Captive insurer received 90 days for a late Section 831(b) election

Plain-English summary

A captive insurer had filed property and casualty insurance company returns without electing the alternative tax available to qualifying small insurers under Section 831(b). Its accounting firm told an outside business manager that the election was available, but the manager's employee left and neither adviser discussed the election with the taxpayer. A later manager discovered the omission, and an attempted election for an earlier year was rejected because the refund-claim period had expired. The taxpayer sought relief for a later open year and represented that no hindsight or aggregate tax reduction was involved. The IRS granted 90 days to file the Section 831(b)(2)(A) election for that year. It did not decide whether the taxpayer qualified as an insurance company or was otherwise eligible for the election.

Ruling snapshot

• Question: Could the captive insurer make a late Section 831(b) election for small-insurance-company treatment?
• Outcome: Approved, with 90 days to file the election for the specified year.
• Key authorities: IRC § 831(b); Treas. Reg. §§ 301.9100-1, 301.9100-3, and 301.9100-8

Full text (IRS public release)

Internal Revenue Service                             Department of the Treasury
                                                     Washington, DC 20224

Number: 201825006                                    Third Party Communication: None
Release Date: 6/22/2018                              Date of Communication: Not Applicable
Index Number: 9100.22-00, 831.00-00
                                                     Person To Contact:
----------------------------------------------       ----------------------, ID No. ------------------
------------------------                             Telephone Number:
------------------------------------                 ----------------------
 --------------------------------                    Refer Reply To:
                                                     CC:FIP:B4
                                                     PLR-129357-17
                                                     Date:
                                                     March 23, 2018




Legend

Taxpayer                                         =     ---------------------------------------------------
                                                       ---------------------------
State A                                          =     ------------
Foreign Country B                                =     -----------------------
State C                                          =     ---------
Date M                                           =     ------------
Date N                                           =     --------------------
Date O                                           =     -------------------
Date P                                           =     -----------------
Date Q                                           =     ----------
Date R                                           =     ------------------
Individual Y                                     =     --------------------
Individual Z                                     =     ------------------------
Year 1                                           =     -------
Year 2                                           =     -------
Year 3                                           =     -------
Year 4                                           =     -------
Year 5                                           =     -------
Year 6                                           =     -------
Year 7                                           =     -------
Year 8                                           =     -------
Year 9                                           =     -------
External Business Manager                        =     -------------------------------------------
CPA Firm                                         =     ------------------------------
Consulting Firm                                  =     -----------------------------------
New External Business Manager                    =     ---------------------------------
PLR-129357-17                               2



Dear ---------------:

This letter is in response to Taxpayer’s request, pursuant to § 301.9100-3 of the
Procedure and Administration Regulations, for an extension of time to make the election
under § 831(b)(2)(A) of the Internal Revenue Code.

FACTS

Taxpayer was initially incorporated and licensed under the laws of State A on Date M of
Year 1. Effective Date N of Year 2 Taxpayer reincorporated as an insurance company
under the laws of Foreign Country B. Effective Date O of Year 7 Taxpayer became re-
domiciled in the United States and became a State C corporation. Taxpayer is licensed
as a captive insurance company under the laws of State C.

When Taxpayer was incorporated under the laws of Foreign County B, Taxpayer was
taxed as a domestic corporation pursuant to a § 953(d) election to be treated as a U.S.
entity. For Year 4 through Year 8, Taxpayer filed Forms 1120-PC, U.S. Property and
Casualty Insurance Company Income Tax Return. Since its initial incorporation as a
captive insurance company under the laws of State A until the present, Taxpayer has
not made a § 831(b)(2)(A) election to be taxed under the alternative tax for small
insurance companies.

