The New Potential Regulatory Death Of Aggressive Captive Insurance

Beckett Cantley (Northeastern) & Geoffrey Dietrich (Cantley Dietrich), The New Potential Regulatory Death of Aggressive Captive Insurance, 75 S. C. L. Rev. 343 (2023): 

The aggressive micro-captive insurance company industry is at severe risk of decimation. The Internal Revenue Service (IRS) initially issued Notice 2016-66 to designate certain micro-captives as transactions of interest, which allowed the IRS to garner information about a micro-captive to measure if it is an abusive tax shelter. However, Notice 2016-66 was overly broad in scope, forcing participants of non-abusive micro-captives to waste time and money on sending information to the IRS that the IRS never deserved to obtain. Therefore, certain taxpayers brought challenges to Notice 2016-66, and it was overturned in CIC Services, LLC v. Internal Revenue Service following a U.S. Supreme Court opinion allowing the challenge to proceed. In the end, the death knell for the Notice was the IRS’s failure to properly follow the Administrative Procedure Act (APA) when issuing the Notice, as well as the arbitrary and capricious manner in which the Notice was issued.

On April 10, 2023, the IRS issued proposed regulations that revive parts of Notice 2016-66 with certain changes, including designating certain micro-captives as listed transactions, while maintaining the transaction of interest designation for certain other micro-captives. The new listed transaction designation places a massive target on certain micro-captives as abusive tax shelters. Given the heightened penalties for unreported or improperly reported listed transactions, the proposed regulations pose a much bigger threat to the aggressive micro-captive world than the now-defunct Notice.

This Article (1) reviews Notice 2016-66 and the CIC Services case that ruled the Notice violated the APA and was issued in an arbitrary and capricious manner; (2) outlines the IRS Proposed Regulations that replace the Notice (Proposed Regulations); (3) describes the differences between the Notice and the Proposed Regulations, including the heightened penalty regime and increased scrutiny that results from the Proposed Regulations; and (4) analyzes the likely effect the Proposed Regulations will have on the aggressive micro-captive industry.

Editor's Note:  If you would like to receive a daily email with links to tax posts on TaxProf Blog, email me here.