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Captive Insurance Companies under IRC Sec. 831(b) in IRS Radar

We have seen some discussion in this forum recently about captive insurance companies under IRC Sec. 831(b) and the cannabis industry. While we understand the attraction of a captive insurance vehicle in a market like cannabis where the options are limited there are a couple of considerations to be aware of…first and above all, THE IRS HATES THEM and anyone that uses one is pretty much guaranteed to be audited by the IRS. They have IRC Sec. 831(b) captives on their “Dirty Dozen” list of what they view as abusive tax shelters for four years running and had this to say about them.

> IR-2017-31, Feb. 14, 2017
_> _
> WASHINGTON – For the third consecutive year, the IRS places abusive micro-captive insurance tax shelters on its list of “Dirty Dozen” tax scams. The list, compiled annually, describes a variety of common scams that taxpayers may encounter. Many of these schemes peak during filing season as people prepare their returns or hire others to help them.
_> _
> “Taxpayers should avoid unscrupulous promoters who encourage the use of phony tax shelters designed to avoid paying what is owed,” said IRS Commissioner John Koskinen. “These scams can end up costing taxpayers more in penalties, back taxes and interest than they saved in the first place.”
_> _
_> The IRS continues to address those using abusive shelters through audits, litigation, published guidance and legislation. _
_> _
> Tax law generally allows businesses to create “captive” insurance companies to protect against certain risks. Traditional captive insurance typically allows a taxpayer to reduce insurance costs. The insured business claims deductions for premiums paid for insurance policies. Those amounts are paid, either as insurance premiums or reinsurance premiums, to a “captive” insurance company owned by the insured or parties related to the insured.
_> _
> Under section 831(b) of the tax code, captive insurers that qualify as small insurance companies can elect to exclude limited amounts of annual net premiums from income, so that the captive pays tax only on its investment income.
_> _
> In abusive “micro-captive” structures, promoters, accountants or wealth planners persuade owners of closely held entities to participate in schemes that lack many of the attributes of genuine insurance. For example, coverages may insure implausible risks, fail to match genuine business needs or duplicate the taxpayer’s commercial coverages. Premium amounts may be unsupported by underwriting or actuarial analysis, may be geared to a desired deduction amount or may be significantly higher than premiums for comparable commercial coverage.
_> _
_> Policies may contain vague, ambiguous or deceptive terms and otherwise fail to meet industry or regulatory standards. Claims administration processes may be insufficient or altogether absent. Insureds may fail to file claims that are seemingly covered by the captive insurance. _
_> _
_> Captives may invest in illiquid or speculative assets or loan or otherwise transfer capital to or for the benefit of the insured, the captive’s owners or other related persons or entities. Captives may also be formed to advance inter-generational wealth transfer objectives and avoid estate and gift taxes. Promoters, reinsurers and captive insurance managers may share common ownership interests that result in conflicts of interest. _
_> _
_> In Notice 2016-66 (Nov. 1, 2016), the IRS advised that micro-captive insurance transactions have the potential for tax avoidance or evasion. The notice designated transactions that are the same as or substantially similar to transactions that are described in the notice as “Transactions of Interest.” The notice established reporting requirements for those entering into such transactions on or after Nov. 2, 2006, and created disclosure and list maintenance obligations for material advisors. _
_> _
> Congress has also acted to curb micro-captive abuses. The Protecting Americans from Tax Hikes (PATH) Act, effective Jan. 1, 2017, established diversification and reporting requirements for new and existing captives.

Good luck.

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Just to augment the initial posting, here is a summary of the applicable tax provisions-

Under section 831(b), small nonlife insurance companies that meet the requirements, including a premium limitations amount, may elect to be subject to an alternative tax based only on taxable investment income. Under this alternative tax, the underwriting profits of the electing insurance company are exempt from federal income tax.In part as a result of perceived abuses, Congress changed the requirements for qualification under section 831(b) effective for taxable years ending after December 31, 2016, and at the same time increased the premium limitation amount. Section 831(b) now requires an electing company to

(1) be an insurance company;

(2) have net written premiums (or, if greater, direct written premiums) for the taxable year that do not exceed $2.2 million;1

(3) meet the diversification requirements described below; and

(4) make or have in effect, an election to be taxed under section 831(b).

