Micro-Captive Listed Transactions and Micro-Captive Transactions of Interest, 21547-21564 [2023-07315]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 88, Number 69 (Tuesday, April 11, 2023)]
[Proposed Rules]
[Pages 21547-21564]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-07315]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-109309-22]
RIN 1545-BQ44


Micro-Captive Listed Transactions and Micro-Captive Transactions 
of Interest

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: This document contains proposed regulations that identify 
transactions that are the same as, or substantially similar to, certain 
micro-captive transactions as listed transactions, a type of reportable 
transaction, and certain other micro-captive transactions as 
transactions of interest, another type of reportable transaction. 
Material advisors and certain participants in these listed transactions 
and transactions of interest are required to file disclosures with the 
IRS and are subject to penalties for failure to disclose. The proposed 
regulations affect participants in these transactions as well as 
material advisors. This document also provides notice of a public 
hearing on the proposed regulations.

DATES: Electronic or written comments must be received by June 12, 
2023. The public hearing on these proposed regulations is scheduled to 
be held by teleconference on July 19, 2023, at 10 a.m. ET. Requests to 
speak and outlines of topics to be discussed at the public hearing must 
be received by June 12, 2023. If no outlines are received by June 12, 
2023, the public hearing will be cancelled. Requests to attend the 
public hearing must be received by 5 p.m. ET on July 17, 2023. The 
telephonic public hearing will be made accessible to people with 
disabilities. Requests for special assistance during the telephonic 
hearing must be received by July 14, 2023.

[[Page 21548]]


ADDRESSES: Commenters are strongly encouraged to submit public comments 
electronically. Submit electronic submissions via the Federal 
eRulemaking Portal at https://www.regulations.gov (indicate IRS and 
REG-109309-22). Once submitted to the Federal eRulemaking Portal, 
comments cannot be edited or withdrawn. The Department of the Treasury 
(Treasury Department) and the IRS will publish any comments to the 
public docket. Send paper submissions to: CC:PA:LPD:PR (REG-109309-22), 
Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin 
Station, Washington, DC 20044.
    For those requesting to speak during the hearing, send an outline 
of topic submissions, electronically via the Federal eRulemaking Portal 
at https://www.regulations.gov (indicate IRS and REG-109309-22).
    Individuals who want to testify (by telephone) at the public 
hearing must send an email to [email protected] to receive the 
telephone number and access code for the hearing. The subject line of 
the email must contain the regulation number REG-109309-22 and the word 
TESTIFY. For example, the subject line may say: Request to TESTIFY at 
Hearing for REG-109309-22. The email should include a copy of the 
speaker's public comments and outline of discussion topics. Individuals 
who want to attend (by telephone) the public hearing must also send an 
email to [email protected] to receive the telephone number and 
access code for the hearing. The subject line of the email must contain 
the regulation number REG-109309-22 and the word ATTEND. For example, 
the subject line may say: Request to ATTEND hearing for REG-109309-22. 
To request special assistance during the telephonic hearing, contact 
the Publications and Regulations Branch of the Office of Associate 
Chief Counsel (Procedure and Administration) by sending an email to 
[email protected] (preferred) or by telephone at (202) 317-6901 
(not a toll-free number).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Elizabeth M. Hill of the Office of Associate Chief Counsel (Financial 
Institutions & Products), (202) 317-4458; concerning the submission of 
comments or the hearing, Vivian Hayes at (202) 317-6901 (not toll-free 
numbers) or by email at [email protected] (preferred).

SUPPLEMENTARY INFORMATION: 

Background

    This document contains proposed additions to 26 CFR part 1 (Income 
Tax Regulations) under section 6011 of the Internal Revenue Code (Code) 
regarding transactions identified as listed transactions and 
transactions of interest for purposes of section 6011.

I. Overview of the Reportable Transaction Regime

    Section 6011(a) generally provides that, when required by 
regulations prescribed by the Secretary of the Treasury or her delegate 
(Secretary), ``any person made liable for any tax imposed by this 
title, or with respect to the collection thereof, shall make a return 
or statement according to the forms and regulations prescribed by the 
Secretary. Every person required to make a return or statement shall 
include therein the information required by such forms or 
regulations.''
    On February 28, 2000, the Treasury Department and the IRS issued a 
series of temporary regulations (TD 8877; TD 8876; TD 8875) and cross-
referencing notices of proposed rulemaking (REG-103735-00; REG-110311-
98; REG-103736-00) under sections 6011, 6111, and 6112. The temporary 
regulations and cross-referencing notices of proposed rulemaking were 
published in the Federal Register (65 FR 11205, 65 FR 11269; 65 FR 
11215, 65 FR 11272; 65 FR 11211, 65 FR 11271) on March 2, 2000 (2000 
Temporary Regulations). The 2000 Temporary Regulations were modified 
several times before March 4, 2003, the date on which the Treasury 
Department and the IRS, after providing notice and opportunity for 
public comment and considering the comments received, published final 
regulations (TD 9046) in the Federal Register (68 FR 10161) under 
sections 6011, 6111, and 6112 (2003 Final Regulations). The 2000 
Temporary Regulations and 2003 Final Regulations consistently provided 
that reportable transactions include listed transactions and that a 
listed transaction is a transaction that is the same as or 
substantially similar to one of the types of transactions that the IRS 
has determined to be a tax avoidance transaction and has identified by 
notice, regulation, or other form of published guidance as a listed 
transaction.
    Following the 2003 promulgation of Sec.  1.6011-4, Congress passed 
the American Jobs Creation Act of 2004 (AJCA), Public Law 108-357, 118 
Stat. 1418 (October 22, 2004), which added sections 6707A, 6662A, and 
6501(c)(10) to the Code, and revised sections 6111, 6112, 6707, and 
6708 of the Code. See sections 811-812 and 814-817 of the AJCA. The 
AJCA's legislative history explains that Congress incorporated in the 
statute the method that the Treasury Department and the IRS had been 
using to identify reportable transactions, and provided incentives, via 
penalties, to encourage taxpayer compliance with the new disclosure 
reporting obligations. As the Committee on Ways and Means explained in 
its report accompanying H.R. 4520, which became the AJCA:

    The Committee believes that the best way to combat tax shelters 
is to be aware of them. The Treasury Department, using the tools 
available, issued regulations requiring disclosure of certain 
transactions and requiring organizers and promoters of tax-
engineered transactions to maintain customer lists and make these 
lists available to the IRS. Nevertheless, the Committee believes 
that additional legislation is needed to provide the Treasury 
Department with additional tools to assist its efforts to curtail 
abusive transactions. Moreover, the Committee believes that a 
penalty for failing to make the required disclosures, when the 
imposition of such penalty is not dependent on the tax treatment of 
the underlying transaction ultimately being sustained, will provide 
an additional incentive for taxpayers to satisfy their reporting 
obligations under the new disclosure provisions.

House Report 108-548(I), 108th Cong., 2nd Sess. 2004, at 261 (June 16, 
2004) (House Report).
    In Footnote 232 of the House Report, the Committee on Ways and 
Means notes that the statutory definitions of ``reportable 
transaction'' and ``listed transaction'' were intended to incorporate 
the pre-AJCA regulatory definitions while providing the Secretary with 
leeway to make changes to those definitions:

    The provision states that, except as provided in regulations, a 
listed transaction means a reportable transaction, which is the same 
as, or substantially similar to, a transaction specifically 
identified by the Secretary as a tax avoidance transaction for 
purposes of section 6011. For this purpose, it is expected that the 
definition of ``substantially similar'' will be the definition used 
in Treas. Reg. sec. 1.6011-4(c)(4). However, the Secretary may 
modify this definition (as well as the definitions of ``listed 
transaction'' and ``reportable transactions'') as appropriate.

Id. at 261 n.232.
    Section 6707A(c)(1) defines a ``reportable transaction'' as ``any 
transaction with respect to which information is required to be 
included with a return or statement because, as determined under 
regulations prescribed under section 6011, such transaction is of a 
type which the Secretary determines as having a potential for tax 
avoidance or evasion.'' A ``listed transaction'' is defined by section 
6707A(c)(2) as ``a reportable

[[Page 21549]]

transaction which is the same as, or substantially similar to, a 
transaction specifically identified by the Secretary as a tax avoidance 
transaction for purposes of section 6011.''
    Section 6111(a), as revised by the AJCA, provides that each 
material advisor with respect to any reportable transaction must make a 
return setting forth (1) information identifying and describing the 
transaction, (2) information describing any potential tax benefits 
expected to result from the transaction, and (3) such other information 
as the Secretary may prescribe. Such return must be filed not later 
than the date specified by the Secretary. Section 6111(b)(2) provides 
that a reportable transaction has the meaning given to such term by 
section 6707A(c).
    Section 6112(a), as revised by the AJCA, provides that each 
material advisor with respect to any reportable transaction (as defined 
in section 6707A(c)) must (whether or not required to file a return 
under section 6111 with respect to such transaction) maintain a list 
(1) identifying each person with respect to whom such advisor acted as 
a material advisor, and (2) containing such other information as the 
Secretary may by regulations require.
    On November 2, 2006, the Treasury Department and the IRS published 
a notice of proposed rulemaking (REG-103038-05) in the Federal Register 
(71 FR 64488) under section 6011 (November 2006 Transaction of Interest 
(TOI) Regulations) proposing to add a new category of reportable 
transaction requiring disclosure under section 6011. The preamble to 
the November 2006 TOI Regulations (71 FR 64488) explains that these 
transactions, referred to as transactions of interest, are transactions 
that the Treasury Department and the IRS believe have the potential for 
tax avoidance or evasion, but for which the Treasury Department and the 
IRS lack enough information to determine whether the transaction should 
be identified as a listed transaction. The November 2006 TOI 
Regulations proposed that transactions of interest would be identified 
by the IRS via notice, regulation, or other form of published guidance.
    On the same date that the November 2006 TOI Regulations were 
published, the Treasury Department and the IRS also published two 
separate notices of proposed rulemaking (REG-103039-05; REG-103043-05) 
in the Federal Register (71 FR 64496, 71 FR 64501) under sections 6111 
and 6112, respectively (November 2006 Regulations). The November 2006 
Regulations proposed to modify the then-existing regulations relating 
to the disclosure of reportable transactions by material advisors under 
section 6111, and the list maintenance requirements of material 
advisors with respect to reportable transactions under section 6112, in 
part, to account for the changes made by the AJCA and, in part, to make 
corresponding updates to the material advisor rules to account for the 
treatment of transactions of interest as reportable transactions as 
proposed by the November 2006 TOI Regulations.
    After providing notice and opportunity for public comment and 
considering the comments received, on August 3, 2007, the Treasury 
Department and the IRS published the November 2006 Regulations and the 
November 2006 TOI Regulations as final regulations (TD 9350, TD 9351, 
and TD 9352) in the Federal Register (72 FR 43146, 72 FR 43157, and 72 
FR 43154) under sections 6011, 6111, and 6112.

II. Disclosure of Reportable Transactions by Participants and Penalties 
for Failure To Disclose

    Section 1.6011-4(a) provides that every taxpayer that has 
participated in a reportable transaction within the meaning of Sec.  
1.6011-4(b) and who is required to file a tax return must file a 
disclosure statement within the time prescribed in Sec.  1.6011-4(e).
    Sections 1.6011-4(d) and (e) provide that the disclosure 
statement--Form 8886, Reportable Transaction Disclosure Statement (or 
successor form)--must be attached to the taxpayer's tax return for each 
taxable year for which a taxpayer participates in a reportable 
transaction. A copy of the disclosure statement must be sent to IRS's 
Office of Tax Shelter Analysis (OTSA) at the same time that any 
disclosure statement is first filed by the taxpayer pertaining to a 
particular reportable transaction.
    Reportable transactions include listed transactions, confidential 
transactions, transactions with contractual protection, loss 
transactions, and transactions of interest. See Sec.  1.6011-4(b)(2) 
through (6). Consistent with the definitions previously provided in the 
2000 Temporary Regulations and later in the 2003 Final Regulations, as 
promulgated in 2007, Sec.  1.6011-4(b)(2) continues to define a 
``listed transaction'' as a transaction that is the same as or 
substantially similar to one of the types of transactions that the IRS 
has determined to be a tax avoidance transaction and identified by 
notice, regulation, or other form of published guidance as a listed 
transaction. Section 1.6011-4(b)(6) defines a ``transaction of 
interest'' as a transaction that is the same as or substantially 
similar to one of the types of transactions that the IRS has identified 
by notice, regulation, or other form of published guidance as a 
transaction of interest.
    Section 1.6011-4(c)(4) provides that a transaction is 
``substantially similar'' if it is expected to obtain the same or 
similar types of tax consequences and is either factually similar or 
based on the same or similar tax strategy. Receipt of an opinion 
regarding the tax consequences of the transaction is not relevant to 
the determination of whether the transaction is the same as or 
substantially similar to another transaction. Further, the term 
substantially similar must be broadly construed in favor of disclosure. 
For example, a transaction may be substantially similar to a listed 
transaction or a transaction of interest even though it may involve 
different entities or use different Code provisions.
    Section 1.6011-4(c)(3)(i)(A) provides that a taxpayer has 
participated in a listed transaction if the taxpayer's tax return 
reflects tax consequences or a tax strategy described in the published 
guidance that lists the transaction under Sec.  1.6011-4(b)(2). 
Published guidance also may identify other types or classes of persons 
that will be treated as participants in a listed transaction. Published 
guidance may identify types or classes of persons that will not be 
treated as participants in a listed transaction. Section 1.6011-
4(c)(3)(i)(E) provides that a taxpayer has participated in a 
transaction of interest if the taxpayer is one of the types or classes 
of persons identified as participants in the transaction in the 
published guidance describing the transaction of interest.
    Section 1.6011-4(e)(2)(i) provides that if a transaction becomes a 
listed transaction or a transaction of interest after the filing of a 
taxpayer's tax return reflecting the taxpayer's participation in the 
transaction and before the end of the period of limitations for 
assessment for any taxable year in which the taxpayer participated in 
the transaction, then a disclosure statement must be filed with OTSA 
within 90 calendar days after the date on which the transaction becomes 
a listed transaction or transaction of interest. This requirement 
extends to an amended return and exists regardless of whether the 
taxpayer participated in the transaction in the year the transaction 
became a listed transaction or transaction of interest. The 
Commissioner of Internal Revenue may also determine the time for 
disclosure of listed transactions and transactions of interest in the 
published guidance identifying the transaction.

