In a Notice issued last November, the Internal Revenue Service has deemed certain “microcaptive transactions” to be of interest to the organization and is mandating certain reporting procedures. “Captive” insurance is an insurance relationship between an insurer that accepts the risk of its owner or related party. The use of the prefix “micro” refers to the size of the company, and primarily whether the captive makes an election under 831(b) of the Internal Revenue Code.
The IRS has identified situations where it considers section 831(b) has been abused. It notes that, “In the abusive structure, unscrupulous promoters persuade closely held entities to participate in this scheme by assisting entities to create captive insurance companies onshore or offshore, drafting organizational documents and preparing initial filings to state insurance authorities and the IRS.”
Andy Weil, writing on behalf of the National Association of Dealer Counsel, says that, “Dealership counsel who know that their clients are involved in F&I programs are encouraged to alert their clients to the potential applicability of the Notice and have them check with their tax advisors about their obligations, if any.”
Weil’s full article can be found here.