831b Captive Insurance Companies Micro

Adkisson's

CAPTIVE INSURANCE COMPANIES

831(b) Captive Insurance Companies

In terms of premium dollars paid, the captive insurance sector is dominated by the large corporate captives, which individually receive tens-of-millions and sometimes more from their insured organizations. These large captives are taxed as other non-life insurance companies, such as insurance companies such as AIG, CNA, State Farm, Farmers, etc., are taxed.

In terms of the number of captives formed, however, most captives are smaller captives that elect to be taxed under IRC section 831(b), and which are primarily characterized by their premiums not exceeding $2.2 million per year (beginning in 2017, and which amount is thereafter indexed against inflation. These captives are variously known as "831(b) captives" or sometimes "Mini-Captives" (correctly) or "Micro-Captives" (incorrectly, as a true "Micro-Captive" is one that qualifies under IRC 501(c)(15)).

The benefit for electing 831(b) status for a properly-qualifying captive is that the company is not taxed on the premium income that it receives. An 831(b) captive's income is still taxable at corporate rates, and the captive is severely restricted as to the amount of expenses that it may deduct against that investment income. Nonetheless, such companies have the advantage that since their premium income is not taxed, they may build reserves and surplus more quickly and efficiently than non-831(b) captives, since they do not have to be concerned with the tax aspects of placing money into reserves and then later re-capturing that money as income.

As with anything that has the potential for tax benefits, 831(b) captives have been subject to abuse by promoters who have rather nakedly marketed such companies as tax shelters that provide no, or only a nominal, true insurance benefit to the insured businesses. With these captives, known as "tax shelter captives", the captive is little more than a vehicle to generate artificial IRC sec. 172 expenses to the insured businesses, and then to either take advantage of the arbitrage between ordinary income and capital gains rates upon distribution (or, in the most abusive forms of these captives, to generate the deduction without ever ultimately paying any tax whatsoever). On November 1, 2016, the IRS issued Notice 2016-66 (reproduced in full below) to combat abusive captives by designating them as a "Transaction of Interest". See also the detailed article: A Detailed Analysis of IRS Notice 2016-66 re 831(b) Captives

Congress has also been concerned with a different misuse of 831(b) captives, which is to use them as an estate-transfer vehicle so as to avoid federal estate and gift taxes. Thus, in the PATH Act of 2015, Congress imposed strict limitations on the ownership of companies that elect under 831(b) so as to attempt to eliminate the estate-transfer potential of such companies. These changes are described in the "Technical Explanation" that accompanied the PATH Act, and which are included in blue with the text of 831(b), below. See also the detailed article: Congress Makes 831(b) Captives Much Better And Deals With (Some) Abuses In 2015 Appropriations Bill

If a captive makes the 831(b) election, but is deemed not to qualify for the election, then it defaults to the tax treatment of other non-life insurance companies, i.e., it will have to set reserves and recapture (taxable) premium income as policy liabilities run off. However, this presumes that the captive qualifies generally as an "insurance company" for tax purposes (something which is seriously in doubt as to tax shelter captives).

The bottom line is that an 831(b) captive is still quite viable, but it should not be misused as a tax-shelter or as an estate-transfer vehicle. Moreover, it is more important than ever than 831(b) captive owners obtain quality tax advice regarding the structuring and operations of their captives so that the 831(b) election is not endangered.

The first U.S. Tax Court opinion to squarely address the problem of 831(b) risk-pooled captives was Avrahami v. Comm'r.

Internal Revenue Code Section 831(b)

26 U.S. Code § 831 - Tax on insurance companies other than life insurance companies

(b) ALTERNATIVE TAX FOR CERTAIN SMALL COMPANIES

(1) IN GENERAL

In lieu of the tax otherwise applicable under subsection (a), there is hereby imposed for each taxable year on the income of every insurance company to which this subsection applies a tax computed by multiplying the taxable investment income of such company for such taxable year by the rates provided in section 11(b).

(2) COMPANIES TO WHICH THIS SUBSECTION APPLIES

(A) In general

This subsection shall apply to every insurance company other than life (including interinsurers and reciprocal underwriters) if—

(i) the net written premiums (or, if greater, direct written premiums) for the taxable year do not exceed $1,200,000 $2,200,000, and

(ii) such company meets the diversification requirements of subparagraph (B), and

(iii) such company elects the application of this subsection for such taxable year.

