Our friends at Chamberlain Hrdlicka Law have been busy this year, particularly in the aftermath of the Avrahami Court Case and the passage of the Consolidated Appropriations Act (CAA). Phil Karter, JD, Scott Kirkpatrick, JD and Christopher Steele, JD have recently co-authored an article published in FC&S LEGAL: The Insurance Coverage Law Information Center.
The Avrahami Tax Court Case (2017) and the PATH ACT in 2015 and CAA in 2018 provide “sign posts” for small captive insurance companies to follow.
According to their article, the Avrahami Case “provided taxpayers much-needed judicial guidance on the proper use of Section 831(b) that should help navigate around the potential pitfalls of small captive transactions more successfully.
Some of those sign posts are as follows…
The captive arrangement is characterized by:
“a solid non-tax business purpose behind the issuance of each policy”
“commercially reasonable policy terms”
“defensible risk premiums”
“appropriate claims review and payment procedures”
“sufficient liquidity in the captive to pay claims should they arise”
“avoid[ing] the appearance of self-dealing through circular cash flow arrangements such as loan backs”
“adequate risk distribution”
Also, Congress clarified the “sign posts” of the PATH ACT with the passage of the CAA in March, 2018. This legislation clarifies the diversification requirements of the PATH ACT. For example, spouses may now own or share ownership in a captive that makes an 831(b) tax election. Also, the CAA clarifies the premium test, making it clear that an 80% risk distribution arrangement or pool would meet the diversification requirement to make an 831(b) election. As we have noted in the past, Congress has been and remains a fan of small captive insurance companies and the businesses that they protect.
According to the Chamberlain attorneys:
“With the passage of the CAA, Congress has again swung the small captive insurance company pendulum back in favor of the taxpayer, albeit slightly.”
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