SIIA Calls on IRS To Recognize Appropriate Captive Structures

IRS Lettered with $20 bill on black background

April 20, 2021

IRS Lettered with $20 bill on black background

The Self-Insurance Institute of America (SIIA) has responded to a recent statement by the Internal Revenue Service (IRS) on abusive micro-captive arrangements by calling on the IRS to move towards recognizing appropriate captive insurance structures and providing guidance.

SIIA's response cited not only the recent IRS statement calling on participants in abusive micro-captive arrangements to exit the structures as soon as possible, but the US Tax Court's March 10 ruling in Caylor Land & Dev v. Commissioner, T.C. Memo. 2021-30 (2021) in which the Tax Court found the micro-captive arrangement in question failed to qualify as insurance for federal tax purposes.

The SIIA statement also notes that the IRS has made it known that it has formed 12 new examination teams to look into various captive insurance transactions.

"To date, the IRS has been successful in limiting cases tried to those whose facts favor the Service and are not reflective of the industry," the SIIA statement said, "thus, creating a negative bias at the examination level of the IRS."

The SIIA statement said that the organization supports curbing abusive practices within the captive insurance industry, and urges participants in potentially abusive transactions to heed the IRS's advice.

"At the same time, it is important to note that a vast majority of captive participants are utilizing the structure to protect themselves against appropriate risks, as the tax code intended," the SIIA statement said. "Among these captive participants are American small- and medium-sized businesses that are utilizing IRC 831(b) to mitigate risks associated with COVID-19, from business interruption to loss of customers and supply chain interruption."

The SIIA statement noted that Congress gave the IRS authority to undertake guidance related to abusive captive insurance practices as part of the Protecting Americans from Tax Hikes (PATH) Act of 2015. "Six years later, the industry is still waiting, as are policymakers in Congress," the SIIA statement said. "As these small businesses are being attacked by the IRS for doing the right thing, many are simply trying to stay afloat."

"While the IRS may remain focused on certain captive structures, SIIA strongly believes that it must do so in a responsible and fair manner," the organization's statement said. "As American business continues to navigate through COVID disruptions, captive insurance companies remain committed to providing a needed and legitimate risk management tool for these businesses to grow and thrive."

April 20, 2021