The election under clause (ii) clause (iii) shall apply to the taxable year for which made and for all subsequent taxable years for which the requirements of clause (i) clauses (i) and (ii) are met. Such an election, once made, may be revoked only with the consent of the Secretary.

CONGRESSIONAL TECHNICAL EXPLANATION: Increase and indexing of dollar limits.

The provision increases the amount of the limit on net written premiums or direct written premiums (whichever is greater) from $1,200,000 to $2,200,000 and indexes this amount for inflation starting in 2016. The base year for calculating the inflation adjustment is 2013. If the amount, as adjusted, is not a multiple of $50,000, it is rounded to the next lowest multiple of $50,000.

(B) DIVERSIFICATION REQUIREMENTS.

CONGRESSIONAL TECHNICAL EXPLANATION: Diversification requirements.

The provision adds diversification requirements to the eligibility rules. A company can meet these in one of two ways.

(i) IN GENERAL. -- An insurance company meets the requirements of this subparagraph if --

(I) no more than 20 percent of the net written premiums (or, if greater, direct written premiums) of such company for the taxable year is attributable to any one policyholder, or

CONGRESSIONAL TECHNICAL EXPLANATION: Risk diversification test.

An insurance company meets the diversification requirement if no more than 20 percent of the net written premiums (or, if greater, direct written premiums) of the company for the taxable year is attributable to any one policyholder. In determining the attribution of premiums to any policyholder, all policyholders that are related or are members of the same controlled group are treated as one policyholder.

[ Footnote 655: For this purpose, persons are related within the meaning of section 267(b) or 707(b). ]

[Footnote 656: Members of the same controlled group are determined as under present law for purposes determining whether a company meets the dollar limit applicable to net written premiums (or, if greater, direct written premiums). The provision relocates the controlled group definition, as modified for purposes of section 831, in section 831(b)(2)(C). ]

(II) such insurance company does not meet the requirement of subclause (I) and no person who holds (directly or indirectly) an interest in such insurance company is a specified holder who holds (directly or indirectly) aggregate interests in such insurance company which constitute a percentage of the entire interests in such insurance company which is more than a de minimis percentage higher than the percentage of interests in the specified assets with respect to such insurance company held (directly or indirectly) by such specified holder.

CONGRESSIONAL TECHNICAL EXPLANATION: Relatedness test.

If the company does not meet this 20-percent requirement, an alternative diversification requirement applies for the company to be eligible to elect 831(b) treatment. Under this requirement, no person who holds (directly or indirectly) an interest in the company is a specified holder who holds (directly or indirectly) aggregate interests in the company that constitute a percentage of the entire interests in the company that is more than a de minimis percentage higher than the percentage of interests in the specified assets with respect to the company held (directly or indirectly) by the specified holder. Except as otherwise provided in regulations or other guidance, two percentage points or less is treated as de minimis. An indirect interest for this purpose includes any interest held through a trust, estate, partnership, or corporation.

[ Footnote 657: These added eligibility rules reflect the concern expressed by the Finance Committee upon reporting out S.905, “A Bill to Amend the Internal Revenue Code of 1986 to Increase the Limitation on Eligibility for the Alternative Tax for Certain Small Insurance Companies,” when the Committee stated, “The Committee notes that the provision does not include a related proposal that would narrow eligibility to elect the alternative tax in a manner intended to address abuse potential, but that may cause problems for certain States. The Committee therefore wants the Treasury Department to study the abuse of captive insurance companies for estate planning purposes, so Congress can better understand the scope of this problem and whether legislation is necessary to address it.” S. Rep. 114-16, April 14, 2015, page 2. ]

* * *

Any insurance company for which an 831(b) election is in effect for a taxable year must report information required by the Secretary relating to the diversification requirements imposed under the provision.

* * *

The provision also makes a technical amendment striking an unnecessary redundant parenthetical reference to interinsurers and reciprocal underwriters.

