3534 Federal Register / Vol. 90, No. 8 / Tuesday, January 14, 2025 / Rules and Regulations 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Part 1 

[TD 10029] 

RIN 1545–BQ44 

Micro-Captive Listed Transactions and 

Micro-Captive Transactions of Interest 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Final rule. 

SUMMARY: This document contains final 

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 final regulations affect 

participants in these transactions as 

well as material advisors. 

DATES: 

Effective date: These regulations are 

effective on January 14, 2025. 

Applicability date: For dates of 

applicability, see §§ 1.6011–10(h) and 

1.6011–11(h). 

FOR FURTHER INFORMATION CONTACT: 

Allan H. Sakaue, (202) 317–6995 (not a 

toll-free number). 

SUPPLEMENTARY INFORMATION: 

Authority 

This document amends the Income 

Tax Regulations (26 CFR part 1) by 

adding final regulations under section 

6011 of the Internal Revenue Code 

(Code) to identify certain micro-captive 

transactions and substantially similar 

transactions as listed transactions and 

certain other micro-captive transactions 

as transactions of interest, each a type 

of reportable transaction (final 

regulations). These regulations are 

issued pursuant to the authority 

conferred on the Secretary of the 

Treasury or her delegate (Secretary) 

under the following provisions of the 

Code: 

Section 6001, which requires every 

taxpayer to keep the records, render the 

statements, make the returns, and 

comply with the rules and regulations 

that the Secretary deems necessary to 

demonstrate tax liability and prescribes, 

either by notice served or by 

regulations; 

Section 6011, which requires every 

taxpayer to ‘‘make a return or statement 

according to the forms and regulations 

prescribed by the Secretary’’ and 

‘‘include therein the information 

required by such forms or regulations’’; 

Section 6707A(c)(1), which states that 

‘‘[t]he term ‘reportable transaction’ 

means 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’’; and 

Section 6707A(c)(2), which states 

that, ‘‘[t]he term ‘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.’’ 

Reportable transactions are described 

in § 1.6011–4 and include listed 

transactions, confidential transactions, 

transactions with contractual protection, 

loss transactions, and transactions of 

interest. See § 1.6011–4(b)(2) through 

(6). Section 1.6011–4(b)(2) defines 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. 

The final regulations are also issued 

under the express delegation of 

authority under section 7805(a) of the 

Code. 

Background 

I. Section 831(b) 

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) of the Code 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 

taxable year by the rates provided in 

section 11(b) of the Code. Thus, an 

eligible electing company pays no tax 

on its underwriting income, including 

amounts paid as premiums, 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 shall require with 

respect to’’ the diversification 

requirements of section 831(b)(2)(B). 

To qualify as an insurance company 

pursuant to section 816(a), a 

requirement to elect section 831(b) 

taxation, more than half of the business 

of the entity during the taxable year 

must be the issuing of insurance or 

annuity contracts or the reinsuring of 

risks underwritten by insurance 

companies. An insurance contract must 

meet all four prongs of the test for 

insurance set forth by the courts: risk 

shifting, risk distribution, insurable 

risks, and insurance in the commonly 


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accepted sense. See Helvering v. Le 

Gierse, 312 U.S. 531, 539 (1941) (both 

risk shifting and risk distribution must 

be present); Allied Fidelity Corp. v. 

Commissioner, 572 F.2d 1190, 1193 (7th 

Cir. 1978) (the risk transferred must be 

risk of economic loss); Commissioner v. 

Treganowan, 183 F.2d 288, 290–91 (2d 

Cir. 1950) (the risk must contemplate 

the fortuitous occurrence of a stated 

contingency); Rent-A-Center, Inc. v. 

Commissioner, 142 T.C. 1, 13 (2014) (the 

arrangement must constitute insurance 

in the commonly accepted sense); see 

also Rev. Rul. 2007–47, 2007–2 C.B. 127 

(the risk must not be merely an 

investment or a business risk). To 

determine whether an arrangement is 

insurance in the commonly accepted 

sense, courts consider several nonexclusive factors including (1) whether 

the company was organized, operated, 

and regulated as an insurance company; 

(2) whether the company was 

adequately capitalized; (3) whether the 

policies were valid and binding; (4) 

whether premiums were reasonable and 

the result of arm’s length transactions; 

(5) whether claims were paid; (6) 

whether the policies cover typical 

insurance risks; and (7) whether there 

was a legitimate business reason for 

acquiring insurance from the captive. 

Avrahami v. Commissioner, 149 T.C. 

144, 191 (2017). 

II. Notice 2016–66 and Notice of 

Proposed Rulemaking (‘‘NPRM’’) 

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 Treasury 

Department and 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 

§ 1.6011–4(b)(6) and for purposes of 

§ 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. 

The Treasury Department and the IRS 

issued proposed regulations under 

section 6011 (REG–109309–22) in an 

NPRM published in the Federal 

Register (88 FR 21547) on April 11, 

2023 (proposed regulations). That 

NPRM obsoleted Notice 2016–66. The 

Treasury Department and the IRS 

considered comments received in 

response to Notice 2016–66 in 

developing the proposed regulations. 

The proposed regulations would 

identify taxpayers who file returns 

reflecting the tax benefits of a 

transaction described at § 1.6011–10(a) 

as participants in a listed transaction 

(‘‘Micro-captive Listed Transaction’’). 

The proposed regulations would 

identify taxpayers who file returns 

reflecting the tax benefits of a 

transaction described at § 1.6011–11(a) 

as participants in a transaction of 

interest (‘‘Micro-captive Transaction of 

Interest’’). Generally, a Micro-captive 

Listed Transaction is a transaction in 

which an Owner (as defined in 

proposed § 1.6011–10(b)(6)) of an 

Insured (as defined in proposed 

§ 1.6011–10(b)(4)) holds the necessary 

interest described in proposed § 1.6011– 

10(b)(1)(iii) (the ‘‘20 Percent 

Relationship Test’’) in Captive (as 

defined in proposed § 1.6011–10(b)(1)), 

Captive meets the definition provided in 

proposed § 1.6011–10(b)(1), and Captive 

provides financing as described in 

proposed § 1.6011–10(c)(1) (the 

‘‘Financing Factor’’), determined over 

the Financing Computation Period 

defined in proposed § 1.6011– 

10(b)(2)(i), or has less than a 65 percent 

loss ratio (the ‘‘Loss Ratio Factor’’) as 

described in proposed § 1.6011–10(c)(2), 

determined over the Loss Ratio 

Computation Period defined in 

proposed § 1.6011–10(b)(2)(ii). 

A Micro-captive Transaction of 

Interest is a transaction in which an 

Owner (as defined in proposed 

§ 1.6011–11(b)(6)) of an Insured (as 

defined in proposed § 1.6011–11(b)(4)) 

holds the necessary interest in Captive 

(as defined in proposed § 1.6011– 

11(b)(1)), Captive meets the definition 

provided in proposed § 1.6011–11(b)(1), 

and Captive has less than a 65 percent 

loss ratio, as described in proposed 

§ 1.6011–11(c), determined over the 

Transaction of Interest Computation 

Period defined in proposed § 1.6011– 

11(b)(2). 

Participants in a Micro-captive Listed 

Transaction or a Micro-captive 

Transaction of Interest, and material 

advisors with respect to Micro-captive 

Listed Transactions and Micro-captive 

Transactions of Interest, would be 

required file disclosure statements as set 

forth in proposed §§ 1.6011–10(f) and 

1.6011–11(f). The Treasury Department 

and the IRS developed these objective 

factors to ensure administrability and 

clarity for taxpayers whose transactions 

are identified in the regulations, so 

taxpayers can clearly determine whether 

they are participants or material 

advisors, and thus be on clear notice of 

their obligations. 

