January 16, 2025
Who Does the IRS Consider a “Participant” in a Micro-Captive Transaction?
The IRS considers the parties listed below to be Participants in a micro-captive transaction if the tax returns of the parties reflect a tax consequence or a tax strategy resulting from the micro-captive transaction.
While these are the parties specifically listed as Participants in the final regulations, the final regulations also make clear that Participants are not limited to only these parties. Other parties could be considered Participants subject to IRS discretion.
General Reporting Requirement
All Participants must prepare and include a copy of Form 8886, Reportable Transaction Disclosure Statement (“Form 8886”), with their tax return for each taxable year in which they participate in the micro-captive transaction.
Reporting Exception for Owners of Insured Entities (“Owners”)
There is an exception from reporting for Owners if the following requirements are met:
Note that the acknowledgment received by the Owner can be a copy of the Form 8886 that the Insured Entity(ies) files with the IRS.
Owners who meet this safe harbor provision will not be treated as having participated in an undisclosed listed transaction or transaction of interest, or as failing to include necessary information on any return or statement related to the listed transaction or transaction of interest.
Reporting Exception for Participants in Transactions with Revoked 831(b) Elections
Another exception applies to Participants involved in a micro-captive transaction with a revoked 831(b) election. If the micro-captive has revoked its 831(b) election, Participants in the transaction are no longer considered Participants and are exempt from the disclosure requirements. As with the reporting exception for owners of insured entities, these Participants will not be treated as having participated in an undisclosed listed transaction or transaction of interest or as failing to disclose any required information on any return or statement.
Listed Transactions – Reporting Requirements for Open Tax Years
Effective January 14, 2025, the final regulations impose additional reporting requirements for Participants with respect to prior tax years. Participants must disclose the transaction for open tax years that are within the “period of limitations for assessment of tax” under Section 6051. The period of limitations will vary depending on specific circumstances, but for most taxpayers it will encompass the previous three tax years. In addition to filing Form 8886 with the IRS for those prior tax years, Participants are also required to provide a copy of the initial Form 8886 to the Office of Tax Shelter Analysis (“OTSA”) within 90 days of the January 14, 2025 effective date.
Participants who have finalized a settlement agreement with the IRS regarding their participation in a micro-captive listed transaction will be treated as having made the necessary disclosures for the years covered by the examination agreement.
Transactions of Interest – Reporting Requirements for Open Tax Years
The reporting obligations for a transaction of interest, with respect to prior periods, are similar to those for listed transactions. However, there is an important exception that relieves Participants from having to file Form 8886 for open tax years. Under Regs. Sec. 1.6011-11(h)(2), Participants who have filed Form 8886 with the OTSA pursuant to Notice 2016-66 will be treated as having made the necessary disclosures under the final regulations for all tax returns filed before January 14, 2025. However, for the first tax year after the effective date of the regulations, the Participant will be required to file a new initial Form 8886 with the OTSA.
For more information contact our Larson captive team to find out how this will affect your micro-captive.