The diversification requirements were added by Congress as anti-abuse measures to address estate and gift tax evasion issues; the amendments do not address federal income tax concerns. In general, to satisfy the diversification requirements, no one policyholder2 may pay more than 20 percent of section 831(b) company’s annual net written premiums (or, if greater, direct written premiums).

For purposes of applying the 20 percent limitation, the amendments apply attribution rules under which all policyholders that are related within the meaning of sections 267(b) and 707(b), or are members of the same controlled group, are treated as a single policyholder.

The new provisions also include an alternative diversification requirement that is an ownership-based test. Under the ownership test, the ownership of section 831(b) company by “specified holders” (as defined below) must not be greater than (by more than a 2 percent de minimis margin) the ownership of the business or assets being insured.

More specifically, an insurance company will have met this alternative diversification test if each specified holder that is an owner of section 831(b) company has no greater interest in section 831(b) company that he or she has in the insured business or assets (the “specified assets”). A specified holder is any individual who is a spouse or lineal descendant (including by adoption) of an individual who holds an interest (directly or indirectly) in the specified assets being insured.

In connection with amending the eligibility requirements for making an election to be subject to tax under section 831(b), Congress also added new annual information reporting requirements on electing companies, leaving the specifics of the required information up to the Internal Revenue Service (IRS).

In November 2016, shortly before the new provisions became effective for most electing companies, the IRS issued Notice 2016–66 indicating that certain section 831(b) companies are “transactions of interest” requiring information reporting under sections 6011 and 6111 as “reportable transactions.” Notice 2016–66 provides that section 831(b) electing companies 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 the section 831(b) electing company that contracts with Insured (or an intermediary) in a transaction that the section 831(b) electing company and the Insured treat as insurance or reinsurance of Insured; and

(3) Either

(a) section 831(b) electing company’s incurred liabilities for losses and claims administration during the most recent 5 taxable years (or such shorter period if the company has been in existence only for such shorter period) are less than 70 percent of the company’s premiums earned less policyholder dividends for the same period or,

(b.) during the same 5-year period, section 831(b) electing company 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.

Pursuant to Notice 2016–66, “material advisors” 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 initial report, for transactions from prior open years, originally was due January 30, 2017, but Notice 2017–08 extended the deadline for filing that initial report to May 1, 2017.

In February 2015, the IRS included section 831(b) companies on its “Dirty Dozen” list of tax scams. The IRS also has numerous audits of section 831(b) companies underway and cases docketed in the United States Tax Court.

One of the concerns of the IRS is whether the transactions of section 831(b) electing companies are properly characterized as insurance. In order to be treated as insurance for federal tax purposes, a transaction must meet a four-part test that requires the presence of an insurance risk, risk shifting, and risk distribution and the recognition of the transaction as insurance in its commonly accepted sense.

The following are a couple of points related to captives in a practical sense and some thoughts about using them in California.

The Controlled Substances Act (CSA) prohibits the possession, production or use of cannabis. So, is there an issue with a state issuing an insurance license to a cannabis captive?

The answer is no. The CSA specifically provides that states are free to pass their own laws regarding cannabis, so long as states’ laws do not create a “positive conflict” with federal law. The term “positive conflict” has been narrowly interpreted by the U.S. Supreme Court. In fact, the Supreme Court’s narrow treatment of this phrase is the chief reason why the Department of Justice declines to prosecute state decriminalization laws — the DOJ would lose.

While the legal field is complex, the issues can be narrowed. States possess the power to issue insurance licenses regardless of the federal government’s opinion of the insured. The CSA prohibits marijuana, but permits states to regulate the field so long as states’ laws do not create a conflict with the goals of Congress. The mere issuance of a cannabis captive insurance license does not impair Congress’ goal of preventing the cultivation, use or possession of cannabis. Consequently, the states may license a cannabis captive.

However, the power to regulate insurance rests with the states. This means that states may either license or decline to license cannabis captives. Most state insurance departments decline because many insurance commissioners prefer not to invite controversy to their department. Others simply do not want cannabis affiliated with their states. Only a handful of domiciles are available for cannabis captives.

