Instead of issuing meaningful regulations based on comments from all stakeholders carrying out the intent of Congress when it approved micro-captives under Section 831(b) of the Code, the Internal Revenue Service (IRS) has opted to pursue concerning tactics born out in a number of high profile lawsuits and regulatory proposals…
The Ownership Factor
The Protecting Americans from Tax Hikes Act of 2015 brought significant changes…
According to the summary of the Senate Finance Committee, the goal of the ownership requirements was to prevent abuse…
The IRS proposed regulations regarding ownership requirements differ from the guidelines established by Congress…
The misalignment between the congressional guidelines and the IRS’s interpretation of ownership requirements leaves business owners, tax professionals, and micro-captive industry participants grappling with uncertainty…
Loss Ratio Computation Factor
The utilization of a loss ratio computation factor as a means to identify potentially abusive transactions within 831(b) micro-captives fails to consider several critical characteristics…
The proposal relies on the use of health insurance as a benchmark, presenting an apples-to-oranges scenario…
Furthermore, the proposal relies on NAIC data to establish a benchmark loss ratio of 72.5 percent for property and casualty companies in 2021. However, this data may not be limited to commercial insurance rates…
By refining the loss ratio computation factor to align with the specific dynamics of 831(b) micro-captives, regulators and policymakers can better ensure a fair assessment…
Unintended Consequences of the IRS’s Approach
Born out of the insurance liability crisis of the 1980s, the 831(b) tax code emerged as a solution designed to empower small insurance companies…
The IRS’s requirement of a 65% loss ratio, coupled with its suggestion of including shareholder distributions, poses a significant challenge…
Furthermore, the IRS’s suggestion of including shareholder distributions exacerbates the issue…
Fails to Address IRS’s Stated Concerns
In IR-2016-25, the IRS explicitly outlined concerns regarding the 831(b) tax provision, citing implausible risk coverage, lack of underwriting, and exorbitant premiums…
While the proposed regulations regarding 20% ownership and the financing computation seek to address certain aspects, they fall short…
Puglisi Egg Farms Conundrum
Within the proposed regulations, a statement caught attention: “Regarding the reduction of the loss ratio threshold…”
In 2021, Commissioner Rettig conceded a related case in the US Tax Court involving Puglisi Egg Farms…
The concession made in the Puglisi Egg Farms case raises significant concerns and highlights the need for clarity…
Taxpayer Burden
Within the proposed regulations, a statement claimed: “…this small amount will not pose any significant economic impact…”
According to Notice 2016-66, 79 percent of participants in 831(b) micro-captives have annual gross revenues below $5 million…
To suggest that doubling the costs of annual tax preparation is negligible is a concerning oversight…
Conclusion
The discrepancies and confusion surrounding the ownership requirements and loss ratio computation factor highlight the need for clarity and consistency…
By addressing these issues and establishing clear guidelines based on industry-specific characteristics, regulators and policymakers can foster innovation, promote responsible risk management, and protect the integrity of the 831(b) framework…