January 16, 2025
For many years, the use of micro-captive insurance companies has been under scrutiny by the Internal Revenue Service (“IRS”). In November 2016, the IRS issued Notice 2016-66, which was designed to help the IRS gather data on micro-captive insurance arrangements. That notice, modified by Notice 2017-08, designated certain micro-captive transactions as "transactions of interest," a category used by the IRS to flag transactions that have the potential for tax abuse but have not been fully designated as abusive tax shelters.
The notice faced significant legal challenges from taxpayers and industry professionals, many of whom argued that the notice was overly broad and burdensome. One of the primary objections was the imposition of disclosure requirements on transactions that had not been officially deemed abusive. Litigation ensued, including the notable case of CIC Services, LLC v. IRS, which reached the Supreme Court in 2021.
CIC Services, LLC held that Notice 2016-66 was issued illegally because the IRS did not follow the law prescribed under the Administrative Procedures Act. However, the IRS argued that the Anti-Injunction Act, which prohibits federal courts from issuing injunctions that “restrain” the “collection or assessment of a tax,” prevented federal courts from stopping the enforcement of Notice 2016-66 by the IRS. The Supreme Court ruled in favor of the taxpayer since the law in question imposed burdens on taxpayers (including the possibility of criminal penalties) when the collection of some unknown amount of tax from unidentified taxpayers was many steps down the line.
Following that loss the Treasury Department and the IRS issued proposed regulations addressing micro-captive transactions in a Notice of Proposed Rulemaking (“NPRM”). The NPRM made Notice 2016-66 obsolete and provided for the appropriate and necessary steps of soliciting public comment. The period for public comment closed on June 12, 2023, and taxpayers in the captive industry have since been waiting for the final regulations.
The wait ended at the beginning of 2025. The Treasury Department and the IRS considered input from over 100 stakeholders and incorporated some changes that aim to address industry concerns. We will discuss in the remaining articles the impact of the final regulations and how the revisions to the proposed regulations narrow the scope of the reporting requirements for participants of micro-captive transactions.
For more information contact our Larson captive team to find out how this will affect your micro-captive.