507(c)) under control
numbers 1545-1800 and 1545-0865. Any disclosures with respect to the
safe harbor for owners as provided in Sec. Sec. 1.6011-10(e)(2) and
1.6011-11(e)(2) are in the nature of an acknowledgment per 5 CFR
1320.3(h)(1), and therefore do not constitute a collection of
information under the Paperwork Reduction Act.
To the extent there is a change in burden as a result of these
regulations, the change in burden will be reflected in the updated
burden estimates for the Forms 8886 and 8918. The requirement to
maintain records to substantiate
[[Page 21560]]
information on Forms 8886 and 8918 is already contained in the burden
associated with the control numbers for the forms and is unchanged.
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless the collection of
information displays a valid control number assigned by OMB.
III. Regulatory Flexibility Act
The Secretary of the Treasury hereby certifies that the proposed
regulations will not have a significant economic impact on a
substantial number of small entities pursuant to the Regulatory
Flexibility Act (5 U.S.C. chapter 6).
As previously explained, the basis for these proposed regulations
is Notice 2016-66, 2016-47 I.R.B. 745 (as modified by Notice 2017-08,
2017-3 I.R.B. 423). The following chart sets forth the gross receipts
of respondents to Notice 2016-66, based on data for tax year 2020:
Notice 2016-66 Respondents by Size
------------------------------------------------------------------------
Firms Filings
Receipts (percent) (percent)
------------------------------------------------------------------------
Under 5M................................ 78.65 75.26
5M to 10M............................... 9.36 10.20
10M to 15M.............................. 4.39 5.10
15M to 20M.............................. 2.34 2.55
20M to 25M.............................. 1.17 1.53
Over 25M................................ 4.09 5.36
-------------------------------
Total............................... 100 100
------------------------------------------------------------------------
This chart shows that the majority of respondents reported gross
receipts under $5 million. Even assuming that these respondents
constitute a substantial number of small entities, the proposed
regulations will not have a significant economic impact on these
entities because the proposed regulations implement sections 6111 and
6112 and Sec. 1.6011-4 by specifying the manner in which and time at
which an identified Micro-captive Listed Transaction or Micro-captive
Transaction of Interest must be reported. Accordingly, because the
regulations are limited in scope to time and manner of information
reporting and definitional information, the economic impact of the
proposal is expected to be minimal.
Further, the Treasury Department and the IRS expect that the
reporting burden is low; the information sought is necessary for
regular annual return preparation and ordinary recordkeeping. The
estimated burden for any taxpayer required to file Form 8886 is
approximately 10 hours, 16 minutes for recordkeeping, 4 hours, 50
minutes for learning about the law or the form, and 6 hours, 25 minutes
for preparing, copying, assembling, and sending the form to the IRS.
The IRS's Research, Applied Analytics, and Statistics division
estimates that the appropriate wage rate for this set of taxpayers is
$77.50 (2020 dollars) per hour. Thus, it is estimated that a respondent
will incur costs of approximately $1,667.27 per filing. Disclosures
received to date by the Treasury Department and the IRS in response to
the reporting requirements of Notice 2016-66 indicate that this small
amount will not pose any significant economic impact for those
taxpayers now required to disclose under the proposed regulations.
For the reasons stated, a regulatory flexibility analysis under the
Regulatory Flexibility Act is not required. The Treasury Department and
the IRS invite comments on the impact of the proposed regulations on
small entities. Pursuant to section 7805(f) of the Code, this notice of
proposed rulemaking has been submitted to the Chief Counsel for the
Office of Advocacy of the Small Business Administration for comment on
its impact on small business.
IV. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA)
requires that agencies assess anticipated costs and benefits and take
certain other actions before issuing a final rule that includes any
Federal mandate that may result in expenditures in any one year by a
State, local, or Tribal government, in the aggregate, or by the private
sector, of $100 million (updated annually for inflation). This proposed
rule does not include any Federal mandate that may result in
expenditures by State, local, or Tribal governments or by the private
sector in excess of that threshold.
