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Disclosure of 831(b) Transactions of Interest Required by IRS in Notice 2016-66

Tax Key
November 03, 2016

By P. Bruce Wright, M. Kristan Rizzolo,
Saren Goldner, and Christopher W. Schoen*
Sutherland Asbill & Brennan LLP

On November 1, 2016, the Internal Revenue Service (IRS) published Notice 2016-66 indicating that certain transactions of captive insurance companies making elections under Internal Revenue Code (IRC) § 831(b) to be subject to federal income tax only on their investment income are "transactions of interest" requiring information reporting under § 6011 and § 6111 as "reportable transactions."

Specifically, the Notice provides that all transactions meeting the following requirements are "transactions of interest."

1) A person ("A") directly or indirectly owns an interest in an entity (the "Insured") that conducts a trade or business;

2) A, the Insured, or related person(s) directly or indirectly own at least 20 percent of the voting power or value of a captive that contracts with Insured (or an intermediary) in a transaction that the captive and Insured treat as insurance or reinsurance of Insured;

3) The captive makes a § 831(b) election; and

4) either

(i) captive's incurred liabilities for losses and claim's administration during the most recent 5 taxable years (or such shorter period if captive has been in existence only for such shorter period) is less than 70 percent of captive's premiums earned less policyholder dividends for the same period, or (ii) during the same 5-year period, captive has directly or indirectly made available or otherwise conveyed funds to A, the Insured or related person(s) in a transaction that did not result in taxable income or gain to the recipient of the funds.

Material advisers and all participants to the transactions are required to disclose information about the transactions to the IRS, including a description of the "insurance" coverage provided by the captive, the names and contact information of actuaries and underwriters, an explanation of how premium amounts were determined, a description of claims, and a description of the captive's assets. The Notice requests comments be submitted by January 30, 2017.

* P. Bruce Wright, M. Kristan Rizzolo, and Saren Goldner are partners and Christopher W. Schoen is counsel in the tax department of the law firm of Sutherland Asbill & Brennan LLP. Mr. Wright and Ms. Goldner are located in New York, and Ms. Rizzolo and Mr. Schoen are located in Washington.

 

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