The Treasury Department and the IRS 

received 110 public comments in 

response to the proposed regulations 

and notice of public hearing that are the 

subject of this final rulemaking. The 

comments are available for public 

inspection at https://

www.regulations.gov or upon request. A 

public hearing on the proposed 

regulations was held by teleconference 

on July 19, 2023, at 10 a.m. Eastern 

Time, at which six speakers provided 

testimony. 

The Summary of Comments and 

Explanation of Revisions of these final 

regulations summarizes the proposed 

regulations, which are described in 

greater detail in the preamble to the 

proposed regulations. After full 

consideration of all the comments 

received and the testimony provided, 

these final regulations adopt the 

proposed regulations with the 

modifications described in this 

Summary of Comments and Explanation 

of Revisions. 

Summary of Comments and 

Explanation of Revisions 

This Summary of Comments and 

Explanation of Revisions summarizes all 

significant comments addressing the 

proposed regulations, and describes and 

responds to comments concerning: (1) 

the authority to issue the proposed and 

final regulations generally; (2) the Loss 

Ratio Factor described in proposed 

§§ 1.6011–10(c)(2) and 1.6011–11(c); (3) 

the Financing Factor described in 

proposed § 1.6011–10(c)(1); (4) the 

exception for certain consumer coverage 

arrangements described in proposed 

§§ 1.6011–10(d)(2) and 1.6011–11(d)(2); 

(5) requests for safe harbors from either 

identification as a reportable transaction 

or from the reporting requirements upon 

identification as a reportable 

transaction; and (6) other matters 

including clarifications and changes not 

specifically related to the identified 

factors already addressed. This 

Summary of Comments and Explanation 

of Revisions also explains revisions 

adopted by the final regulations in 

response to those comments. Comments 

outside the scope of this rulemaking are 

generally not addressed. 

As an initial matter, the final 

regulations incorporate non-substantive 

changes to the description of the 


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election under section 831(b) at 

proposed § 1.6011–10(b)(1)(i) (defining 

in part the term Captive) to better reflect 

the text of the statute. See § 1.6011– 

10(b)(1)(i) of the final regulations. 

Furthermore, §§ 1.6011–10(e) and 

1.6011–11(e) are added to the final 

regulations, to provide more clarity on 

when a transaction is considered 

substantially similar as defined in 

§ 1.6011–4(c)(4) to the identified 

transactions. The term ‘‘Substantially 

Similar’’ has also been defined in the 

final regulations by cross-reference to 

§ 1.6011–4(c)(4). 

I. Comments on Authority To Issue the 

Proposed Regulations 

A. The McCarran-Ferguson Act 

Several commenters argued that the 

proposed regulations implicate ‘‘the 

business of insurance’’ under the 

McCarran-Ferguson Act, 15 U.S.C. 1011 

et seq. (‘‘McCarran-Ferguson’’). In 

addition, commenters argued that 

sections 6011, 6111, and 6112 do not 

explicitly reference insurance, and thus 

McCarran-Ferguson prohibits the 

application of the proposed regulations 

thereunder. Commenters also asserted 

that the inclusion of a Loss Ratio Factor 

and a Financing Factor in the proposed 

regulations will invalidate, impair, or 

supersede State law governing 

insurance companies. For example, 

commenters contended that because 

State regulators must approve relatedparty financing transactions entered into 

by insurance companies, State law to 

that effect will preempt identification of 

a captive insurance transaction 

involving related-party financing as a 

reportable transaction. Similarly, 

commenters contended that because 

State regulators establish solvency 

requirements for insurers licensed in 

their domicile, State laws regarding 

premium pricing will preempt 

identification of a captive insurance 

transaction as a reportable transaction 

based on the Loss Ratio Factor. 

Commenters also asserted that the Loss 

Ratio Factor, by encouraging payment of 

policyholder dividends, impacts the 

insurer and policyholder relationship 

and therefore implicates McCarranFerguson. 

Contrary to the commenters’ 

arguments, and as discussed in more 

detail in the following paragraphs, 

McCarran-Ferguson does not apply to 

these regulations for two primary 

reasons: first, because the regulations do 

not invalidate, impair, or supersede 

State law, and second, because the 

regulations do not implicate the 

business of insurance. 

First, the proposed regulations do not 

‘‘invalidate, impair, or supersede’’ any 

State law. As relevant here, McCarranFerguson provides that ‘‘[n]o Act of 

Congress shall be construed to 

invalidate, impair, or supersede any law 

enacted by any State for the purpose of 

regulating the business of insurance, or 

which imposes a fee or tax upon such 

business, unless such Act specifically 

relates to the business of insurance.’’ 15 

U.S.C. 1012(b). In other words, 

McCarran-Ferguson prohibits 

application of Federal law not 

specifically relating to the business of 

insurance if it would invalidate, impair, 

or supersede State laws enacted for the 

purpose of regulating the business of 

insurance. Humana Inc. v. Forsyth, 525 

U.S. 299, 307 (1999). Courts have 

uniformly upheld Tax Code provisions 

pertaining to the taxation of insurance 

companies in the face of a McCarranFerguson challenge. See, e.g., Modern 

Life & Acc. Ins. Co. v. Commissioner, 

420 F.2d 36, 37 (7th Cir. 1969) (holding 

that taxpayer did not show that 

Commissioner’s determination of 

taxpayer’s status under the Internal 

Revenue Code ‘‘will interfere with the 

choice made by [State].’’); Indust. Life 

Ins. Co. v. United States, 344 F. Supp. 

870, 875 (D.S.C. 1972), aff’d, 481 F.2d 

609 (4th Cir. 1973) (holding that 

Congress did not give up the right to tax 

by passing McCarran-Ferguson); 

Hanover Ins. Co. v. Commissioner, 65 

T.C. 715, 722 (1976) (‘‘Congress did not, 

under the McCarran-Ferguson Act, 

surrender to the States the power of the 

Federal Government to tax insurance 

companies and to issue regulations 

implementing the taxing statute.’’). 

Moreover, McCarran-Ferguson was 

enacted to prevent inadvertent Federal 

intrusion on the State’s rights to regulate 

insurance. See Barnett Bank of Marion 

Cty. v. Nelson, 517 U.S. 25, 39. 

McCarran-Ferguson does not prevent 

the Federal Government from issuing 

insurance regulations. Id. The Supreme 

Court has stated that McCarranFerguson does not ‘‘cede the field of 

insurance regulation to the States, 

saving only instances in which Congress 

expressly orders otherwise.’’ Humana, 

525 U.S. at 308; see also SEC v. Nat’l 

Sec., Inc., 393 U.S. 453, 459–60 (1969) 

(‘‘The [McCarran-Ferguson Act] did not 

purport to make the States supreme in 

regulating all the activities of insurance 

companies.’’); Modern Life & Acc. Ins. 

Co., 420 F.2d at 37–38; Indust. Life Ins. 

Co., 344 F. Supp. at 875; Hanover Ins. 

Co., 66 T.C. at 721–22. The Supreme 

Court also stated that ‘‘[t]he term 

‘invalidate’ ordinarily means ‘to render 

ineffective, generally without providing 

a replacement rule or law . . . [a]nd the 

term ‘supersede’ ordinarily means ‘to 

displace (and thus render ineffective) 

while providing a substitute rule.’’ 

Humana, 525 U.S. at 307 (citations 

omitted). The Supreme Court relied on 

the dictionary definition of ‘‘impair,’’ 

which is ‘‘[t]o weaken, to make worse, 

to lessen in power, diminish, or relax, 

or otherwise affect in an injurious 

manner.’’ Humana, 525 U.S. at 309–10 

(citing Black’s Law Dictionary 752 (6th 

ed. 1990)). Thus, ‘‘[w]hen federal law 

does not directly conflict with state 

regulation, and when the application of 

federal law would not frustrate any 

declared state policy or interfere with a 

State’s administrative regime, the 

McCarran-Ferguson Act does not 

preclude its application.’’ Humana, 525 

U.S. at 310. 

