Revenue Rulings

Relevant IRS guidance includes:

Revenue Ruling 78-338 – The Internal Revenue Service held that a Group Captive Insurance Company – where no shareholder’s individual risk exceeded 5% of the total risks of the captive – had sufficient risk shifting and risk distribution

Revenue Ruling 2001-31 – The Internal Revenue Service abandoned its “economic family theory” with respect to captive insurance transactions

Revenue Ruling 2002-89 – Provides a safe harbor determination for risk shifting if a captive has more than 50% unrelated business risk

Revenue Ruling 2002-90 – Reviews Brother and Sister Operating Subsidiaries and establishes the Rule of 12 for safe harbor purposes

Revenue Ruling 2002-91 – If the liability of each company is no more than 15% of total risks insured by the captive, significant Risk Shifting and Risk Distribution exists

Revenue Notice 2004-65 – The service stated that 831(b) no longer should be identified as “listed transactions” for purposes of disclosure, registration, and list maintenance requirements

Revenue Ruling 2005-40 – Reviewed cases in which the captive underwrote a significant amount of third party risks, risk distribution and risk shifting were found to be present, even when the captive insurance companies that were wholly owned, or nearly wholly owned by its insured’s

Revenue Ruling 2008-8 – This ruling explains how arrangements between an individual cell and its owner are analyzed for purposes of determining whether there is adequate risk shifting and risk distribution to constitute insurance

Proposed Regulations – Initial Draft (REG–119921–09) – On September 14, 2010, the Treasury proposed that domestic series organizations (typically a series limited liability company – Series LLC) would be treated as a separate entity formed under local law and general tax principals

The Protecting Americans from Tax Hikes (PATH) Act of 2015 – signed into law December 18, 2015. The new legislation affecting eligibility for 831(b) election for captives is effective for taxable years beginning after December 31, 2016. Premiums allowed under section 831(b) are increased from $1.2m to $2.2m annually, with indexing for inflation starting in 2016. The legislation includes new restrictions on the ability to qualify for section 831(b) treatment and addresses concerns over abusive arrangements.

Notice 2016-66 – Issued on November 1, 2016 to provide guidance on reporting requirements for 831(b) Captive Insurance Companies as Transactions of Interest and Material Advisors. The information requested in Notice 2016-66 is expected to assist the IRS in gaining knowledge on what structures are out there and conclude if additional scrutiny is warranted.

Notice 2017-08 – Issued on December 29, 2016 to extend until May 1, 2017, the time for filing participant and material adviser disclosure statements regarding micro-captive deals and substantially similar transactions that were identified in Notice 2016-66 as transactions of interest.