Presenting a live 90-minute webinar with interactive Q&A IRC 831(b) Micro-Captives After the PATH Act: Meeting New Diversification Requirements and Avoiding IRS Scrutiny TUESDAY, JUNE 21, 2016 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: F . Hale Stewart, Owner , The Law Office of Hale Stewart , Houston The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 . NOTE: If you are seeking CPE credit, you must listen via your computer — phone listening is no longer permitted.
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Program Outline • Recent Cases • Securitas • Rent-a-Center • RVI • Legislative Changes • Dirty dozen listing and business purpose • Anti-avoidance law • Substance over form • Economic Substance • IRS broad enforcement capabilities. 4
Rent A Center • Captive formed late 2002 • Needed Deferred Tax Asset (DTA) to meet minimum capital requirement • DTA needed a parental guarantee • One parental guarantee in 2002-2003 • Different guarantee in 2004-2006 5
Securitas • Foreign parent (FP) owns • U.S. holding company (HC) • Irish Reinsurer (IR) • HC owned Vermont Captive (VC) & a tax exempt 501(c)(15) • VC ceded 100% of risk to IR • HC guaranteed of VC’s obligations 6
RVI PROCEDURAL BACKGROUND • Taxpayer issued “residual value insurance” policies – which insured against the risk that the value of the asset at the end of a lease would be lower than the expected value • IRS concluded that RVI’s policies were not insurance for tax purposes (primarily) because the insureds were purchasing protection against an investment risk, not an insurance risk 7
RVI FACT CTUAL BACKGROUND • Insureds included leasing companies, manufacturers, and financial institutions (lessors of assets, or providers of lease financing) • Assets (risk units) included passenger vehicles, commercial real estate, commercial equipment (over 2 million in total) • Policies included standard terminology and policy provisions adapted for this line of coverage • Taxpayer paid significant claims 8
RVI CT CTUAL BACKGROUND • Bermuda mono-line commercial insurer electing onshore tax treatment under IRC §953(d) • Policies Owned fully admitted subsidiary charted in Connecticut and admitted in most states • Policies were treated as insurance for state and Bermuda regulatory purposes and received excellent “insurance strength ratings” from rating agency (A.M. Best) 9
OPINION – INS INSURANCE RIS RISK • States have regulated insurance contracts that provide coverage against decline in the market value of assets for over 80 years 10
831(b) Legislative Changes • Starting in 2001, the estate tax credit began increasing. • This forced estate planning attorneys to broaden their offerings, leading them to start forming captives. • Ideally, the captive would perform 2 functions: risk mitigation and intra-generational wealth transfer. • However, the Service was concerned that the underlying subjective intent of these transactions was suspect, leading them to request legislative changes to the statute. 11
831(b) Legislative Changes • Insurance company = captive • de minimis = 2% • specified assets = parent company • specified holder = wife or child/children • Using the above substitution scheme, we arrive at the following language: • “( II) such captive does not meet the requirement of subclause (I) and no person who holds (directly or indirectly) an interest in such captive is a wife or child who holds (directly or indirectly) aggregate interests in such captive which constitute a percentage of the entire interests in such captive which is more than 2% percentage higher than the percentage of interests in the parent company with respect to such captive held (directly or indirectly) by such wife or child • While the language is still confusing, we can distill the section’s intent down to the following sentence: If the lineal descendants’ or wives captive ownership is greater than 2% of their ownership of the parent company, then the captive can’t make an IRC 831(b) election. 12
831(b) Legislative Changes • 1.) Father owns 100% of the parent company and captive. The captive can make the 831(b) election because no lineal descendants own the captive. • 2 .) Father owns’ 100% of the parent company; child/children/wives directly own 100% of the captive. The captive can’t make the IRC 831(b) election; the lineal descendant’s captive interest is greater than 2% of their interest in the parent company. • 3 .) Father owns’ 100% of the parent company; child/children/wives own 100% of the captive, but through a trust/family corporation. The captive can’t make an IRC 831(b) election; the statute applies to indirect and direct ownership. • 4.) Father owns 50% of parent company and the captive; child/children/wife directly or indirectly own 50% of the parent company and captive. The captive can make the IRC 831(b) election; lineal descendants’ own the same percentage of the captive that they do of the parent company 13
Program Outline • Recent Cases • Securitas • Rent-a-Center • RVI • Legislative Changes • Dirty dozen listing and business purpose • Anti-avoidance law • Substance over form • Economic Substance • IRS broad enforcement capabilities. 14
Recent Dirty Dozen Listing • From the DD listing: In the abusive structure, unscrupulous promoters, accountants, or wealth planners persuade the owners of closely held entities to participate in these schemes. • “abusive structure:” this implies there’s a non -abusive structure • “Accountants and wealth planners:” specifically mentioning professions. The implication is they are NOT in the insurance industry • “Persuade the owners:” there’s an outward effort to sell or market this idea • “closely held entities:” family companies • “scheme:” negative connotation; usually used with the adjective “Ponzi” 15
The Business Purpose Test • To show business purpose, we need to document: • there is a genuine multiple-party transaction • with economic substance that is • compelled or encouraged by business or regulatory realities, • that is imbued with tax-independent considerations, and • that is not shaped solely by tax-avoidance features to which meaningless labels are attached. • Frank Lyon Co. v. United States, 435 U.S. 561 (U.S. 1978) 16
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