(ii) DEFINITIONS. For purposes of clause (i)(II)

(I) SPECIFIED HOLDER. The term ‘specified holder’ means, with respect to any insurance company, any individual who holds (directly or indirectly) an interest in such insurance company and who is a spouse or lineal descendant (including by adoption) of an individual who holds an interest (directly or indirectly) in the specified assets with respect to such insurance company.

CONGRESSIONAL TECHNICAL EXPLANATION: A specified holder means, with respect to an insurance company, any individual who holds (directly or indirectly) an interest in the insurance company and who is a spouse or lineal descendant (including by adoption) of an individual who holds an interest (directly or indirectly) in the specified assets with respect to the insurance company.

(II) SPECIFIED ASSETS. The term ‘specified assets’ means, with respect to any insurance company, the trades or businesses, rights, or assets with respect to which the net written premiums (or direct written premiums) of such insurance company are paid.

CONGRESSIONAL TECHNICAL EXPLANATION: The specified assets with respect to an insurance company mean the trades or businesses, rights, or assets with respect to which the net written premiums (or direct written premiums) of the company are paid.

For example, assume that in 2017, a captive insurance company does not meet the requirement that no more than 20 percent of its net (or direct) written premiums is attributable to any one policyholder. The captive has one policyholder, Business, certain of whose property and liability risks the captive covers (the specified assets), and Business pays the captive $2 million in premiums in 2017. Business is owned 70 percent by Father and 30 percent by Son. The captive is owned 100 percent by Son (whether directly, or through a trust, estate, partnership, or corporation). Son is Father's lineal descendant. Son, a specified holder, has a non-de minimis percentage greater interest in the captive (100 percent) than in the specified assets with respect to the captive (30 percent). Therefore, the captive is not eligible to elect section 831(b) treatment.

If, by contrast, all the facts were the same except that Son owed 30 percent and Father owned 70 percent of the captive, Son would not have a non-de minimis percentage greater interest in the captive (30 percent) than in the specified assets with respect to the captive (30 percent). The captive would meet the diversification requirement for eligibility to elect section 831(b) treatment. The same result would occur if Son owned less than 30 percent of the captive (and Father more than 70 percent), and the other facts remained unchanged.

(III) INDIRECT INTEREST. An indirect interest includes any interest held through a trust, estate, partnership, or corporation.

(IV) DE MINIMIS. Except as otherwise provided by the Secretary in regulations or other guidance, 2 percentage points or less shall be treated as de minimis.

(i) In general. For purposes of subparagraph (A), in determining For purposes of this paragraph

(I) In determining whether any company is described in clause (i) of subparagraph (A), such company shall be treated as receiving during the taxable year amounts described in such clause (i) which are received during such year by all other companies which are members of the same controlled group as the insurance company for which the determination is being made, and

(II) in determining the attribution of premiums to any policyholder under subparagraph (B)(i), all policyholders which are related (within the meaning of section 267(b) or 707(b)) or are members of the same controlled group shall be treated as one policyholder.

(ii) Controlled group. For purposes of clause (i), the term “controlled group” means any controlled group of corporations (as defined in section 1563(a)); except that—

(I) “more than 50 percent” shall be substituted for “at least 80 percent” each place it appears in section 1563(a), and

(II) subsections (a)(4) and (b)(2)(D) of section 1563 shall not apply.

(D) INFLATION ADJUSTMENT.

In the case of any taxable year beginning in a calendar year after 2015, the dollar amount set forth in subparagraph (A)(i) shall be increased by an amount equal to --

(i) such dollar amount, multiplied by

(ii) the cost-of-living adjustment determined under section 1(f)(3) for such calendar year by substituting ‘calendar year 2013’ for ‘calendar year 1992’ in subparagraph (B) thereof.

If the amount as adjusted under the preceding sentence is not a multiple of $50,000, such amount shall be rounded to the next lowest multiple of $50,000.

(3) LIMITATION ON USE OF NET OPERATING LOSSES

For purposes of this part, except as provided in section 844, a net operating loss (as defined in section 172) shall not be carried—

(A) to or from any taxable year for which the insurance company is not subject to the tax imposed by subsection (a), or

(B) to any taxable year if, between the taxable year from which such loss is being carried and such taxable year, there is an intervening taxable year for which the insurance company was not subject to the tax imposed by subsection (a).

