As we previously told you, on January 14, 2025, the IRS issued final regulations identifying certain 831(b) captives as “listed transactions” or “transactions of interest”. The regulations replaced Notice 2016-66, which had identified certain 831(b) captives as “transactions of interest” and imposed a reporting requirement on captives and their insureds and the owners of the captives and the insureds. The notice is available here.
In 2022, Notice 2016-66 was found by the United States District Court for the Eastern District of Tennessee to be invalid. The Court held that the IRS had violated the Administrative Procedure Act (APA) when it issued Notice 2016-66 by failing to follow the notice and comment requirements of the APA. In addition, the Court found that Notice 2016-66 was “arbitrary and capricious”. As a result, the Court issued an injunction against enforcement of the reporting requirements of Notice 2016-66.
The invalidation of Notice 2016-66 by the Court also meant that the finding by the IRS that certain 831(b) captives were “transactions of interest” was also invalidated. That means that the final regulations published by the IRS on January 14, 2025, constitutes a new finding by the IRS that certain 831(b) captives are “listed transactions” or “transactions of interest”. Further, the finding does not apply only to new captives formed after January 14, 2025, but also to existing captives formed prior to that date.
Certain 831(b) captives formed prior to January 14, 2025, are referred to as either “Later Identified Micro-captive Listed Transactions” or “Later Identified Micro-captive Transactions of Interest”. In either case, an existing 831(b) captive falling within either definition was required to file amended returns for open tax years and attach a Form 8886 to the returns. In addition, the Form 8886 was required to filed with the IRS Office of Tax Shelter Analysis (OTSA). These forms were required to be filed within 90 days after the transaction was identified by the IRS or on or before April 14, 2025.
On April 11, 2025, the IRS issued Notice 2025-24, which extends the deadline for making these filings until July 31, 2025. This relief is provided only to 831(b) captives whose first tax return was filed before January 14, 2025. So, for example, a captive formed in 2024, is still required to attach a Form 8886 to its 2024 return and file the Form 8886 with OTSA by the due date of its tax return. However, a new captive can get similar relief by filing for an extension.
The final regulations are the subject of two lawsuits recently filed. Each lawsuit has asked the respective court to declare that the final regulations are also invalid and to enjoin enforcement of the reporting requirements. We will keep you posted as those lawsuits progress.
For questions about Captive Insurance, contact our office at 239-298-8210 or send a message here.
