Micro-Captive Listed Transactions and Micro-Captive Transactions of Interest
Notice of proposed rulemaking and notice of public hearing.
CFR Part: "26 CFR Part 1"
RIN Number: "RIN 1545-BQ44"
Citation: "88 FR 21547"
Document Number: "REG-109309-22"
Page Number: "21547"
"Proposed Rules"
Agency: "
SUMMARY: This document contains proposed regulations that identify transactions that are the same as, or substantially similar to, certain micro-captive transactions as listed transactions, a type of reportable transaction, and certain other micro-captive transactions as transactions of interest, another type of reportable transaction. Material advisors and certain participants in these listed transactions and transactions of interest are required to file disclosures with the
DATES:
Electronic or written comments must be received by
ADDRESSES: Commenters are strongly encouraged to submit public comments electronically. Submit electronic submissions via the Federal eRulemaking Portal at https://www.regulations.gov (indicate
For those requesting to speak during the hearing, send an outline of topic submissions, electronically via the Federal eRulemaking Portal at https://www.regulations.gov (indicate
Individuals who want to testify (by telephone) at the public hearing must send an email to [email protected] to receive the telephone number and access code for the hearing. The subject line of the email must contain the regulation number REG-109309-22 and the word TESTIFY. For example, the subject line may say: Request to TESTIFY at Hearing for REG-109309-22. The email should include a copy of the speaker's public comments and outline of discussion topics. Individuals who want to attend (by telephone) the public hearing must also send an email to [email protected] to receive the telephone number and access code for the hearing. The subject line of the email must contain the regulation number REG-109309-22 and the word ATTEND. For example, the subject line may say: Request to ATTEND hearing for REG-109309-22. To request special assistance during the telephonic hearing, contact the Publications and Regulations Branch of the
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
SUPPLEMENTARY INFORMATION:
Background This document contains proposed additions to 26 CFR part 1 (Income Tax Regulations) under section 6011 of the Internal Revenue Code (Code) regarding transactions identified as listed transactions and transactions of interest for purposes of section 6011.
I. Overview of the Reportable Transaction Regime
Section 6011(a) generally provides that, when required by regulations prescribed by the Secretary of the
On
Following the 2003 promulgation of
The Committee believes that the best way to combat tax shelters is to be aware of them.
House Report 108-548(I), 108th Cong., 2nd Sess. 2004, at 261 (
In Footnote 232 of the House Report, the
The provision states that, except as provided in regulations, a listed transaction means a reportable transaction, which is the same as, or substantially similar to, a transaction specifically identified by the Secretary as a tax avoidance transaction for purposes of section 6011. For this purpose, it is expected that the definition of "substantially similar" will be the definition used in Treas. Reg. sec. 1.6011-4(c)(4). However, the Secretary may modify this definition (as well as the definitions of "listed transaction" and "reportable transactions") as appropriate.
Id. at 261 n.232.
Section 6707A(c)(1) defines a "reportable transaction" as "any transaction with respect to which information is required to be included with a return or statement because, as determined under regulations prescribed under section 6011, such transaction is of a type which the Secretary determines as having a potential for tax avoidance or evasion." A "listed transaction" is defined by section 6707A(c)(2) as "a reportable transaction which is the same as, or substantially similar to, a transaction specifically identified by the Secretary as a tax avoidance transaction for purposes of section 6011."
Section 6111(a), as revised by the AJCA, provides that each material advisor with respect to any reportable transaction must make a return setting forth (1) information identifying and describing the transaction, (2) information describing any potential tax benefits expected to result from the transaction, and (3) such other information as the Secretary may prescribe. Such return must be filed not later than the date specified by the Secretary. Section 6111(b)(2) provides that a reportable transaction has the meaning given to such term by section 6707A(c).
Section 6112(a), as revised by the AJCA, provides that each material advisor with respect to any reportable transaction (as defined in section 6707A(c)) must (whether or not required to file a return under section 6111 with respect to such transaction) maintain a list (1) identifying each person with respect to whom such advisor acted as a material advisor, and (2) containing such other information as the Secretary may by regulations require.