[[Page 21550]]

    Participants required to disclose these transactions under Sec.  
1.6011-4 who fail to do so are subject to penalties under section 
6707A. Section 6707A(b) provides that the amount of the penalty is 75 
percent of the decrease in tax shown on the return as a result of the 
reportable transaction (or which would have resulted from such 
transaction if such transaction were respected for Federal tax 
purposes), subject to minimum and maximum penalty amounts. The minimum 
penalty amount is $5,000 in the case of a natural person and $10,000 in 
any other case. For listed transactions, the maximum penalty amount is 
$100,000 in the case of a natural person and $200,000 in any other 
case. For other reportable transactions, including transactions of 
interest, the maximum penalty is $10,000 in the case of a natural 
person and $50,000 in any other case.
    Additional penalties may also apply. In general, section 6662A 
imposes a 20 percent accuracy-related penalty on any understatement (as 
defined in section 6662A(b)(1)) attributable to an adequately disclosed 
reportable transaction. If the taxpayer had a requirement to disclose 
participation in the reportable transaction but did not adequately 
disclose the transaction in accordance with the regulations under 
section 6011, the taxpayer is subject to an increased penalty rate 
equal to 30 percent of the understatement. See section 6662A(c). 
Section 6662A(b)(2) provides that section 6662A applies to any item 
which is attributable to any listed transaction and any reportable 
transaction (other than a listed transaction) if a significant purpose 
of such transaction is the avoidance or evasion of Federal income tax.
    Participants required to disclose listed transactions who fail to 
do so are also subject to an extended period of limitations under 
section 6501(c)(10). That section provides that the time for assessment 
of any tax with respect to the transaction shall not expire before the 
date that is one year after the earlier of the date the participant 
discloses the transaction or the date a material advisor discloses the 
participation pursuant to a written request under section 
6112(b)(1)(A).

III. Disclosure of Reportable Transactions by Material Advisors and 
Penalties for Failure To Disclose

    Section 301.6111-3(a) of the Procedure and Administration 
Regulations provides that each material advisor with respect to any 
reportable transaction, as defined in Sec.  1.6011-4(b), must file a 
return as described in Sec.  301.6111-3(d) by the date described in 
Sec.  301.6111-3(e).
    Section 301.6111-3(b)(1) provides that a person is a material 
advisor with respect to a transaction if the person provides any 
material aid, assistance, or advice with respect to organizing, 
managing, promoting, selling, implementing, insuring, or carrying out 
any reportable transaction, and directly or indirectly derives gross 
income in excess of the threshold amount as defined in Sec.  301.6111-
3(b)(3) for the material aid, assistance, or advice. Under Sec.  
301.6111-3(b)(2)(i) and (ii), a person provides material aid, 
assistance, or advice if the person provides a tax statement, which is 
any statement (including another person's statement), oral or written, 
that relates to a tax aspect of a transaction that causes the 
transaction to be a reportable transaction as defined in Sec.  1.6011-
4(b)(2) through (7).
    Material advisors must disclose transactions on Form 8918, Material 
Advisor Disclosure Statement (or successor form), as provided in Sec.  
301.6111-3(d) and (e). Section 301.6111-3(e) provides that the material 
advisor's disclosure statement for a reportable transaction must be 
filed with OTSA by the last day of the month that follows the end of 
the calendar quarter in which the advisor becomes a material advisor 
with respect to a reportable transaction or in which the circumstances 
necessitating an amended disclosure statement occur. A person may 
become a material advisor with respect to transactions that are later 
identified as listed transactions or transactions of interest. See 
Sec.  301.6111-3(b)(4). The disclosure statement must be sent to OTSA 
at the address provided in the Instructions for Form 8918 (or successor 
form).
    Section 301.6111-3(d)(2) provides that the IRS will issue to a 
material advisor a reportable transaction number with respect to the 
disclosed reportable transaction. Receipt of a reportable transaction 
number does not indicate that the disclosure statement is complete, nor 
does it indicate that the transaction has been reviewed, examined, or 
approved by the IRS. Material advisors must provide the reportable 
transaction number to all taxpayers and material advisors for whom the 
material advisor acts as a material advisor as defined in Sec.  
301.6111-3(b). The reportable transaction number must be provided at 
the time the transaction is entered into, or, if the transaction is 
entered into prior to the material advisor receiving the reportable 
transaction number, within 60 calendar days from the date the 
reportable transaction number is mailed to the material advisor.
    Additionally, material advisors must prepare and maintain lists 
identifying each person with respect to whom the advisor acted as a 
material advisor with respect to the reportable transaction in 
accordance with Sec.  301.6112-1(b) and furnish such lists to the IRS 
in accordance with Sec.  301.6112-1(e).
    Section 6707(a) provides that a material advisor who fails to file 
a timely disclosure, or files an incomplete or false disclosure 
statement, is subject to a penalty. Pursuant to section 6707(b)(2), for 
listed transactions, the penalty is the greater of (A) $200,000, or (B) 
50 percent of the gross income derived by such person with respect to 
aid, assistance, or advice which is provided with respect to the listed 
transaction before the date the return is filed under section 6111. 
Pursuant to section 6707(b)(1), the penalty for other reportable 
transactions, including transactions of interest, is $50,000.
    A material advisor may also be subject to a penalty under section 
6708 for failing to maintain a list under section 6112(a) and failing 
to make the list available upon written request to the Secretary in 
accordance with section 6112(b) within 20 business days after the date 
of such request. Section 6708(a) provides that the penalty is $10,000 
per day for each day of the failure after the 20th day. However, no 
penalty will be imposed with respect to the failure on any day if such 
failure is due to reasonable cause.

IV. Micro-Captive Transactions and Notice 2016-66

    As enacted by section 1024 of the Tax Reform Act of 1986, Public 
Law 99-514, 100 Stat. 2085, 2405 (October 22, 1986), section 831(a) 
generally imposes tax on the taxable income (determined under the 
special rules for calculating taxable income of insurance companies in 
part II of subchapter L of chapter 1 of the Code) of every insurance 
company other than a life insurance company (nonlife insurance 
company), for each taxable year computed as provided in section 11 of 
the Code. However, certain small nonlife insurance companies may elect 
to be subject to the alternative tax imposed by section 831(b).
    Upon election by an eligible nonlife insurance company (eligible 
electing company) to be taxed under section 831(b), in lieu of the tax 
otherwise imposed by section 831(a), section 831(b) imposes tax on the 
company's income computed by multiplying the taxable investment income 
of the eligible electing company (determined under section 834 of the 
Code) for the

[[Page 21551]]

taxable year by the rates provided in section 11(b) of the Code. 
Premium income of a nonlife insurance company is included in taxable 
income under section 831(a), but not taxable investment income under 
section 834. Thus, an eligible electing company pays no tax on premium 
income for taxable years for which its election is in effect.
    Congress enacted section 333 of the Protecting Americans from Tax 
Hikes Act of 2015 (PATH Act), div. Q. of Public Law 114-113, 129 Stat. 
2242, 3040 (December 18, 2015), to both tighten and expand the 
requirements for qualifying under section 831(b), effective for taxable 
years beginning after December 31, 2016. As amended by the PATH Act, 
section 831(b) requires an eligible electing company to be an insurance 
company (within the meaning of section 816(a) of the Code) having net 
written premiums or, if greater, direct written premiums, for the 
taxable year not exceeding $2.2 million as adjusted for inflation (net 
written premium limitation) and to meet the diversification 
requirements of section 831(b)(2)(B). The last sentence of section 
831(b)(2)(A) provides that an election under section 831(b) applies to 
the taxable year for which it is made and all subsequent taxable years 
for which the net written premium limitation and the diversification 
requirements are met and may be revoked only with the Secretary's 
consent. In addition, section 831(d) requires every eligible electing 
company that has a section 831(b) election in effect to furnish to the 
Secretary ``at such time and in such manner as the Secretary shall 
prescribe such information for such taxable year as the Secretary may 
require with respect to'' the diversification requirements of section 
831(b)(2)(B).
    On November 21, 2016, the Treasury Department and the IRS published 
Notice 2016-66, 2016-47 I.R.B 745, which identified certain micro-
captive transactions as transactions of interest. On January 17, 2017, 
the IRS published Notice 2017-08, 2017-3 I.R.B. 423, which modified 
Notice 2016-66 by providing for an extension of time for participants 
and material advisors to file their disclosures.
    Notice 2016-66 alerted taxpayers and their representatives pursuant 
to Sec.  1.6011-4(b)(6) and for purposes of Sec.  1.6011-4(b)(6) and 
sections 6111 and 6112, that the Treasury Department and the IRS 
identified as transactions of interest certain micro-captive 
transactions in which a taxpayer attempts to reduce the aggregate 
taxable income of the taxpayer, related persons, or both, using 
contracts that the parties treat as insurance contracts and a related 
company that the parties treat as an insurance company. Notice 2016-66 
also alerted persons involved with the identified transactions that 
certain responsibilities may arise from their involvement.
    Notice 2016-66 describes the following micro-captive transaction as 
a transaction of interest: (1) a company that the parties treat as an 
insurance company (Captive) elects to exclude premiums from taxable 
income under section 831(b); (2) at least 20 percent of the voting 
power or value of the outstanding stock of Captive is directly or 
indirectly owned by the insured entity (Insured), owners of Insured, or 
persons related to Insured or its owners (20-percent relationship 
factor); and (3) either or both of the following apply: (i) Captive has 
at any time during a defined Computation Period (referred to as the 
Notice Computation Period) directly or indirectly made available as 
financing, or otherwise conveyed or agreed to make available or convey, 
to certain related persons in a transaction that did not result in 
taxable income or gain to the recipient any portion of the payments 
treated as premiums, such as through a guarantee, a loan, or other 
transfer of Captive's capital (financing factor), or (ii) the amount of 
liabilities incurred by Captive for insured losses and claim 
administration expenses during the Notice Computation Period is less 
than 70 percent of the amount equal to premiums earned by Captive 
during that period less policyholder dividends paid by Captive during 
that period (70-percent loss ratio factor).
    Notice 2016-66 defines the Notice Computation Period as the most 
recent five taxable years of Captive or, if Captive has been in 
existence for less than five taxable years, the entire period of 
Captive's existence. For purposes of the preceding sentence, if Captive 
has been in existence for less than five taxable years and Captive is a 
successor to one or more Captives created or availed of in connection 
with a transaction described in the notice, taxable years of such 
predecessor entities are treated as taxable years of Captive. A short 
taxable year is treated as a taxable year.
    Notice 2016-66 also provides that the arrangement is not treated as 
a transaction of interest if the micro-captive arrangement provides 
insurance for employee compensation or benefits and the arrangement is 
one for which the Employee Benefits Security Administration of the U.S. 
Department of Labor has issued a Prohibited Transaction Exemption. A 
Prohibited Transaction Exemption may be granted by the U.S. Department 
of Labor on an individual basis or may fall under the class exemption 
for captives. The Prohibited Transaction Exemption procedures are 
published as final regulations in the Federal Register (76 FR 66637). 
The Department of Labor's proposed amendments to the Prohibited 
Transaction Exemption procedures were published on March 15, 2022, in 
the Federal Register (87 FR 14722).
    Notice 2016-66 requires disclosure of the information specified in 
Sec.  1.6011-4(d) and the Instructions to Form 8886 (or successor 
form), which includes identifying and describing the transaction in 
sufficient detail for the IRS to be able to understand the tax 
structure of the reportable transaction and identity of all parties 
involved in the transaction. Notice 2016-66 provides that for all 
participants, describing the transaction in sufficient detail includes, 
but is not limited to, describing on Form 8886 (or successor form) when 
and how the taxpayer became aware of the transaction. The notice 
further provides that for Captive, describing the transaction in 
sufficient detail includes, but is not limited to, describing the 
following on Form 8886 (or successor form): (1) whether Captive is 
reporting because (i) the 70-percent loss ratio factor is met for the 
taxable year; (ii) the financing factor is met for the taxable year; or 
(iii) both (i) and (ii); (2) under what authority Captive is chartered; 
(3) all the type(s) of coverage provided by Captive during the year or 
years of participation (if disclosure pertains to multiple years); (4) 
how the amounts treated as premiums for coverage provided by Captive 
during the year or years of participation (if disclosure pertains to 
multiple years) were determined, including the name and contact 
information of any actuary or underwriter who assisted in these 
determinations; (5) any claims paid by Captive during the year or years 
of participation (if disclosure pertains to multiple years), and the 
amount of, and reason for, any reserves reported by Captive on the 
annual statement; and (6) the assets held by Captive during the year or 
years of participation (if disclosure pertains to multiple years).