V. Executive Order 13132: Federalism
Executive Order 13132 (Federalism) prohibits an agency from
publishing any rule that has federalism implications if the rule either
imposes substantial, direct compliance costs on State and local
governments, and is not required by statute, or preempts state law,
unless the agency meets the consultation and funding requirements of
section 6 of the Executive order. This proposed rule does not have
federalism implications and does not impose substantial direct
compliance costs on state and local governments or preempt state law
within the meaning of the Executive order.
Comments and Public Hearing
Before these proposed amendments to the regulations are adopted as
final regulations, consideration will be given to any comments that are
submitted timely to the IRS as prescribed in the preamble under the
ADDRESSES section. The Treasury Department and the IRS request comments
on all aspects of the proposed regulations. The Treasury Department and
the IRS specifically request comments on the following:
1. What are the specific and objective metrics, factors, or
standards, if any, that, if reported, would allow for the IRS to better
identify and distinguish abusive micro-captive transactions from other
micro-captive transactions?
2. With respect to proposed Sec. Sec. 1.6011-10(c)(2) and 1.6011-
11(c), whether the loss ratio described therein, which compares ``the
amount of liabilities incurred by Captive for insured losses and claim
administration expenses during the [applicable] Computation Period'' to
the ``premiums earned by Captive during the [applicable] Computation
Period less policyholder dividends paid by Captive during the
[applicable] Computation Period'', should be replaced by a combined
ratio, which compares ``losses incurred, plus loss adjustment expenses
incurred and other underwriting expenses incurred by Captive during the
[applicable] Computation Period'' to ``Captive's earned premiums, less
policyholder dividends, for the
[[Page 21561]]
[applicable] Computation Period'', and if so, what percentage would be
an effective threshold for purposes of identifying abusive
transactions. For this purpose, Captive's ``other underwriting expenses
incurred'' would equal Captive's expenses incurred in carrying on an
insurance business, other than loss adjustment expenses and investment-
related expenses.
3. With respect to the percentage of premiums retained as
commissions for contracts as described at proposed Sec. Sec. 1.6011-
10(d)(2) and 1.6011-11(d)(2), what, if any, are the specific metrics,
factors, or standards that, if reported, would allow for the IRS to
better identify and distinguish abusive micro-captive transactions of
this type from other such micro-captive transactions?
Any comments submitted will be made available at <a href="https://www.regulations.gov">https://www.regulations.gov</a> or upon request.
A public hearing is scheduled to be held by teleconference on July
19, 2023, beginning at 10:00 a.m. ET unless no outlines are received by
June 12, 2023.
The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who
wish to comment by telephone at the hearing must submit written or
electronic comments and an outline of the topics to be discussed as
well as the time to be devoted to each topic by June 12, 2023 as
prescribed in the preamble under the ADDRESSES section.
A period of ten minutes will be allocated to each person for making
comments. After the deadline for receiving outlines has passed, the IRS
will prepare an agenda containing the schedule of speakers. Copies of
the agenda will be made available at <a href="https://www.regulations.gov">https://www.regulations.gov</a>,
search IRS and REG-109309-22. Copies of the agenda will also be
available by emailing a request to <a href="/cdn-cgi/l/email-protection#ee9e9b8c82878d868b8f9c8780899dae879c9dc0898198"><span class="__cf_email__" data-cfemail="97e7e2f5fbfef4fff2f6e5fef9f0e4d7fee5e4b9f0f8e1">[email protected]</span></a>. Please put
``REG-109309-22 Agenda Request'' in the subject line of the email.
Announcement 2020-4, 2020-17 I.R.B. 667 (April 20, 2020), provides
that until further notice, public hearings conducted by the IRS will be
held telephonically. Any telephonic hearing will be made accessible to
people with disabilities.
Statement of Availability of IRS Documents
The notices and revenue ruling cited in this document are published
in the Internal Revenue Bulletin (or Cumulative Bulletin) and are
available from the Superintendent of Documents, U.S. Government
Publishing Office, Washington, DC 20402, or by visiting the IRS website
at <a href="https://www.irs.gov">https://www.irs.gov</a>.