On
On the same date that the
After providing notice and opportunity for public comment and considering the comments received, on
II. Disclosure of Reportable Transactions by Participants and Penalties for Failure To Disclose
Section 1.6011-4(a) provides that every taxpayer that has participated in a reportable transaction within the meaning of
Sections 1.6011-4(d) and (e) provide that the disclosure statement--Form 8886, Reportable Transaction Disclosure Statement (or successor form)--must be attached to the taxpayer's tax return for each taxable year for which a taxpayer participates in a reportable transaction. A copy of the disclosure statement must be sent to
Reportable transactions include listed transactions, confidential transactions, transactions with contractual protection, loss transactions, and transactions of interest. See
Section 1.6011-4(c)(4) provides that a transaction is "substantially similar" if it is expected to obtain the same or similar types of tax consequences and is either factually similar or based on the same or similar tax strategy. Receipt of an opinion regarding the tax consequences of the transaction is not relevant to the determination of whether the transaction is the same as or substantially similar to another transaction. Further, the term substantially similar must be broadly construed in favor of disclosure. For example, a transaction may be substantially similar to a listed transaction or a transaction of interest even though it may involve different entities or use different Code provisions.
Section 1.6011-4(c)(3)(i)(A) provides that a taxpayer has participated in a listed transaction if the taxpayer's tax return reflects tax consequences or a tax strategy described in the published guidance that lists the transaction under
Section 1.6011-4(e)(2)(i) provides that if a transaction becomes a listed transaction or a transaction of interest after the filing of a taxpayer's tax return reflecting the taxpayer's participation in the transaction and before the end of the period of limitations for assessment for any taxable year in which the taxpayer participated in the transaction, then a disclosure statement must be filed with OTSA within 90 calendar days after the date on which the transaction becomes a listed transaction or transaction of interest. This requirement extends to an amended return and exists regardless of whether the taxpayer participated in the transaction in the year the transaction became a listed transaction or transaction of interest. The Commissioner of Internal Revenue may also determine the time for disclosure of listed transactions and transactions of interest in the published guidance identifying the transaction.
Participants required to disclose these transactions under
Additional penalties may also apply. In general, section 6662A imposes a 20 percent accuracy-related penalty on any understatement (as defined in section 6662A(b)(1)) attributable to an adequately disclosed reportable transaction. If the taxpayer had a requirement to disclose participation in the reportable transaction but did not adequately disclose the transaction in accordance with the regulations under section 6011, the taxpayer is subject to an increased penalty rate equal to 30 percent of the understatement. See section 6662A(c). Section 6662A(b)(2) provides that section 6662A applies to any item which is attributable to any listed transaction and any reportable transaction (other than a listed transaction) if a significant purpose of such transaction is the avoidance or evasion of Federal income tax.
Participants required to disclose listed transactions who fail to do so are also subject to an extended period of limitations under section 6501(c)(10). That section provides that the time for assessment of any tax with respect to the transaction shall not expire before the date that is one year after the earlier of the date the participant discloses the transaction or the date a material advisor discloses the participation pursuant to a written request under section 6112(b)(1)(A).
III. Disclosure of Reportable Transactions by
Section 301.6111-3(a) of the Procedure and Administration Regulations provides that each material advisor with respect to any reportable transaction, as defined in
Section 301.6111-3(b)(1) provides that a person is a material advisor with respect to a transaction if the person provides any material aid, assistance, or advice with respect to organizing, managing, promoting, selling, implementing, insuring, or carrying out any reportable transaction, and directly or indirectly derives gross income in excess of the threshold amount as defined in
Material advisors must disclose transactions on Form 8918, Material Advisor Disclosure Statement (or successor form), as provided in
Section 301.6111-3(d)(2) provides that the
Additionally, material advisors must prepare and maintain lists identifying each person with respect to whom the advisor acted as a material advisor with respect to the reportable transaction in accordance with
Section 6707(a) provides that a material advisor who fails to file a timely disclosure, or files an incomplete or false disclosure statement, is subject to a penalty. Pursuant to section 6707(b)(2), for listed transactions, the penalty is the greater of (A)
A material advisor may also be subject to a penalty under section 6708 for failing to maintain a list under section 6112(a) and failing to make the list available upon written request to the Secretary in accordance with section 6112(b) within 20 business days after the date of such request. Section 6708(a) provides that the penalty is
IV. Micro-Captive Transactions and Notice 2016-66
As enacted by section 1024 of the Tax Reform Act of 1986, Public Law 99-514, 100 Stat. 2085, 2405 (
Upon election by an eligible nonlife insurance company (eligible electing company) to be taxed under section 831(b), in lieu of the tax otherwise imposed by section 831(a), section 831(b) imposes tax on the company's income computed by multiplying the taxable investment income of the eligible electing company (determined under section 834 of the Code) for the taxable year by the rates provided in section 11(b) of the Code. Premium income of a nonlife insurance company is included in taxable income under section 831(a), but not taxable investment income under section 834. Thus, an eligible electing company pays no tax on premium income for taxable years for which its election is in effect.
