Consent to revoke a captive insurer's § 831(b) small-company election

Plain-English summary

A small captive insurance company (a foreign captive that had elected to be treated
as a U.S. company under § 953(d)) had elected under § 831(b) to be taxed only on its
investment income rather than on its underwriting income. That election, once made,
can be revoked only with the IRS's consent. The company asked the IRS for consent to
revoke the § 831(b) election. The IRS granted consent, effective for the requested
year, on the condition that the company not make a new § 831(b) election for the five
following taxable years, a safeguard reflecting Congress's concern that the election
not be toggled on and off to avoid tax. The ruling does not decide whether the
company's arrangements are actually insurance or whether it qualified under § 831(b)
in any year.

Ruling snapshot

• Question: Will the IRS consent to a captive insurer revoking its § 831(b) election?
• Outcome: Approved (consent granted, conditioned on no re-election for 5 years)
• Key authorities: IRC §§ 831(a), 831(b), 953(d)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202214007 Third Party Communication: None
Release Date: 4/8/2022 Date of Communication: Not Applicable
Index Number: 831.00-00 Person To Contact:
-----------------, ID No. -----------------
----------------------- Telephone Number:
-------------------------- -------------------
----------------- Refer Reply To:
----------------------------------------- CC:FIP:B04
----------------------------------------- PLR-115831-21
------------------------------------------------------ Date:
January 11, 2022

Taxpayer = ---------------------------------------
Parent = ------------------------------------------------------------
Owner = -----------------------------------------------------
Country 1 = ----------------------
Year 1 = -------
Year 2 = -------
Year 3 = -------

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

This letter is in reply to your request for consent to revoke Taxpayer's election under
section 831(b) of the Internal Revenue Code, effective for the taxable year beginning
Year 2. This letter ruling is being issued electronically in accordance with section 6 of
Rev. Proc. 2020-29, 2020-21 I.R.B. 859. A paper copy will not be mailed.

                                                 FACTS

Taxpayer is a licensed captive insurance company formed in Year 1 in Country 1.
Parent is registered as an exempted segregated portfolio company in Country 1.
Taxpayer is a segregated portfolio of Parent, which has 100% voting control of
Taxpayer. The value and economic rights of Taxpayer's non-voting stock are owned by
Owner. In Year 1, Taxpayer elected to be treated as a domestic corporation for federal
income tax purpose under section 953(d) and elected to be taxed only on its taxable
investment income under section 831(b). Taxpayer represents that it has no net
operating losses. Taxpayer represents that it will not make a future section 831(b)
election for the 5 taxable years following Year 2 (i.e., through and including Year 3).
PLR-115831-21 2

                              REQUESTED RULING

Taxpayer requests a ruling granting consent to revoke its section 831(b) election
effective for Year 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 section 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
section 834(a)) of the company for the taxable year by the rates in section 11(b).

Section 831(b)(2)(A) provides 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) for the taxable year do not exceed $2,200,000
(adjusted for inflation), (ii) the company meets the diversification requirements laid out in
subparagraph (B) of section 831(b)(2), and (iii) the company elects the application of
section 831(b) (the alternative tax) for the taxable year.

Section 1010(f)(1) of the Technical and Miscellaneous Revenue Act of 1988 added the
flush paragraph following section 831(b)(2)(A)(ii) (now section 831(b)(2)(A)(iii)), which
states the following:

          The election under clause (iii) shall apply to the taxable year
          for which made and for all subsequent taxable years for
          which the requirements of the clauses (i) and (ii) are met.
          Such an election, once made, may be revoked only with the
          consent of the Secretary.

This clarification reflects Congress' intent that the election not be used as a means of
eliminating tax liability (e.g., by making the election only for the years the taxpayer does
not have net operating losses). S. Rep. No. 445, 100th Congress, 2d Sess. 127 (1988).

Taxpayer represents that it will not make a future section 831(b) election for the 5
taxable years following Year 2, through and including Year 3.

                                         RULING

PLR-115831-21 3

Consent is granted for Taxpayer to revoke its section 831(b) election effective for Year
2, provided Taxpayer does not make an election under section 831(b) for the 5 years
following Year 2 (i.e., through Year 3).

                                     CAVEATS

The ruling contained in this letter is based upon information and representations
submitted by the 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.

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 any part of Taxpayer's business
constitutes insurance, whether Taxpayer qualified as an insurance company for any
Year involved, or whether Taxpayer was properly taxed under section 831(b) for any
year.

This ruling is directed only to the taxpayer(s) requesting it. 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 a power of attorney on file in this office, a copy of this ruling is being
furnished to your authorized representative.

                                               Sincerely,



                                               John E. Glover
                                               Senior Counsel, Branch 4
                                               Associate Chief Counsel
                                               (Financial Institutions and Products)

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