Drafting Information
The principal author of these proposed regulations is Elizabeth M.
Hill, Office of Associate Chief Counsel (Financial Institutions &
Products). However, other personnel from the Treasury Department and
the IRS participated in the development of these regulations.
List of Subjects in 26 CFR Part 1
Income Taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, the Treasury Department and the IRS propose to amend
26 CFR part 1 as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
* * * * *
Section 1.6011-10 also issued under 26 U.S.C. 6001 and 26 U.S.C.
6011.
Section 1.6011-11 also issued under 26 U.S.C. 6001 and 26 U.S.C.
6011.
* * * * *
0
Par. 2. Section 1.6011-10 is added to read as follows:
Sec. 1.6011-10 Micro-captive listed transaction.
(a) Identification as listed transaction. Transactions that are the
same as, or substantially similar to, transactions described in
paragraph (c) of this section are identified as listed transactions for
purposes of Sec. 1.6011-4(b)(2), except as provided in paragraph (d)
of this section.
(b) Definitions. The following definitions apply for purposes of
this section:
(1) Captive means any entity that:
(i) Elects under section 831(b) of the Internal Revenue Code (Code)
to exclude premiums from taxable income;
(ii) Issues a Contract to an Insured, reinsures a Contract of an
Insured issued by an Intermediary, or both; and
(iii) Has at least 20 percent of its assets or the voting power or
value of its outstanding stock or equity interests directly or
indirectly owned, individually or collectively, by an Insured, an
Owner, or persons Related to an Insured or an Owner. For purposes of
this paragraph (b)(1)(iii), the following rules apply to the extent
application of a rule (or rules) would increase such direct or indirect
ownership:
(A) A person that holds a derivative is treated as indirectly
owning the assets referenced by the derivative; and
(B) The interest of each beneficiary of a trust or estate in the
assets of such trust or estate must be determined by assuming the
maximum exercise of discretion by the fiduciary in favor of such
beneficiary and the maximum use of the trust's or estate's interest in
the company to satisfy the interests of such beneficiary.
(2) Computation periods--(i) Financing Computation Period. The
Financing Computation Period is the most recent five taxable years of
Captive (or all taxable years of Captive, if Captive has been in
existence for less than five taxable years).
(ii) Loss Ratio Computation Period. The Loss Ratio Computation
Period is the most recent ten taxable years of Captive. A Captive that
does not have at least ten taxable years cannot have a Loss Ratio
Computation Period, and therefore is not described in paragraph (c)(2)
of this section.
(iii) Rules for computation periods. This paragraph (b)(2)(iii)
applies for purposes of determining the Financing Computation Period
and the Loss Ratio Computation Period. Each short taxable year is a
separate taxable year. If Captive is a successor to one or more other
Captives, taxable years of each such other Captive are treated as
taxable years of Captive. A successor is any of the following:
(A) A successor corporation as defined in Sec. 1.382-2(a)(5);
(B) An entity that, directly or indirectly, acquires (or is deemed
to acquire) the assets of another entity and succeeds to and takes into
account the other entity's earnings and profits or deficit in earnings
and profits; or
(C) An entity that receives (or is deemed to receive) any assets
from another entity if such entity's basis is determined, directly or
indirectly, in whole or in part, by reference to the other entity's
basis.
(3) Contract means any contract that is treated by a party to the
contract as an insurance contract or reinsurance contract for Federal
income tax purposes.
(4) Insured means any person that conducts a trade or business,
enters into a Contract with a Captive or enters into a Contract with an
Intermediary that is directly or indirectly reinsured by a Captive, and
treats amounts paid under the Contract as insurance premiums for
Federal income tax purposes.
(5) Intermediary means any entity that issues a Contract to an
Insured, or reinsures a Contract that is issued to an Insured, and such
Contract is reinsured,
[[Page 21562]]
directly or indirectly, by a Captive. A transaction may have more than
one Intermediary.