On
Notice 2016-66 alerted taxpayers and their representatives pursuant to
Notice 2016-66 describes the following micro-captive transaction as a transaction of interest: (1) a company that the parties treat as an insurance company (Captive) elects to exclude premiums from taxable income under section 831(b); (2) at least 20 percent of the voting power or value of the outstanding stock of Captive is directly or indirectly owned by the insured entity (Insured), owners of Insured, or persons related to Insured or its owners (20-percent relationship factor); and (3) either or both of the following apply: (i) Captive has at any time during a defined Computation Period (referred to as the Notice Computation Period) directly or indirectly made available as financing, or otherwise conveyed or agreed to make available or convey, to certain related persons in a transaction that did not result in taxable income or gain to the recipient any portion of the payments treated as premiums, such as through a guarantee, a loan, or other transfer of Captive's capital (financing factor), or (ii) the amount of liabilities incurred by Captive for insured losses and claim administration expenses during the Notice Computation Period is less than 70 percent of the amount equal to premiums earned by Captive during that period less policyholder dividends paid by Captive during that period (70-percent loss ratio factor).
Notice 2016-66 defines the Notice Computation Period as the most recent five taxable years of Captive or, 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 the notice, taxable years of such predecessor entities are treated as taxable years of Captive. A short taxable year is treated as a taxable year.
Notice 2016-66 also provides that the arrangement is not treated as a transaction of interest if the micro-captive arrangement provides insurance for employee compensation or benefits and the arrangement is one for which the
Notice 2016-66 requires disclosure of the information specified in
V. Comments Submitted in Response to Notice 2016-66
Comments submitted in response to Notice 2016-66 were carefully considered in the development of these proposed regulations. Although the Administrative Procedure Act (APA), 5 U.S.C. 551-559, does not require a response to those comments, the comments are described here in an effort to assist taxpayers in understanding the provisions of the proposed regulations described in the Explanation of Provisions section.
First, some commenters suggested that changes to the Form 1120-PC,
Second, commenters also suggested that the reporting requirements under Notice 2016-66 are contrary to Congressional intent in enacting section 333 of the PATH Act, which, as noted earlier, effective for taxable years beginning after
Third, other commenters indicated that the reporting requirements were unduly burdensome, as well as duplicative, because the information sought could be readily obtained from a smaller subgroup of the participants in a transaction. However, the reporting and recordkeeping required for reportable transactions from each participant ensure that the Service can identify all of the participants of a particular transaction and that all participants are aware of their participation in a reportable transaction. Nevertheless, the proposed regulations significantly narrow the information sought from participants compared to that required by Notice 2016-66 and provide a disclosure safe harbor to a significant number of participants, thereby reducing the burden in reporting to the maximum extent consistent with sound tax administration. See proposed
Fourth, additional commenters on Notice 2016-66 expressed concerns regarding certain arrangements in which a service provider, automobile dealer, lender, or retailer (Seller) sells insurance contracts to its customers in connection with the products or services being sold (Consumer Coverage). These commenters recommended that such Consumer Coverage arrangements be excepted from the disclosure requirements. The proposed regulations provide a limited exception for certain participants in Consumer Coverage arrangements. See proposed [Sec.]
Finally, commenters argued that the 20-percent relationship factor and the 70-percent loss ratio factor described in sections 2.01(d) and 2.01(e)(2) of Notice 2016-66, respectively, are overly broad and arbitrary. However, the
Similarly, the 70-percent loss ratio factor was informed by, but is less burdensome than, the 85 percent medical loss ratio test enacted by
Commenters indicated that some Captives electing the alternative tax under section 831(b) have loss ratios that fall below the industry-wide average during a given year of operation and suggested that the loss ratio in Notice 2016-66 is set too high. However, the average loss ratio reported by the NAIC and the loss ratio factor in Notice 2016-66 are computed differently and are not directly comparable. First, the average loss ratio reported by the NAIC reflects the ratio of net losses incurred and loss expenses incurred to net premiums earned, without adjustment for policyholder dividends paid, whereas Captive's loss ratio factor under Notice 2016-66 subtracts policyholder dividends paid from premiums earned by Captive. This means that, for an entity that pays policyholder dividends, the loss ratio factor under Notice 2016-66 would be higher than its NAIC loss ratio. Second, the loss ratio factor in Notice 2016-66 reflects the ratio of insured losses and claims administration expenses during the Notice Computation Period, which may be as long as five years. By contrast, the average loss ratio reported by the NAIC is a single-year average. Accordingly, even Captives electing the alternative tax under section 831(b) that have loss ratios that fall below the industry-wide average for property and casualty companies in any particular year may not have loss ratio factors that cause a transaction to be described in Notice 2016-66 or the proposed regulations.
