The IRS is biding its time by taking on micro-captives and will eventually refocus on captives not taking the 831(b) election, says The 831(b) Institute
Captive Review reported earlier this year that Nevada had experienced captives shutting down in 2023, but the state may see as many as 50 of them reopen in the future if the Internal Revenue Service (IRS) forgos adopting the proposed regulations on micro-captives.
The president of The 831(b) Institute, Dustin Carlson, told Captive Review: “The data coming out of Nevada is clear evidence that the IRS is getting the results it’s looking for.”
He argues that the IRS is simply biding its time by taking on micro-captives and will eventually refocus on captives not taking the 831(b) election.
“What we’re seeing here is the IRS playing the long game. They don’t properly understand captive insurance, and as a result, they don’t like captive insurance. They see micro-captives as an easy target right now, but some day they could turn their energy back towards everyone else.”
In two 2014 Tax Court cases, Rent-A-Center, Inc. v Comm’r and Securitas Holdings, Inc. v Comm’r, the IRS tried to prove captive insurance is not insurance under a theory known as the economic family doctrine.
The US Tax Court ruled against the IRS, with the agency losing both cases in landmark outcomes for the captive industry.
However, many captive professionals are concerned that the agency continues to believe captive insurance is not real insurance.
Captive Review spoke with Matthew Queen, attorney and 831(b) Institute advisor, about the future of micro-captives and how they could impact larger captive arrangements.
“The IRS clearly lost in the Rent-A-Center and Securitas Holdings cases. However, the Service continues to win cases against captives that have supposedly failed to properly distribute their risk. The argument seems to be that the only captives with sufficient risk distribution are those insuring risks equal to or greater than Rent-A-Center’s, because that’s where the Tax Court drew the line,” Queen said.
“That is a ridiculous and arbitrary standard — even law schools and insurance professionals can’t provide you with a clear list of criteria for what risk distribution is.”
Queen argues that if this standard continues to gain traction, many midmarket companies might end up being completely excluded from participating in captive insurance.
“What about a captive writing workers’ compensation policies for 500 employees, or a doctor’s office with $3 million in premiums for medical malpractice? They wouldn’t be making the 831(b) election, but the IRS could still successfully argue they have not properly distributed their risk.”
In Queen’s view, this is evidence of an IRS plan to build a web of case law against those taking the 831(b) election, then use it as a foundation for a renewed campaign against captive insurance more broadly.
“If we don’t get some clarification on this issue from Congress soon, the IRS might end up taking down even large captives with some of the case law they’re accumulating right now.
“Ultimately, the 5,000 or so largest companies in the country could be the only ones allowed to operate captives if they’re the only ones the IRS considers having met this arbitrary risk distribution standard,” he concluded.