(6) Owner means any person who, directly or indirectly, holds an
ownership interest in an Insured or its assets. For purposes of this
paragraph (b)(6), the following rules apply to the extent application
of a rule (or rules) would increase such direct or indirect ownership:
(i) The interest of a person that holds a derivative must be
determined as provided in paragraph (b)(1)(iii)(A) of this section; and
(ii) The interest of each beneficiary of a trust or estate in the
assets of such trust or estate must be determined as provided in
paragraph (b)(1)(iii)(B) of this section.
(7) Recipient means any Owner, Insured, or person Related to an
Owner or an Insured engaged in a transaction described in paragraph
(c)(1) of this section.
(8) Related means having a relationship described in one or more of
sections 267(b), 707(b), 2701(b)(2)(C), and 2704(c)(2) of the Code.
(9) Seller means a service provider, automobile dealer, lender, or
retailer that sells products or services to Unrelated Customers who
purchase insurance contracts in connection with those products or
services.
(10) Seller's Captive means a Captive Related to Seller, an owner
of Seller, or individuals or entities Related to Seller or owners of
Seller.
(11) Unrelated Customers means persons who do not own an interest
in, and are not wholly or partially owned by, Seller, an owner of
Seller, or individuals or entities Related to Seller or owners of
Seller.
(c) Transaction description. A transaction is described in this
paragraph (c) if the transaction is described in paragraph (c)(1) of
this section, paragraph (c)(2) of this section, or both.
(1) The transaction involves a Captive that, at any time during the
Financing Computation Period, directly or indirectly made available as
financing or otherwise conveyed or agreed to make available or convey
to a Recipient, in a transaction that did not result in taxable income
or gain to the Recipient, any portion of the payments under the
Contract, such as through a guarantee, a loan, or other transfer of
Captive's capital, or made such financings or conveyances prior to the
Financing Computation Period that remain outstanding or in effect at
any point in the taxable year for which disclosure is required. Any
amounts that a Captive made available as financing or otherwise
conveyed or agreed to make available or convey to a Recipient are
presumed to be portions of the payments under the Contract to the
extent such amounts when made available or conveyed are in excess of
Captive's cumulative after-tax net investment earnings minus any
outstanding financings or conveyances.
(2) The transaction involves a Captive for which the amount of
liabilities incurred for insured losses and claim administration
expenses during the Loss Ratio Computation Period is less than 65
percent of the amount equal to premiums earned by Captive during the
Loss Ratio Computation Period less policyholder dividends paid by
Captive during the Loss Ratio Computation Period.
(d) Exceptions. A transaction described in paragraph (c) of this
section is not classified as a listed transaction for purposes of this
section and Sec. 1.6011-4(b)(2) if the transaction:
(1) Provides insurance for employee compensation or benefits and is
one for which the Employee Benefits Security Administration of the U.S.
Department of Labor has issued a Prohibited Transaction Exemption under
the procedures provided at 76 FR 66637 (Oct. 27, 2011) (or subsequent
procedures); or
(2) Is an arrangement in which a Captive meets all of the following
requirements:
(i) Captive is a Seller's Captive,
(ii) The Seller's Captive issues or reinsures some or all of the
Contracts sold to Unrelated Customers in connection with the products
or services being sold by the Seller,
(iii) 100 percent of the business of the Seller's Captive is
insuring or reinsuring Contracts in connection with products or
services being sold by the Seller or persons Related to the Seller, and
(iv) With respect to the Contracts issued or reinsured by the
Seller's Captive, the fee, commission, or other remuneration earned by
any person or persons, in the aggregate, for the sale of the Contracts,
described as a percentage of the premiums paid by the Seller's
customers, is at least equal to the greater of:
(A) 50 percent; or
(B) The unrelated commission percentage (which is the highest
percentage fee, commission, or other remuneration known to the Seller
that is earned by any person or persons, in the aggregate, for the sale
of any extended warranty, insurance, or other similar Contract sold to
a customer covering products or services sold by the Seller.
(e) Special participation rules--(1) In general. Whether a taxpayer
has participated in the listed transaction identified in paragraph (a)
of this section will be determined under Sec. 1.6011-4(c)(3)(i)(A).
