IRS releases CCAs discussing determinants of micro-captive insurance


Authored by RSM US LLP

The IRS recently released six heavily redacted Chief Counsel Advise memoranda addressing whether captive insurance transactions were the same as, or substantially similar to, the section 831(b) micro-captive transactions identified as transactions of interest in Notice 2016-66. In determining whether the transactions were reportable transactions for purposes of Notice 2016-66, the IRS applied the five factors delineated in the notice to each transaction. The six memoranda are: 20211601F, 20211602F, 20211603F, 20211604F, 20211605F, 20211606F.

Notice 2016-66

Notice 2016-66 deems that micro-captive insurance arrangements are “transactions of interest.” The notice requires taxpayers participating in such arrangements to disclose the transaction on Form 8886, Reportable Transaction Disclosure Statement, and file the form with their current tax return and with the Office of Tax Shelter Analysis.

In its examples of abusive micro-captive insurance arrangements, the notice describes the potential abusive transaction as one that starts with a taxpayer who deducts premiums paid to a micro-captive insurance company. This micro-captive insurance company elects (under section 831(b)) to be taxed only on its investment income (premium income is not directly taxed). The mismatching of the deductible insurance premiums and the insurance company’s election not to be taxed on premium income may lead to potential abuse. This potential for abuse arises when the micro-captive insurance company insures against implausible risks, the micro-captive insurance company is used as an investment vehicle for its owners, or where there are loans between the micro-captive and related parties. 


Notice 2016-66 lists a number of factors used to determine whether a micro-captive arrangement is an abusive tax structure. These are the factors that the IRS follows in the Chief Counsel Advice. The IRS analyzes whether:

  1. The micro-captive transaction involves a person who directly or indirectly owned an interest in an entity, or entities, (the Insured) conducting a trade or business
  2. The micro-captive transaction involves a Captive (which is directly or indirectly owned by the owner(s) of Insured, Insured or persons related to the owners of Insured) who entered into Contracts with the Insured that the Captive and the Insured treated as insurance, or reinsures risks that Insured initially insured with an intermediary company
  3. The Captive makes a section 831(b) election to be taxed only on investment income
  4. Twenty percent of the voting power or value of the outstanding stock of Captive is owned directly or indirectly by the owner(s) of Insured, Insured or persons related to the owners of Insured
  5. One or both of the following apply:

a. The amount of the liabilities incurred by Captive for insured losses and claim administration expenses during the Computation Period is less than 70% of the following:

i. Premiums earned by Captive during the Computation Period, less

ii. Policyholder dividends paid by Captive during the Computation Period; or

b. Captive has at any time during the Computation Period directly or indirectly made available as financing or otherwise conveyed or agreed to make available or convey to A, Insured, or a person related (within the meaning of sections 267(b) or 707(b)) to A or Insured (collectively, the Recipient) in a transaction that did not result in taxable income or gain to Recipient, any portion of the payments under the Contract, such as through a guarantee, a loan or other transfer of Captive’s capital.

After analyzing the transactions laid out in the CCAs, the IRS determined that all factors were met and that each of the six chief counsel advice fact patterns contained transactions that were the same, or substantially similar to, the micro-captive insurance transaction as defined in Notice 2016-66.

WNT Observations

Although the CCAs were extremely redacted, taxpayers can look to the five factor analysis to get clarity on whether their micro-captive insurance arrangements will be seen as being the same, or substantially similar to, the reportable micro-captive transaction delineated in Notice 2016-66. Taxpayers who think they may be participants in micro-captive transactions should consult with their tax advisers to determine the filing obligations for such transactions.

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This article was written by Trina Pinneau and originally appeared on 2021-05-05.
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The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

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