V. Comments Submitted in Response to Notice 2016-66

    Comments submitted in response to Notice 2016-66 were carefully 
considered in the development of these proposed regulations. Although 
the Administrative Procedure Act (APA), 5 U.S.C. 551-559, does not 
require a response to those comments, the comments are described here 
in an effort to assist taxpayers in understanding the provisions of the

[[Page 21552]]

proposed regulations described in the Explanation of Provisions 
section.
    First, some commenters suggested that changes to the Form 1120-PC, 
U.S. Property and Casualty Insurance Company Income Tax Return, would 
be better suited to capture the information sought by Notice 2016-66. 
Other commenters indicated that the information sought could be readily 
obtained from the existing Forms 1120-PC being filed, so any additional 
reporting would be unnecessarily duplicative and burdensome. However, 
changes to the Form 1120-PC would at a minimum impact all nonlife 
insurance companies that make section 831(b) elections, not only 
participants in the micro-captive transactions described in the 
proposed regulations. Also, some of the requested information is not 
readily available from filed Forms 1120-PC, such as the descriptions of 
the types of coverages provided by a Captive and the name and contact 
information of any actuary or underwriter who assisted Captive in the 
determination of amounts treated as premiums. Additionally, limiting 
the collection of information to only those entities filing the Form 
1120-PC would be insufficient to gather relevant information, as 
information regarding Insureds and promoters of the transactions would 
not be included.
    Second, commenters also suggested that the reporting requirements 
under Notice 2016-66 are contrary to Congressional intent in enacting 
section 333 of the PATH Act, which, as noted earlier, effective for 
taxable years beginning after December 31, 2016, modified the section 
831(b) eligibility rules for a property and casualty insurance company 
to elect to be taxed only on taxable investment income. The provision 
increased the limit on net written premiums (or, if greater, direct 
written premiums) from $1,200,000 to $2,200,000 and indexed that amount 
for inflation. The provision also added diversification requirements to 
the eligibility rules. However, nothing in the statutory language or 
legislative history of the PATH Act suggests that Congress intended to 
provide the benefits of section 831(b) to companies that do not qualify 
as insurance companies for Federal income tax purposes. As exemplified 
by the transactions described in Avrahami v. Commissioner, 149 T.C. 144 
(2017), Syzygy Insurance Co., Inc. v. Commissioner, T.C. Memo. 2019-34, 
and Caylor Land & Development, Inc. v. Commissioner, T.C. Memo. 2021-
30, some companies claiming the benefits of section 831(b) do not meet 
these basic eligibility requirements for such treatment. See also 
Reserve Mechanical Corp. v. Commissioner, 34 F.4th 881 (10th Cir. 2022) 
(concluding company filing as a tax-exempt entity under section 
501(c)(15) did not qualify as an insurance company for Federal income 
tax purposes using similar analysis). The proposed regulations, like 
Notice 2016-66, would apply to entities that claim the benefits of 
section 831(b) when certain factors indicate that they do not or may 
not qualify as insurance companies for Federal income tax purposes.
    Third, other commenters indicated that the reporting requirements 
were unduly burdensome, as well as duplicative, because the information 
sought could be readily obtained from a smaller subgroup of the 
participants in a transaction. However, the reporting and recordkeeping 
required for reportable transactions from each participant ensure that 
the Service can identify all of the participants of a particular 
transaction and that all participants are aware of their participation 
in a reportable transaction. Nevertheless, the proposed regulations 
significantly narrow the information sought from participants compared 
to that required by Notice 2016-66 and provide a disclosure safe harbor 
to a significant number of participants, thereby reducing the burden in 
reporting to the maximum extent consistent with sound tax 
administration. See proposed Sec.  1.6011-10(e)(2) and (f) and proposed 
Sec.  1.6011-11(e)(2) and (f).
    Fourth, additional commenters on Notice 2016-66 expressed concerns 
regarding certain arrangements in which a service provider, automobile 
dealer, lender, or retailer (Seller) sells insurance contracts to its 
customers in connection with the products or services being sold 
(Consumer Coverage). These commenters recommended that such Consumer 
Coverage arrangements be excepted from the disclosure requirements. The 
proposed regulations provide a limited exception for certain 
participants in Consumer Coverage arrangements. See proposed Sec. Sec.  
1.6011-10(d)(2) and 1.6011-11(d)(2).
    Finally, commenters argued that the 20-percent relationship factor 
and the 70-percent loss ratio factor described in sections 2.01(d) and 
2.01(e)(2) of Notice 2016-66, respectively, are overly broad and 
arbitrary. However, the Treasury Department and the IRS have determined 
that the factors are objective and reasonably determined based on 
existing statutory provisions and available industry data. The 20-
percent relationship factor was based on the diversification 
requirements established by section 333 of the PATH Act. While one part 
of the PATH Act diversification requirements is based on the percentage 
of premiums from related insureds, requiring that no more than 20 
percent of net written premiums (or if greater, direct written 
premiums) for a taxable year is attributable to any one policyholder, 
the 20-percent threshold in Notice 2016-66 is based on concentration of 
ownership of stock in a Captive when Insured or Insured's owner owns 
Captive's stock or is related to Captive's owner. Both requirements are 
based on a lack of diversification and identify a threshold at which a 
lack of diversification may facilitate abuse.
    Similarly, the 70-percent loss ratio factor was informed by, but is 
less burdensome than, the 85 percent medical loss ratio test enacted by 
Congress in section 833(c)(5) of the Code for Blue Cross and Blue 
Shield organizations and other health insurers that are entitled to 
certain tax benefits that are not available to other nonlife insurance 
companies, as well as the medical loss ratio computed under section 
2718(b) of the Public Health Service Act, 42 U.S.C. 300gg-18. The loss 
ratio factor in Notice 2016-66 compares claims and expenses to premiums 
charged in a manner similar to the medical loss ratio test in section 
833(c)(5) of the Code and the medical loss ratio computed under section 
2718(b) of the Public Health Service Act. However, the medical loss 
ratio has a narrower focus than the Notice 2016-66 loss ratio factor 
and is computed as a percentage of the total premium revenue (excluding 
Federal and State taxes and licensing or regulatory fees) an issuer 
expends (1) on reimbursement for clinical services provided to 
enrollees under such coverage and (2) for activities that improve 
health care quality of enrollees.
    The Treasury Department and IRS also considered data from the 
National Association of Insurance Commissioners (NAIC) in determining 
the applicable loss ratio factor. NAIC, in its 2021 Annual Property & 
Casualty and Title Insurance Industries Report (2021 NAIC P&C Report), 
indicated that annual loss ratios for property and casualty companies 
averaged 72.5 percent for that year. See Insurance Industry Snapshots 
and Analysis Reports ((July 21, 2022), https://content.naic.org/cipr_topics/topic_insurance_industry_snapshots_and_analysis_reports.htm 
(last visited April 3, 2023). The 2021 NAIC P&C Report is ``produced 
from insurer statutory filings and represent[s] approximately 99% of 
all insurers expected to file the NAIC Financial Data Repository.'' Id. 
The single-year average

[[Page 21553]]

loss ratio for property and casualty companies ranged between 67.2 and 
76.2 percent per year from 2012 to 2021. See U.S. Property & Casualty 
and Title Insurance Industries--2021 Full Year Results (2022), https://content.naic.org/sites/default/files/inline-files/2021%20Annual%20Property%20%26%20Casualty%20and%20Title%20Insurance%20Industry%20Report.pdf (last visited April 3, 2023).
    Commenters indicated that some Captives electing the alternative 
tax under section 831(b) have loss ratios that fall below the industry-
wide average during a given year of operation and suggested that the 
loss ratio in Notice 2016-66 is set too high. However, the average loss 
ratio reported by the NAIC and the loss ratio factor in Notice 2016-66 
are computed differently and are not directly comparable. First, the 
average loss ratio reported by the NAIC reflects the ratio of net 
losses incurred and loss expenses incurred to net premiums earned, 
without adjustment for policyholder dividends paid, whereas Captive's 
loss ratio factor under Notice 2016-66 subtracts policyholder dividends 
paid from premiums earned by Captive. This means that, for an entity 
that pays policyholder dividends, the loss ratio factor under Notice 
2016-66 would be higher than its NAIC loss ratio. Second, the loss 
ratio factor in Notice 2016-66 reflects the ratio of insured losses and 
claims administration expenses during the Notice Computation Period, 
which may be as long as five years. By contrast, the average loss ratio 
reported by the NAIC is a single-year average. Accordingly, even 
Captives electing the alternative tax under section 831(b) that have 
loss ratios that fall below the industry-wide average for property and 
casualty companies in any particular year may not have loss ratio 
factors that cause a transaction to be described in Notice 2016-66 or 
the proposed regulations. The Treasury Department and the IRS therefore 
view the average loss ratio data reported by the NAIC as supportive of 
the loss ratio factors provided in Notice 2016-66 and in these proposed 
regulations. See proposed Sec. Sec.  1.6011-10(c)(2) and 1.6011-11(c).
    Despite commenters' objections to the 20-percent relationship 
factor and 70-percent loss ratio factor, the commenters did not 
identify different factors or industry-wide standards for small 
insurers that would distinguish abusive from non-abusive transactions 
or provide examples of non-abusive transactions for which disclosure 
was required as a result of these factors. These objective factors in 
Notice 2016-66 have been effective in identifying transactions for 
which disclosure should be required and are reasonable given existing 
statutory provisions and available industry data.
    To better ensure non-abusive transactions are not required to be 
reported under the proposed regulations, however, the proposed 
regulations lower the loss ratio factor for both the micro-captive 
transactions identified in proposed Sec.  1.6011-10(a) as listed 
transactions (Micro-captive Listed Transactions) and the micro-captive 
transactions identified in proposed Sec.  1.6011-11(a) as transactions 
of interest (Micro-captive Transactions of Interest) from 70 percent to 
65 percent. See proposed Sec. Sec.  1.6011-10(c)(2) and 1.6011-11(c). 
Additionally, the computation period used to determine the loss ratio 
factor is extended from a Notice Computation Period of up to five 
taxable years to a computation period of up to nine taxable years 
(referred to as the Transaction of Interest Computation Period) for the 
Micro-captive Transaction of Interest. See proposed Sec.  1.6011-
11(b)(2). For the Micro-captive Listed Transaction, the computation 
period used to determine the loss ratio factor (referred to as the Loss 
Ratio Factor Computation Period) is ten taxable years. See proposed 
Sec.  1.6011-10(b)(2)(ii).
    For the foregoing reasons, the IRS intends to challenge the 
purported tax benefits from transactions identified in proposed Sec.  
1.6011-10(c) as listed transactions, and the IRS may challenge the 
purported tax benefits from transactions identified in proposed Sec.  
1.6011-11(c) as transactions of interest. The IRS may also challenge 
the purported tax benefits from these transactions based on the 
economic substance, business purpose, or other rules or doctrines if 
applicable based on the facts of a particular case.

VI. Purpose of Proposed Regulation

    On March 3, 2022, the Sixth Circuit issued an order in Mann 
Construction v. United States, 27 F.4th 1138, 1147 (6th Cir. 2022), 
holding that Notice 2007-83, 2007-2 C.B. 960, which identified certain 
trust arrangements claiming to be welfare benefit funds and involving 
cash value life insurance policies as listed transactions, violated the 
APA, because the notice was issued without following the notice-and-
comment procedures required by section 553 of the APA. The Sixth 
Circuit concluded that Congress did not clearly express an intent to 
override the notice-and-comment procedures required by section 553 of 
the APA when it enacted the AJCA. 27 F.4th at 1148. The Sixth Circuit 
reversed the decision of the district court, which held that Congress 
had authorized the IRS to identify listed transactions without notice 
and comment. See Mann Construction, Inc. v. United States, 539 
F.Supp.3d 745, 763 (E.D. Mich. 2021).
    In CIC Services, LLC v. IRS, the United States District Court for 
the Eastern District of Tennessee, which is located in the Sixth 
Circuit, viewed the analysis in Mann Construction as controlling and 
vacated Notice 2016-66, holding that the IRS failed to comply with the 
APA's notice-and-comment procedures. The Court also held that the IRS 
acted arbitrarily and capriciously based on the administrative record. 
CIC Services, LLC v. IRS, 2022 WL 985619 (E.D. Tenn. March 21, 2022), 
as modified by 2022 WL 2078036 (E.D. Tenn. June 2, 2022); see also 
Green Valley Investors, LLC, et al. v. Commissioner, 159 T.C. No. 5 
(Nov. 9, 2022) (relying on Mann Construction in holding that Notice 
2017-10, 2017-4 I.R.B. 544 (identifying certain syndicated conservation 
easements as listed transactions) was improperly issued because it was 
issued without following the APA's notice-and-comment procedures); 
Green Rock, LLC v. IRS, No. 2:21-cv-01320-ACA, 2023 U.S. Dist. LEXIS 
17670 (N.D. Ala. Feb. 2, 2023) (holding that notice and comment 
procedures were required before issuance of Notice 2017-10).
    In light of the decision by the district court in CIC Services, the 
IRS will not enforce the disclosure requirements or penalties that are 
dependent upon the procedural validity of Notice 2016-66. Thus, the 
Treasury Department and the IRS are issuing these proposed regulations 
to identify certain micro-captive transactions as Micro-captive 
Transactions of Interest. In addition, this document obsoletes Notice 
2016-66 (as modified by Notice 2017-08). The obsoletion of the notice, 
however, has no effect on the merits of the tax benefits claimed from 
the transactions themselves and related litigation, or income tax 
examinations and promoter investigations relating to micro-captive 
transactions.
    The Treasury Department and the IRS disagree with the Sixth 
Circuit's decision in Mann Construction and the Tax Court's decision in 
Green Valley and are continuing to defend the validity of notices 
identifying transactions as listed transactions in circuits other than 
the Sixth Circuit. However, to help allow for consistent enforcement 
throughout the nation, the Treasury Department and the IRS are 
proposing to identify certain other

[[Page 21554]]

micro-captive transactions as Micro-captive Listed Transactions by 
regulation.