Participants include, but are not limited to, any Owner, Insured,
Captive, or Intermediary with respect to the transaction whose tax
return reflects tax consequences or a tax strategy described in
paragraph (a) of this section, except as otherwise provided in
paragraph (e)(2) of this section.
(2) Disclosure safe harbor for Owners. An Owner who, solely by
reason of the Owner's direct or indirect ownership interest in an
Insured, has participated in the listed transaction described in this
section will not be required to disclose participation in the
transaction under section 6011(a), notwithstanding Sec. 1.6011-
4(c)(3), if the Owner receives an acknowledgement, in writing or
electronically, from the Insured that the Insured has or will comply
with the Insured's separate disclosure obligation under Sec. 1.6011-4
with respect to the transaction and the Insured discloses the
transaction in a timely manner. The acknowledgment can be a copy of the
Form 8886, Reportable Transaction Disclosure Statement (or successor
form), filed (or to be filed) by the Insured and must be received by
the Owner prior to the time set forth in Sec. 1.6011-4(e) in which the
Owner would otherwise be required to provide disclosure. Owners who
meet the requirements of this safe harbor will not be treated as having
participated in an undisclosed listed transaction for purposes of Sec.
1.6664-2(c)(3)(ii) or as having failed to include information on any
return or statement with respect to a listed transaction for purposes
of section 6501(c)(10).
(f) Disclosure requirements--(1) Information required of all
participants. Participants must provide the information required under
Sec. 1.6011-4(d) and the Instructions to Form 8886 (or successor
form). For all participants, describing the transaction in sufficient
detail includes, but is not limited to, describing on Form 8886 (or
successor form) when, how, and from whom the participant became aware
of the transaction, and how the participant participated in the
transaction (for example, as an Insured, a Captive, or other
participant). Paragraphs (f)(2) and (3) of this section describe
information required of a Captive and an Insured, respectively.
(2) Information required of a Captive. For a Captive, describing
the transaction in sufficient detail includes, but is not limited to,
describing the following on Form 8886 (or successor form):
[[Page 21563]]
(i) All the type(s) of policies issued or reinsured by Captive
during the year of participation or years of participation (if
disclosure pertains to multiple years);
(ii) The amounts treated by Captive as premiums written for
coverage provided by Captive during the year of participation or each
year of participation (if disclosure pertains to multiple years);
(iii) The name and contact information of each and every actuary or
underwriter who assisted in the determination of the amounts treated as
premiums for coverage provided by Captive during the year or each year
of participation (if disclosure pertains to multiple years);
(iv) The total amount of claims paid by Captive during the year of
participation or each year of participation (if disclosure pertains to
multiple years); and
(v) The name and percentage of interest directly or indirectly held
by each person whose interest in Captive meets the 20 percent threshold
or is taken into account in meeting the 20 percent threshold under
Sec. 1.6011-10(b)(1)(iii).
(3) Information required of Insured. For Insured, describing the
transaction in sufficient detail includes, but is not limited to,
describing on Form 8886 (or successor form) the amounts treated by
Insured as premiums for coverage provided to Insured, directly or
indirectly, by Captive or by each Captive (if disclosure pertains to
multiple Captives) during the year or each year of participation (if
disclosure pertains to multiple years), as well as the identity of all
persons identified as Owners to whom the Insured provided an
acknowledgment described in paragraph (e)(2) of this section.
(g) Applicability date--(1) In general. This section identifies
transactions that are the same as, or substantially similar to, the
transactions described in paragraph (a) of this section as listed
transactions for purposes of Sec. 1.6011-4(b)(2) effective the date
the regulations are published as final regulations in the Federal
Register.
(2) Obligations of participants with respect to prior periods.
Pursuant to Sec. 1.6011-4(d) and (e), taxpayers who have filed a tax
return (including an amended return) reflecting their participation in
transactions described in paragraph (a) of this section prior to the
date these regulations are published as final regulations in the
Federal Register, who have not otherwise finalized a settlement
agreement with the Internal Revenue Service with respect to the
transaction, must disclose the transactions as required by Sec.
