Micro-captive insurance disclosure statement deadline approaching

By Alistair M. Nevius

The deadline for filing Forms 8886, Reportable Transaction Disclosure Statement, to report micro-captive transactions is right around the corner: May 1. The disclosure statements originally had a deadline of Jan. 30, 2017, but in Notice 2017-8, issued in December 2016, the IRS extended the deadline to May 1, 2017. The extension applies to any taxpayer that is required to file a disclosure statement reporting a micro-captive transaction between Nov. 1, 2016, and May 1, 2017, under Regs. Sec. 1.6011-4(e)(1), which requires taxpayers to attach Form 8886 to their return for each tax year in which they participate in a reportable transaction.

The reporting requirement stems from the IRS’s designation of certain transactions involving captive insurance companies (micro-captive transactions) as transactions of interest in Notice 2016-66, issued in November 2016.

Under Regs. Sec.1.6011-4(e)(2)(i), taxpayers that have participated in a transaction that becomes a listed transaction or transaction of interest after their tax return is filed but before the end of the assessment limitation period for any year the taxpayer participated in the transaction must file a disclosure within 90 days after the date the transaction became a listed transaction or transaction of interest. For disclosures of micro-captive transactions, the 90-day deadline has been extended to 180 days.

Micro-captive transactions involve captive insurance companies that insure (or reinsure) the parent company’s risk, but either (1) the amount of the liabilities incurred by the captive insurance company for insured losses and claim administration expenses is less than 70% of premiums earned by the captive minus policyholder dividends paid by the captive, or (2) the captive insurance company directly or indirectly makes available as financing or otherwise conveys or agrees to make available or convey to the parent company or a related person, in a transaction that did not result in taxable income or gain to the recipient, any portion of the payments under the insurance contract.

Under Sec. 6707A, the penalty for failing to report a transaction of interest is 75% of the reduction in the tax reported on the income tax return as a result of participating in the transaction of interest, or that would result if the transaction were respected for federal tax purposes. The minimum penalty is $5,000 for individuals and $10,000 for other taxpayers. The maximum penalty is $10,000 for individuals and $50,000 for other taxpayers.

Alistair Nevius (Alistair.Nevius@aicpa-cima.com) is The Tax Adviser’s editor-in-chief, tax.

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