Explanation of Provisions

A. Micro-Captive Listed Transactions and Micro-Captive Transactions of 
Interest

    This section generally describes the micro-captive transactions 
that are the focus of the proposed regulations and why the Micro-
captive Listed Transactions are abusive and the Micro-captive 
Transactions of Interest have the potential for abuse. This section 
also describes the proposed regulations identifying Micro-captive 
Listed Transactions and Micro-captive Transactions of Interest.
1. In General
    The Treasury Department and the IRS are aware of a micro-captive 
transaction, in which a taxpayer attempts to reduce the aggregate 
taxable income of the taxpayer, persons related to the taxpayer, or 
both, using contracts that the parties treat as insurance contracts and 
a related Captive. In some cases, Captive enters into a contract with a 
related entity that the parties treat as an insurance contract. In 
other cases, Captive and a related entity enter into separate contracts 
with one or more unrelated intermediaries. For example, the related 
entity and an intermediary may enter into a contract that the parties 
treat as an insurance contract, and Captive may then enter into a 
separate contract with the intermediary that the parties treat as a 
reinsurance contract covering the ``risks'' under the contract between 
the related entity and the intermediary. Each entity that makes 
payments to an intermediary or Captive under these contracts treats the 
payments as insurance premiums that are within the scope of Sec.  
1.162-1(a) and deducts the payments as ordinary and necessary business 
expenses under section 162. Captive treats the payments received from 
the related entity or intermediary under a contract treated as an 
insurance contract or reinsurance contract as premiums for insurance 
coverage.
    Captive asserts that it is taxable as a nonlife insurance company 
under the Code and, if it is not a domestic corporation, makes an 
election under section 953(d) of the Code to be treated as a domestic 
corporation for purposes of the Code. Captive makes an election under 
section 831(b) to be taxed only on taxable investment income (defined 
in section 834). Captive accordingly excludes from the computation of 
its taxable income the payments received from the related entity or 
intermediary treated as premiums. For each taxable year in which the 
micro-captive transaction is in effect, the transaction is structured 
so that Captive does not have net premiums written (or, if greater, 
direct premiums written) that exceed the statutory limit. For taxable 
years beginning after December 31, 2016, the statutory limit is 
$2,200,000, adjusted annually for inflation ($2,650,000 for taxable 
years beginning in 2023).
    Since the publication of Notice 2016-66, examinations of taxpayers 
and promoters and information received through disclosures filed in 
response to Notice 2016-66 have clarified the Treasury Department's and 
the IRS's understanding of micro-captive transactions, including the 
scope of participation. Further, in the three section 831(b) micro-
captive cases decided on their merits since the publication of Notice 
2016-66, the U.S. Tax Court held that the micro-captive transactions at 
issue did not meet the requirements for treatment as insurance for 
Federal income tax purposes. See Avrahami v. Commissioner, 149 T.C. at 
144; Syzygy v. Commissioner, T.C. Memo. 2019-34; and Caylor v. 
Commissioner, T.C. Memo. 2021-30; see also Reserve Mechanical Corp. v. 
Commissioner, 34 F.4th at 881 (concluding transactions entered into by 
company filing as a tax-exempt entity under section 501(c)(15) did not 
meet the requirements for treatment as insurance for Federal income tax 
purposes using similar analysis). Taking into account only the years in 
issue in these decisions, the information included in the Court's 
opinions indicates that the transactions at issue had the elements that 
would require disclosure under Notice 2016-66. Accordingly, the 
Treasury Department and the IRS have determined that certain micro-
captive transactions are abusive tax avoidance transactions and certain 
other micro-captive transactions have the potential for tax avoidance 
or evasion.
    As further discussed in sections B.1. through B.3. of this 
Explanation of Provisions, the Treasury Department and the IRS have 
determined that two categories of micro-captive transactions, described 
in proposed Sec.  1.6011-10(c)(1) and (c)(2), are tax avoidance 
transactions, and thus propose to identify such transactions as listed 
transactions. The transactions in both categories involve related 
parties, including a Captive, at least 20 percent of the voting power 
or the value of the outstanding stock or equity interest of which is 
owned, directly or indirectly, by an Insured, an Owner, or persons 
Related to an Insured or an Owner. See proposed Sec.  1.6011-
10(b)(1)(iii). The first category of these transactions is identified 
by the presence of a financing factor, described in proposed Sec.  
1.6011-10(c)(1). The second category of these transactions is 
identified by a loss ratio factor that falls below 65 percent based on 
a Loss Ratio Computation Period of ten taxable years, as described in 
proposed Sec.  1.6011-10(c)(2). The proposed regulations therefore 
identify transactions that are the same as, or substantially similar 
to, the Micro-captive Listed Transaction described in proposed Sec.  
1.6011-10(a) as listed transactions for purposes of Sec.  1.6011-4. As 
noted previously, a transaction is ``substantially similar'' if it is 
expected to obtain the same or similar types of tax consequences and is 
either factually similar or based on the same or similar tax strategy, 
even though it may involve different entities or use different Code 
provisions.
    As further discussed in section B.1. and B.3. of this Explanation 
of Provisions, the Treasury Department and the IRS have also determined 
that a third category of micro-captive transactions, described in 
proposed Sec.  1.6011-11(c), has a potential for tax avoidance or 
evasion, and thus propose to identify such transactions as transactions 
of interest. This category of micro-captive transactions also involves 
related parties as described in proposed Sec.  1.6011-10(b)(1)(iii) and 
is identified by the presence of a loss ratio factor that falls below 
65 percent over a shorter Transaction of Interest Computation Period, 
generally because Captives involved have been in operation for a 
shorter period of time. With respect to this third category of 
transactions, the Treasury Department and the IRS require more 
information to determine if the transactions are being used for tax 
avoidance or evasion. The proposed regulations therefore identify 
transactions that are the same as, or substantially similar to, the 
Micro-captive Transaction of Interest described in proposed Sec.  
1.6011-11(a) as transactions of interest for purposes of Sec.  1.6011-
4(b)(6).
2. Abuses
    In Micro-captive Listed Transactions and Micro-captive Transactions 
of Interest, related parties claim the Federal income tax benefits of 
treating the contracts as insurance (or reinsurance) contracts. Insured 
deducts premiums paid to Captive under section 162, while the related 
Captive excludes the premium income from its taxable income by electing 
under section 831(b)

[[Page 21555]]

to be taxed only on its taxable investment income.
    Neither the Code nor the regulations thereunder define the terms 
``insurance'' or ``insurance contract.'' The Supreme Court has 
explained that for an arrangement to constitute insurance for federal 
income tax purposes, both risk shifting and risk distribution must be 
present. Helvering v. Le Gierse, 312 U.S. 531 (1941). The risk 
transferred must be risk of economic loss. Allied Fidelity Corp. v. 
Commissioner, 572 F.2d 1190, 1193 (7th Cir. 1978). The risk must 
contemplate the fortuitous occurrence of a stated contingency, 
Commissioner v. Treganowen, 183 F.2d 288, 290-91 (2d Cir. 1950), and 
must not be merely an investment or business risk. Rev. Rul. 2007-17, 
2007-2 C.B. 127. In addition, the arrangement must constitute insurance 
in the commonly accepted sense. See, e.g., Rent-A-Center, Inc. v. 
Commissioner, 142 T.C. 1, 10-13 (2014).
    In many micro-captive transactions, however, the manner in which 
the contracts are interpreted, administered, and applied is 
inconsistent with arm's length transactions and sound business 
practices. Captive typically does not behave as an insurance company 
commonly would, indicating that Captive is not issuing insurance 
contracts and the transaction does not constitute insurance for Federal 
income tax purposes. For example, Captive may fail to adequately 
distribute risk or fail to employ actuarial techniques to establish 
premium rates that appropriately reflect the risk of loss and costs of 
conducting an insurance business. Captive may also use its premium 
income for purposes other than administering and paying claims under 
the contract(s), including routing funds that have not been taxed to 
the Insured or a person related to the Insured or its owners. A micro-
captive transaction may share other characteristics with the purported 
insurance transactions considered by the Tax Court in Avrahami, Syzygy, 
and Caylor, or with the transactions considered in other cases in which 
the courts determined the transactions were not insurance for Federal 
income tax purposes. See, e.g., Reserve Mechanical Corp. v. 
Commissioner, 34 F.4th 881 (10th Cir. 2022). The net effect of 
participating in this transaction is that the Insured claims a tax 
deduction for transferring amounts treated as premiums to Captive, 
which is owned by parties related to Insured, and Captive is not taxed 
on the corresponding income.
    If the transaction does not constitute insurance, Insured is not 
entitled to deduct under section 162 as a trade or business expense the 
amount treated as an insurance premium. In addition, if Captive does 
not actually provide insurance, it does not qualify as an insurance 
company and its elections to be taxed only on its taxable investment 
income under section 831(b) and to be treated as a domestic insurance 
company under section 953(d) are invalid.
    These proposed regulations inform taxpayers that participate in 
transactions described in proposed Sec. Sec.  1.6011-10(c) and 1.6011-
11(c), and substantially similar transactions, and persons who act as 
material advisors with respect to these transactions, and substantially 
similar transactions, that they must disclose in accordance with the 
rules provided in Sec.  1.6011-4(a) and section 6111(a), respectively. 
Material advisors must also maintain lists as required by section 6112.
    As previously noted, the IRS intends to challenge the claimed tax 
benefits from Micro-captive Listed Transactions, and may challenge the 
claimed tax benefits from Micro-captive Transactions of Interest. 
Examinations of these micro-captive transactions may result in 
adjustments including full disallowance of claimed micro-captive 
insurance premium deductions, inclusion in income of amounts received 
by Captive, imposition of withholding tax liability under section 1461 
of the Code for failing to deduct and withhold tax on payments made to 
a foreign Captive, imposition of a 20 percent or 40 percent penalty for 
lack of economic substance under section 6662(b)(6) or (i)(1) of the 
Code, which may not be avoided by a reasonable cause exception, and 
imposition of other applicable taxes and penalties.
3. Micro-Captive Listed Transactions
    Proposed Sec.  1.6011-10(a) provides that transactions that are the 
same as, or substantially similar to, transactions described in 
proposed Sec.  1.6011-10(c) are identified as listed transactions for 
purposes of Sec.  1.6011-4(b)(2), except as provided in proposed Sec.  
1.6011-10(d). Proposed Sec.  1.6011-10(b) provides definitions of terms 
used to describe Micro-captive Listed Transactions, including Captive, 
Financing Computation Period, Loss Ratio Computation Period, Contract, 
Insured, Intermediary, Recipient, and Related. In particular, Captive 
is defined as an entity that elects under section 831(b) to be taxed as 
an insurance company only on its taxable investment income; issues a 
Contract to an Insured, reinsures a Contract of an Insured issued by an 
Intermediary, or both; and has at least 20 percent of its assets or 
voting power or the value of its outstanding stock or equity interests 
directly or indirectly, individually or collectively, owned by an 
Insured, an Owner, or persons Related to an Insured or Owner. The term 
Related is defined in proposed Sec.  1.6011-10(b)(8) by reference to 
sections 267(b), 707(b), 2701(b)(2)(C), and 2704(c)(2). The definition 
incorporates the constructive ownership rules in those sections. 
Proposed Sec.  1.6011-10(b) also provides the rules for persons that 
hold derivatives and for the treatment of beneficiaries of trusts and 
estates. The treatment of beneficiaries of trusts in proposed Sec.  
1.6011-10(b) does not affect the application of Subpart E of Subchapter 
J of Chapter 1 of Subtitle A, which provides rules concerning when a 
grantor or another person is treated as the owner of a portion of that 
trust.
    A transaction is described in proposed Sec.  1.6011-10(c) if it is 
described in proposed Sec.  1.6011-10(c)(1), or (c)(2), or both. 
Proposed Sec.  1.6011-10(c)(1) describes transactions that involve a 
Captive that, at any time during the Financing Computation Period, 
directly or indirectly made available as financing or otherwise 
conveyed or agreed to make available or convey to a Recipient, in a 
transaction that did not result in taxable income or gain to the 
Recipient, any portion of the payments under the Contract, such as 
through a guarantee, a loan, or other transfer of Captive's capital, 
including such financings or conveyances made prior to the Financing 
Computation Period that remain outstanding as of the taxable year in 
which disclosure is required. Any amounts that a Captive made available 
as financing or otherwise conveyed or agreed to make available or 
convey to a Recipient are presumed to be portions of the payments under 
the Contract to the extent such amounts when conveyed or made available 
are in excess of Captive's cumulative after-tax net investment earnings 
minus any outstanding financings or conveyances. See section B.2. of 
this Explanation of Provisions. The Financing Computation Period is the 
most recent five taxable years of Captive, or all taxable years of 
Captive, if Captive has been in existence for less than five taxable 
years. For purposes of determining the Financing Computation Period, 
each short taxable year is a separate taxable year and taxable years of 
predecessor entities are treated as taxable years of Captive.
    Proposed Sec.  1.6011-10(c)(2) describes transactions that involve 
a Captive for which the amount of liabilities incurred for insured 
losses and claim administration expenses during a Loss

[[Page 21556]]