Despite commenters' objections to the 20-percent relationship factor and 70-percent loss ratio factor, the commenters did not identify different factors or industry-wide standards for small insurers that would distinguish abusive from non-abusive transactions or provide examples of non-abusive transactions for which disclosure was required as a result of these factors. These objective factors in Notice 2016-66 have been effective in identifying transactions for which disclosure should be required and are reasonable given existing statutory provisions and available industry data.
To better ensure non-abusive transactions are not required to be reported under the proposed regulations, however, the proposed regulations lower the loss ratio factor for both the micro-captive transactions identified in proposed
For the foregoing reasons, the
VI. Purpose of Proposed Regulation
On
In
In light of the decision by the district court in CIC Services, the
Explanation of Provisions
A. Micro-Captive Listed Transactions and Micro-Captive Transactions of Interest
This section generally describes the micro-captive transactions that are the focus of the proposed regulations and why the Micro-captive Listed Transactions are abusive and the Micro-captive Transactions of Interest have the potential for abuse. This section also describes the proposed regulations identifying Micro-captive Listed Transactions and Micro-captive Transactions of Interest.
1. In General
Captive asserts that it is taxable as a nonlife insurance company under the Code and, if it is not a domestic corporation, makes an election under section 953(d) of the Code to be treated as a domestic corporation for purposes of the Code. Captive makes an election under section 831(b) to be taxed only on taxable investment income (defined in section 834). Captive accordingly excludes from the computation of its taxable income the payments received from the related entity or intermediary treated as premiums. For each taxable year in which the micro-captive transaction is in effect, the transaction is structured so that Captive does not have net premiums written (or, if greater, direct premiums written) that exceed the statutory limit. For taxable years beginning after
Since the publication of Notice 2016-66, examinations of taxpayers and promoters and information received through disclosures filed in response to Notice 2016-66 have clarified the
As further discussed in sections B.1. through B.3. of this Explanation of Provisions, the
As further discussed in section B.1. and B.3. of this Explanation of Provisions, the
2. Abuses
In Micro-captive Listed Transactions and Micro-captive Transactions of Interest, related parties claim the Federal income tax benefits of treating the contracts as insurance (or reinsurance) contracts. Insured deducts premiums paid to Captive under section 162, while the related Captive excludes the premium income from its taxable income by electing under section 831(b) to be taxed only on its taxable investment income.
Neither the Code nor the regulations thereunder define the terms "insurance" or "insurance contract." The
In many micro-captive transactions, however, the manner in which the contracts are interpreted, administered, and applied is inconsistent with arm's length transactions and sound business practices. Captive typically does not behave as an insurance company commonly would, indicating that Captive is not issuing insurance contracts and the transaction does not constitute insurance for Federal income tax purposes. For example, Captive may fail to adequately distribute risk or fail to employ actuarial techniques to establish premium rates that appropriately reflect the risk of loss and costs of conducting an insurance business. Captive may also use its premium income for purposes other than administering and paying claims under the contract(s), including routing funds that have not been taxed to the Insured or a person related to the Insured or its owners. A micro-captive transaction may share other characteristics with the purported insurance transactions considered by the Tax Court in Avrahami, Syzygy, and Caylor, or with the transactions considered in other cases in which the courts determined the transactions were not insurance for Federal income tax purposes. See, e.g.,
If the transaction does not constitute insurance, Insured is not entitled to deduct under section 162 as a trade or business expense the amount treated as an insurance premium. In addition, if Captive does not actually provide insurance, it does not qualify as an insurance company and its elections to be taxed only on its taxable investment income under section 831(b) and to be treated as a domestic insurance company under section 953(d) are invalid.
These proposed regulations inform taxpayers that participate in transactions described in proposed [Sec.]