IRS Notice 2016-66

Transaction of Interest -- Section 831(b) Micro-Captive Transactions

Notice 2016-66

The Department of the Treasury (“Treasury Department”) and the Internal Revenue Service (the “IRS”) are aware of a type of transaction, described below, 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 a captive insurance company. Each entity that the parties treat as an insured entity under the contracts claims deductions for premiums for insurance coverage. The related company that the parties treat as a captive insurance company elects under § 831(b) of the Internal Revenue Code (the “Code”) to be taxed only on investment income and therefore excludes the payments directly or indirectly received under the contracts from its taxable income. The manner in which the contracts are interpreted, administered, and applied is inconsistent with arm’s length transactions and sound business practices.

The Treasury Department and the IRS believe this transaction (“micro-captive transaction”) has a potential for tax avoidance or evasion. See IR-2016-25 (discussing characteristics of an abusive micro-captive insurance structure). However, the Treasury Department and the IRS lack sufficient information to identify which § 831(b) arrangements should be identified specifically as a tax avoidance transaction and may lack sufficient information to define the characteristics that distinguish the tax avoidance transactions from other § 831(b) related-party transactions. This notice identifies the transaction described in section 2.01 of this notice and substantially similar transactions as transactions of interest for purposes of § 1.6011-4(b)(6) of the Income Tax Regulations and §§ 6111 and 6112 of the Code. This notice also alerts persons involved in such transactions to certain responsibilities and penalties that may arise from their involvement with these transactions.

SECTION 1. BACKGROUND

.01 Overview of Transaction

In the micro-captive transaction, A, a person, directly or indirectly owns an interest in an entity (or entities) (“Insured”) conducting a trade or business. A, persons related to A, or both, also directly or indirectly own another entity (or entities) (“Captive”).

In some cases, Captive enters into a contract (or contracts) (the “Contract”) with Insured as discussed below in section 1.02 of this notice. In these cases, Captive may enter into a reinsurance or pooling agreement under which a portion of the risks covered under the Contract are treated as pooled with risks of other entities, and Captive assumes risks from other entities as also discussed below in section 1.02 of this notice.

In other cases, Captive indirectly enters into the Contract by reinsuring risks that Insured has initially insured with an intermediary, Company C, as discussed below in section 1.03 of this notice.

.02 Cases in Which Captive Enters into the Contract with Insured

(a) In general.

In cases in which Captive enters into the Contract with Insured, Captive and Insured treat the Contract as an insurance contract for federal income tax purposes. Captive provides coverage for Insured.

Captive may offer coverage only to persons related to or affiliated with Insured. If Captive also offers coverage to persons that are not related to or affiliated with Insured, Captive typically offers coverage only to other entities represented by a person who promotes the micro-captive transaction. Captive may enter into a reinsurance or pooling agreement under which a portion of the risks covered under the Contract are treated as pooled with risks of other entities and Captive assumes risks from other entities. Typically, the other entities participating in the reinsurance or pooling agreement are also represented by a person who promotes the micro-captive transaction.

Insured makes payments to Captive under the Contract, treats the payments as insurance premiums that are within the scope of § 1.162-1(a), and deducts the payments as ordinary and necessary business expenses under § 162. Captive treats the payments received from Insured under the Contract as premiums for insurance coverage. If Captive is not a domestic corporation, Captive makes an election under § 953(d) to be treated as a domestic corporation. The micro-captive transaction is structured so that Captive has no more than $1,200,000 in net premiums written (or, if greater, direct premiums written) for each taxable year ($2,200,000 for taxable years beginning after December 31, 2016) in which the transaction is in effect. Captive makes an election under § 831(b) to be taxed only on taxable investment income and excludes the premiums from taxable income.

(b) Promoter.

A promoter (“Promoter”) typically markets the micro-captive transaction structure to A. Promoter, persons related to Promoter, or both, typically provide continuing services to Captive, including:

(1) providing the forms used for the Contract;

(2) management of Captive; and

(3) administrative, accounting, or legal services, including the filing of tax forms.

The coverage provided by Captive under the Contract has one or more of the following characteristics:

(1) the coverage involves an implausible risk;

(2) the coverage does not match a business need or risk of Insured;

(3) the description of the scope of the coverage in the Contract is vague, ambiguous, or illusory; or

(4) the coverage duplicates coverage provided to Insured by an unrelated, commercial insurance company, and the policy with the commercial insurer often has a far smaller premium.