Ratio Computation Period is less than 65 percent of the amount equal to 
premiums earned by Captive during the Loss Ratio Computation Period 
less policyholder dividends paid by Captive during the Loss Ratio 
Computation Period. See section B.3. of this Explanation of Provisions. 
The Loss Ratio Computation Period is the most recent ten taxable years 
of Captive, each short taxable year is a separate taxable year, and the 
taxable years of predecessor entities are treated as taxable years of 
Captive. Proposed Sec.  1.6011-10(c)(2) does not apply to any Captive 
that has been in existence for less than ten taxable years, including 
taxable years of predecessor entities.
    Proposed Sec.  1.6011-10(d) provides that a transaction described 
in proposed Sec.  1.6011-10(c) is not classified as a listed 
transaction if the transaction (1) provides insurance for employee 
compensation or benefits and is one for which the Employee Benefits 
Security Administration of the U.S. Department of Labor has issued a 
Prohibited Transaction Exemption, or (2) is a Consumer Coverage 
reinsurance arrangement described in proposed Sec.  1.6011-10(d)(2). 
See section B.6. of this Explanation of Provisions.
    Proposed Sec.  1.6011-10(e)(1) provides the rules for determining 
who is a participant in a listed transaction described in proposed 
Sec.  1.6011-10(a). Proposed Sec.  1.6011-10(e)(2) provides a safe 
harbor from the disclosure requirements for certain persons. See 
section B.5. of this Explanation of Provisions.
    Proposed Sec.  1.6011-10(f) describes information that participants 
must provide to satisfy the disclosure requirements of Sec.  1.6011-
4(d). See section B.4. of this Explanation of Provisions.
    Proposed Sec.  1.6011-10(g) provides the applicability date for the 
proposed regulations.
4. Micro-Captive Transactions of Interest
    Proposed Sec.  1.6011-11(a) provides that transactions that are the 
same as, or substantially similar to, transactions described in 
proposed Sec.  1.6011-11(c) are identified as transactions of interest 
for purposes of Sec.  1.6011-4(b)(6), except as provided in proposed 
Sec.  1.6011-11(d). Proposed Sec.  1.6011-11(b) provides definitions of 
terms used to describe Micro-captive Transactions of Interest by 
reference to the relevant definitions in proposed Sec.  1.6011-10(b), 
except for the definition of the computation period. Proposed Sec.  
1.6011-11(b)(2) defines the Transaction of Interest Computation Period 
for Micro-captive Transactions of Interest as the most recent nine 
taxable years, or the entire period of Captive's existence if Captive 
has been in existence for less than nine taxable years. For this 
purpose, each short taxable year is a separate taxable year, and the 
taxable years of predecessor entities are treated as taxable years of 
Captive.
    A transaction is described in proposed Sec.  1.6011-11(c) if it 
involves the issuance of a Contract to an Insured by a Captive, or the 
reinsurance by a Captive of a Contract issued to an Insured by an 
Intermediary, and involves a Captive for which the amount of 
liabilities incurred for insured losses and claim administration 
expenses during the Transaction of Interest Computation Period is less 
than 65 percent of the amount equal to premiums earned by Captive 
during the Transaction of Interest Computation Period less policyholder 
dividends paid by Captive during the Transaction of Interest 
Computation Period. See section B.3. of this Explanation of Provisions.
    Proposed Sec.  1.6011-11(d) provides that a transaction described 
in proposed Sec.  1.6011-11(c) is not classified as a ``transaction of 
interest'' if the transaction (1) provides insurance for employee 
compensation or benefits and is one for which the Employee Benefits 
Security Administration of the U.S. Department of Labor has issued a 
Prohibited Transaction Exemption, or (2) is a Consumer Coverage 
reinsurance arrangement described in proposed Sec.  1.6011-11(d)(2). 
See section B.6. of this Explanation of Provisions. Additionally, 
proposed Sec.  1.6011-11(d)(3) provides that a transaction described in 
proposed Sec.  1.6011-11(c) is not classified as a ``transaction of 
interest'' if the transaction is identified as a ``listed transaction'' 
in proposed Sec.  1.6011-10(a). Under proposed Sec.  1.6011-11(d)(3), a 
transaction that would (but for that subsection) be identified as both 
a ``listed transaction'' under proposed Sec.  1.6011-10 and a 
``transaction of interest'' under proposed Sec.  1.6011-11, is 
identified as a ``listed transaction'' only, and participants in the 
transaction must disclose it as such. Material advisors that are 
uncertain about whether the transaction they are required to disclose 
should be reported as a Micro-captive Listed Transaction or as a Micro-
captive Transaction of Interest should disclose the transaction as a 
Micro-captive Listed Transaction, and will not be required to disclose 
the transaction a second time if it is determined later that the 
transaction should have been disclosed as a Micro-captive Transaction 
of Interest.
    Proposed Sec.  1.6011-11(e)(1) provides the rules for determining 
who is a participant in a transaction of interest described in proposed 
Sec.  1.6011-11(a). Proposed Sec.  1.6011-11(e)(2) provides a safe 
harbor from the disclosure requirements for certain persons. See 
section B.5. of this Explanation of Provisions.
    Proposed Sec.  1.6011-11(f) describes information that participants 
must provide to satisfy the disclosure requirements of Sec.  1.6011-
4(d) by reference to the information described in proposed Sec.  
1.6011-10(f). See section B.4. of this Explanation of Provisions.
    Proposed Sec.  1.6011-11(g) provides the applicability date for the 
proposed regulations.

B. Changes to Transaction Identified in Notice 2016-66

    Examinations of taxpayers and promoters and information received 
through disclosures filed in response to Notice 2016-66 have clarified 
the Treasury Department's and the IRS's understanding of micro-captive 
transactions, including the scope of participation. Based on such 
information, the Treasury Department and the IRS have determined that 
certain changes to the micro-captive transaction identified in Notice 
2016-66 are appropriate for the proposed regulations. The transactions 
described in proposed Sec.  1.6011-10 and proposed Sec.  1.6011-11 
share common features with the micro-captive transactions described in 
Notice 2016-66, but with modifications to the scope of the 20-percent 
relationship factor and the factors used to distinguish between listed 
transactions, transactions of interest, and transactions that are not 
reportable transactions under the proposed regulations.
1. Changes to the Definition of Captive
    The Treasury Department and the IRS are aware that some promoters 
have structured transactions in which Insureds, Owners, or persons 
Related to an Insured or an Owner do not have a direct or indirect 
interest in Captive's voting power or value of its outstanding stock or 
equity interests, but have a relationship with Captive that provides 
substantially similar benefits and risks. For example, Captive may 
issue various types of instruments representing rights to all or a 
portion of the assets held by Captive but not rights to the voting 
power or equity interests in Captive. All equity interests and voting 
stock are held by individuals or entities related to the promoter, not 
the taxpayers. The promoters thereby seek to avoid the 20 percent 
related interest in the voting

[[Page 21557]]

stock or equity interests in Captive necessary for a transaction to be 
described in Notice 2016-66. The proposed regulations expand the scope 
of the definition of Captive to clarify that derivatives and interests 
in the assets of Captive are taken into account. See proposed 
Sec. Sec.  1.6011-10(b)(1)(A)-(C) and 1.6011-11(b)(1).
2. Changes to the Financing Factor
    Transactions in which the financing factor is met based on a 
computation period of Captive's most recent five taxable years (or all 
years of Captive's existence if Captive has been in existence for less 
than five taxable years), referred to as the Financing Computation 
Period in the proposed regulations, are identified as transactions of 
interest in Notice 2016-66 but are identified as listed transactions in 
the proposed regulations. See proposed Sec.  1.6011-10(c)(1). Presence 
of the financing factor in related party micro-captive insurance 
transactions indicates tax avoidance and abuse of Captive's status as a 
section 831(b)-electing insurance company.
3. Changes to the Loss Ratio Factor and Computation Period
    Notice 2016-66 identifies transactions in which the loss ratio 
factor is less than 70 percent based on a Notice Computation Period of 
Captive's most recent five taxable years (or all years of Captive's 
existence if it has been in existence for less than five taxable years) 
as transactions of interest. The proposed regulations, however, 
identify as listed transactions those transactions in which the loss 
ratio factor is less than 65 percent for a computation period extended 
to Captive's most recent ten taxable years (referred to as the Loss 
Ratio Computation Period). See proposed Sec.  1.6011-10(c)(2). Further, 
the proposed regulations identify transactions in which the loss ratio 
factor is less than 65 percent based on a Transaction of Interest 
Computation Period consisting of Captive's most recent nine taxable 
years (or all years of Captive's existence if Captive has been in 
existence for less than nine taxable years) as transactions of 
interest. See proposed Sec.  1.6011-11(c).
    Regarding the reduction of the loss ratio threshold from 70 percent 
to 65 percent, the Treasury Department and the IRS are not aware of any 
non-abusive transactions for which disclosure was required under Notice 
2016-66 as a result of the 70-percent loss ratio factor set forth 
therein. Nevertheless, for purposes of the proposed regulations and to 
ensure that disclosure is not required for non-abusive transactions, 
the Treasury Department and the IRS are lowering the applicable loss 
ratio factor to 65 percent. See proposed Sec. Sec.  1.6011-10(c)(2) and 
1.6011-11(c). The loss ratio factor helps to identify transactions 
involving circumstances inconsistent with insurance in the commonly 
accepted sense, including excessive pricing of premiums and 
artificially low or nonexistent claims activity. The primary purpose of 
premium pricing is to ensure funds are available should a claim arise. 
The pricing of premiums should naturally reflect the economic reality 
of insurance operations. Pricing premiums far in excess of what is 
reasonably needed to fund insurance operations results in a lower loss 
ratio and is a strong indicator of abuse. Any Captives that would be 
required to disclose as a result of the loss ratio factor may consider 
paying policyholder dividends to increase the loss ratio and eliminate 
the need to disclose.
    The Treasury Department and the IRS are considering whether a 
combined ratio may be a better indicator for distinguishing abusive 
transactions from other captive transactions. A combined ratio is ``an 
indication of the profitability of an insurance company, calculated by 
adding the loss and expense ratios.'' NAIC Glossary of Insurance Terms, 
https://content.naic.org/consumer_glossary#C (last visited April 3, 
2023). The 2021 NAIC P&C Report provides that the combined ratios for 
property and casualty insurance companies ranged from 96 percent to 
103.9 percent over the ten-year period from 2012 to 2021, for a ten-
year average of approximately 99.5 percent. See U.S. Property & 
Casualty and Title Insurance Industries--2021 Full Year Results (2022), 
https://content.naic.org/sites/default/files/inline-files/2021%20Annual%20Property%20%26%20Casualty%20and%20Title%20Insurance%20Industry%20Report.pdf (last visited April 3, 2023). The combined ratio 
would compare losses incurred, plus loss adjustment expenses incurred 
and other underwriting expenses incurred by Captive during the relevant 
computation period to Captive's earned premiums, less policyholder 
dividends, for the relevant computation period. For this purpose, 
Captive's other underwriting expenses incurred would equal Captive's 
expenses incurred in carrying on an insurance business, other than loss 
adjustment expenses and investment-related expenses. Transactions in 
which Captive's combined ratio is less than a certain percentage for a 
Loss Ratio Computation Period of the most recent ten taxable years of 
Captive would be identified as listed transactions. Transactions in 
which Captive's combined ratio is less than a certain percentage for a 
Transaction of Interest Computation Period of the most recent nine 
taxable years (or all years of Captive's existence if it has been in 
existence for less than nine taxable years) would be identified as 
transactions of interest. The Treasury Department and the IRS invite 
comments on whether a combined ratio would better distinguish abusive 
transactions than the proposed loss ratio factor, and if so, what 
combined ratio threshold would be most effective in distinguishing 
abusive transactions.
    Regarding the computation periods for the loss ratio factor, the 
Treasury Department and the IRS understand that it is possible that a 
Captive with a loss history of fewer than ten taxable years could have 
a loss ratio that falls below 65 percent solely because Captive 
provides coverage for low frequency, high severity losses and Insureds 
purchasing policies from such Captive do not incur such losses in every 
year. In recognition of this fact, the proposed regulations categorize 
transactions as either transactions of interest or listed transactions 
based on the length of the computation period on which the loss ratio 
is based. The Notice Computation Period used by Notice 2016-66 to 
identify transactions of interest based on a loss ratio factor was five 
taxable years, and it has been more than five years since Notice 2016-
66 was published. The Treasury Department and the IRS have determined 
that extending the computation period by five years to a Loss Ratio 
Computation Period of ten taxable years (doubling the Notice 
Computation Period) allows Captives significant time to develop a 
reasonable loss history that supports the use of Captive for legitimate 
insurance purposes, and a loss ratio that remains below 65 percent for 
a Loss Ratio Computation Period of ten taxable years indicates a tax 
avoidance transaction. Accordingly, the proposed regulations identify 
transactions in which the loss ratio is less than 65 percent based on 
an extended Loss Ratio Computation Period of Captive's most recent ten 
taxable years as listed transactions. See proposed Sec.  1.6011-
10(b)(2).
    However, the Treasury Department and the IRS also have determined 
that related party transactions in which the loss ratio is less than 65 
percent over a shorter period of time have a potential for tax 
avoidance or evasion. The proposed regulations therefore identify 
transactions in which Captive has a loss