The proposed regulations do not 

render ineffective any State law, nor do 

they displace or diminish any State 

regulator’s ability to regulate the 

insurers within their jurisdiction. 

Rather, the proposed regulations run 

parallel to the State laws. Identification 

of a transaction as a listed transaction or 

a transaction of interest, solely for 

Federal tax purposes, does not in any 

way invalidate, impair, supersede, or 

affect State insurance laws. As in United 

States v. Redcorn, ‘‘state insurance 

regulations remain fully in force.’’ 528 

F.3d 727, 736 (10th Cir. 2008) (holding 

that prosecution under 18 U.S.C. 669 

(‘‘Theft or embezzlement in connection 

with health care’’) did not conflict in 

any way with state insurance law for 

purposes of McCarran-Ferguson); see 

also United States v. Del. Dep’t of Ins., 

66 F.4th 114, 132 (3d Cir. 2023) (holding 

that Delaware State law prohibiting the 

Delaware Department of Insurance from 

disclosing certain information about 

captive insurance companies to anyone, 

including the Federal Government, did 

not, under McCarran-Ferguson, override 

the IRS’s statutory authority to issue 

summonses to the Department and have 

them enforced). 

Commenters cite to United States 

Dep’t of Treasury v. Fabe, 508 U.S. 491 

(1993), to support their argument that 

the proposed regulations violate the 

McCarran-Ferguson Act, but the 

proposed regulations can be readily 

distinguished from the Federal statute at 

issue in Fabe. In Fabe, a State 

preference for distributions to 

policyholders for claims and expenses 

incurred in the administration of 

insolvency proceedings was found to be 

the ‘‘business of insurance.’’ The 

Supreme Court found that the Ohio 

statute at issue in Fabe was ‘‘aimed at 

protecting or regulating, directly or 

indirectly, the relationship between the 


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insurance company and its 

policyholders.’’ Fabe, 508 U.S. at 491– 

92 (citing SEC v. Nat’l Sec., Inc., 393 

U.S. at 460). Considering the 

relationship between the insurer and the 

insured, the Supreme Court held that, to 

the extent (1) the State law at issue in 

Fabe protected policyholders and (2) the 

Federal priority statute under 31 U.S.C. 

3713(a)(1)(A)(iii) would impair that 

relationship, Federal law did not 

preempt State law. The Court in Fabe 

had to choose between Federal and 

State statutes because they were in 

direct conflict. Conversely, the proposed 

regulations are not in conflict with any 

State regulations; the relationship 

between insurer and insured is in no 

way impacted. Taxpayers remain free to 

enter into captive insurance transactions 

in any State and to structure such 

transactions within the confines of State 

regulations, and States remain free to 

regulate such transactions. However, if 

such structure is described in § 1.6011– 

10 or § 1.6011–11, participants must 

disclose information about the 

arrangement to the IRS. In other words, 

the proposed regulations attach specific 

tax obligations (in the form of 

disclosure) to specific acts (in the form 

of participating in a transaction 

described in § 1.6011–10 or § 1.6011– 

11), but the proposed regulations do not 

change how those acts are done. 

Second, the act of disclosing a 

transaction to the tax authorities is not 

the ‘‘business of insurance.’’ The 

threshold question under 15 U.S.C. 

1012(a), in determining whether the 

anti-preemption mandate of 15 U.S.C. 

1012(b) applies, is whether the 

challenged conduct broadly constitutes 

the ‘‘business of insurance’’ in the first 

place. If the contested activities are 

wholly unrelated to the insurance 

business, then McCarran-Ferguson has 

no place in analyzing Federal regulation 

because only when ‘‘[insurance 

companies] are engaged in the ‘business 

of insurance’ does the act apply.’’ Sabo 

v. Metropolitan Life Ins. Co., 137 F.3d 

185, 190 (3d Cir. 1998) (citing SEC v. 

Nat’l Sec., Inc., 393 U.S. at 459–60); see 

also United States v. Del. Dep’t of Ins., 

66 F.4th at 125 (reaffirming the 

threshold inquiry precedent set in 

Sabo). The ‘‘core of ‘the business of 

insurance’’ is ‘‘[t]he relationship 

between insurer and insured, the type of 

policy which could be issued, its 

reliability, interpretation and 

enforcement.’’ United States v. Del. 

Dep’t of Ins., 66 F.4th at 130 (citing SEC 

v. Nat’l Sec., Inc., 393 U.S. at 460). The 

‘‘business of insurance’’ is also 

understood to be ‘‘[an]other activity of 

insurance companies [that] relate[s] so 

closely to [their] status as reliable 

insurers that [it] must be placed in the 

same class.’’ Id. The conduct at issue in 

the proposed regulations is the filing of 

disclosure statements upon 

identification as participants in or 

material advisors of a transaction that, 

for Federal tax purposes, either is a 

listed transaction or a transaction of 

interest. Like the information gathering 

conduct via the summonses at issue in 

the United States v. Del. Dep’t of Ins., 

the disclosure requirements in the 

proposed regulations are not ‘‘the 

business of insurance.’’ The final 

regulations do not adopt any changes 

based on these comments. 

B. Federalism Implications 

Commenters also argued that the 

proposed regulations have federalism 

implications and fail to satisfy 

Executive Order 13132 (Federalism). 

Executive Order 13132 generally 

provides that an agency is prohibited 

from publishing any rule that has 

federalism implications if the rule 

imposes substantial, direct compliance 

costs on State and local governments, 

and is not required by statute, or if the 

rule preempts State law, unless the 

agency satisfies, among other things, the 

consultation and federalism summary 

impact statement requirements of 

section 6 of the Executive order. 

The proposed regulations do not have 

federalism implications, and the 

requirements in section 6 of Executive 

Order 13132 to consult with State and 

local officials and issue a federalism 

impact statement do not apply. As 

described in this preamble, the 

proposed regulations do not preempt 

State law, nor do they impose 

substantial, direct compliance costs on 

State and local governments, as there is 

no obligation created by the regulations 

with which any State or local agency 

may need to comply. The final 

regulations do not adopt any changes 

based on these comments. 

C. Constitutionality, Fairness, and 

Retroactivity 

Commenters contended that the 

proposed regulations are 

unconstitutional for a number of 

reasons. First, commenters argued that 

requiring participants to disclose 

transactions they participated in, even if 

such taxpayers were examined for one 

or more years for which reporting would 

be required and for which the IRS did 

not make any adjustments to the 

taxpayers’ returns, is unconstitutional 

and retroactive in nature. Second, 

commenters argued that the proposed 

regulations are intended to shut down 

the captive insurance industry and may 

constitute a ‘‘taking’’ under the Fifth 

Amendment of the U.S. Constitution, by 

restricting the rights of taxpayers to 

engage in captive insurance 

transactions. 

With respect to the first argument, 

commenters did not specify what 

provision of the Constitution is 

allegedly violated by the potential need 

to disclose participation in a transaction 

after an examination resulted in no 

change to the examined returns, and we 

are not aware of any Constitutional 

provision that would be violated. In 

addition, any such disclosure 

requirement in these regulations is not 

retroactive in nature; the final 

regulations will be effective January 14, 

2025. To the extent the final regulations 

result in a disclosure obligation with 

respect to transactions occurring in 

prior taxable years for which the statute 

of limitations on assessment has not 

expired, such obligation is a current 

reporting obligation that arises after 

January 14, 2025. 