1.6011-4(d) and (e) provided that the period of limitations for
assessment of tax (as determined under section 6501 of the Code,
including section 6501(c)) for any taxable year in which the taxpayer
participated has not ended on or before the date the regulations are
published as final regulations in the Federal Register.
(3) Obligations of material advisors with respect to prior periods.
Material advisors defined in Sec. 301.6111-3(b) of this chapter who
have previously made a tax statement with respect to a transaction
described in paragraph (a) of this section have disclosure and list
maintenance obligations as described in Sec. Sec. 301.6111-3 and
301.6112-1 of this chapter, respectively. Notwithstanding Sec.
301.6111-3(b)(4)(i) and (iii) of this chapter, material advisors are
required to disclose only if they have made a tax statement on or after
the date that is six years before the date the regulations are
published as final regulations in the Federal Register. Material
advisors that are uncertain whether the transaction they are required
to disclose should be reported under this section or Sec. 1.6011-11
should disclose under this section, and will not be required to
disclose a second time if it is later determined that the transaction
should have been disclosed under Sec. 1.6011-11.
0
Par. 3. Section 1.6011-11 is added to read as follows:
Sec. 1.6011-11 Micro-captive transaction of interest.
(a) Identification as transaction of interest. Transactions that
are the same as, or substantially similar to, transactions described in
paragraph (c) of this section are identified as transactions of
interest for purposes of Sec. 1.6011-4(b)(6), except as provided in
paragraph (d) of this section.
(b) Definitions. The following definitions apply for purposes of
this section:
(1) Captive has the same meaning as provided in Sec. 1.6011-
10(b)(1).
(2) Transaction of Interest Computation Period means the most
recent nine taxable years of a Captive (or all taxable years of
Captive, if Captive has been in existence for less than nine taxable
years). For purposes of this paragraph (b)(2), each short taxable year
is a separate taxable year, and if Captive is a successor to one or
more other Captives, taxable years of each such other Captive are
treated as taxable years of Captive. A successor has the same meaning
as provided in Sec. 1.6011-10(b)(2)(iii) for purposes of this
paragraph (b)(2).
(3) Contract has the same meaning as provided in Sec. 1.6011-
10(b)(3).
(4) Insured has the same meaning as provided in Sec. 1.6011-
10(b)(4).
(5) Intermediary has the same meaning as provided in Sec. 1.6011-
10(b)(5).
(6) Owner has the same meaning as provided in Sec. 1.6011-
10(b)(6).
(7) Related has the same meaning as provided in Sec. 1.6011-
10(b)(8).
(8) Seller has the same meaning as provided in Sec. 1.6011-
10(b)(9).
(9) Seller's Captive has the same meaning as provided in Sec.
1.6011-10(b)(10).
(10) Unrelated Customers has the same meaning as provided in Sec.
1.6011-10(b)(11).
(c) Transaction description. A transaction is described in this
paragraph (c) if the transaction involves a Captive for which the
amount of liabilities incurred for insured losses and claim
administration expenses during the Transaction of Interest Computation
Period is less than 65 percent of the amount equal to premiums earned
by Captive during the Transaction of Interest Computation Period less
policyholder dividends paid by Captive during the Transaction of
Interest Computation Period.
(d) Exceptions. A transaction described in paragraph (c) of this
section is not classified as a transaction of interest for purposes of
this section and Sec. 1.6011-4(b)(6) if the transaction:
(1) Is described in Sec. 1.6011-10(d)(1);
(2) Is described in Sec. 1.6011-10(d)(2); or
(3) Is identified as a listed transaction in Sec. 1.6011-10(a), in
which case the transaction must be reported as a listed transaction
under Sec. 1.6011-10.
(e) Special participation rules--(1) In general. Whether a taxpayer
has participated in the transaction of interest identified in paragraph
(a) of this section will be determined under Sec. 1.6011-
4(c)(3)(i)(E). Participants include, but are not limited to, any Owner,
Insured, Captive, or Intermediary with respect to the transaction whose
tax return reflects tax consequences or a tax strategy described in
paragraph (a) of this section, except as otherwise provided in
paragraph (e)(2) of this section.