[[Page 21558]]

ratio of less than 65 percent based on a Transaction of Interest 
Computation Period of Captive's most recent nine taxable years (or all 
years of Captive's existence if it has been in existence for less than 
nine taxable years) as transactions of interest, provided such 
transactions are not otherwise characterized as listed transactions 
(that is, due to the presence of the financing factor described in 
proposed Sec.  1.6011-10(c)(1) or due to having a loss ratio factor of 
less than 65 percent based on a Loss Ratio Computation Period of 
Captive's most recent ten taxable years). See proposed Sec.  1.6011-
11(c) and (d)(3). Identification of these transactions as transactions 
of interest will permit the Treasury Department and the IRS to gather 
more information to determine if these transactions are being used for 
tax avoidance or evasion.
4. Information Sought From Participants
    The proposed regulations significantly reduce the information 
required to be reported by Captives under Sec.  1.6011-4(d) as compared 
to Notice 2016-66. See proposed Sec. Sec.  1.6011-10(f) and 1.6011-
11(f). Unlike Notice 2016-66, the proposed regulations do not require 
Captive participants to identify which factors of the proposed 
regulations apply, state under what authority Captive is chartered, 
describe how amounts treated as premiums for coverage provided by 
Captive were determined, provide the amounts of reserves reported by 
Captive on its annual statement, or describe the assets held by 
Captive. The proposed regulations do, however, require Captive to 
identify the types of policies issued or reinsured, the amounts treated 
as premiums written, the name and contact information of actuaries and 
underwriters involved, and the total amount of claims paid by Captive. 
Additionally, proposed Sec. Sec.  1.6011-10(b)(1) and 1.6011-11(b)(1) 
include a 20-percent relationship test in the definition of Captive, 
and the proposed regulations require Captive participants to identify 
the name and percentage of interest held directly or indirectly by each 
person whose interest in Captive meets the 20 percent threshold or is 
taken into account in meeting the 20 percent threshold under proposed 
Sec.  1.6011-10(b)(1)(iii). Also, the proposed regulations require each 
Insured (as defined in proposed Sec. Sec.  1.6011-10(b)(4) and 1.6011-
11(b)(4)) subject to the disclosure requirements set forth in Sec.  
1.6011-4(d) to provide the amounts treated by Insured as insurance 
premiums for coverage provided to Insured, directly or indirectly, by 
Captive.
5. Disclosure Requirement Safe Harbor for Owners
    The Treasury Department and the IRS believe that it is now feasible 
to generally limit the persons from whom reporting would be required 
under the proposed regulations to Captive, Insured, and material 
advisors to the transaction. Accordingly, the proposed regulations 
provide that any person who, solely by reason of their direct or 
indirect ownership interest in Insured, is subject to the disclosure 
requirements set forth in Sec.  1.6011-4 as a participant in a Micro-
captive Listed Transaction or a Micro-captive Transaction of Interest, 
is not required under Sec.  1.6011-4 to file a disclosure statement 
with respect to that transaction provided that person receives written 
or electronic acknowledgment that Insured has or will comply with its 
separate disclosure obligation under Sec.  1.6011-4(a) with respect to 
the transaction. See proposed Sec. Sec.  1.6011-10(e)(2) and 1.6011-
11(e)(2). The acknowledgment can be a copy of the Form 8886, Reportable 
Transaction Disclosure Statement (or successor form), filed (or to be 
filed) by Insured and must be received by Owner prior to the time set 
forth in Sec.  1.6011-4(e) in which Owner would otherwise be required 
to provide disclosure. See proposed Sec. Sec.  1.6011-10(e)(2) and 
1.6011-11(e)(2). However, the receipt of an acknowledgment that Insured 
has or will comply with its disclosure obligation does not relieve the 
Owners of Insured of their disclosure obligations if Insured fails to 
disclose the transaction in a timely manner.
6. Exception for Consumer Coverage Arrangements
    The proposed regulations provide a limited exception from 
classification as a Micro-captive Listed Transaction or Micro-captive 
Transaction of Interest for certain Consumer Coverage reinsurance 
arrangements. See proposed Sec. Sec.  1.6011-10(d)(2) and 1.6011-
11(d)(2). In Consumer Coverage arrangements, a ``Seller'' (that is, a 
service provider, automobile dealer, lender, or retailer) sells 
products or services to ``Unrelated Customers'' (that is, customers who 
do not own an interest in and are not wholly or partially owned by 
Seller, an owner of Seller, or individuals or entities related (within 
the meaning of one or more of sections 267(b), 707(b), 2701(b)(2)(C), 
or 2704(c)(2)) to Seller or owners of Seller). An Unrelated Customer 
may also purchase an insurance contract in connection with those 
products or services (Consumer Coverage contract). The Consumer 
Coverage contract generally provides coverage for repair or replacement 
costs if the product breaks down or is lost, stolen, or damaged; 
coverage for the customer's payment obligations if the customer dies or 
becomes disabled or unemployed; coverage for the difference between all 
or a portion of the value of the product and the amount owed on the 
product's financing, including a lease, if the product suffers a 
covered peril; or a combination of one or more of the foregoing types 
of coverage.
    An entity related to or affiliated with Seller may issue or 
reinsure the Consumer Coverage contracts. In some arrangements, the 
Consumer Coverage contracts name an unrelated third party, which may be 
referred to as a ``Fronting Company,'' as the provider of the coverage, 
and an entity related to or affiliated with Seller reinsures the 
Consumer Coverage contracts. In other arrangements, the Consumer 
Coverage contracts may name an entity related to or affiliated with 
Seller as the provider of the coverage. In these arrangements, an 
unrelated third party may reinsure the contracts and may also then 
retrocede risk under the contracts to the entity related to or 
affiliated with Seller. The parties may treat the entity related to or 
affiliated with Seller as an insurance company that elects under 
section 831(b) (and section 953(d) if the corporation is foreign) to 
exclude premium payments from taxable income.
    As a general matter, participation in this type of reinsurance 
arrangement is neither a Micro-captive Listed Transaction nor a Micro-
captive Transaction of Interest because the insured is not sufficiently 
related to the insurer or any reinsurer. Generally, the Consumer 
Coverage contracts insure Unrelated Customers of Seller, and Unrelated 
Customers, their owners, and persons related to Unrelated Customers or 
their owners do not directly or indirectly own at least 20 percent of 
the voting power or value of the outstanding stock of any entity 
issuing or reinsuring the Consumer Coverage contract. However, the 20-
percent relationship factor in proposed Sec. Sec.  1.6011-10(b)(1) and 
1.6011-11(b)(1) may be met in some of these reinsurance arrangements. 
For instance, in ``dealer obligor'' arrangements in which the Seller 
would be legally required to pay a claim under certain conditions, such 
as a total loss of the covered product within a certain time frame, the 
Seller could potentially be considered an Insured under a Contract 
issued or reinsured by a Captive, and thus be required to disclose.
    The Treasury Department and the IRS have determined that a limited

[[Page 21559]]

exception for taxpayers in Consumer Coverage arrangements is 
appropriate, provided commissions paid for Consumer Coverage contracts 
issued or reinsured by the Seller's Captive are comparable to the 
commissions paid for Consumer Coverage contracts covering Seller's 
products or services that are not issued or reinsured by the Seller's 
Captive. See proposed Sec. Sec.  1.6011-10(d)(2) and 1.6011-11(d)(2).

C. Effect of Transaction Becoming a Listed Transaction or a Transaction 
of Interest Under These Regulations

    Participants required to disclose these transactions under Sec.  
1.6011-4 who fail to do so are subject to penalties under section 
6707A. Participants required to disclose the listed transactions under 
Sec.  1.6011-4 who fail to do so are also subject to an extended period 
of limitations under section 6501(c)(10). Material advisors required to 
disclose these transactions under section 6111 who fail to do so are 
subject to the penalty under section 6707. Material advisors required 
to maintain lists of investors under section 6112 who fail to do so (or 
who fail to provide such lists when requested by the IRS) are subject 
to the penalty under section 6708(a). In addition, the IRS may impose 
other penalties on persons involved in these transactions or 
substantially similar transactions, including accuracy-related 
penalties under section 6662 or section 6662A, the section 6694 penalty 
for understatements of a taxpayer's liability by a tax return preparer, 
the section 6700 penalty for promoting abusive tax shelters, and the 
section 6701 penalty for aiding and abetting understatement of a tax 
liability.
    Taxpayers who have filed a tax return (including an amended return 
(or Administrative Adjustment Request (AAR) for certain partnerships)) 
reflecting their participation in these transactions prior to the date 
the Treasury decision adopting these regulations as final regulations 
is published in the Federal Register and who have not otherwise 
finalized a settlement agreement with the Internal Revenue Service with 
respect to the transaction must disclose the transactions as provided 
in Sec.  1.6011-4(d) and (e) provided that the period of limitations 
for assessment of tax, including any applicable extensions, for any 
taxable year in which the taxpayer participated in the transaction has 
not ended on or before the date the Treasury decision adopting these 
regulations as final regulations is published in the Federal Register.
    In addition, material advisors have disclosure requirements with 
regard to transactions occurring in prior years. However, 
notwithstanding Sec.  301.6111-3(b)(4)(i) and (iii), material advisors 
are required to disclose only if they have made a tax statement on or 
after six years before the date of the Treasury decision adopting these 
regulations as final regulations is published in the Federal Register.
    A participant in a transaction that is a Micro-captive Listed 
Transaction must file a disclosure statement with OTSA when required to 
do so under Sec.  1.6011-4(e), regardless of whether the participant 
has previously disclosed the transaction to OTSA pursuant to Notice 
2016-66. A participant in a transaction that is a Micro-captive 
Transaction of Interest that has previously filed a disclosure 
statement with OTSA pursuant to Notice 2016-66 will be treated as 
having made the disclosure pursuant to the final regulations for 
taxable years for which the taxpayer filed returns before the final 
regulations are published in the Federal Register. However, if a 
taxpayer described in the preceding sentence participates in the Micro-
captive Transaction of Interest in a taxable year for which the 
taxpayer files a return on or after the date the final regulations are 
published in the Federal Register, the taxpayer must file a disclosure 
statement with OTSA at the same time the taxpayer files their return 
for the first such taxable year.
    A material advisor with respect to a transaction that is a Micro-
captive Listed Transaction or Micro-captive Transaction of Interest 
must file a disclosure statement with OTSA when required to do so under 
Sec.  301.6111-3(e), regardless of whether the material advisor has 
previously disclosed the transaction to OTSA pursuant to Notice 2016-
66.
    The Treasury Department and the IRS recognize that some taxpayers 
may have filed tax returns taking the position that they were entitled 
to the purported tax benefits of the types of transactions described in 
these proposed regulations. Because the IRS will take the position that 
taxpayers are not entitled to the purported tax benefits of the listed 
transactions described in the proposed regulations, and may take such a 
position with respect to the transactions of interest described in the 
proposed regulations, taxpayers should consider filing amended returns 
or AARs for certain partnerships and ensure that their transactions are 
disclosed properly. Taxpayers filing an amended individual return 
should write ``Microcaptive'' at the top of the first page of the 
amended return and mail the amended return to: Internal Revenue 
Service, 2970 Market Street, Philadelphia, PA 19104.
    Taxpayers filing amended business returns on paper should write 
``Microcaptive'' at the top of the first page of the amended return and 
mail to the address listed in the instructions for the amended return. 
Taxpayers filing amended business returns electronically should include 
``Microcaptive'' when explaining the reason for the changes.

Proposed Applicability Dates

    Proposed Sec.  1.6011-10(a) would identify certain micro-captive 
transactions described in proposed Sec.  1.6011-10(c) as listed 
transactions effective as of the date of publication in the Federal 
Register of a Treasury decision adopting these regulations as final 
regulations. Similarly, proposed Sec.  1.6011-11(a) would identify 
certain micro-captive transactions described in proposed Sec.  1.6011-
11(c) as transactions of interest as of the date of publication in the 
Federal Register of a Treasury decision adopting these regulations as 
final regulations.

Effect on Other Documents

    This document obsoletes Notice 2016-66 (2016-47 I.R.B. 745), as 
modified by Notice 2017-08 (2017-3 I.R.B. 423), as of April 11, 2023.

Special Analyses

I. Regulatory Planning and Review

    The proposed regulations are not subject to review under section 
6(b) of Executive Order 12866 pursuant to the Memorandum of Agreement 
(April 11, 2018) between the Treasury Department and the Office of 
Management and Budget (OMB) regarding the review of tax regulations.

II. Paperwork Reduction Act

    The collection of information contained in these proposed 
regulations is reflected in the collection of information for Forms 
8886 and 8918 that have been reviewed and approved by OMB in accordance 
with the Paperwork Reduction Act (44 U.S.C. 3507(c)) under control 
numbers 1545-1800 and 1545-0865. Any disclosures with respect to the 
safe harbor for owners as provided in Sec. Sec.  1.6011-10(e)(2) and 
1.6011-11(e)(2) are in the nature of an acknowledgment per 5 CFR 
1320.3(h)(1), and therefore do not constitute a collection of 
information under the Paperwork Reduction Act.
    To the extent there is a change in burden as a result of these 
regulations, the change in burden will be reflected in the updated 
burden estimates for the Forms 8886 and 8918. The requirement to 
maintain records to substantiate

[[Page 21560]]

information on Forms 8886 and 8918 is already contained in the burden 
associated with the control numbers for the forms and is unchanged.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless the collection of 
information displays a valid control number assigned by OMB.