With respect to the comment about 

reporting requirements for taxpayers 

whose returns have been examined, the 

reporting rules are outside the scope of 

these final regulations, which merely 

identify a listed transaction and a 

transaction of interest, respectively. The 

reporting rules for listed transactions 

and transactions of interest are found in 

§ 1.6011–4, which was issued pursuant 

to notice and comment and finalized 

most recently on August 3, 2007, in TD 

9350 (72 FR 43146), and which is not 

amended by these regulations. However, 

there are tax administration reasons to 

maintain these reporting requirements. 

Most importantly, initial disclosures of 

reportable transactions are filed with the 

Office of Tax Shelter Analysis (OTSA) 

to ensure that all information is 

collected in one place. The OTSA’s 

mission is, among other things, to 

ensure that the IRS has the information 

necessary to detect abusive tax shelters 

and identify issues of significant 

compliance risk to tax administration. 

The OTSA collects and analyzes 

information about abusive tax shelters 

and reportable transactions to identify 

trends and disseminates the results to 

those in a position to take appropriate 

action. In order to identify participants 

and promoters of tax avoidance 

transactions, the OTSA needs to receive 

and review Forms 8886 in a timely and 

efficient manner. Limiting disclosure to 

a subset of transaction participants 

(such as taxpayers whose examinations 

have been closed) would provide an 

incomplete picture of the transaction 

and hinder the OTSA’s efforts. 

Accordingly, the final regulations do not 


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3538 Federal Register / Vol. 90, No. 8 / Tuesday, January 14, 2025 / Rules and Regulations 

adopt any changes based on these 

comments. 

The commenters’ second 

Constitutional argument, under the Fifth 

Amendment, is also without merit. As 

relevant here, the Fifth Amendment 

provides, in addition to the other 

limitations on government power, that 

‘‘private property [shall not] be taken for 

public use, without just compensation.’’ 

The proposed regulations identify a 

transaction as a listed transaction or a 

transaction of interest for Federal tax 

purposes and require the filing of 

disclosures with the IRS and the OTSA. 

Requiring disclosure of participation in 

these transactions does not implicate 

the Fifth Amendment; no property 

interest is taken for public use by the 

government under the proposed 

regulations necessitating compensation. 

Taxpayers remain free to engage in 

any captive insurance transaction, 

regardless of whether such transaction 

is identified in § 1.6011–10 or § 1.6011– 

11, respectively; however, there may be 

Federal tax consequences if the 

transaction is not a valid captive 

insurance transaction. As there is no 

limitation on participation in any 

transaction by operation of the proposed 

regulations, there is no ‘‘taking’’ for 

Fifth Amendment purposes. 

D. The Administrative Procedure Act 

Commenters argued that the proposed 

regulations lack legal foundation and 

assert that the regulations will be 

challenged and set aside just as Notice 

2016–66 was set aside in CIC Services, 

LLC v. IRS, 592 F.Supp.3d 677 (E.D. 

Tenn. 2022). In CIC Services, the district 

court followed the analysis in Mann 

Construction, Inc. v. United States, 27 

F.4th 1138 (6th Cir. 2022), rev’g 539 

F.Supp.3d 745 (E.D. Mich. 2021), which 

held that the identification of a listed 

transaction must follow the notice-andcomment procedures of the 

Administrative Procedure Act (‘‘APA’’). 

The district court in CIC Services held 

that Notice 2016–66 should be vacated 

because the IRS did not follow the 

APA’s notice-and-comment procedures. 

The district court held in the alternative 

that the IRS acted arbitrarily and 

capriciously based on the administrative 

record. CIC Services, 592 F.Supp.3d at 

687. 

In light of the decision by the district 

court in CIC Services and other judicial 

decisions, the Treasury Department and 

the IRS published the proposed 

regulations and obsoleted Notice 2016– 

66. The NPRM provided for a comment 

period from April 11, 2023, through 

June 12, 2023, and more than 100 

comment letters were received. The 

Treasury Department and the IRS 

conducted a public hearing on July 19, 

2023, providing further opportunity for 

taxpayers to comment on the proposed 

regulations. The APA notice-andcomment procedures have been 

followed. 

Some commenters suggested that the 

IRS’s purpose for publishing the 

proposed regulations is to harass 

otherwise valid businesses, but the 

purpose is simply to require disclosures 

with respect to transactions described in 

§§ 1.6011–10 and 1.6011–11, in the 

interest of tax administration. 

Examinations of taxpayers and 

promoters have helped to clarify the 

Treasury Department’s and the IRS’s 

understanding of micro-captive 

transactions, including the scope of 

participation. The factors used to 

identify the Micro-captive Listed 

Transaction and the Micro-captive 

Transaction of Interest are neither 

arbitrary nor capricious. They reflect the 

IRS’s long-standing positions with 

respect to abusive micro-captives as 

made public in annual Dirty Dozen tax 

schemes publications and case law. The 

factors are objective and reasonably 

determined, based on relevant factors in 

existing statutory provisions, on 

available industry data, and on a careful 

review of case law and examination 

information. The objectivity and 

reasonableness of each factor is 

discussed more fully throughout this 

Summary of Comments and Explanation 

of Revisions, notably in part II. (Loss 

Ratio Factor); part III. (Financing 

Factor); and part VI.B. (20 Percent 

Relationship Test). The existing case 

law with respect to micro-captives 

demonstrates the commonalities in the 

fact patterns in these transactions, 

which is relevant to the development of 

the transaction fact patterns identified 

in these regulations. The Tax Court has 

consistently determined in its section 

831(b) decisions issued to date that 

taxpayers in the relevant micro-captive 

transactions remitted amounts treated as 

premiums for something other than 

insurance. See Avrahami, 149 T.C. at 

197–98; Syzygy v. Commissioner, T.C. 

Memo. 2019–34, at *45; Caylor Land & 

Dev., Inc. v. Commissioner, T.C. Memo. 

2021–30, at *48–49; Keating v. 

Commissioner, T.C. Memo. 2024–2, at 

*64; Swift v. Commissioner, T.C. Memo. 

2024–13, at *44–45; Patel v. 

Commissioner, T.C. Memo. 2024–34, at 

*51–52, and Royalty Mgmt. Ins. Co., Ltd. 

v. Commissioner, T.C. Memo. 2024–87, 

at *49–50. Current examinations and 

litigation also are relevant, as they 

demonstrate consistency with the 

transaction fact patterns identified in 

these regulations. 

Section 6707A(c) delegates to the IRS 

the authority to promulgate regulations 

pursuant to section 6011 identifying 

reportable transactions. Specifically, 

section 6707A(c)(1) states that ‘‘[t]he 

term ‘reportable transaction’ means 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.’’ 

Section 6707A(c)(2) defines the term 

‘‘listed transaction’’ as ‘‘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.’’ Section 

6707A(a) provides that ‘‘[a]ny person 

who fails to include on any return or 

statement any information with respect 

to a reportable transaction which is 

required under section 6011 to be 

included with such return or statement 

shall pay a penalty in the amount 

determined under subsection (b)’’ 

(emphasis added). Under section 

6011(a), returns and statements, 

including disclosures, should be filed 

‘‘according to the forms and regulations 

prescribed by the Secretary.’’ The 

proposed regulations do not create any 

law that is contrary to any statute; 

rather, the proposed regulations identify 

transactions that must be disclosed per 

the existing rules under the Code with 

respect to reportable transactions, as 

sections 6707A(c) and 6011 prescribe. 

In addition, the Secretary has general 

regulatory authority under section 

7805(a) to ‘‘prescribe all needful rules 

and regulations for the enforcement of’’ 

the Code. The Treasury Department and 

the IRS have clear authority to issue the 

proposed regulations and have followed 

the procedural requirements of the APA. 

As explained more fully throughout this 

Summary of Comments and Explanation 

of Revisions, these final regulations are 

based on consideration of comments in 

response to the proposed regulations, 

case law, and the IRS’s years of 

experience with abusive micro-captives. 