Two of the largest cannabis markets, Washington and California, do not have captive insurance laws. Captive insurance companies may only be licensed in states with captive insurance legislation permitting their existence. As a result, many prospects for cannabis captives may have to incorporate their cannabis captives in foreign domiciles. This results in the captive being treated as a nonadmitted insured in the state in which the risks are located. This raises the issue of procurement taxes (also called direct procurement or direct placement, depending on the jurisdiction).

The rules regulating procurement taxes vary by state. Washington, taking a potentially unconstitutional position, maintains that no individual may purchase insurance from an unauthorized, unlicensed insurer. These procurement issues are generally resolved by paying the state the procurement tax fee. However, Washington’s prohibition requires any cannabis captive insuring Washington residents to use a fronting company. This adds additional costs to operating the captive.

These hurdles are common legal issues encountered by qualified captive managers every day. Thus, the real issue for brokers and agents is not whether cannabis captives are legal, but whether they make sense for the insured.

When Is a Captive Ideal?
In general, captive insurance is ideal in situations where the market fails the insureds. Where insurance is too expensive, fails to cover proper risks, or is simply unavailable, insurance professionals should be aware of the potential value of captive insurance. Ideal candidates include cannabis companies with positive cash flow, relatively few claims and strong risk management practices. Companies require capital to establish their own captives, and the more risk assumed by the captive, then the more capital necessary to fund the reserves.

Additionally, captive insurance companies should ideally insure multiple entities. The IRS would prefer large numbers of insured entities to secure proper risk distribution. While captive professionals differ on the precise number of insured entities necessary to form a captive, the model is better suited for middle-market companies with large operations. If a captive is not a good fit for an individual operation, then several cannabis companies can pool their resources to form a group captive. A full analysis of risk distribution and the ways to structure a captive are beyond the scope of this article, but competent captive managers have multiple solutions to bring to the analysis.

Agents and brokers should be wary of the risks placed into the captive. The most common risks should include general liability and property insurance. However, there is case law indicating that a cannabis captive may insure against criminal liability, which is a potential lifesaver in the event of a federal raid. Landlords renting to cannabis companies may want to consider self-insuring their property risks through a captive because carriers have an enviable track of wins against insureds on those grounds. Finally, doctors prescribing medical marijuana should consider captives to cover gaps in their malpractice coverage. Many malpractice carriers are likely to deny coverage in the event of a loss related to the prescription of cannabis.

Finally the text of IRS Notice 2016-66

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Transaction of Interest – Section 831(b) Micro-Captive Transactions
Notice 2016-66

The Department of the Treasury (“Treasury Department”) and the Internal
Revenue Service (the “IRS”) are aware of a type of transaction, described below, in
which a taxpayer attempts to reduce the aggregate taxable income of the taxpayer,
related persons, or both, using contracts that the parties treat as insurance contracts
and a related company that the parties treat as a captive insurance company. Each
an entity that the parties treat as an insured entity under the contracts claims deductions
for premiums for insurance coverage.

The related company that the parties treat as a captive insurance company elects under § 831(b) of the Internal Revenue Code (the
“Code”) to be taxed only on investment income and therefore excludes the payments
directly or indirectly received under the contracts from its taxable income. The manner
in which the contracts are interpreted, administered, and applied is inconsistent with
arm’s length transactions and sound business practices.

The Treasury Department and the IRS believe this transaction (“micro-captive
transaction”) has a potential for tax avoidance or evasion. See IR-2016-25 (discussing
characteristics of an abusive micro-captive insurance structure). However, the Treasury
Department and the IRS lack sufficient information to identify which § 831(b)
arrangements should be identified specifically as a tax avoidance transaction and may
lack sufficient information to define the characteristics that distinguish the tax avoidance
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transactions from other § 831(b) related-party transactions. This notice identifies the
transaction described in section 2.01 of this notice and substantially similar transactions
as transactions of interest for purposes of § 1.6011-4(b)(6) of the Income Tax
Regulations and §§ 6111 and 6112 of the Code. This notice also alerts persons
involved in such transactions to certain responsibilities and penalties that may arise
from their involvement with these transactions.