III. Regulatory Flexibility Act

    The Secretary of the Treasury hereby certifies that the proposed 
regulations will not have a significant economic impact on a 
substantial number of small entities pursuant to the Regulatory 
Flexibility Act (5 U.S.C. chapter 6).
    As previously explained, the basis for these proposed regulations 
is Notice 2016-66, 2016-47 I.R.B. 745 (as modified by Notice 2017-08, 
2017-3 I.R.B. 423). The following chart sets forth the gross receipts 
of respondents to Notice 2016-66, based on data for tax year 2020:

                   Notice 2016-66 Respondents by Size
------------------------------------------------------------------------
                                               Firms          Filings
                Receipts                     (percent)       (percent)
------------------------------------------------------------------------
Under 5M................................           78.65           75.26
5M to 10M...............................            9.36           10.20
10M to 15M..............................            4.39            5.10
15M to 20M..............................            2.34            2.55
20M to 25M..............................            1.17            1.53
Over 25M................................            4.09            5.36
                                         -------------------------------
    Total...............................             100             100
------------------------------------------------------------------------

    This chart shows that the majority of respondents reported gross 
receipts under $5 million. Even assuming that these respondents 
constitute a substantial number of small entities, the proposed 
regulations will not have a significant economic impact on these 
entities because the proposed regulations implement sections 6111 and 
6112 and Sec.  1.6011-4 by specifying the manner in which and time at 
which an identified Micro-captive Listed Transaction or Micro-captive 
Transaction of Interest must be reported. Accordingly, because the 
regulations are limited in scope to time and manner of information 
reporting and definitional information, the economic impact of the 
proposal is expected to be minimal.
    Further, the Treasury Department and the IRS expect that the 
reporting burden is low; the information sought is necessary for 
regular annual return preparation and ordinary recordkeeping. The 
estimated burden for any taxpayer required to file Form 8886 is 
approximately 10 hours, 16 minutes for recordkeeping, 4 hours, 50 
minutes for learning about the law or the form, and 6 hours, 25 minutes 
for preparing, copying, assembling, and sending the form to the IRS. 
The IRS's Research, Applied Analytics, and Statistics division 
estimates that the appropriate wage rate for this set of taxpayers is 
$77.50 (2020 dollars) per hour. Thus, it is estimated that a respondent 
will incur costs of approximately $1,667.27 per filing. Disclosures 
received to date by the Treasury Department and the IRS in response to 
the reporting requirements of Notice 2016-66 indicate that this small 
amount will not pose any significant economic impact for those 
taxpayers now required to disclose under the proposed regulations.
    For the reasons stated, a regulatory flexibility analysis under the 
Regulatory Flexibility Act is not required. The Treasury Department and 
the IRS invite comments on the impact of the proposed regulations on 
small entities. Pursuant to section 7805(f) of the Code, this notice of 
proposed rulemaking has been submitted to the Chief Counsel for the 
Office of Advocacy of the Small Business Administration for comment on 
its impact on small business.

IV. Unfunded Mandates Reform Act

    Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) 
requires that agencies assess anticipated costs and benefits and take 
certain other actions before issuing a final rule that includes any 
Federal mandate that may result in expenditures in any one year by a 
State, local, or Tribal government, in the aggregate, or by the private 
sector, of $100 million (updated annually for inflation). This proposed 
rule does not include any Federal mandate that may result in 
expenditures by State, local, or Tribal governments or by the private 
sector in excess of that threshold.

V. Executive Order 13132: Federalism

    Executive Order 13132 (Federalism) prohibits an agency from 
publishing any rule that has federalism implications if the rule either 
imposes substantial, direct compliance costs on State and local 
governments, and is not required by statute, or preempts state law, 
unless the agency meets the consultation and funding requirements of 
section 6 of the Executive order. This proposed rule does not have 
federalism implications and does not impose substantial direct 
compliance costs on state and local governments or preempt state law 
within the meaning of the Executive order.

Comments and Public Hearing

    Before these proposed amendments to the regulations are adopted as 
final regulations, consideration will be given to any comments that are 
submitted timely to the IRS as prescribed in the preamble under the 
ADDRESSES section. The Treasury Department and the IRS request comments 
on all aspects of the proposed regulations. The Treasury Department and 
the IRS specifically request comments on the following:
    1. What are the specific and objective metrics, factors, or 
standards, if any, that, if reported, would allow for the IRS to better 
identify and distinguish abusive micro-captive transactions from other 
micro-captive transactions?
    2. With respect to proposed Sec. Sec.  1.6011-10(c)(2) and 1.6011-
11(c), whether the loss ratio described therein, which compares ``the 
amount of liabilities incurred by Captive for insured losses and claim 
administration expenses during the [applicable] Computation Period'' to 
the ``premiums earned by Captive during the [applicable] Computation 
Period less policyholder dividends paid by Captive during the 
[applicable] Computation Period'', should be replaced by a combined 
ratio, which compares ``losses incurred, plus loss adjustment expenses 
incurred and other underwriting expenses incurred by Captive during the 
[applicable] Computation Period'' to ``Captive's earned premiums, less 
policyholder dividends, for the

[[Page 21561]]

[applicable] Computation Period'', and if so, what percentage would be 
an effective threshold for purposes of identifying abusive 
transactions. For this purpose, Captive's ``other underwriting expenses 
incurred'' would equal Captive's expenses incurred in carrying on an 
insurance business, other than loss adjustment expenses and investment-
related expenses.
    3. With respect to the percentage of premiums retained as 
commissions for contracts as described at proposed Sec. Sec.  1.6011-
10(d)(2) and 1.6011-11(d)(2), what, if any, are the specific metrics, 
factors, or standards that, if reported, would allow for the IRS to 
better identify and distinguish abusive micro-captive transactions of 
this type from other such micro-captive transactions?
    Any comments submitted will be made available at https://www.regulations.gov or upon request.
    A public hearing is scheduled to be held by teleconference on July 
19, 2023, beginning at 10:00 a.m. ET unless no outlines are received by 
June 12, 2023.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who 
wish to comment by telephone at the hearing must submit written or 
electronic comments and an outline of the topics to be discussed as 
well as the time to be devoted to each topic by June 12, 2023 as 
prescribed in the preamble under the ADDRESSES section.
    A period of ten minutes will be allocated to each person for making 
comments. After the deadline for receiving outlines has passed, the IRS 
will prepare an agenda containing the schedule of speakers. Copies of 
the agenda will be made available at https://www.regulations.gov, 
search IRS and REG-109309-22. Copies of the agenda will also be 
available by emailing a request to [email protected]. Please put 
``REG-109309-22 Agenda Request'' in the subject line of the email.
    Announcement 2020-4, 2020-17 I.R.B. 667 (April 20, 2020), provides 
that until further notice, public hearings conducted by the IRS will be 
held telephonically. Any telephonic hearing will be made accessible to 
people with disabilities.

Statement of Availability of IRS Documents

    The notices and revenue ruling cited in this document are published 
in the Internal Revenue Bulletin (or Cumulative Bulletin) and are 
available from the Superintendent of Documents, U.S. Government 
Publishing Office, Washington, DC 20402, or by visiting the IRS website 
at https://www.irs.gov.

Drafting Information

    The principal author of these proposed regulations is Elizabeth M. 
Hill, Office of Associate Chief Counsel (Financial Institutions & 
Products). However, other personnel from the Treasury Department and 
the IRS participated in the development of these regulations.

List of Subjects in 26 CFR Part 1

    Income Taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, the Treasury Department and the IRS propose to amend 
26 CFR part 1 as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *
* * * * *
    Section 1.6011-10 also issued under 26 U.S.C. 6001 and 26 U.S.C. 
6011.
    Section 1.6011-11 also issued under 26 U.S.C. 6001 and 26 U.S.C. 
6011.
* * * * *
0
Par. 2. Section 1.6011-10 is added to read as follows:


Sec.  1.6011-10  Micro-captive listed transaction.

    (a) Identification as listed transaction. Transactions that are the 
same as, or substantially similar to, transactions described in 
paragraph (c) of this section are identified as listed transactions for 
purposes of Sec.  1.6011-4(b)(2), except as provided in paragraph (d) 
of this section.
    (b) Definitions. The following definitions apply for purposes of 
this section:
    (1) Captive means any entity that:
    (i) Elects under section 831(b) of the Internal Revenue Code (Code) 
to exclude premiums from taxable income;
    (ii) Issues a Contract to an Insured, reinsures a Contract of an 
Insured issued by an Intermediary, or both; and
    (iii) Has at least 20 percent of its assets or the voting power or 
value of its outstanding stock or equity interests directly or 
indirectly owned, individually or collectively, by an Insured, an 
Owner, or persons Related to an Insured or an Owner. For purposes of 
this paragraph (b)(1)(iii), the following rules apply to the extent 
application of a rule (or rules) would increase such direct or indirect 
ownership:
    (A) A person that holds a derivative is treated as indirectly 
owning the assets referenced by the derivative; and
    (B) The interest of each beneficiary of a trust or estate in the 
assets of such trust or estate must be determined by assuming the 
maximum exercise of discretion by the fiduciary in favor of such 
beneficiary and the maximum use of the trust's or estate's interest in 
the company to satisfy the interests of such beneficiary.
    (2) Computation periods--(i) Financing Computation Period. The 
Financing Computation Period is the most recent five taxable years of 
Captive (or all taxable years of Captive, if Captive has been in 
existence for less than five taxable years).
    (ii) Loss Ratio Computation Period. The Loss Ratio Computation 
Period is the most recent ten taxable years of Captive. A Captive that 
does not have at least ten taxable years cannot have a Loss Ratio 
Computation Period, and therefore is not described in paragraph (c)(2) 
of this section.
    (iii) Rules for computation periods. This paragraph (b)(2)(iii) 
applies for purposes of determining the Financing Computation Period 
and the Loss Ratio Computation Period. Each short taxable year is a 
separate taxable year. If Captive is a successor to one or more other 
Captives, taxable years of each such other Captive are treated as 
taxable years of Captive. A successor is any of the following:
    (A) A successor corporation as defined in Sec.  1.382-2(a)(5);
    (B) An entity that, directly or indirectly, acquires (or is deemed 
to acquire) the assets of another entity and succeeds to and takes into 
account the other entity's earnings and profits or deficit in earnings 
and profits; or
    (C) An entity that receives (or is deemed to receive) any assets 
from another entity if such entity's basis is determined, directly or 
indirectly, in whole or in part, by reference to the other entity's 
basis.
    (3) Contract means any contract that is treated by a party to the 
contract as an insurance contract or reinsurance contract for Federal 
income tax purposes.
    (4) Insured means any person that conducts a trade or business, 
enters into a Contract with a Captive or enters into a Contract with an 
Intermediary that is directly or indirectly reinsured by a Captive, and 
treats amounts paid under the Contract as insurance premiums for 
Federal income tax purposes.
    (5) Intermediary means any entity that issues a Contract to an 
Insured, or reinsures a Contract that is issued to an Insured, and such 
Contract is reinsured,

[[Page 21562]]

