IRC 831(b) Small Captives After the PATH Act: Meeting New Diversification Requirements and Avoiding IRS Scrutiny

Recording of a 90-minute CLE/CPE webinar with Q&A


Conducted on Wednesday, July 19, 2017
Recorded event now available


This CLE/CPE webinar will provide tax counsel and advisers with practical tools and guidance to ensure that clients utilizing small captive insurance companies are fully compliant with the Section 831(b) rules. The panelist will discuss the PATH Act’s changes in both tax benefits and compliance burdens to small captives and offer detailed guidance on structuring small captives to be fully compliant with Section 831(b) requirements.

Description

The use of captive insurance companies, particularly Section 831(b) “small captives,” has recently come under increased IRS scrutiny. While Congress has explicitly recognized small captives as a legitimate form of risk protection, the IRS expressed concern that these vehicles are being used for reasons other than as legitimate insurance companies. For the third consecutive year, the IRS has placed Section 831(b) small captives on its 2017 “Dirty Dozen List of Tax Scams,” warning that certain small captives represent an “abuse involving a legitimate tax structure.”

More significantly, in November, 2016, the IRS issued Notice 2016-66, further detailing areas of concern with Section 831(b) small captives. The Notice established criteria under which certain captive insurance companies must report their 831(b) election as a “transaction of interest,” subject to additional reporting requirements, with steep penalties for noncompliance.

The PATH Act of 2015 made several changes to the interpretation of small captives under Section 831(b), which went into effect on Jan. 1, 2017. These provisions have all but guaranteed both that small captives will continue to be used and likely will increase in frequency, and that the IRS will step up its examinations of the small captive arrangements. The PATH Act increased the 831(b) deductible premium limit from $1.2 million to $2.2 million, which will allow small businesses to better manage their coverage and risk profiles.

Listen as our experienced panel discusses the history and flexibility of captive insurance companies and how the lessons learned from 60 years of captives can be used to effectively utilize captives to manage and reduce a company’s risk of IRS scrutiny.

Outline

  1. Recent cases
    1. Securitas
    2. Rent-a-Center
    3. RVI
    4. Legislative changes
  2. Dirty dozen listing and establishing business purpose
  3. Anti-avoidance law
    1. Substance over form
    2. Business purpose
    3. Economic substance
  4. IRS broad enforcement capabilities
  5. IRS Notice 2016-66
  6. Section 831(b) Captives as a “transaction of interest”

Benefits

The panel will review these and other key issues:

  • Risk shifting and distribution
  • IRS enforcement areas in small captives, including excessive premiums and risk definition
  • PATH Act changes to 831(b) structuring
  • Diversification requirements and tests
  • Response to IRS challenges of 831(b) small captive structures

Learning Objectives

After completing this course, you will be able to:

  • Identify potential IRS issues with Section 831(b) micro-captive insurance companies
  • Comply with the rules regarding prohibiting excessive premiums and prearranged deduction schemes
  • Understand the IRS’ requirements for captives to have “insurance risk,” risk shifting and risk distribution
  • Know the changes brought about by the 2015 PATH Act affecting micro-captives structures, particularly the two-pronged diversification requirements for qualification under Section 831(b)

Faculty

David B. Liptz, CPA, Principal
Liptz & Associates, Newport Beach, Calif.

With more than 25 years of experience, Mr. Liptz is considered an expert in the specialty niche of captive insurance. He provides captive insurance audit, tax, representation and consulting services for over 200 captive insurance companies. In addition he provides services to the areas of manufacturing, distribution, nursing homes, real estate, internet and international tax compliance. He provides pro-active "wealth preservation" strategies for his clients. Additionally, he provides tax consulting and representation to businesses in IRS audit disputes. He frequently speaks at captive insurance educational seminars and other industry events.

J. Scot Kirkpatrick, Shareholder
Chamberlain Hrdlicka White Williams & Aughtry, Atlanta

As Chair of the firm’s Trusts and Estates Practice Group in Atlanta, Mr. Kirkpatrick's practice focuses principally upon estate and income tax planning for high net worth individuals and their businesses. He is a frequent lecturer at various seminars for attorneys, accountants, insurance agents and financial planners, and has published articles in Today’s CPA, Trusts & Estates and Taxpro Journal.


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