(d) Amounts paid to Captive.

The payments made by Insured to Captive under the Contract have one or more of the following characteristics:

(1) the amounts of Insured’s payments under the Contract are designed to provide Insured with a deduction under § 162 of a particular amount;

(2) the payments are determined without an underwriting or actuarial analysis that conforms to insurance industry standards;

(3) the payments are not made consistently with the schedule in the Contract;

(4) the payments are agreed to by Insured and Captive without comparing the amounts of the payments to payments that would be made under alternative insurance arrangements providing the same or similar coverage;

(5) the payments significantly exceed the premium prevailing for coverage offered by unrelated, commercial insurance companies for risks with similar loss profiles; or

(6) if Insured includes multiple entities, the allocation of amounts paid to Captive among the insured entities does not reflect the actuarial or economic measure of the risk of each entity.

(e) Claims procedures and management of Captive.

Captive, Insured, or both does one or more of the following:

(1) Captive fails to comply with some or all of the laws or regulations applicable to insurance companies in the jurisdiction in which Captive is chartered, the jurisdiction(s) in which Captive is subject to regulation because of the nature of its business, or both;

(2) Captive does not issue policies or binders in a timely manner consistent with industry standards;

(3) Captive does not have defined claims administration procedures that are consistent with insurance industry standards; or

(4) Insured does not file claims for each loss event covered by the Contract.

(f) Captive’s capital.

Captive’s capital has one or more of the following characteristics:

(1) Captive does not have capital adequate to assume the risks that the Contract transfers from Insured;

(2) Captive invests its capital in illiquid or speculative assets usually not held by insurance companies; or

(3) Captive loans or otherwise transfers its capital to Insured, entities affiliated with Insured, A, or persons related to A.

.03 Cases in Which Insured and Captive Use an Intermediary Company

In certain cases, Captive indirectly enters into the Contract by reinsuring risks that Insured has initially insured with an intermediary, Company C. In these cases, Insured enters into a contract with Company C that the parties treat as an insurance contract. Company C also enters into a reinsurance contract with Captive to reinsure risks under the contract between Insured and Company C. In cases in which Captive reinsures risks that Insured has initially insured with an intermediary, Company C, the reinsurance agreement between Company C and Captive is the Contract for purposes of this notice and the disclosures required in section 3.05 of this notice.

In these cases, the coverage provided by Captive under the Contract, the payments made to Captive by Company C, and Captive’s capital each has one or more of the characteristics described in section 1.02(c), (d) or (f) of this notice, as applicable; also, Captive, Insured or both do one or more of the items described in section 1.02(e) of this notice. In addition, a Promoter typically markets the transaction to A.

Moreover, in these cases, Company C is unrelated to A or Insured but may be related to Promoter. Company C enters into similar arrangements with other entities, which usually are also represented by Promoter. Company C reinsures with Captive a portion of the risks, commonly in layers. For example, the first layer might cover losses from $1 up to $10,000; the second layer might cover losses greater than $10,000, but not more than $100,000; and the third layer might cover losses greater than $100,000. Captive might assume from Company C 100% of one layer of Insured’s risks and in another layer a proportionate share of the aggregate risk of Insured and other entities. The allocation among the layers of amounts paid to Captive as premiums typically does not reflect the actuarial or economic measures of the risks associated with the particular layers. In addition, any claims filed generally fall within the layer or layers that only cover risks of Insured.

.04 Claimed Tax Treatment and Benefits

In the micro-captive transaction, Insured, Captive, and, if applicable, Company C, treat the Contract as an insurance contract for federal income tax purposes. Insured claims a deduction for the premiums paid under § 162. Captive excludes the premium income from its taxable income by electing under § 831(b) to be taxed only on its investment income. Captive uses the premium income for purposes other than administering and paying claims under the Contract, generally benefitting Insured or a party related to Insured. For instance, Captive may use premium income to provide a loan to Insured.

However, if the transaction does not constitute insurance, Insured is not entitled to deduct the amount of that payment under § 162 as an insurance premium. In addition, if Captive does not provide insurance, Captive does not qualify as an insurance company and Captive’s elections to be taxed only on its investment income under § 831(b) and to be treated as a domestic insurance company under § 953(d) are invalid.