E. Definition of Insurance for Federal 

Tax Purposes 

Commenters also argued that by 

identifying a micro-captive transaction 

as a listed transaction or a transaction of 

interest on the basis of a Loss Ratio 

Factor, a Financing Factor, or both, the 

proposed regulations define insurance 

for Federal tax purposes in a manner 

inconsistent with case law. Commenters 

cited a number of cases, including 

Reserve Mech. Corp. v. Commissioner, 


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Federal Register / Vol. 90, No. 8 / Tuesday, January 14, 2025 / Rules and Regulations 3539 

34 F.4th 881 (10th Cir. 2022), aff’g, T.C. 

Memo. 2018–86; United Parcel Service 

of America, Inc. v. Commissioner, 254 

F.3d 1014 (11th Cir. 2001); Harper Grp. 

v. Commissioner, 979 F.2d 1341 (9th 

Cir. 1992), aff’g, 96 T.C. 45 (1991); Sears 

Roebuck & Co. v. Commissioner, 972 

F.2d 858 (7th Cir. 1992); AMERCO v. 

Commissioner, 96 T.C. 18 (1991); 

Humana, Inc. v. Commissioner, 881 

F.2d 247 (6th Cir. 1989); Caylor, T.C. 

Memo. 2021–30; Syzygy, T.C. Memo. 

2019–34; Avrahami, 149 T.C. 144 

(2017); R.V.I. Guar. Co. v. 

Commissioner, 145 T.C. 209 (2015); 

Rent-A-Center, 142 T.C. 1 (2014); and 

Securitas Holdings, Inc. v. 

Commissioner, T.C. Memo. 2014–225. 

Additionally, several commenters 

pointed to the IRS’s concession in 

Puglisi v. Commissioner, 2021 WL 

7162530 (T.C. Oct. 29, 2021), as proof 

that the IRS has accepted facts similar 

to those described in the proposed 

regulations as insurance for Federal tax 

purposes, and therefore, the apparent 

attempt by the proposed regulations to 

redefine insurance for Federal tax 

purposes is contrary to established 

precedent. 

The proposed regulations do not 

redefine insurance for Federal tax 

purposes by identifying the specific fact 

patterns set forth in §§ 1.6011–10 and 

1.6011–11 as listed transactions or 

transactions of interest, respectively. 

The proposed regulations identify fact 

patterns that are consistently present in 

the micro-captive cases tried on their 

merits and the examined cases with 

respect to which the IRS has determined 

that the transaction at issue lacked the 

necessary characteristics, based on the 

specific facts in each case, to qualify as 

insurance for Federal tax purposes 

under existing caselaw. (Although 

section 6103 prohibits the IRS from 

disclosing specific taxpayer 

information, it does not preclude the 

IRS from identifying consistent fact 

patterns based on specific taxpayer 

information.) 

For specific cases with respect to 

which the IRS received comments, 

section 6103 of the Code prohibits the 

IRS from discussing taxpayer return 

information. However, section 

6103(b)(2) clarifies that the IRS is not 

prohibited from disclosing information 

to the extent it is ‘‘in a form which 

cannot be associated with, or otherwise 

identify, directly or indirectly, a 

particular taxpayer,’’ such as, for 

example, fact patterns based on specific 

taxpayer return information. In general, 

there are a variety of reasons why 

certain examined cases may have 

conceded an otherwise valid challenge 

to the taxpayer’s position, either by the 

IRS Independent Office of Appeals 

(Appeals) or in litigation. 

Several commenters incorrectly 

assumed that the proposed regulations 

declare all entities electing the 

alternative tax under section 831(b) as 

tax avoidant or potentially tax avoidant, 

contrary to Congressional intent to 

encourage the use of small captives by 

enacting section 831(b) and subsequent 

amendments thereof, including section 

333 of the PATH Act. This assumption 

is incorrect for several reasons. First, the 

proposed regulations identify a specific 

fact pattern involving 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 Insured or an Owner (as such 

terms are defined in § 1.6011–10(b)). 

The definition of Captive includes the 

section 831(b) election, but there are 

several other factors that must be met 

before the transaction is described as a 

Micro-captive Listed Transaction or a 

Micro-captive Transaction of Interest. 

The closely held nature of the 

arrangement coupled with the section 

831(b) election and the use of premiums 

for personal investments or for relatedparty financing and not to pay losses are 

what renders these transactions 

appropriate subjects of disclosure as tax 

avoidance transactions or transactions 

of interest. 

Second, Congress enacted section 

831(b) in the interest of simplifying the 

Code, not to encourage the use of small 

captive insurance companies. H.R. Rep. 

No. 99–426, at 678 (1985) (‘‘The present 

law applicable to small and certain 

ordinary mutual companies is 

inordinately complex and should be 

simplified.’’). Congress amended section 

831(b) to provide that the election may 

be revoked only with the consent of the 

Secretary, with the clear intent ‘‘that the 

election not be used as a means of 

eliminating tax liability (e.g., by making 

the election only for years when the 

taxpayer does not have net operating 

losses), but rather as a simplification for 

small companies.’’ H.R. Rep. No. 100– 

795, at 121 (1988); S. Rep. 100–445, at 

127 (1988). Nothing in the statutory 

language or the legislative history of 

section 831(b) suggests that Congress 

intended to provide the benefits of 

section 831(b) to companies that do not 

qualify as insurance companies for 

Federal tax purposes. 

Third, the Code does not permit a 

current deduction for amounts set aside 

for self-funding of future losses. See, 

e.g., Harper Grp, 96 T.C. at 46 n.2 (1991) 

(‘‘Losses incurred by the self-insured 

taxpayer are deductible (if at all) only in 

the year paid out from the reserve 

fund.’’), aff’d, 979 F.2d 1341 (9th Cir. 

1992); Stearns-Roger Corp. v. United 

States, 774 F.2d 414, 415 (10th Cir. 

1985) (‘‘Payments [for self-insurance] 

are not deductible as insurance 

premiums’’). The transactions described 

in § 1.6011–11 have many of the 

characteristics of self-insurance, and as 

such, taxpayers who deduct amounts 

paid to captives in such transactions 

may be engaged, as a matter of 

substance, in self-insurance, but more 

information is needed to determine if 

that is the case. 

F. Small and Mid-Sized Businesses and 

the Captive Industry 

A number of commenters suggested 

that the proposed regulations 

discriminate against small and midsized businesses by designating certain 

micro-captive transactions as listed 

transactions, and certain other microcaptive transactions as transactions of 

interest. Commenters also stated that the 

proposed regulations will impermissibly 

chill the captive insurance industry. 

Although it may be the case that many 

small and mid-sized businesses utilize 

captive insurance entities that make an 

election under section 831(b), the 

proposed regulations do not 

discriminate against such businesses on 

the basis of their size by identifying 

their captive as a Micro-captive Listed 

Transaction or a Micro-captive 

Transaction of Interest. Regarding 

Insureds, there is no specific size of 

company at issue; large and small 

businesses alike may engage in a captive 

insurance transaction, but if such 

transaction meets the description of a 

Micro-captive Listed Transaction or a 

Micro-captive Transaction of Interest, 

the participants in and material advisors 

thereof must file disclosure statements. 

The Treasury Department and the IRS 

do not intend to discourage the use of 

section 831(b) by entities that qualify for 

the election, nor should these 

regulations be construed as intending to 

discourage the use of section 831(b) by 

such entities. These regulations do not 

hinder the formation of valid captive 

insurance companies, as discussed more 

fully at parts VI.C. and H. of the 

Summary of Comments and Explanation 

of Revisions. 