SECTION 1. BACKGROUND

.01 Overview of Transaction

In the micro-captive transaction, A, a person, directly or indirectly owns an
interest in an entity (or entities) (“Insured”) conducting a trade or business. A, persons
related to A, or both, also directly or indirectly own another entity (or entities)
(“Captive”).
In some cases, Captive enters into a contract (or contracts) (the “Contract”) with
Insured as discussed below in section 1.02 of this notice. In these cases, Captive may
enter into a reinsurance or pooling agreement under which a portion of the risks
covered under the Contract are treated as pooled with risks of other entities, and
Captive assumes risks from other entities as also discussed below in section 1.02 of
this notice.
In other cases, Captive indirectly enters into the Contract by reinsuring risks that
Insured has initially insured with an intermediary, Company C, as discussed below in
section 1.03 of this notice.
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.02 Cases in Which Captive Enters into the Contract with Insured
(a) In general. In cases in which Captive enters into the Contract with Insured,
Captive and Insured treat the Contract as an insurance contract for federal income tax
purposes. Captive provides coverage for Insured.
Captive may offer coverage only to persons related to or affiliated with Insured. If
Captive also offers coverage to persons that are not related to or affiliated with Insured,
Captive typically offers coverage only to other entities represented by a person who
promotes the micro-captive transaction. Captive may enter into a reinsurance or
pooling agreement under which a portion of the risks covered under the Contract are
treated as pooled with risks of other entities and Captive assumes risks from other
entities. Typically, the other entities participating in the reinsurance or pooling
agreement are also represented by a person who promotes the micro-captive
transaction.
Insured makes payments to Captive under the Contract, treats the payments as
insurance premiums that are within the scope of § 1.162-1(a), and deducts the
payments as ordinary and necessary business expenses under § 162. Captive treats
the payments received from Insured under the Contract as premiums for insurance
coverage. If Captive is not a domestic corporation, Captive makes an election under
§ 953(d) to be treated as a domestic corporation. The micro-captive transaction is
structured so that Captive has no more than $1,200,000 in net premiums written (or, if
greater, direct premiums written) for each taxable year ($2,200,000 for taxable years
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beginning after December 31, 2016) in which the transaction is in effect. Captive makes
an election under § 831(b) to be taxed only on taxable investment income and excludes
the premiums from taxable income.

(b) Promoter. A promoter (“Promoter”) typically markets the micro-captive
transaction structure to A. Promoter, persons related to Promoter, or both, typically
provide continuing services to Captive, including:

(1) providing the forms used for the Contract;
(2) management of Captive; and
(3) administrative, accounting, or legal services, including the filing of tax forms.
© Contract coverage. The coverage provided by Captive under the Contract
has one or more of the following characteristics:
(1) the coverage involves an implausible risk;
(2) the coverage does not match a business need or risk of Insured;
(3) the description of the scope of the coverage in the Contract is vague,
ambiguous, or illusory; or
(4) the coverage duplicates coverage provided to Insured by an unrelated,
commercial insurance company, and the policy with the commercial insurer often has a
far smaller premium.
(d) Amounts paid to Captive. The payments made by Insured to Captive under
the Contract have one or more of the following characteristics:
(1) the amounts of Insured’s payments under the Contract are designed to
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provide Insured with a deduction under § 162 of a particular amount;
(2) the payments are determined without an underwriting or actuarial analysis
that conforms to insurance industry standards;
(3) the payments are not made consistently with the schedule in the Contract;
(4) the payments are agreed to by Insured and Captive without comparing the
amounts of the payments to payments that would be made under alternative insurance
arrangements providing the same or similar coverage;
(5) the payments significantly exceed the premium prevailing for coverage
offered by unrelated, commercial insurance companies for risks with similar loss
profiles; or
(6) if Insured includes multiple entities, the allocation of amounts paid to Captive
among the insured entities does not reflect the actuarial or economic measure of the
risk of each entity.
(e) Claims procedures and management of Captive. Captive, Insured, or both
does one or more of the following:
(1) Captive fails to comply with some or all of the laws or regulations applicable
to insurance companies in the jurisdiction in which Captive is chartered, the
jurisdiction(s) in which Captive is subject to regulation because of the nature of its
business, or both;
(2) Captive does not issue policies or binders in a timely manner consistent with
industry standards;
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(3) Captive does not have defined claims administration procedures that are
consistent with insurance industry standards; or
(4) Insured does not file claims for each loss event covered by the Contract.
(f) Captive’s capital. Captive’s capital has one or more of the following
characteristics:
(1) Captive does not have capital adequate to assume the risks that the Contract
transfers from Insured;
(2) Captive invests its capital in illiquid or speculative assets usually not held by
insurance companies; or
(3) Captive loans or otherwise transfers its capital to Insured, entities affiliated
with Insured, A, or persons related to A.
.03 Cases in Which Insured and Captive Use an Intermediary Company
In certain cases, Captive indirectly enters into the Contract by reinsuring risks
that Insured has initially insured with an intermediary, Company C. In these cases,
Insured enters into a contract with Company C that the parties treat as an insurance
contract. Company C also enters into a reinsurance contract with Captive to reinsure
risks under the contract between Insured and Company C. In cases in which Captive
reinsures risks that Insured has initially insured with an intermediary, Company C, the
reinsurance agreement between Company C and Captive is the Contract for purposes
of this notice and the disclosures required in section 3.05 of this notice.
In these cases, the coverage provided by Captive under the Contract, the
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payments made to Captive by Company C, and Captive’s capital each has one or more
of the characteristics described in section 1.02©, (d) or (f) of this notice, as applicable;
also, Captive, Insured or both do one or more of the items described in section 1.02(e)
of this notice. In addition, a Promoter typically markets the transaction to A.
Moreover, in these cases, Company C is unrelated to A or Insured but may be
related to Promoter. Company C enters into similar arrangements with other entities,
which usually are also represented by Promoter. Company C reinsures with Captive a
portion of the risks, commonly in layers. For example, the first layer might cover losses
from $1 up to $10,000; the second layer might cover losses greater than $10,000, but
not more than $100,000; and the third layer might cover losses greater than $100,000.
Captive might assume from Company C 100% of one layer of Insured’s risks and in
another layer a proportionate share of the aggregate risk of Insured and other entities.
The allocation among the layers of amounts paid to Captive as premiums typically does
not reflect the actuarial or economic measures of the risks associated with the particular
layers. In addition, any claims filed generally fall within the layer or layers that only
cover risks of Insured.
.04 Claimed Tax Treatment and Benefits
In the micro-captive transaction, Insured, Captive, and, if applicable, Company C,
treat the Contract as an insurance contract for federal income tax purposes. Insured
claims a deduction for the premiums paid under § 162. Captive excludes the premium
income from its taxable income by electing under § 831(b) to be taxed only on its
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investment income. Captive uses the premium income for purposes other than
administering and paying claims under the Contract, generally benefitting Insured or a
party related to Insured. For instance, Captive may use premium income to provide a
loan to Insured.
However, if the transaction does not constitute insurance, Insured is not entitled
to deduct the amount of that payment under § 162 as an insurance premium. In
addition, if Captive does not provide insurance, Captive does not qualify as an
insurance company and Captive’s elections to be taxed only on its investment income
under § 831(b) and to be treated as a domestic insurance company under § 953(d) are
invalid.
The Treasury Department and the IRS recognize that related parties may use
captive insurance companies that make elections under § 831(b) for risk management
purposes that do not involve tax avoidance, but believe that there are cases in which
the use of such arrangements to claim the tax benefits of treating the Contract as an
insurance contract is improper. Therefore, the Treasury Department and the IRS are
identifying transactions described in section 2.01 of this notice (and transactions
substantially similar to such transactions) as transactions of interest for purposes of
§ 1.6011-4(b)(6) and §§ 6111 and 6112 of the Code.