(2) Disclosure safe harbor for Owners. An Owner who, solely by
reason of the Owner's direct or indirect ownership interest in an
Insured, has participated in the transaction of interest described in
this section will not be required to disclose participation in the
transaction under section 6011(a), notwithstanding Sec. 1.6011-
4(c)(3), if the Owner receives acknowledgment, in writing or
electronically, from the Insured that the Insured has or will comply
with
[[Page 21564]]
Insured's separate disclosure obligation under Sec. 1.6011-4 with
respect to the transaction and the Insured discloses the transaction in
a timely manner. The acknowledgment can be a copy of the Form 8886,
Reportable Transaction Disclosure Statement (or successor form), filed
(or to be filed) by the Insured and must be received by the Owner prior
to the time set forth in Sec. 1.6011-4(e) in which the Owner would
otherwise be required to provide disclosure.
(f) Disclosure requirements. Participants must provide the
information required under Sec. 1.6011-4(d) and the Instructions to
Form 8886 (or successor form). For all participants, describing the
transaction in sufficient detail includes, but is not limited to,
describing on Form 8886 (or successor form) when, how, and from whom
the participant became aware of the transaction, and how the
participant participated in the transaction (for example, as an
Insured, a Captive, or other participant). A Captive and an Insured
must also provide the information required in Sec. 1.6011-10(f)(2) and
(3), respectively.
(g) Applicability date--(1) In general. This section identifies
transactions that are the same as, or substantially similar to, the
transaction described in paragraph (a) of this section as transactions
of interest for purposes of Sec. 1.6011-4(b)(6) effective the date the
regulations are published as final regulations in the Federal Register.
(2) Obligations of participants with respect to prior periods.
Pursuant to Sec. 1.6011-4(d) and (e), taxpayers who have filed a tax
return (including an amended return) reflecting their participation in
transactions described in paragraph (a) of this section prior to the
date the regulations are published as final regulations in the Federal
Register, who have not otherwise finalized a settlement agreement with
the Internal Revenue Service with respect to the transaction, must
disclose the transactions as required by Sec. 1.6011-4(d) and (e)
provided that the period of limitations for assessment of tax (as
determined under section 6501, including section 6501(c)) for any
taxable year in which the taxpayer participated has not ended on or
before the date the regulations are published as final regulations in
the Federal Register. However, taxpayers who have filed a disclosure
statement regarding their participation in the transaction with the
Office of Tax Shelter Analysis pursuant to Notice 2016-66, 2016-47
I.R.B. 745, will be treated as having made the disclosure pursuant to
the final regulations for the taxable years for which the taxpayer
filed returns before the final regulations are published in the Federal
Register. If a taxpayer described in the preceding sentence
participates in the Micro-captive Transaction of Interest in a taxable
year for which the taxpayer files a return on or after the date the
final regulations are published in the Federal Register, the taxpayer
must file a disclosure statement with the Office of Tax Shelter
Analysis at the same time the taxpayer files their return for the first
such taxable year.
(3) Obligations of material advisors with respect to prior periods.
Material advisors defined in Sec. 301.6111-3(b) of this chapter who
have previously made a tax statement with respect to a transaction
described in paragraph (a) of this section have disclosure and list
maintenance obligations as described in Sec. Sec. 301.6111-3 and
301.6112-1 of this chapter, respectively. Notwithstanding Sec.
301.6111-3(b)(4)(i) and (iii) of this chapter, material advisors are
required to disclose only if they have made a tax statement on or after
the date six years before the date the regulations are published as
final regulations in the Federal Register. Material advisors that are
uncertain whether the transaction they are required to disclose should
be reported under this section or Sec. 1.6011-10 should disclose under
Sec. 1.6011-10, and will not be required to disclose a second time if
it is later determined that the transaction should have been disclosed
under this section.
Douglas W. O'Donnell,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2023-07315 Filed 4-10-23; 8:45 am]
BILLING CODE 4830-01-P
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This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.