As previously noted, the
3. Micro-Captive Listed Transactions
Proposed
A transaction is described in proposed
Proposed
Proposed
Proposed
Proposed
Proposed
4. Micro-Captive Transactions of Interest
Proposed
A transaction is described in proposed
Proposed
Proposed
Proposed
Proposed
B. Changes to Transaction Identified in Notice 2016-66
Examinations of taxpayers and promoters and information received through disclosures filed in response to Notice 2016-66 have clarified the
1. Changes to the Definition of Captive
2. Changes to the Financing Factor
Transactions in which the financing factor is met based on a computation period of Captive's most recent five taxable years (or all years of Captive's existence if Captive has been in existence for less than five taxable years), referred to as the Financing Computation Period in the proposed regulations, are identified as transactions of interest in Notice 2016-66 but are identified as listed transactions in the proposed regulations. See proposed
3.Changes to the Loss Ratio Factor and Computation Period
Notice 2016-66 identifies transactions in which the loss ratio factor is less than 70 percent based on a Notice Computation Period of Captive's most recent five taxable years (or all years of Captive's existence if it has been in existence for less than five taxable years) as transactions of interest. The proposed regulations, however, identify as listed transactions those transactions in which the loss ratio factor is less than 65 percent for a computation period extended to Captive's most recent ten taxable years (referred to as the Loss Ratio Computation Period). See proposed
Regarding the reduction of the loss ratio threshold from 70 percent to 65 percent, the
Regarding the computation periods for the loss ratio factor, the
However, the
4.Information Sought From Participants
The proposed regulations significantly reduce the information required to be reported by Captives under
5.Disclosure Requirement Safe Harbor for Owners
6. Exception for Consumer Coverage Arrangements
The proposed regulations provide a limited exception from classification as a Micro-captive Listed Transaction or Micro-captive Transaction of Interest for certain Consumer Coverage reinsurance arrangements. See proposed [Sec.]
An entity related to or affiliated with Seller may issue or reinsure the Consumer Coverage contracts. In some arrangements, the Consumer Coverage contracts name an unrelated third party, which may be referred to as a "Fronting Company," as the provider of the coverage, and an entity related to or affiliated with Seller reinsures the Consumer Coverage contracts. In other arrangements, the Consumer Coverage contracts may name an entity related to or affiliated with Seller as the provider of the coverage. In these arrangements, an unrelated third party may reinsure the contracts and may also then retrocede risk under the contracts to the entity related to or affiliated with Seller. The parties may treat the entity related to or affiliated with Seller as an insurance company that elects under section 831(b) (and section 953(d) if the corporation is foreign) to exclude premium payments from taxable income.
As a general matter, participation in this type of reinsurance arrangement is neither a Micro-captive Listed Transaction nor a Micro-captive Transaction of Interest because the insured is not sufficiently related to the insurer or any reinsurer. Generally, the Consumer Coverage contracts insure Unrelated Customers of Seller, and Unrelated Customers, their owners, and persons related to Unrelated Customers or their owners do not directly or indirectly own at least 20 percent of the voting power or value of the outstanding stock of any entity issuing or reinsuring the Consumer Coverage contract. However, the 20-percent relationship factor in proposed [Sec.]
C. Effect of Transaction Becoming a Listed Transaction or a Transaction of Interest Under These Regulations
Participants required to disclose these transactions under
Taxpayers who have filed a tax return (including an amended return (or Administrative Adjustment Request (AAR) for certain partnerships)) reflecting their participation in these transactions prior to the date the
In addition, material advisors have disclosure requirements with regard to transactions occurring in prior years. However, notwithstanding
A participant in a transaction that is a Micro-captive Listed Transaction must file a disclosure statement with OTSA when required to do so under
A material advisor with respect to a transaction that is a Micro-captive Listed Transaction or Micro-captive Transaction of Interest must file a disclosure statement with OTSA when required to do so under
Taxpayers filing amended business returns on paper should write "Microcaptive" at the top of the first page of the amended return and mail to the address listed in the instructions for the amended return. Taxpayers filing amended business returns electronically should include "Microcaptive" when explaining the reason for the changes.
Proposed Applicability Dates
Proposed
Effect on Other Documents
This document obsoletes Notice 2016-66 (2016-47 I.R.B. 745), as modified by Notice 2017-08 (2017-3 I.R.B. 423), as of
Special Analyses
I. Regulatory Planning and Review
The proposed regulations are not subject to review under section 6(b) of Executive Order 12866 pursuant to the Memorandum of Agreement (
II. Paperwork Reduction Act
The collection of information contained in these proposed regulations is reflected in the collection of information for Forms 8886 and 8918 that have been reviewed and approved by OMB in accordance with the Paperwork Reduction Act (44 U.S.C. 3507(c)) under control numbers 1545-1800 and 1545-0865. Any disclosures with respect to the safe harbor for owners as provided in [Sec.]
To the extent there is a change in burden as a result of these regulations, the change in burden will be reflected in the updated burden estimates for the Forms 8886 and 8918. The requirement to maintain records to substantiate information on Forms 8886 and 8918 is already contained in the burden associated with the control numbers for the forms and is unchanged.
An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection of information displays a valid control number assigned by OMB.
