Friday, October 18, 2024

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No significant changes expected to IRS 831(b) regulation

The decision by the Internal Revenue Service (IRS) to include micro captive regulation in its 2024-2025 priority guidance shows that the IRS is still planning to “move forward” with its proposed regulations, according to Bailey Roese, partner at Dentons, Bingham Greenebaum.

In April 2023, the IRS “obsoleted” its notorious Notice 2016-66 and issued new proposed regulations that identify certain micro captive transactions – those making the 831(b) tax election – as “listed transactions” and other micro captive transactions as “transactions of interest”.

Earlier this month, the IRS announced plans to release the text of the 2024-2025 priority guidance, which includes plans to finalise its micro captive regulations.



“We thought they would finalise them at some point, but we were not sure if they had adjusted their timeline since last year, when they indicated they wanted to complete it by the end of 2023,” Roese told Captive Intelligence.

Some in the industry thought the IRS might have purposely been drawing out the process to cause doubt in the space, which has led to a number of micro captive closures.

“It seems like they are still pushing forward,” Roese added. “They’ve crossed off some significant priorities from their to-do list, which frees up resources to focus on this and move it forward.”

It is important to note that although the IRS has included micro captive regulation in its 2024-2025 priority guidance, it does not automatically mean the proposals will be finalised by 30 June 2025.

Chaz Lavelle, partner at Dentons, Bingham Greenebaum, said that some seem to be misinterpreting the guidance on this point.

“Some believe this indicates that the regulations will be finalised by 30 June, but I do not think that’s necessarily the case,” he said.

“It simply means they will continue to work on them. They might finish them tomorrow, or it could be after 30 June, at which point they would either include them in next year’s plan or decide not to proceed.”

It is also not yet certain how these proposals will be defined and whether it will be in line or materially different from the original proposals which drew strong criticism from the industry when first published.

“The industry submitted a substantial number of robust and well-researched comments,” Roese said.

“The IRS has the opportunity to consider these submissions and respond with acknowledgment, stating they agreed or reconsidered their position after discussion.”

However, Roese believes the likelihood of the IRS making large changes based on industry comments is quite small.

“When they put forward these proposed regulations, they have already conducted their internal research and developed their position,” she said.

“They typically solicit feedback from stakeholders within the IRS to reinforce their stance.

“Based on prior experience, once regulations are finalised, there usually are not significant changes made in response to the comments received.”