directly or indirectly, by a Captive. A transaction may have more than 
one Intermediary.
    (6) Owner means any person who, directly or indirectly, holds an 
ownership interest in an Insured or its assets. For purposes of this 
paragraph (b)(6), the following rules apply to the extent application 
of a rule (or rules) would increase such direct or indirect ownership:
    (i) The interest of a person that holds a derivative must be 
determined as provided in paragraph (b)(1)(iii)(A) of this section; and
    (ii) The interest of each beneficiary of a trust or estate in the 
assets of such trust or estate must be determined as provided in 
paragraph (b)(1)(iii)(B) of this section.
    (7) Recipient means any Owner, Insured, or person Related to an 
Owner or an Insured engaged in a transaction described in paragraph 
(c)(1) of this section.
    (8) Related means having a relationship described in one or more of 
sections 267(b), 707(b), 2701(b)(2)(C), and 2704(c)(2) of the Code.
    (9) Seller means a service provider, automobile dealer, lender, or 
retailer that sells products or services to Unrelated Customers who 
purchase insurance contracts in connection with those products or 
services.
    (10) Seller's Captive means a Captive Related to Seller, an owner 
of Seller, or individuals or entities Related to Seller or owners of 
Seller.
    (11) Unrelated Customers means persons who do not own an interest 
in, and are not wholly or partially owned by, Seller, an owner of 
Seller, or individuals or entities Related to Seller or owners of 
Seller.
    (c) Transaction description. A transaction is described in this 
paragraph (c) if the transaction is described in paragraph (c)(1) of 
this section, paragraph (c)(2) of this section, or both.
    (1) The transaction involves a Captive that, at any time during the 
Financing Computation Period, directly or indirectly made available as 
financing or otherwise conveyed or agreed to make available or convey 
to a Recipient, in a transaction that did not result in taxable income 
or gain to the Recipient, any portion of the payments under the 
Contract, such as through a guarantee, a loan, or other transfer of 
Captive's capital, or made such financings or conveyances prior to the 
Financing Computation Period that remain outstanding or in effect at 
any point in the taxable year for which disclosure is required. Any 
amounts that a Captive made available as financing or otherwise 
conveyed or agreed to make available or convey to a Recipient are 
presumed to be portions of the payments under the Contract to the 
extent such amounts when made available or conveyed are in excess of 
Captive's cumulative after-tax net investment earnings minus any 
outstanding financings or conveyances.
    (2) The transaction involves a Captive for which the amount of 
liabilities incurred for insured losses and claim administration 
expenses during the Loss Ratio Computation Period is less than 65 
percent of the amount equal to premiums earned by Captive during the 
Loss Ratio Computation Period less policyholder dividends paid by 
Captive during the Loss Ratio Computation Period.
    (d) Exceptions. A transaction described in paragraph (c) of this 
section is not classified as a listed transaction for purposes of this 
section and Sec.  1.6011-4(b)(2) if the transaction:
    (1) Provides insurance for employee compensation or benefits and is 
one for which the Employee Benefits Security Administration of the U.S. 
Department of Labor has issued a Prohibited Transaction Exemption under 
the procedures provided at 76 FR 66637 (Oct. 27, 2011) (or subsequent 
procedures); or
    (2) Is an arrangement in which a Captive meets all of the following 
requirements:
    (i) Captive is a Seller's Captive,
    (ii) The Seller's Captive issues or reinsures some or all of the 
Contracts sold to Unrelated Customers in connection with the products 
or services being sold by the Seller,
    (iii) 100 percent of the business of the Seller's Captive is 
insuring or reinsuring Contracts in connection with products or 
services being sold by the Seller or persons Related to the Seller, and
    (iv) With respect to the Contracts issued or reinsured by the 
Seller's Captive, the fee, commission, or other remuneration earned by 
any person or persons, in the aggregate, for the sale of the Contracts, 
described as a percentage of the premiums paid by the Seller's 
customers, is at least equal to the greater of:
    (A) 50 percent; or
    (B) The unrelated commission percentage (which is the highest 
percentage fee, commission, or other remuneration known to the Seller 
that is earned by any person or persons, in the aggregate, for the sale 
of any extended warranty, insurance, or other similar Contract sold to 
a customer covering products or services sold by the Seller.
    (e) Special participation rules--(1) In general. Whether a taxpayer 
has participated in the listed transaction identified in paragraph (a) 
of this section will be determined under Sec.  1.6011-4(c)(3)(i)(A). 
Participants include, but are not limited to, any Owner, Insured, 
Captive, or Intermediary with respect to the transaction whose tax 
return reflects tax consequences or a tax strategy described in 
paragraph (a) of this section, except as otherwise provided in 
paragraph (e)(2) of this section.
    (2) Disclosure safe harbor for Owners. An Owner who, solely by 
reason of the Owner's direct or indirect ownership interest in an 
Insured, has participated in the listed transaction described in this 
section will not be required to disclose participation in the 
transaction under section 6011(a), notwithstanding Sec.  1.6011-
4(c)(3), if the Owner receives an acknowledgement, in writing or 
electronically, from the Insured that the Insured has or will comply 
with the Insured's separate disclosure obligation under Sec.  1.6011-4 
with respect to the transaction and the Insured discloses the 
transaction in a timely manner. The acknowledgment can be a copy of the 
Form 8886, Reportable Transaction Disclosure Statement (or successor 
form), filed (or to be filed) by the Insured and must be received by 
the Owner prior to the time set forth in Sec.  1.6011-4(e) in which the 
Owner would otherwise be required to provide disclosure. Owners who 
meet the requirements of this safe harbor will not be treated as having 
participated in an undisclosed listed transaction for purposes of Sec.  
1.6664-2(c)(3)(ii) or as having failed to include information on any 
return or statement with respect to a listed transaction for purposes 
of section 6501(c)(10).
    (f) Disclosure requirements--(1) Information required of all 
participants. Participants must provide the information required under 
Sec.  1.6011-4(d) and the Instructions to Form 8886 (or successor 
form). For all participants, describing the transaction in sufficient 
detail includes, but is not limited to, describing on Form 8886 (or 
successor form) when, how, and from whom the participant became aware 
of the transaction, and how the participant participated in the 
transaction (for example, as an Insured, a Captive, or other 
participant). Paragraphs (f)(2) and (3) of this section describe 
information required of a Captive and an Insured, respectively.
    (2) Information required of a Captive. For a Captive, describing 
the transaction in sufficient detail includes, but is not limited to, 
describing the following on Form 8886 (or successor form):

[[Page 21563]]

    (i) All the type(s) of policies issued or reinsured by Captive 
during the year of participation or years of participation (if 
disclosure pertains to multiple years);
    (ii) The amounts treated by Captive as premiums written for 
coverage provided by Captive during the year of participation or each 
year of participation (if disclosure pertains to multiple years);
    (iii) The name and contact information of each and every actuary or 
underwriter who assisted in the determination of the amounts treated as 
premiums for coverage provided by Captive during the year or each year 
of participation (if disclosure pertains to multiple years);
    (iv) The total amount of claims paid by Captive during the year of 
participation or each year of participation (if disclosure pertains to 
multiple years); and
    (v) The name and percentage of interest directly or indirectly held 
by each person whose interest in Captive meets the 20 percent threshold 
or is taken into account in meeting the 20 percent threshold under 
Sec.  1.6011-10(b)(1)(iii).
    (3) Information required of Insured. For Insured, describing the 
transaction in sufficient detail includes, but is not limited to, 
describing on Form 8886 (or successor form) the amounts treated by 
Insured as premiums for coverage provided to Insured, directly or 
indirectly, by Captive or by each Captive (if disclosure pertains to 
multiple Captives) during the year or each year of participation (if 
disclosure pertains to multiple years), as well as the identity of all 
persons identified as Owners to whom the Insured provided an 
acknowledgment described in paragraph (e)(2) of this section.
    (g) Applicability date--(1) In general. This section identifies 
transactions that are the same as, or substantially similar to, the 
transactions described in paragraph (a) of this section as listed 
transactions for purposes of Sec.  1.6011-4(b)(2) effective the date 
the regulations are published as final regulations in the Federal 
Register.
    (2) Obligations of participants with respect to prior periods. 
Pursuant to Sec.  1.6011-4(d) and (e), taxpayers who have filed a tax 
return (including an amended return) reflecting their participation in 
transactions described in paragraph (a) of this section prior to the 
date these regulations are published as final regulations in the 
Federal Register, who have not otherwise finalized a settlement 
agreement with the Internal Revenue Service with respect to the 
transaction, must disclose the transactions as required by Sec.  
1.6011-4(d) and (e) provided that the period of limitations for 
assessment of tax (as determined under section 6501 of the Code, 
including section 6501(c)) for any taxable year in which the taxpayer 
participated has not ended on or before the date the regulations are 
published as final regulations in the Federal Register.
    (3) Obligations of material advisors with respect to prior periods. 
Material advisors defined in Sec.  301.6111-3(b) of this chapter who 
have previously made a tax statement with respect to a transaction 
described in paragraph (a) of this section have disclosure and list 
maintenance obligations as described in Sec. Sec.  301.6111-3 and 
301.6112-1 of this chapter, respectively. Notwithstanding Sec.  
301.6111-3(b)(4)(i) and (iii) of this chapter, material advisors are 
required to disclose only if they have made a tax statement on or after 
the date that is six years before the date the regulations are 
published as final regulations in the Federal Register. Material 
advisors that are uncertain whether the transaction they are required 
to disclose should be reported under this section or Sec.  1.6011-11 
should disclose under this section, and will not be required to 
disclose a second time if it is later determined that the transaction 
should have been disclosed under Sec.  1.6011-11.
0
Par. 3. Section 1.6011-11 is added to read as follows:


Sec.  1.6011-11   Micro-captive transaction of interest.

    (a) Identification as transaction of interest. Transactions that 
are the same as, or substantially similar to, transactions described in 
paragraph (c) of this section are identified as transactions of 
interest for purposes of Sec.  1.6011-4(b)(6), except as provided in 
paragraph (d) of this section.
    (b) Definitions. The following definitions apply for purposes of 
this section:
    (1) Captive has the same meaning as provided in Sec.  1.6011-
10(b)(1).
    (2) Transaction of Interest Computation Period means the most 
recent nine taxable years of a Captive (or all taxable years of 
Captive, if Captive has been in existence for less than nine taxable 
years). For purposes of this paragraph (b)(2), each short taxable year 
is a separate taxable year, and if Captive is a successor to one or 
more other Captives, taxable years of each such other Captive are 
treated as taxable years of Captive. A successor has the same meaning 
as provided in Sec.  1.6011-10(b)(2)(iii) for purposes of this 
paragraph (b)(2).
    (3) Contract has the same meaning as provided in Sec.  1.6011-
10(b)(3).
    (4) Insured has the same meaning as provided in Sec.  1.6011-
10(b)(4).
    (5) Intermediary has the same meaning as provided in Sec.  1.6011-
10(b)(5).
    (6) Owner has the same meaning as provided in Sec.  1.6011-
10(b)(6).
    (7) Related has the same meaning as provided in Sec.  1.6011-
10(b)(8).
    (8) Seller has the same meaning as provided in Sec.  1.6011-
10(b)(9).
    (9) Seller's Captive has the same meaning as provided in Sec.  
1.6011-10(b)(10).
    (10) Unrelated Customers has the same meaning as provided in Sec.  
1.6011-10(b)(11).
    (c) Transaction description. A transaction is described in this 
paragraph (c) if the transaction involves a Captive for which the 
amount of liabilities incurred for insured losses and claim 
administration expenses during the Transaction of Interest Computation 
Period is less than 65 percent of the amount equal to premiums earned 
by Captive during the Transaction of Interest Computation Period less 
policyholder dividends paid by Captive during the Transaction of 
Interest Computation Period.
    (d) Exceptions. A transaction described in paragraph (c) of this 
section is not classified as a transaction of interest for purposes of 
this section and Sec.  1.6011-4(b)(6) if the transaction:
    (1) Is described in Sec.  1.6011-10(d)(1);
    (2) Is described in Sec.  1.6011-10(d)(2); or
    (3) Is identified as a listed transaction in Sec.  1.6011-10(a), in 
which case the transaction must be reported as a listed transaction 
under Sec.  1.6011-10.
    (e) Special participation rules--(1) In general. Whether a taxpayer 
has participated in the transaction of interest identified in paragraph 
(a) of this section will be determined under Sec.  1.6011-
4(c)(3)(i)(E). Participants include, but are not limited to, any Owner, 
Insured, Captive, or Intermediary with respect to the transaction whose 
tax return reflects tax consequences or a tax strategy described in 
paragraph (a) of this section, except as otherwise provided in 
paragraph (e)(2) of this section.
    (2) Disclosure safe harbor for Owners. An Owner who, solely by 
reason of the Owner's direct or indirect ownership interest in an 
Insured, has participated in the transaction of interest described in 
this section will not be required to disclose participation in the 
transaction under section 6011(a), notwithstanding Sec.  1.6011-
4(c)(3), if the Owner receives acknowledgment, in writing or 
electronically, from the Insured that the Insured has or will comply 
with

[[Page 21564]]

Insured's separate disclosure obligation under Sec.  1.6011-4 with 
respect to the transaction and the Insured discloses the transaction in 
a timely manner. The acknowledgment can be a copy of the Form 8886, 
Reportable Transaction Disclosure Statement (or successor form), filed 
(or to be filed) by the Insured and must be received by the Owner prior 
to the time set forth in Sec.  1.6011-4(e) in which the Owner would 
otherwise be required to provide disclosure.
    (f) Disclosure requirements. Participants must provide the 
information required under Sec.  1.6011-4(d) and the Instructions to 
Form 8886 (or successor form). For all participants, describing the 
transaction in sufficient detail includes, but is not limited to, 
describing on Form 8886 (or successor form) when, how, and from whom 
the participant became aware of the transaction, and how the 
participant participated in the transaction (for example, as an 
Insured, a Captive, or other participant). A Captive and an Insured 
must also provide the information required in Sec.  1.6011-10(f)(2) and 
(3), respectively.
    (g) Applicability date--(1) In general. This section identifies 
transactions that are the same as, or substantially similar to, the 
transaction described in paragraph (a) of this section as transactions 
of interest for purposes of Sec.  1.6011-4(b)(6) effective the date the 
regulations are published as final regulations in the Federal Register.
    (2) Obligations of participants with respect to prior periods. 
Pursuant to Sec.  1.6011-4(d) and (e), taxpayers who have filed a tax 
return (including an amended return) reflecting their participation in 
transactions described in paragraph (a) of this section prior to the 
date the regulations are published as final regulations in the Federal 
Register, who have not otherwise finalized a settlement agreement with 
the Internal Revenue Service with respect to the transaction, must 
disclose the transactions as required by Sec.  1.6011-4(d) and (e) 
provided that the period of limitations for assessment of tax (as 
determined under section 6501, including section 6501(c)) for any 
taxable year in which the taxpayer participated has not ended on or 
before the date the regulations are published as final regulations in 
the Federal Register. However, taxpayers who have filed a disclosure 
statement regarding their participation in the transaction with the 
Office of Tax Shelter Analysis pursuant to Notice 2016-66, 2016-47 
I.R.B. 745, will be treated as having made the disclosure pursuant to 
the final regulations for the taxable years for which the taxpayer 
filed returns before the final regulations are published in the Federal 
Register. If a taxpayer described in the preceding sentence 
participates in the Micro-captive Transaction of Interest in a taxable 
year for which the taxpayer files a return on or after the date the 
final regulations are published in the Federal Register, the taxpayer 
must file a disclosure statement with the Office of Tax Shelter 
Analysis at the same time the taxpayer files their return for the first 
such taxable year.
    (3) Obligations of material advisors with respect to prior periods. 
Material advisors defined in Sec.  301.6111-3(b) of this chapter who 
have previously made a tax statement with respect to a transaction 
described in paragraph (a) of this section have disclosure and list 
maintenance obligations as described in Sec. Sec.  301.6111-3 and 
301.6112-1 of this chapter, respectively. Notwithstanding Sec.  
301.6111-3(b)(4)(i) and (iii) of this chapter, material advisors are 
required to disclose only if they have made a tax statement on or after 
the date six years before the date the regulations are published as 
final regulations in the Federal Register. Material advisors that are 
uncertain whether the transaction they are required to disclose should 
be reported under this section or Sec.  1.6011-10 should disclose under 
Sec.  1.6011-10, and will not be required to disclose a second time if 
it is later determined that the transaction should have been disclosed 
under this section.

Douglas W. O'Donnell,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2023-07315 Filed 4-10-23; 8:45 am]
BILLING CODE 4830-01-P