III. Regulatory Flexibility Act
The Secretary of the
As previously explained, the basis for these proposed regulations is Notice 2016-66, 2016-47 I.R.B. 745 (as modified by Notice 2017-08, 2017-3 I.R.B. 423). The following chart sets forth the gross receipts of respondents to Notice 2016-66, based on data for tax year 2020:
Notice 2016-66 Respondents by Size
Receipts Firms Filings
(percent) (percent)
Under 5M 78.65 75.26
5M to 10M 9.36 10.20
10M to 15M 4.39 5.10
15M to 20M 2.34 2.55
20M to 25M 1.17 1.53
Over 25M 4.09 5.36
Total 100 100
This chart shows that the majority of respondents reported gross receipts under
Further, the
For the reasons stated, a regulatory flexibility analysis under the Regulatory Flexibility Act is not required.
IV. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) requires that agencies assess anticipated costs and benefits and take certain other actions before issuing a final rule that includes any Federal mandate that may result in expenditures in any one year by a State, local, or Tribal government, in the aggregate, or by the private sector, of
V. Executive Order 13132: Federalism
Executive Order 13132 (Federalism) prohibits an agency from publishing any rule that has federalism implications if the rule either imposes substantial, direct compliance costs on State and local governments, and is not required by statute, or preempts state law, unless the agency meets the consultation and funding requirements of section 6 of the Executive order. This proposed rule does not have federalism implications and does not impose substantial direct compliance costs on state and local governments or preempt state law within the meaning of the Executive order.
Comments and Public Hearing
Before these proposed amendments to the regulations are adopted as final regulations, consideration will be given to any comments that are submitted timely to the
1. What are the specific and objective metrics, factors, or standards, if any, that, if reported, would allow for the
2. With respect to proposed [Sec.]
3. With respect to the percentage of premiums retained as commissions for contracts as described at proposed [Sec.]
Any comments submitted will be made available at https://www.regulations.gov or upon request.
A public hearing is scheduled to be held by teleconference on
The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who wish to comment by telephone at the hearing must submit written or electronic comments and an outline of the topics to be discussed as well as the time to be devoted to each topic by
A period of ten minutes will be allocated to each person for making comments. After the deadline for receiving outlines has passed, the
Announcement 2020-4, 2020-17 I.R.B. 667 (
Statement of Availability of
The notices and revenue ruling cited in this document are published in the Internal Revenue Bulletin (or Cumulative Bulletin) and are available from the Superintendent of Documents,
Drafting Information
The principal author of these proposed regulations is
List of Subjects in 26 CFR Part 1 Income Taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, the
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 continues to read in part as follows:
Authority:26 U.S.C. 7805 * * *
*****
Section 1.6011-10 also issued under 26 U.S.C. 6001 and 26 U.S.C. 6011.
Section 1.6011-11 also issued under 26 U.S.C. 6001 and 26 U.S.C. 6011.
*****
Par. 2. Section 1.6011-10 is added to read as follows:
(a) Identification as listed transaction. Transactions that are the same as, or substantially similar to, transactions described in paragraph (c) of this section are identified as listed transactions for purposes of
(b) Definitions. The following definitions apply for purposes of this section:
(1) Captive means any entity that:
(i) Elects under section 831(b) of the Internal Revenue Code (Code) to exclude premiums from taxable income;
(ii) Issues a Contract to an Insured, reinsures a Contract of an Insured issued by an Intermediary, or both; and
(iii) Has at least 20 percent of its assets or the voting power or value of its outstanding stock or equity interests directly or indirectly owned, individually or collectively, by an Insured, an Owner, or persons Related to an Insured or an Owner. For purposes of this paragraph (b)(1)(iii), the following rules apply to the extent application of a rule (or rules) would increase such direct or indirect ownership:
(A) A person that holds a derivative is treated as indirectly owning the assets referenced by the derivative; and
(B) The interest of each beneficiary of a trust or estate in the assets of such trust or estate must be determined by assuming the maximum exercise of discretion by the fiduciary in favor of such beneficiary and the maximum use of the trust's or estate's interest in the company to satisfy the interests of such beneficiary.
(2) Computation periods--(i) Financing Computation Period. The Financing Computation Period is the most recent five taxable years of Captive (or all taxable years of Captive, if Captive has been in existence for less than five taxable years).
(ii) Loss Ratio Computation Period. The Loss Ratio Computation Period is the most recent ten taxable years of Captive. A Captive that does not have at least ten taxable years cannot have a Loss Ratio Computation Period, and therefore is not described in paragraph (c)(2) of this section.