SECTION 2. TRANSACTIONS OF INTEREST
.01 Transactions Identified as Transactions of Interest
The following transaction is identified as a transaction of interest under this
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notice:
(a) A, a person, directly or indirectly owns an interest in an entity (or entities)
(“Insured”) conducting a trade or business;
(b) An entity (or entities) directly or indirectly owned by A, Insured, or persons
related to A or Insured (“Captive”) enters into a contract (or contracts) (the “Contracts”)
with Insured that Captive and Insured treat as insurance, or reinsures risks that Insured
has initially insured with an intermediary, Company C;
© Captive makes an election under § 831(b) to be taxed only on taxable
investment income;
(d) A, Insured, or one or more persons related (within the meaning of § 267(b) or
707(b)) to A or Insured directly or indirectly own at least 20 percent of the voting power
or value of the outstanding stock of Captive; and
(e) One or both of the following apply:
(1) the amount of the liabilities incurred by Captive for insured losses and claim
administration expenses during the Computation Period (defined in section 2.02 of this
notice) is less than 70 percent of the following:
(A) premiums earned by Captive during the Computation Period, less
(B) policyholder dividends paid by Captive during the Computation Period; or
(2) 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 § 267(b) or 707(b)) to A
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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.
A transaction described in this section 2.01 is identified as a transaction of
interest regardless of whether the transaction has the characteristics described in
section 1 of this notice.
.02 The Computation Period
The Computation Period is (a) the most recent five taxable years of Captive or
(b) if Captive has been in existence for less than five taxable years, the entire period of
Captive’s existence. For purposes of the preceding sentence, if Captive has been in
existence for less than five taxable years and Captive is a successor to one or more
Captives created or availed of in connection with a transaction described in this notice,
taxable years of such predecessor entities are treated as taxable years of Captive. For
purposes of this section 2.02, a short taxable year is treated as a taxable year.
.03 Exception for Compensatory Arrangements with Prohibited Transaction
Exemption
There may be limited circumstances in which a captive insurance company
arrangement that provides insurance for employee compensation or benefits is
described in this section and accordingly is identified as a transaction of interest under
this notice. However, if such an arrangement is one for which the Employee Benefits
Security Administration of the U.S. Department of Labor has issued a Prohibited
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Transaction Exemption, it is not treated as an arrangement identified as a transaction of
interest under this notice.

SECTION 3. RULES OF APPLICATION
.01 Effective Date
Transactions that are the same as, or substantially similar to, the transaction
described in section 2.01 of this notice are identified as “transactions of interest” for
purposes of § 1.6011-4(b)(6) and §§ 6111 and 6112 effective November 1, 2016.
Persons entering into these transactions on or after November 2, 2006, must disclose
the transaction as described in § 1.6011-4. Material advisors who make a tax statement
on or after November 2, 2006, with respect to transactions entered into on or after
November 2, 2006, have disclosure and list maintenance obligations under §§ 6111 and
6112. See § 1.6011-4(h) and § 301.6111-3(i) and § 301.6112-1(g) of the Procedure
and Administration Regulations.
Independent of their classification as transactions of interest, transactions that
are the same as, or substantially similar to, the transaction described in section 2.01 of
this notice may already be subject to the requirements of §§ 6011, 6111, or 6112, or the
regulations thereunder. When the Treasury Department and the IRS have gathered
enough information regarding potentially abusive § 831(b) arrangements, the IRS and
the Treasury Department may take one or more actions, including removing the
transaction from the transactions of interest category in published guidance, designating
the transaction as a listed transaction, or providing a new category of reportable
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transaction. In the interim, the IRS may challenge a position taken as part of a
transaction that is the same as, or substantially similar to, the transaction described in
section 2.01 of this notice under other provisions of the Code or judicial doctrines such
as sham transaction, substance over form, or economic substance.

.02 Participation
Under § 1.6011-4©(3)(i)(E), A, Insured, Captive, and, if applicable, Company C
are participants in a transaction for each year in which their respective tax returns reflect
tax consequences or a tax strategy of a transaction of interest described in section 2.01
of this notice.