From Year 2 to mid-Year 7, Taxpayer hired External Business Manager as its captive
insurance manager. External Business Manager, on behalf of Taxpayer, engaged CPA
Firm to provide tax provision and tax compliance services for Year 3 to Year 6, including
the preparation of Taxpayer’s U.S. federal income tax returns on Forms 1120-PC. On
Date P of Year 7 in a communication transmitting Taxpayer’s tax provision work papers
for Year 6 to External Business Manager, Individual Y, an employee of CPA Firm,
informed Individual Z an employee of External Business Manager that Taxpayer was
eligible to make the election under § 831(b)(2)(A). Individual Y stated that it was clear
that Taxpayer qualified under § 831(b) as a small insurance company, and as a result
that Taxpayer could make an election to be taxed solely on its investment income. In a
follow-up correspondence on Date Q of Year 7 Individual Y again informed Individual Z
about the election, that Taxpayer was now in a position to make the § 831(b)(2)(A)
election. Individual Z, however, left the employ of External Business Manager prior to
the filing of Taxpayer’s Form 1120-PC for the calendar Year 6 and the question of
whether or not to make the election under § 831(b)(2)(A) was dropped. Taxpayer
represents that at no time did CPA Firm or External Business Manager discuss the
election under § 831(b)(2)(A) with Taxpayer.

In mid-Year 7, Consulting Firm was engaged by Taxpayer and External Business
Manager was replaced by New External Business Manager. New External Business
PLR-129357-17                                 3

Manager reviewed Taxpayer’s federal income tax return for calendar Years 4, 5 and 6
and noted that Taxpayer was eligible to make the election under § 831(b)(2)(A). New
External Business Manager notified Consulting Firm and Consulting Firm, in turn,
brought the § 831(b)(2)(A) election to the attention of Taxpayer in early Year 8.

In Year 8, Taxpayer filed an amended Form 1120-PC for Year 4 to make an election
under § 831(b)(2)(A)(ii). The Service rejected the amended return because the period
of limitation on filing a claim for refund or credit under § 6511(a) had expired.

On Date R of Year 9, Taxpayer filed amended Forms 1120-PC for calendar Year 5 and
Year 6. On these amended returns, Taxpayer computed its U.S. federal income tax
liability consistent with the relief being sought in this request for ruling being granted
(that is, consistent with making a § 831(b)(2)(A)(ii) election effective for calendar Year 5
and thereafter).

Taxpayer represents that it qualifies as a property and casualty insurance company
under Part II of Subchapter L of the Internal Revenue Code and that it qualifies as a
company eligible to make the election under § 831(b)(2)(A)(ii) for Year 5. Additionally,
Taxpayer represents that upon granting of the requested extension, Taxpayer will not
have a lower tax liability in the aggregate for all taxable years affected by the election
than Taxpayer would have had if the election had been timely filed (taking into account
the time value of money) and Taxpayer is not seeking to alter a return position for which
an accuracy-related penalty has been or could be imposed under § 6662 at the time of
this request. Further, Taxpayer represents that it requested relief before the failure to
make the election was discovered by the Internal Revenue Service. Moreover,
Taxpayer represents that it is not using hindsight in requesting this relief.

LAW AND ANALYSIS

Section 831(a) provides that taxes, computed as provided in § 11, are imposed for each
taxable year on the taxable income of every insurance company other than a life
insurance company. However, § 831(b) allows certain small companies to elect to be
subject to tax on their taxable investment income only. The election applies to the
taxable year for which the company made it and, as long as the company continues to
qualify, for all subsequent taxable years unless revoked with the consent of the
Secretary.

The time and manner to make the § 831(b)(2)(A) election is prescribed by Treas. Reg.
§ 301.9100-8. Accordingly, the election under § 831(b) is a regulatory election. Treas.
Reg. § 301.9100-1(b). Pursuant to Treas. Reg. § 301.9100-8(a)(2), the election is to be
made by the due date (taking into account any extensions of time to file obtained by the
taxpayer) of the tax return for the first taxable year for which the election is effective by
attaching a statement to the tax return containing the information specified in Treas.
Reg. § 301.9100-8(a)(3).
PLR-129357-17                                  4


Under Treas. Reg. § 301.9100-1(c), the Commissioner may grant a reasonable
extension of time under the rules set forth in Treas. Reg. §§ 301.9100-2 and 301.9100-3
to make a regulatory or statutory election. Treas. Reg. § 301.9100-3(a) provides that a
request for relief will be granted when the taxpayer provides evidence to establish to the
satisfaction of the Commissioner that the taxpayer “acted reasonably and in good faith”
and that “the grant of relief will not prejudice the interests of the Government.”

