What is a "Successor Captive" and What Do the Final Regulations Say About Them?

What Is a “Successor Captive” and What Do the Final Regulations Say About Them?

January 16, 2025

For a micro-captive transaction to be considered a listed transaction, the micro-captive insurance company participating in the transaction must have been in existence for ten tax years, among other requirements (see this post for a complete list of what must be present to be considered a listed transaction).

To avoid a listed transaction designation, possible solutions that have been suggested for micro-captive insurance companies that have existed for ten years, or are nearing that point, are to (1) form a new micro-captive insurance company (the “New Captive”) to take the place of the previous micro-captive insurance company (the “Predecessor Captive”), or (2) participate in a reorganization in which Predecessor Captive goes out of existence and another entity, whether new or old (the “Surviving Captive”), inherits the business of Predecessor Captive. The goal of these possible solutions is to restart the clock and remove the ten-year taint that could lead to a designation as a listed transaction.

However, the final regulations contain rules regarding “successors” and in certain circumstances, a New Captive or Surviving Captive could be considered a successor to the Predecessor Captive. The result of that designation is that the taxable years of the Predecessor Captive would be attributable to the New or Surviving Captive, which could lead to a listed transaction designation.

The tax years of a Predecessor Captive can be attributed to a New Captive or Surviving Captive in the following scenarios:

• If the Predecessor Captive distributes its assets and liquidates into a parent corporation (the Surviving Captive) under Section 332.
• If the Predecessor Captive is a party to one of the reorganizations below, which are described in Section 368(a)(1), in which the Predecessor Captive goes out of existence and a new entity (New Captive or Surviving Captive) continues:
  • Section 368(a)(1)(A): Statutory merger or consolidation
  • Section 368(a)(1)(C): Asset acquisition
  • Section 368(a)(1)(D): Transfer to a controlled corporation
  • Section 368(a)(1)(F): Identity change
  • Section 368(a)(1)(G): Bankruptcy reorganization
• Any other transaction in which an entity, directly or indirectly, acquires (or is deemed to acquire) the assets of a Predecessor Captive and succeeds to and takes into account the Predecessor Captive’s earnings and profits.
• Any other transaction in which an entity receives (or is deemed to receive) any assets from a Predecessor Captive if such entity’s basis in such assets is determined, directly or indirectly, in whole or in part, by reference to the Predecessor Captive’s basis in such assets.

The transactions and reorganizations described above can, if certain requirements are met, be tax-free transactions or reorganizations. In instituting the successor corporation rules in the final regulations, the IRS is not allowing micro-captive insurance companies to avoid the ten-year taint by taking part in a tax-free reorganization.

In order for a New Captive or Surviving Captive to be free from inheriting the tax years of a Predecessor Captive, the newly formed micro-captive insurance company must be capitalized with assets completely independent of the Predecessor Captive and ensure that all other applicable rules are met.

For more information contact our Larson captive team to find out how this will affect your micro-captive. 

LEARN MORE FROM OUR MICRO-CAPTIVE SERIES

• How Did We Get Here? The History of Notice 2016-66 and the Micro-Captive Regulations
• What Is a Listed Transaction, What Is a Transaction of Interest, and Why Does It Matter?
• When Is a Micro-Captive Insurance Company Deemed to Be Participating in a Listed Transaction?
• When Is a Micro-Captive Insurance Company Deemed to Be Participating in a Transaction of Interest?
• Flowchart: Determining Whether a Micro-Captive Transaction is a Listed Transaction or a Transaction of Interest
• What Are the Reporting Requirements for a Micro-Captive Insurance Company That Is Deemed to Be Participating in a Listed Transaction or a Transaction of Interest?
• What Information Is Required to Be Reported on Form 8886, Reportable Transaction Disclosure Statement, with Respect to Micro-Captive Listed Transactions and Transactions of Interest?
• How Can a Micro-Captive Revoke Its Section 831(b) Election?