.03 Time for Disclosure
For rules regarding the time for providing disclosure of a transaction described in
section 2.01 of this notice, see § 1.6011-4(e) and § 301.6111-3(e). However, if, under
§ 1.6011-4(e), a taxpayer is required to file a disclosure statement with respect to a
transaction described in section 2.01 of this notice after November 1, 2016, and prior to
January 30, 2017, that disclosure statement will be considered to be timely filed if the
taxpayer alternatively files the disclosure with the Office of Tax Shelter Analysis by
January 30, 2017.

.04 Material Advisor Threshold Amount
The threshold amounts are the same as those for listed transactions. See
§ 301.6111-3(b)(3)(i)(B).

.05 Disclosure
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(a) General rule. Under § 1.6011-4(d) and the Instructions to Form 8886,
Reportable Transaction Disclosure Statement, the required disclosure must identify and
describe the transaction in sufficient detail for the IRS to be able to understand the tax
structure of the reportable transaction and the identity of all parties involved in the
transaction.
(b) Information required of all participants. For all participants, describing the
transaction in sufficient detail includes, but is not limited to, describing on Form 8886
when and how the taxpayer became aware of the transaction.
© Information required of Captive. For Captive, describing the transaction in
sufficient detail includes, but is not limited to, describing the following on Form 8886:
(1) Whether Captive is reporting because (i) the amount of the liabilities incurred
by Captive for insured losses and claim administration expenses during the
Computation Period is less than 70 percent of the amount specified in section 2.01(e)(1)
of this notice; (ii) Captive has at any time during the Computation Period made available
as financing or otherwise conveyed or agreed to make available or convey any portion
of the payments under the Contract to A, Insured, or a person related (within the
meaning of § 267(b) or 707(b)) to A or Insured through a separate transaction, such as
a guarantee, a loan, or other transfer; or (iii) both (i) and (ii);
(2) Under what authority Captive is chartered;
(3) A description of all the type(s) of coverage provided by Captive during the
year or years of participation (if disclosure pertains to multiple years);
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(4) A description of how the amounts treated as premiums for coverage provided
by Captive during the year or years of participation (if disclosure pertains to multiple
years) were determined, including the name and contact information of any actuary or
underwriter who assisted in these determinations;
(5) A description of any claims paid by Captive during the year or years of
participation (if disclosure pertains to multiple years), and of the amount of, and reason
for, any reserves reported by Captive on the annual statement; and
(6) A description of the assets held by Captive during the year or years of
participation (if disclosure pertains to multiple years); that is, the use Captive has made
of its premium and investment income, including but not limited to, securities (whether
or not registered), loans, real estate, or partnerships or other joint ventures, and an
identification of the related parties involved in any transactions with respect to those
assets.

.06 Penalties
Persons required to disclose these transactions under § 1.6011-4 who fail to do
so may be subject to the penalty under § 6707A. Persons required to disclose these
transactions under § 6111 who fail to do so may be subject to the penalty under
§ 6707(a). Persons required to maintain lists of advisees under § 6112 who fail to do so
(or who fail to provide such lists when requested by the IRS) may be subject to the
penalty under § 6708(a). In addition, the IRS may impose other penalties on parties
involved in these transactions, including the accuracy-related penalty under § 6662 or
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§ 6662A.

SECTION 4. REQUEST FOR COMMENTS
The Treasury Department and the IRS request comments on how the transaction
might be addressed in published guidance.
Comments should be submitted in writing on or before January 30, 2017. Send
submissions to CC:PA:LPD:PR (Notice 2016-66), Room 5203, Internal Revenue
Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions
may be hand-delivered Monday through Friday between the hours of 8 a.m. and 4 p.m.
to CC:PA:LPD:PR (Notice 2016-66), Courier’s Desk, Internal Revenue Service, 1111
Constitution Avenue, NW, Washington, DC 20224. Comments may also be sent
electronically, via the following e-mail address: [email protected].
Please include “Notice 2016-66” in the subject line of any electronic communications.
All comments submitted will be available for public inspection and copying.

SECTION 5. DRAFTING INFORMATION
The principal author of this notice is John E. Glover of the Office of Associate
Chief Counsel (Financial Institutions & Products). For further information regarding this
notice contact Mr. Glover at (202) 317-6995 (not a toll-free call).