Small insurer gets IRS consent to revoke its Section 831(b) election to avoid captive-insurance reporting

Plain-English summary

A small insurance company, formed as a risk retention group by a trade
association to insure its members, had elected under Section 831(b) to be
taxed only on its investment income rather than on its underwriting income,
a break available to certain small insurers. That election, once made, can
be revoked only with the IRS's consent. The company asked to revoke it,
effective for a later year, so it would no longer have to report as a
participant in a "transaction of interest" under Notice 2016-66 (the IRS
disclosure regime targeting certain micro-captive insurance arrangements).
The IRS granted consent to revoke, effective for the requested year, on the
condition that the company not re-elect Section 831(b) for any of the next
five years, which matches Congress's concern that the election not be
toggled on and off to dodge tax. The IRS expressed no opinion on whether the
company qualifies as an insurance company or was ever eligible for the
election, or on whether it participated in a transaction of interest. Small
captive insurers care because revoking an 831(b) election is one way to step
out of the heightened scrutiny and reporting that micro-captives now face.

Ruling snapshot

• Question: Will the IRS consent to a small insurer's revocation of its § 831(b) election?
• Outcome: Approved (consent granted, effective the requested year, contingent on no re-election for five years)
• Key authorities: IRC § 831(a), (b); Notice 2016-66 (modified by Notice 2017-8)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201918007 Third Party Communication: None
Release Date: 5/3/2019 Date of Communication: Not Applicable
Index Number: 831.00-00
Person To Contact:
---------- ----------, ID No. 1000219333
---------- Telephone Number:
---------- ----------
---------- Refer Reply To:
---------- CC:FIP:B04
PLR-121062-18
Date:
December 18, 2018

Taxpayer = ----------
Owner = ----------
----------
State = ----------
Year 1 = ----------
Year 2 = ----------
Year 3 = ----------

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

This is in response to the letter submitted by your authorized representatives, dated
May 31, 2018 requesting a ruling granting consent to revoke Taxpayer’s election under
§ 831(b) of the Internal Revenue Code.

                                                 FACTS

Taxpayer was incorporated by Owner, a trade association, as a risk retention group
under the law of State in Year 1. Taxpayer issues liability insurance to Owner’s
members. With its Year 2 federal income tax return, Taxpayer elected to be taxed on
only its investment income pursuant to § 831(b)(2)(A) and § 301.9100-8 of the
Procedure and Administration Regulations. Taxpayer now wishes to revoke this
election, to avoid reporting as a “transaction of interest” under Notice 2016-66, 2016-47
I.R.B. 745, modified by Notice 2017-8, 2017-3 I.R.B. 423, effective for Year 3.

Taxpayer represents that it is not requesting to revoke the election as a means of
eliminating tax liability, and that it will not make another election pursuant to
§ 831(b)(2)(A) for any of the first five taxable years following the year to which the
requested revocation applies, i.e., Year 3.
PLR-121062-18 2

                              LAW AND ANALYSIS

Section 831(a) imposes a tax for each taxable year on the taxable income of every
insurance company other than a life insurance company.

Section 831(b) provides an alternative tax to the tax imposed by § 831(a) for certain
insurance companies. The alternative tax for these companies is a tax computed for
each year by multiplying the taxable investment income (defined in § 834) of the
company for the taxable year by the rates imposed by § 11(b).

At the time Taxpayer elected to be taxed under § 831(b)(2)(A), § 831(b)(2)(A) provided
that the alternative tax applies to every insurance company other than a life insurance
company if (i) the company’s net written premiums (or, if greater, direct written
premiums) did not exceed $1,200,000, and (ii) the company elects the application of the
§ 831(b) alternative tax for the taxable year. (The ceiling on premiums was amended
for taxable years beginning after December 31, 2016, by § 333 of the Protecting
Americans from Tax Hikes Act of 2015, P.L. 114-113, 129 Stat. 2242, 3106.)

Section 1010(f) of the Technical and Miscellaneous Revenue Act of 1988, P.L. 100-647,
102 Stat. 3342, 3454, added the flush language following § 831(b)(2)(A)(ii), which states
“The election under [§ 832(b)(2)(A)(ii)] shall apply to the taxable year for which made
and for all subsequent taxable years for which the requirements of [§ 832(b)(2)(A)(i)] are
met. Such election, once made, may be revoked only with the consent of the
Secretary.” This clarification reflects Congress’s intent that the election not be used as
a means of eliminating tax liability (e.g., by making the election only for years the
taxpayer does not have net operating losses). S. Rep. No. 445, 100th Congress, 2d
Sess. 127 (1988). Section 831(b)(3) provides that net operating losses cannot be
carried to or from taxable years for which § 831(a) did not apply.

Here, Taxpayer, having made the election to be taxed under the alternative tax of §
831(b) wishes consent to revoke that election. Taxpayer represents it will it will not
make another election pursuant to § 831(b) for any of the first five taxable years
following the year to which the requested revocation applies, i.e., Year 3.

                                     RULING

Consent to the revocation of Taxpayer’s § 831(b) election is given to be effective for the
Year 3 tax year provided Taxpayer does not make an election under § 831(b) for any of
the first five taxable years following Year 3.

The ruling contained in this letter is based on 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 material submitted in support of
the request for ruling and it is subject to verification on examination.
PLR-121062-18 3

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter, including, but not limited to, whether Taxpayer qualifies as an insurance
company under § 831(c), whether Taxpayer was eligible to be taxed under § 831(b), or
whether Taxpayer is or has been a participant in a transaction of interest.

This ruling is directed only to Taxpayer. Section 6110(k)(3) provides that it may not be
used or cited as precedent. A copy of this letter must be attached to any federal income
tax return to which it is relevant.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.

                                   Sincerely,



                                   Rebecca L. Baxter
                                   Senior Technician Reviewer, Branch 4
                                   Office of Associate Chief Counsel
                                   (Financial Institutions & Products)