II. Comments and Changes Relating to 

the Loss Ratio Factors as Described in 

Proposed §§ 1.6011–10(c)(2) and 

1.6011–11(c) 

A. Overview of Comments Relating to 

the Loss Ratio Factors 

Commenters expressed a number of 

concerns about the Loss Ratio Factors 


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3540 Federal Register / Vol. 90, No. 8 / Tuesday, January 14, 2025 / Rules and Regulations 

and Computation Periods. In response 

to these concerns, the final regulations 

significantly narrow the scope of the 

Micro-captive Listed Transaction 

description by providing that 

transactions are identified as listed 

transactions under the final regulations 

only if both the Financing Factor and 

the Loss Ratio Factor tests are met. The 

final regulations also lower the Loss 

Ratio Factors for both Micro-captive 

Listed Transactions and Micro-captive 

Transactions of Interest in response to 

comments. With respect to the proposed 

Loss Ratio Computation Period set forth 

at proposed § 1.6011–10(b)(2)(ii) and the 

proposed Transaction of Interest 

Computation Period set forth at 

proposed § 1.6011–11(b)(2) (collectively, 

the ‘‘Computation Periods’’), as further 

discussed in this part II. of the Summary 

of Comments and Explanation of 

Revisions, the final regulations make no 

substantive changes to the Loss Ratio 

Computation Period but do extend the 

Transaction of Interest Computation 

Period to a period of up to ten years. 

Many of the comments related to the 

Loss Ratio Factors in the proposed 

regulations raised multiple concerns 

that were not clearly delineated from 

other comments or recommendations. 

For clarity, comments received with 

respect to the Loss Ratio Factors are 

addressed categorically in the remaining 

subparts of this part II. of the Summary 

of Comments and Explanation of 

Revisions. 

B. Tax Avoidance or Potential for Tax 

Avoidance Identified by Loss Ratio 

Factors 

Several commenters suggested that 

the Loss Ratio Factors as set forth at 

proposed §§ 1.6011–10(c)(2) and 

1.6011–11(c) are inappropriate metrics 

for the captive insurance industry and 

should not be determinative of whether 

a transaction is a Micro-captive Listed 

Transaction or a Micro-captive 

Transaction of Interest. Some cited 

Puglisi, 2021 WL 7162530, for support, 

suggesting that the IRS conceded the 

case because the captive at issue, which 

had a loss ratio below 65 percent, was 

not participating in a tax avoidance 

transaction. Commenters also argued 

that the IRS is treating similarly situated 

taxpayers differently, by predicating 

whether a micro-captive transaction 

involving an entity electing the 

alternative tax under section 831(b) is a 

reportable transaction using the Loss 

Ratio Factors but not doing the same for 

entities that do not make the section 

831(b) election. Other commenters 

asserted that the Loss Ratio Factors were 

inappropriate because captives may 

recover funds through reinsurance, 

which would have the effect of lowering 

loss ratios. 

In the context of closely held section 

831(b) entities, the Loss Ratio Factors 

generally identify transactions involving 

circumstances inconsistent with 

insurance for Federal tax purposes, 

including excessive pricing of 

premiums and artificially low or 

nonexistent claims activity. The Loss 

Ratio Factor measures whether the 

amount of liabilities incurred for 

insured losses and claims 

administration expenses is significantly 

less than the amount of premiums 

earned, adjusted for policyholder 

dividends. 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, to ensure that policies are 

‘‘price[d] in such a way that the 

premiums brought in cover losses and 

the insurer’s business expenses with 

enough profit left over to keep investors 

happy.’’ Avrahami, 149 T.C. at 152. 

Typically, actuaries establish a policy 

rating scheme and classify risks ‘‘‘to 

allow credible statistical inferences 

regarding expected outcomes.’’’ Id. 

(quoting Actuarial Standard of Practice 

No. 12: Risk Classification (for All 

Practice Areas), sec. 3.3 (Actuarial 

Standards Bd. 2005). The work should 

be reproducible and permit ‘‘another 

actuary qualified in the same practice 

area [to] make an objective appraisal of 

the reasonableness of the actuary’s 

work.’’ Actuarial Standard of Practice 

No. 41: Actuarial Communications, sec. 

3.2 (Actuarial Standards Bd. 2010), 

https://www.actuarial

standardsboard.org/standards-ofpractice/ (last visited Jan. 6, 2025). 

Pricing premiums far in excess of what 

is reasonably needed to fund insurance 

operations results in a lower loss ratio 

and remains a strong indicator of tax 

avoidance. Further, while amounts paid 

for insurance may be deductible 

business expenses, amounts set aside in 

a loss reserve as a form of self-insurance 

are not. See, e.g., Harper Grp., 96 T.C. 

at 46 n.2; Stearns-Roger Corp., 774 F.2d 

at 415. 

With respect to comments suggesting 

that the outcome of specific examined 

cases (such as Puglisi, 2021 WL 

7162530) demonstrates the impropriety 

of using Loss Ratio Factors generally, or 

that determinations in such cases 

demonstrate that the Service is treating 

similarly situated taxpayers differently, 

section 6103 prohibits the IRS from 

disclosing specific taxpayer 

information. However, as discussed in 

part I.E. of this Summary of Comments 

and Explanation of Revisions, section 

6103 does not preclude the IRS from 

identifying consistent fact patterns 

based on specific taxpayer information. 

The IRS’s decision to concede or settle 

a given case in no way alters these 

findings and conclusions, nor are these 

findings and conclusions altered by the 

examination of entities that do not fit 

the identified fact pattern. 

Further, commenters suggested that 

the inclusion of a section 831(b) election 

as an identifying factor in the proposed 

regulations but not doing the same for 

entities that do not make a section 

831(b) election means similarly situated 

taxpayers are being treated differently. 

However, an entity that does not make 

a section 831(b) election is not similarly 

situated. An insurance company taxed 

under section 831(a) has a 

corresponding income recognition for 

amounts paid as insurance premiums, 

lessening the potential of ongoing tax 

deferral present in the transactions 

identified by these regulations. 

In response to the commenters who 

asserted that reinsurance would have 

the effect of lowering loss ratios, the 

Treasury Department and the IRS 

respectfully disagree. Any reinsurance 

obtained by the Captive for risks 

attributable to direct written coverage 

would tend to reduce the premiums 

earned by the Captive (as most if not all 

amounts attributable to the reinsurance 

would typically be ceded to the 

reinsurer and deducted from premiums 

earned), thereby increasing the Captive’s 

Loss Ratio Factor percentage and 

making it less likely that such 

transaction would be described in the 

regulations. The final regulations do not 

eliminate the Loss Ratio Factors based 

on these and similar comments. 

C. Potential To Capture Transactions 

That Are Not Tax Avoidance 

Transactions as Listed Transactions 

Commenters asserted that microcaptive transactions that are not tax 

avoidance transactions may have loss 

ratios that fall below the threshold 

established by the Loss Ratio Factors. 

Commenters opined that a loss ratio 

factor of 65 percent leaves 

determination of whether a transaction 

is a listed transaction up to ‘‘random 

chance,’’ because future loss experience 

cannot be known when premiums are 

set, which makes the Loss Ratio Factors 

inappropriate for identifying tax 

avoidance transactions or transactions 

of interest. Commenters stated that 

premiums are intentionally set at high 

rates for long periods of time to ensure 

that there are adequate reserves to pay 

claims in case of catastrophic loss. Some 

suggested that transactions meeting the 

proposed 65 percent Loss Ratio Factor 


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using a ten-year Loss Ratio Computation 

Period be identified as Micro-captive 

Transactions of Interest instead of 

Micro-captive Listed Transactions. 