The Treasury Department and the IRS recognize that related parties may use captive insurance companies that make elections under § 831(b) for risk management purposes that do not involve tax avoidance, but believe that there are cases in which the use of such arrangements to claim the tax benefits of treating the Contract as an insurance contract is improper. Therefore, the Treasury Department and the IRS are identifying transactions described in section 2.01 of this notice (and transactions substantially similar to such transactions) as transactions of interest for purposes of § 1.6011-4(b)(6) and §§ 6111 and 6112 of the Code.

SECTION 2. TRANSACTIONS OF INTEREST

.01 Transactions Identified as Transactions of Interest

The following transaction is identified as a transaction of interest under this notice:

(a) A, a person, directly or indirectly owns an interest in an entity (or entities) (“Insured”) conducting a trade or business;

(b) An entity (or entities) directly or indirectly owned by A, Insured, or persons related to A or Insured (“Captive”) enters into a contract (or contracts) (the “Contracts”) with Insured that Captive and Insured treat as insurance, or reinsures risks that Insured has initially insured with an intermediary, Company C;

(d) A, Insured, or one or more persons related (within the meaning of § 267(b) or 707(b)) to A or Insured directly or indirectly own at least 20 percent of the voting power or value of the outstanding stock of Captive; and

(e) One or both of the following apply:

(1) the amount of the liabilities incurred by Captive for insured losses and claim administration expenses during the Computation Period (defined in section 2.02 of this notice) is less than 70 percent of the following:

(A) premiums earned by Captive during the Computation Period, less

(B) policyholder dividends paid by Captive during the Computation Period; or

(2) Captive has at any time during the Computation Period directly or indirectly made available as financing or otherwise conveyed or agreed to make available or convey to A, Insured, or a person related (within the meaning of § 267(b) or 707(b)) to A or Insured (collectively, the “Recipient”) in a transaction that did not result in taxable income or gain to Recipient, any portion of the payments under the Contract, such as through a guarantee, a loan, or other transfer of Captive’s capital.

A transaction described in this section 2.01 is identified as a transaction of interest regardless of whether the transaction has the characteristics described in section 1 of this notice.

.02 The Computation Period

The Computation Period is (a) the most recent five taxable years of Captive or (b) 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 this notice, taxable years of such predecessor entities are treated as taxable years of Captive. For purposes of this section 2.02, a short taxable year is treated as a taxable year.

.03 Exception for Compensatory Arrangements with Prohibited Transaction Exemption

There may be limited circumstances in which a captive insurance company arrangement that provides insurance for employee compensation or benefits is described in this section and accordingly is identified as a transaction of interest under this notice. However, if such an arrangement is one for which the Employee Benefits Security Administration of the U.S. Department of Labor has issued a Prohibited Transaction Exemption, it is not treated as an arrangement identified as a transaction of interest under this notice.

SECTION 3. RULES OF APPLICATION

.01 Effective Date

Transactions that are the same as, or substantially similar to, the transaction described in section 2.01 of this notice are identified as "transactions of interest" for purposes of § 1.6011-4(b)(6) and §§ 6111 and 6112 effective November 1, 2016. Persons entering into these transactions on or after November 2, 2006, must disclose the transaction as described in § 1.6011-4. Material advisors who make a tax statement on or after November 2, 2006, with respect to transactions entered into on or after November 2, 2006, have disclosure and list maintenance obligations under §§ 6111 and 6112. See § 1.6011-4(h) and § 301.6111-3(i) and § 301.6112-1(g) of the Procedure and Administration Regulations.

Independent of their classification as transactions of interest, transactions that are the same as, or substantially similar to, the transaction described in section 2.01 of this notice may already be subject to the requirements of §§ 6011, 6111, or 6112, or the regulations thereunder. When the Treasury Department and the IRS have gathered enough information regarding potentially abusive § 831(b) arrangements, the IRS and the Treasury Department may take one or more actions, including removing the transaction from the transactions of interest category in published guidance, designating the transaction as a listed transaction, or providing a new category of reportable transaction. In the interim, the IRS may challenge a position taken as part of a transaction that is the same as, or substantially similar to, the transaction described in section 2.01 of this notice under other provisions of the Code or judicial doctrines such as sham transaction, substance over form, or economic substance.

