IRS consents to a captive insurer's revocation of its Section 831(b) election

Plain-English summary

A licensed captive insurance company had elected under Section 831(b) to be taxed only on its taxable investment income. It asked the IRS for consent to revoke that election beginning with a later taxable year. The company represented that it had no net operating losses and would not make another Section 831(b) election during the following five taxable years. The IRS explained that an 831(b) election continues for later qualifying years and can be revoked only with the Secretary's consent, a rule intended to prevent taxpayers from switching the election on and off to eliminate tax liability. The IRS granted consent effective for the requested year, conditioned on the company not making another 831(b) election for the next five years. It did not rule on whether the company's business constituted insurance, whether it qualified as an insurance company, or whether its earlier 831(b) treatment was proper.

Ruling snapshot

• Question: May a captive insurer revoke its Section 831(b) election effective for the requested taxable year?
• Outcome: approved (consent granted, conditioned on no new Section 831(b) election for the following five years)
• Key authorities: IRC §§ 831(a), 831(b), 834(a); Technical and Miscellaneous Revenue Act of 1988 § 1010(f)(1)

Full text (IRS public release)

Internal Revenue Service                                      Department of the Treasury
                                                              Washington, DC 20224

Number: 202448007                                             Third Party Communication: None
Release Date: 11/29/2024                                      Date of Communication: Not Applicable
Index Number: 831.00-00
                                                              Person To Contact:
                                                              ---------------------, ID No. -----------------
----------------------------                                  Telephone Number:
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------------------------------------------                    Refer Reply To:
------------------------------------------------              CC:FIP:B04
-----------------------                                       PLR-104907-24
----------------------------                                  Date:
                                                              August 27, 2024




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



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

This letter responds to Taxpayer’s request for a letter ruling revoking Taxpayer’s
election under section 831(b) of the Internal Revenue Code, effective January 1 of Year

2. This letter ruling is being issued electronically in accordance with section 7 of Rev.
Proc. 2024-1, 2024-1 I.R.B. 1.

                                                   FACTS

Taxpayer represents the following facts.

Taxpayer is a licensed captive insurance company formed in Year 1 in State. Taxpayer
is owned by Owner 1 and Owner 2. Taxpayer provides property and casualty-type
coverages to various insured entities. In Year 1, Taxpayer elected to be taxed only on
its taxable investment income under section 831(b). As of the date of Taxpayer’s
request, Taxpayer has no net operating losses. Taxpayer represents that it will not
make a future section 831(b) election through and including the five taxable years
following Year 2.

PLR-104907-24                                 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 a
flush paragraph following then-section 831(b)(2)(A)(ii) (now section 831(b)(2)(A)(iii)),
which now 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).

                                         RULING

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 five years
following Year 2.

PLR-104907-24                                            3

                                                 CAVEATS

The ruling contained in this letter is based upon information and representations
submitted by the taxpayer and accompanied by a penalties 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 for Year
1 or any subsequent year constitutes insurance, whether Taxpayer qualified as an
insurance company under section 831(c) for federal tax purposes for Year 1 or any
subsequent year, or whether Taxpayer was properly taxed under section 831(b) for
Year 1 or any subsequent year.

This ruling is directed only to the taxpayer 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 representatives.

                                               Sincerely,


                                               __________________________________
                                               Elizabeth M. Hill
                                               Assistant to the Branch Chief, Branch 4
                                               Office of the Associate Chief Counsel
                                               (Financial Institutions & Products)

cc: ------------------------

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