Commenters expressed concern that 

transactions that are not tax avoidance 

transactions would be captured if the 

Loss Ratio Factors are retained, arguing 

that limited loss history does not mean 

that risks are not present, or that 

premiums are overpriced. Commenters 

pointed to a governmental program that 

provides reimbursement coverage for 

certain losses attributable to acts of 

terrorism set forth in the Terrorism Risk 

Insurance Act of 2002 (‘‘TRIA’’) as an 

example for why a loss ratio well below 

the proposed 65 percent is not 

inherently indicative of tax avoidance. 

Several commenters pointed to the Tax 

Court’s holdings in R.V.I. Guar. Co., Ltd. 

& Subs. v. Commissioner, 145 T.C. 209 

(2015), as support for why the proposed 

65 percent for a loss ratio is too high. 

With respect to concerns that 

transactions that are not tax avoidance 

transactions could be identified as 

Micro-captive Listed Transactions based 

on a ten-year Loss Ratio Computation 

Period and proposed 65 percent Loss 

Ratio Factor, the IRS recognizes that low 

loss ratios may be the result of coverage 

of low-frequency, high-severity risks. 

Inherent in insurance underwriting is 

the concept that by assuming numerous 

independent risks that will occur 

randomly, losses will become more 

predictable over time, and pricing 

should reflect those anticipated losses. 

See, e.g., Clougherty Packing Co., Inc. v. 

Commissioner, 811 F.2d 1297, 1306 (9th 

Cir. 1987) (‘‘The likelihood that a loss 

will occur is of uncertain but 

predictable magnitude; the size of the 

loss is similarly uncertain but 

predictable.’’). This concept is notably 

absent from the micro-captive cases 

tried to date, as premiums were 

consistently priced to meet the target 

threshold under section 831(b) without 

regard to reasonable estimates for loss 

experience. See Avrahami, 149 T.C. at 

194–198; Syzygy, T.C. Memo. 2019–34, 

at *33–34; Caylor, T.C. Memo. 2021–30, 

at *45–47; Keating, T.C. Memo. 2024–2, 

at *59–61; Swift, T.C. Memo. 2024–13, 

at *40–42; Patel, T.C Memo. 2024–34, at 

*48–50; and Royalty Mgmt., T.C. Memo. 

2024–87, at *23, 46–48; see also Reserve 

Mech., 34 F.4th at 891–94. The Loss 

Ratio Factor percentage is not intended 

to act as a proxy for the actuarial basis 

of premium pricing, as such a basis 

would be too fact specific to establish an 

administrable test that would 

adequately put all relevant taxpayers on 

notice of their obligations under the 

Code in accordance with every 

taxpayer’s right to be informed. See 

Taxpayer Bill of Rights, https://

www.irs.gov/taxpayer-bill-of-rights (last 

visited Jan. 6, 2025). 

Commenters identifying loss ratios at 

issue in specific Tax Court cases did not 

specify what the loss ratios would be in 

those cases if computed as set forth in 

the proposed regulations over the 

proposed ten-year Loss Ratio 

Computation Period, nor did they 

specify an administrable metric that 

would enable better identification of tax 

avoidance transactions. The inclusion of 

a ten-year Loss Ratio Computation 

Period is intended to allow a Captive 

significant time to develop a reasonable 

loss history that supports the use of a 

micro-captive for legitimate insurance 

purposes. The final regulations retain 

the ten-year Loss Ratio Computation 

Period in the proposed listed 

transaction regulations, but in response 

to concerns that the proposed Loss Ratio 

Factors are nevertheless set too high and 

will capture transactions that are not tax 

avoidance transactions, the final 

regulations lower the Loss Ratio Factor 

for purposes of designating a listed 

transaction under § 1.6011–10 to 30 

percent. 

The percentage was selected in 

response to comments indicating that 

the Tax Court’s holding in R.V.I. 

supports a lower loss ratio. R.V.I. is the 

one case cited by commenters that 

analyzed loss ratios for time periods 

corresponding to the Loss Ratio 

Computation Period for the Microcaptive Listed Transaction. In R.V.I., the 

Tax Court listed the captive’s loss ratios 

from 2000 through 2013. R.V.I., 145 T.C. 

at 216. The listed loss ratios ranged from 

a low of 0.2 percent (2012) to a high of 

97.9 percent (2008). Id. As the Tax Court 

found, when considered in their totality, 

these ratios reflect ‘‘significant claims 

and . . . . significant insurance losses.’’ 

Id. at 215. The average loss ratio in 

R.V.I. for the five ten-year periods 

analyzed by the Tax Court (2000 

through 2009; 2001 through 2010; 2002 

through 2011; 2003 through 2012; and 

2004 through 2013) themselves ranged 

from a low of 28 percent (2000 through 

2009) to a high of 35 percent (2004 

through 2013). Taking the average of 

those five ten-year periods, the average 

ten-year loss ratio in the R.V.I. case was 

32 percent. This amount is rounded 

down to 30 percent in the final 

regulations. 

Further, to better target those 

transactions that are properly identified 

as listed transactions rather than as 

transactions of interest, the final 

regulations require that the transaction 

meet both the Loss Ratio Factor and the 

Financing Factor (a conjunctive test) to 

be designated as a listed transaction, as 

explained more fully in part III. of this 

Summary of Comments and Explanation 

of Revisions. This change to a 

conjunctive test, coupled with the lower 

Loss Ratio Factor percentage for Microcaptive Listed Transactions, 

significantly narrows the scope of the 

Micro-captive Listed Transaction in the 

final regulations and should provide 

adequate relief for taxpayers who 

suggested comparisons to specific 

business line loss ratios, as well as for 

taxpayers who expressed concerns 

about the breadth of the Micro-captive 

Listed Transaction under the proposed 

regulations or who requested that 

transactions that would have met the 

proposed 65 percent Loss Ratio Factor 

be identified as transactions of interest 

instead. Although the example of the 

TRIA’s loss experience is not strictly 

relevant (that is, because the TRIA is a 

governmental relief program, not an 

insurance company) the significantly 

narrowed scope of the Micro-captive 

Listed Transaction is intended to 

respond to concerns that lower losses do 

not necessarily mean risks were not 

present or that premiums were 

overpriced. 

For clarity, the proposed Loss Ratio 

Computation Period is retitled as the 

‘‘Listed Transaction Loss Ratio 

Computation Period’’ and the proposed 

Transaction of Interest Computation 

Period is retitled as the ‘‘Transaction of 

Interest Loss Ratio Computation 

Period’’. The final regulations generally 

retain the substance of the proposed 

Computation Periods except the 

Transaction of Interest Loss Ratio 

Computation Period is increased in the 

final regulations from a Captive’s nine 

most recent taxable years to its ten most 

recent taxable years (or all taxable years 

of the Captive’s existence if it has been 

in existence for less than ten taxable 

years) as discussed more fully in part 

II.D. of this Summary of Comments and 

Explanation of Revisions. If an 

established transaction that is otherwise 

described in the final regulations has 

not had adequate time to develop a tenyear loss history, the transaction may 

only be designated as a transaction of 

interest rather than a listed transaction. 

In addition, the Loss Ratio Factor for 

identification as a transaction of interest 

is also lowered from 65 percent to 60 

percent in the final regulations, as 

described in part II.D. of this Summary 

of Comments and Explanation of 

Revisions. 

D. Comparison to National Averages 

The proposed Loss Ratio Factors were 

generally formulated by using the 

medical loss ratio in section 833 of the 


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Code, to inform the original loss ratio 

factor in Notice 2016–66, and by using 

national data for commercial property 

and casualty insurers, to inform the 

proposed regulations. A number of 

commenters contended that these 

metrics are inappropriate because 

section 831(b) captive insurers are 

materially different from commercial 

insurers due to the different types of 

coverage offered by commercial and 

captive insurers. For example, several 

commenters asserted that the inclusion 

in national averages of certain lines of 

coverage (identified by one commenter 

as private passenger auto liability, 

commercial auto liability, and accident 

and health coverage lines) that captives 

do not typically write, or may not be 

permitted to write, may tend to skew 

industry-wide loss ratios higher. 