Under Treas. Reg. § 301.9100-3(b)(1) a taxpayer is deemed to have acted reasonably
and in good faith if the taxpayer:

       (i) Requests relief under this section before the failure to make the regulatory
election is discovered by the Internal Revenue Service;

      (ii) Failed to make the election because of intervening events beyond the
taxpayer’s control;

       (iii) Failed to make the election because, after exercising reasonable diligence
(taking into account the taxpayer’s experience and complexity of the return or issue),
the taxpayer was unaware of the necessity for the election;

       (iv) Reasonably relied on the written advice of the Internal Revenue Service; or

      (v) Reasonably relied on a qualified tax professional, including a tax professional
employed by the taxpayer, and the tax professional failed to make, or advise the
taxpayer to make the election.

Under Treas. Reg. § 301.9100-3(b)(3), a taxpayer is deemed not to have acted
reasonably and in good faith if the taxpayer:

       (i) Seeks to alter a return position for which an accuracy-related penalty has been
or could be imposed under § 6662 at the time the taxpayer requests relief and the new
position requires or permits a regulatory election for which relief is requested;

      (ii) Was informed in all material respects of the required election and related tax
consequences, but chose not to file the election; or

       (iii) Uses hindsight in requesting relief.

The Commissioner will grant a reasonable extension of time to make a regulatory
election only when the interests of the Government will not be prejudiced by the
granting of relief. Treas. Reg. § 301.9100-3(c)(1).
PLR-129357-17                                 5

The interests of the Government are prejudiced if granting relief would result in a
taxpayer having a lower tax liability in the aggregate for all taxable years affected by the
election than the taxpayer would have had if the election had been timely made (taking
into account the time value of money). Treas. Reg. § 301.9100-3(c)(1).

Treas. Reg. § 301.9100-1(a) cautions that granting an extension of time to make an
election is not a determination that the taxpayer is otherwise eligible to make the
election.

Based solely on Taxpayer’s representations and the additional information required
under Treas. Reg. § 301.9100-3(e), Taxpayer qualifies for an extension of time to make
the election under § 831(b)(2)(A). Taxpayer is deemed to have acted in good faith, as
defined by Treas. Reg. § 301.9100-3(b), and the grant of relief will not prejudice the
interests of the Government.

RULING

Accordingly, under Treas. Reg. § 301.9100-3, Taxpayer is granted an extension of time
until 90 days following the date of this letter to make the election provided by § 831(b)
(2)(A) for the tax year ending on December 31 of Year 5. The election should be made
in a written statement filed with the appropriate service center. A copy of this letter
should be attached to the § 831(b) election.

CAVEATS

The ruling contained in this letter is based upon the information and representations
submitted by Taxpayer and accompanied by a penalty of perjury statement executed by
an appropriate party. This office has not verified any of the materials submitted in
support of the ruling request, and it is subject to verification on examination.

Except as provided above, no opinion is expressed or implied concerning the federal
income tax consequences of any other aspect of this or other transactions or item of
income of Taxpayer. Specifically no ruling is made as to whether Taxpayer qualifies as
an insurance company under § 831(c) and the granting of the extension under
§ 301.9100-1(a) should not be construed as a determination that Taxpayer is eligible to
make the election provided by § 831(b)(2)(A).

This ruling is directed only to the taxpayer that requested it. Section 6110(k)(3) provides
that this ruling may not be used or cited as precedent.
PLR-129357-17                                  6


In accordance with a power of attorney on file in this office, a copy of this letter is being
sent to your authorized representative.

                                        Sincerely,




                                        Alexis A. MacIvor
                                        Branch Chief, Branch 4
                                        Office of the Associate Chief Counsel
                                        (Financial Institutions & Products)




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