The Internal Revenue Service has announced plans to release the text of the 2024-2025 priority guidance, which includes plans to finalise its micro captive regulations.
In April 2023, the IRS “obsoleted” its notorious Notice 2016-66 and issued new proposed regulations identifying certain micro-captive transactions as “listed transactions” and certain other micro captive transactions as “transactions of interest”.
Captive Intelligence has reported extensively on sustained push back and criticism from the captive industry, including some state regulators, but the Service had appeared in a prolonged stand-off with previously no indication of a forthcoming conclusion.
Some observers believe the IRS has purposely been drawing out the process to cause doubt in the space, which has led to a number of micro captive closures.
In its latest announcement, the IRS said, once finalised, the regulations will see certain 831(b) captives deemed “listed transactions,” and others labelled “transactions of interest.”
It is not yet clear, however, how these will be defined and whether it will be in line or materially different from the original proposals which due such strong criticism from the industry.
In those previous regulations propsed in 2023, the majority of captives that recorded a loss ratio under 65% would be considered a “listed transaction.”
The 65% loss ratio threshold has been almost universally scorned. It is not uncommon for captives, whether taking the 831(b) tax election or not, and commercial insurers to perform at or better than that level.
Under the new IRS plans, conservation easement transactions and substantially similar transactions will also be considered as listed transactions.
Since the proposals were first put forward by the IRS, they have divided opinion across the industry, with some saying they could destroy the industry, while others have branded them a “refreshing change”.