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TCIA responds to the IRS notice of proposed regulations that unfairly discriminate between insurance companies because of a voluntary tax election.

Wednesday, June 21, 2023 12:37 PM | Admin Impact (Administrator)

On its face, the proposed micro-captive listed transaction discriminates between similarly situated insurance companies simply because of a voluntary election, an election that is permissible under the Internal Revenue Code.

Two unrelated insurance companies will receive vastly different treatment by the IRS if one elects to be taxed under IRC § 831(b) and the other does not. Under the proposed micro-captive listed transaction, if both insurance companies have loss ratios less than 65% over a ten-year period, then the company electing to be taxed under IRC § 831(b) will be a listed transaction and the other will not.

The IRS can investigate whether the premium is proper for the amount of risk the captive has assumed, but a loss ratio is a pale proxy for this, particularly when it is used to invalidate insurance status. Losses are evidence of risk, but lack of losses is not evidence of lack of risk. 

Tony Greer of TCIA's Government Relations Committee explains that "If my car wrecks and my neighbor’s car does not, I have a loss; however, my neighbor and I had the identical risk. The IRS must look at the method used to compute premiums, not arbitrary loss ratios."

TCIA has submitted a response within the IRS public comment period and expects the IRS to respond to all comments before the end of the year. 

To learn more and view the comments submitted by TCIA, its members, and others on behalf of captive insurance companies - CLICK HERE

For more information about the proposed IRS changes - CLICK HERE

To read the comments from TCIA members and others - CLICK HERE

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