(iii) Rules for computation periods. This paragraph (b)(2)(iii) applies for purposes of determining the Financing Computation Period and the Loss Ratio Computation Period. Each short taxable year is a separate taxable year. If Captive is a successor to one or more other Captives, taxable years of each such other Captive are treated as taxable years of Captive. A successor is any of the following:
(A) A successor corporation as defined in
(B) An entity that, directly or indirectly, acquires (or is deemed to acquire) the assets of another entity and succeeds to and takes into account the other entity's earnings and profits or deficit in earnings and profits; or
(C) An entity that receives (or is deemed to receive) any assets from another entity if such entity's basis is determined, directly or indirectly, in whole or in part, by reference to the other entity's basis.
(3) Contract means any contract that is treated by a party to the contract as an insurance contract or reinsurance contract for Federal income tax purposes.
(4) Insured means any person that conducts a trade or business, enters into a Contract with a Captive or enters into a Contract with an Intermediary that is directly or indirectly reinsured by a Captive, and treats amounts paid under the Contract as insurance premiums for Federal income tax purposes.
(5) Intermediary means any entity that issues a Contract to an Insured, or reinsures a Contract that is issued to an Insured, and such Contract is reinsured, directly or indirectly, by a Captive. A transaction may have more than one Intermediary.
(6) Owner means any person who, directly or indirectly, holds an ownership interest in an Insured or its assets. For purposes of this paragraph (b)(6), the following rules apply to the extent application of a rule (or rules) would increase such direct or indirect ownership:
(i) The interest of a person that holds a derivative must be determined as provided in paragraph (b)(1)(iii)(A) of this section; and
(ii) The interest of each beneficiary of a trust or estate in the assets of such trust or estate must be determined as provided in paragraph (b)(1)(iii)(B) of this section.
(7) Recipient means any Owner, Insured, or person Related to an Owner or an Insured engaged in a transaction described in paragraph (c)(1) of this section.
(8) Related means having a relationship described in one or more of sections 267(b), 707(b), 2701(b)(2)(C), and 2704(c)(2) of the Code.
(9) Seller means a service provider, automobile dealer, lender, or retailer that sells products or services to Unrelated Customers who purchase insurance contracts in connection with those products or services.
(10) Seller's Captive means a Captive Related to Seller, an owner of Seller, or individuals or entities Related to Seller or owners of Seller.
(11) Unrelated Customers means persons who do not own an interest in, and are not wholly or partially owned by, Seller, an owner of Seller, or individuals or entities Related to Seller or owners of Seller.
(c) Transaction description. A transaction is described in this paragraph (c) if the transaction is described in paragraph (c)(1) of this section, paragraph (c)(2) of this section, or both.
(1) The transaction involves a Captive that, at any time during the Financing Computation Period, directly or indirectly made available as financing or otherwise conveyed or agreed to make available or convey to a Recipient, in a transaction that did not result in taxable income or gain to the Recipient, any portion of the payments under the Contract, such as through a guarantee, a loan, or other transfer of Captive's capital, or made such financings or conveyances prior to the Financing Computation Period that remain outstanding or in effect at any point in the taxable year for which disclosure is required. Any amounts that a Captive made available as financing or otherwise conveyed or agreed to make available or convey to a Recipient are presumed to be portions of the payments under the Contract to the extent such amounts when made available or conveyed are in excess of Captive's cumulative after-tax net investment earnings minus any outstanding financings or conveyances.
(2) The transaction involves a Captive for which the amount of liabilities incurred for insured losses and claim administration expenses during the Loss Ratio Computation Period is less than 65 percent of the amount equal to premiums earned by Captive during the Loss Ratio Computation Period less policyholder dividends paid by Captive during the Loss Ratio Computation Period.
(d) Exceptions. A transaction described in paragraph (c) of this section is not classified as a listed transaction for purposes of this section and
(1) Provides insurance for employee compensation or benefits and is one for which the
(2) Is an arrangement in which a Captive meets all of the following requirements:
(i) Captive is a Seller's Captive,
(ii) The Seller's Captive issues or reinsures some or all of the Contracts sold to Unrelated Customers in connection with the products or services being sold by the Seller,
(iii) 100 percent of the business of the Seller's Captive is insuring or reinsuring Contracts in connection with products or services being sold by the Seller or persons Related to the Seller, and
(iv) With respect to the Contracts issued or reinsured by the Seller's Captive, the fee, commission, or other remuneration earned by any person or persons, in the aggregate, for the sale of the Contracts, described as a percentage of the premiums paid by the Seller's customers, is at least equal to the greater of:
(A) 50 percent; or
(B) The unrelated commission percentage (which is the highest percentage fee, commission, or other remuneration known to the Seller that is earned by any person or persons, in the aggregate, for the sale of any extended warranty, insurance, or other similar Contract sold to a customer covering products or services sold by the Seller.