.02 Participation

Under § 1.6011-4(c)(3)(i)(E), A, Insured, Captive, and, if applicable, Company C are participants in a transaction for each year in which their respective tax returns reflect tax consequences or a tax strategy of a transaction of interest described in section 2.01 of this notice.

.03 Time for Disclosure

For rules regarding the time for providing disclosure of a transaction described in section 2.01 of this notice, see § 1.6011-4(e) and § 301.6111-3(e). However, if, under § 1.6011-4(e), a taxpayer is required to file a disclosure statement with respect to a transaction described in section 2.01 of this notice after November 1, 2016, and prior to January 30, 2017, that disclosure statement will be considered to be timely filed if the taxpayer alternatively files the disclosure with the Office of Tax Shelter Analysis by January 30, 2017.

.04 Material Advisor Threshold Amount

The threshold amounts are the same as those for listed transactions. See § 301.6111-3(b)(3)(i)(B).

.05 Disclosure

(a) General rule.

Under § 1.6011-4(d) and the Instructions to Form 8886, Reportable Transaction Disclosure Statement, the required disclosure must identify and describe the transaction in sufficient detail for the IRS to be able to understand the tax structure of the reportable transaction and the identity of all parties involved in the transaction.

(b) Information required of all participants.

For all participants, describing the transaction in sufficient detail includes, but is not limited to, describing on Form 8886 when and how the taxpayer became aware of the transaction.

For Captive, describing the transaction in sufficient detail includes, but is not limited to, describing the following on Form 8886:

(1) Whether Captive is reporting because (i) the amount of the liabilities incurred by Captive for insured losses and claim administration expenses during the Computation Period is less than 70 percent of the amount specified in section 2.01(e)(1) of this notice; (ii) Captive has at any time during the Computation Period made available as financing or otherwise conveyed or agreed to make available or convey any portion of the payments under the Contract to A, Insured, or a person related (within the meaning of § 267(b) or 707(b)) to A or Insured through a separate transaction, such as a guarantee, a loan, or other transfer; or (iii) both (i) and (ii);

(2) Under what authority Captive is chartered;

(3) A description of all the type(s) of coverage provided by Captive during the year or years of participation (if disclosure pertains to multiple years);

(4) A description of 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) A description of any claims paid by Captive during the year or years of participation (if disclosure pertains to multiple years), and of the amount of, and reason for, any reserves reported by Captive on the annual statement; and

(6) A description of the assets held by Captive during the year or years of participation (if disclosure pertains to multiple years); that is, the use Captive has made of its premium and investment income, including but not limited to, securities (whether or not registered), loans, real estate, or partnerships or other joint ventures, and an identification of the related parties involved in any transactions with respect to those assets.

.06 Penalties

Persons required to disclose these transactions under § 1.6011-4 who fail to do so may be subject to the penalty under § 6707A. Persons required to disclose these transactions under § 6111 who fail to do so may be subject to the penalty under § 6707(a). Persons required to maintain lists of advisees under § 6112 who fail to do so (or who fail to provide such lists when requested by the IRS) may be subject to the penalty under § 6708(a). In addition, the IRS may impose other penalties on parties involved in these transactions, including the accuracy-related penalty under § 6662 or § 6662A.

SECTION 4. REQUEST FOR COMMENTS

The Treasury Department and the IRS request comments on how the transaction might be addressed in published guidance.

Comments should be submitted in writing on or before January 30, 2017. Send submissions to CC:PA:LPD:PR (Notice 2016-66), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand-delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (Notice 2016-66), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC 20224. Comments may also be sent electronically, via the following e-mail address: Notice.comments@irscounsel.treas.gov. Please include “Notice 2016-66” in the subject line of any electronic communications. All comments submitted will be available for public inspection and copying.

SECTION 5. DRAFTING INFORMATION

The principal author of this notice is John E. Glover of the Office of Associate Chief Counsel (Financial Institutions & Products). For further information regarding this notice contact Mr. Glover at (202) 317-6995 (not a toll-free call).

Adkisson's Captive Insurance Companies available at Amazon.com