(e) Special participation rules--(1) In general. Whether a taxpayer has participated in the listed transaction identified in paragraph (a) of this section will be determined under
(2) Disclosure safe harbor for Owners. An Owner who, solely by reason of the Owner's direct or indirect ownership interest in an Insured, has participated in the listed transaction described in this section will not be required to disclose participation in the transaction under section 6011(a), notwithstanding
(f) Disclosure requirements--(1) Information required of all participants. Participants must provide the information required under
(2) Information required of a Captive. For a Captive, describing the transaction in sufficient detail includes, but is not limited to, describing the following on Form 8886 (or successor form):
(i) All the type(s) of policies issued or reinsured by Captive during the year of participation or years of participation (if disclosure pertains to multiple years);
(ii) The amounts treated by Captive as premiums written for coverage provided by Captive during the year of participation or each year of participation (if disclosure pertains to multiple years);
(iii) The name and contact information of each and every actuary or underwriter who assisted in the determination of the amounts treated as premiums for coverage provided by Captive during the year or each year of participation (if disclosure pertains to multiple years);
(iv) The total amount of claims paid by Captive during the year of participation or each year of participation (if disclosure pertains to multiple years); and
(v) The name and percentage of interest directly or indirectly held by each person whose interest in Captive meets the 20 percent threshold or is taken into account in meeting the 20 percent threshold under
(3) Information required of Insured. For Insured, describing the transaction in sufficient detail includes, but is not limited to, describing on Form 8886 (or successor form) the amounts treated by Insured as premiums for coverage provided to Insured, directly or indirectly, by Captive or by each Captive (if disclosure pertains to multiple Captives) during the year or each year of participation (if disclosure pertains to multiple years), as well as the identity of all persons identified as Owners to whom the Insured provided an acknowledgment described in paragraph (e)(2) of this section.
(g) Applicability date--(1) In general. This section identifies transactions that are the same as, or substantially similar to, the transactions described in paragraph (a) of this section as listed transactions for purposes of
(2) Obligations of participants with respect to prior periods. Pursuant to
(3) Obligations of material advisors with respect to prior periods. Material advisors defined in
Par. 3. Section 1.6011-11 is added to read as follows:
(a) Identification as transaction of interest. Transactions that are the same as, or substantially similar to, transactions described in paragraph (c) of this section are identified as transactions of interest for purposes of
(b) Definitions. The following definitions apply for purposes of this section:
(1) Captive has the same meaning as provided in
(2) Transaction of Interest Computation Period means the most recent nine taxable years of a Captive (or all taxable years of Captive, if Captive has been in existence for less than nine taxable years). For purposes of this paragraph (b)(2), each short taxable year is a separate taxable year, and if Captive is a successor to one or more other Captives, taxable years of each such other Captive are treated as taxable years of Captive. A successor has the same meaning as provided in
(3) Contract has the same meaning as provided in
(4) Insured has the same meaning as provided in
(5) Intermediary has the same meaning as provided in
(6) Owner has the same meaning as provided in
(7) Related has the same meaning as provided in
(8) Seller has the same meaning as provided in
(9) Seller's Captive has the same meaning as provided in
(10) Unrelated Customers has the same meaning as provided in
(c) Transaction description. A transaction is described in this paragraph (c) if the transaction involves a Captive for which the amount of liabilities incurred for insured losses and claim administration expenses during the Transaction of Interest Computation Period is less than 65 percent of the amount equal to premiums earned by Captive during the Transaction of Interest Computation Period less policyholder dividends paid by Captive during the Transaction of Interest Computation Period.
(d) Exceptions. A transaction described in paragraph (c) of this section is not classified as a transaction of interest for purposes of this section and
(1) Is described in
(2) Is described in
(3) Is identified as a listed transaction in
(e) Special participation rules--(1) In general. Whether a taxpayer has participated in the transaction of interest identified in paragraph (a) of this section will be determined under
(2) Disclosure safe harbor for Owners. An Owner who, solely by reason of the Owner's direct or indirect ownership interest in an Insured, has participated in the transaction of interest described in this section will not be required to disclose participation in the transaction under section 6011(a), notwithstanding
(f) Disclosure requirements. Participants must provide the information required under
(g) Applicability date--(1) In general. This section identifies transactions that are the same as, or substantially similar to, the transaction described in paragraph (a) of this section as transactions of interest for purposes of
(2) Obligations of participants with respect to prior periods. Pursuant to
(3) Obligations of material advisors with respect to prior periods. Material advisors defined in
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2023-07315 Filed 4-10-23;
BILLING CODE 4830-01-P
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