Another commenter relatedly suggested 

that the Loss Ratio Factor’s reliance on 

data from the National Association of 

Insurance Commissioners (NAIC) as a 

benchmark was inappropriate because 

the data does not include the experience 

of the vast majority of captive insurance 

companies, including those which have 

elected to be taxed under section 831(b). 

One commenter asserted that the 

national industry average relied upon in 

the proposed regulations lacks an 

actuarial basis, and another commenter 

stated that aggregated data of the U.S. 

property-casualty insurance industry 

would reflect more risk diversification 

and geographic diversity than would be 

present in a typical micro-captive 

arrangement. 

As noted in the preamble to the 

proposed regulations, the Loss Ratio 

Factors are modified loss ratios spread 

out over the course of many years, 

unlike the single-year NAIC averages, 

and are also lower than the NAIC 

industry averages. The NAIC industry 

averages ranged between 67.2 and 76.2 

percent per year from 2012 to 2021. See 

Insurance Industry Snapshots and 

Analysis Reports, https://

naic.soutronglobal.net/Portal/Public/enUS/RecordView/Index/26555 (last 

visited Jan. 6, 2025). In the latest 

published NAIC industry report, 

national averages ranged between 69.0 

and 76.4 percent per year from 2014 to 

2023. See 2023 Annual Property & 

Casualty Insurance and Title Insurance 

Industries Analysis Report, https://

naic.soutronglobal.net/Portal/Public/enUS/RecordView/Index/26555 (last 

visited Jan. 6, 2025). Accordingly, even 

a Captive electing the alternative tax 

under section 831(b) that has a loss ratio 

below the industry-wide average for 

property and casualty companies in a 

given year will not necessarily have a 

loss ratio that causes it to be a 

participant to a transaction identified by 

the regulations. 

With respect to concerns that the use 

of NAIC data as a benchmark for the 

Loss Ratio Factor is inappropriate 

because the NAIC does not capture 

micro-captive data, the commenter did 

not identify any alternative published 

data set that would capture the 

experience of ‘‘the vast majority of 

captive insurance companies, including 

micro-captive insurance companies,’’ 

nor is the IRS aware of one. The 

commenter included a table illustrating 

the distribution of AM Best Company’s 

average loss and loss administration 

expenses ratios for small insurance 

companies, described as insurers 

grouped by capital and surplus up to 

$10 million, but this data set is 

inappropriate. As the commenter noted, 

the AM Best Company’s data set 

includes ‘‘vastly different claims 

characteristics than micro-captives’’ 

covering risks that micro-captives are 

not generally permitted to cover, such as 

personal automobile liability and 

homeowner’s liability. The NAIC data, 

conversely, represents industry averages 

generally applicable to all nonlife 

insurers, and, accordingly, was relied 

upon in the proposed regulations as a 

starting point, which was modified by 

the inclusion of policyholder dividends 

in the computation and by the 

application of an extended Computation 

Period. Further, as previously discussed 

in part II.C. of this Summary of 

Comments and Explanation of 

Revisions, the threshold for the Loss 

Ratio Factor for identification of a 

Micro-captive Listed Transaction has 

been lowered significantly in the final 

regulations. 

The comments regarding the lines of 

coverage included in the NAIC averages 

provide support for a reduction to the 

proposed Loss Ratio Factor for 

identification as a transaction of 

interest. The specific business lines 

identified by the commenters would, 

based on the NAIC Profitability Study 

provided by one of the commenters, 

result in an average nine-year loss ratio 

of approximately 59 percent. However, 

there are other high frequency, low 

severity coverages and other business 

lines that captives are unlikely to cover 

in the data provided by the commenter 

that the commenter failed to mention: 

private passenger auto physical damage, 

homeowners’ multiple peril, and 

mortgage guaranty lines. Removing 

these lines from the data set provided by 

the commenter would reduce the 

average nine-year loss ratio percentage 

from 65 percent identified in the 

proposed regulations to slightly over 60 

percent. 

However, this relies on the national 

average computation of loss ratios, 

which as commenters pointed out, is 

not the modified computation set forth 

in the proposed regulations. The 

modified computation ratio in the final 

regulations would potentially be lower, 

in part because policyholder dividend 

payments reduce the ratio. To determine 

what the average loss ratio would be 

using the modified loss ratio 

computation set forth in the proposed 

regulations, the IRS considered the 

annual NAIC Report on Profitability by 

Line by State for each year from 2013 

through 2022 to understand a typical 

property and casualty company loss 

ratio. See, e.g., 2013 Report on 

Profitability by Line by State, Center for 

Insurance Policy & Research, https://

naic.soutronglobal.net/Portal/Public/enUS/RecordView/Index/7008 (last visited 

Jan. 6, 2025). By removing the high 

frequency, low severity coverages that 

captives are unlikely to cover for each 

year from 2013 through 2022 from the 

annual data and computing the 

comparison of liabilities incurred for 

insured losses and claim administration 

expenses to premiums earned less 

policyholder dividends as set forth in 

the regulations, the average nine-year 

modified loss ratio is approximately 66 

percent, which is slightly higher than 

the proposed 65 percent established in 

the proposed regulations. The average 

ten-year modified loss ratio is also 

slightly higher, at approximately 67 

percent. 

In light of commenters’ concerns that 

the proposed 65 percent modified loss 

ratio is still too high, the Loss Ratio 

Factor percentage for identification of a 

transaction of interest in these 

regulations is lowered to 60 percent. 

This amount represents a discount from 

the lowest loss ratio supported by 

available data. The Loss Ratio Factor 

percentage for identification as a listed 

transaction has been reduced much 

more substantially to 30 percent, for 

other reasons, as described in part II.C. 

of this Summary of Comments and 

Explanation of Revisions. In the interest 

of ensuring all taxpayers can easily 

determine their status under the 

regulations, the Loss Ratio Factor 

remains based on the aggregated NAIC 

average as modified in the final 

regulations; although commenters were 

critical of the aggregated data provided 

by the NAIC, commenters did not point 

to, and the IRS is not aware of, an 

alternative publicly-available data set 

that would be more appropriate. 

Further, the Treasury Department and 

the IRS considered alternative 


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Computation Periods and determined 

that a difference of one year in the 

Computation Periods between the 

Micro-captive Listed Transaction and 

the Micro-captive Transaction of 

Interest when the loss ratio thresholds 

are different adds unnecessary 

complexity and burden to affected 

taxpayers. The Transaction of Interest 

Loss Ratio Computation Period is 

accordingly increased to a period of up 

to ten years, or if the Captive has not 

been existence for ten full years, all 

years of the Captive’s existence. This 

change will afford affected taxpayers 

more time to develop a loss history and 

will enable the computation of one ratio 

when affected taxpayers are considering 

if they need to report under § 1.6011–10 

or § 1.6011–11. 

E. Proposed Alternatives to the Loss 

Ratio Factors 

Commenters suggested alternatives to 

the Loss Ratio Factors including: (1) 

evaluating the methodology used to 

price premiums to ensure the premiums 

either are priced commensurate with 

commercial insurance market 

premiums, or are priced at arm’s length, 

given that several Code sections (such as 

section 482) and the regulations 

thereunder place strict limitations on 

what may be considered arm’s length in 

a given industry; (2) applying the 

definition of a qualified insurance 

company (QIC) set forth in the passive 

foreign investment company rules; (3) 

comparing micro-captives to 

commercial carriers and special 

markets, such as commercial excess and 

surplus lines (‘‘E&S’’) carriers; (4) 

comparing micro-captives to county 

mutual insurance companies, which 

commenters said have loss ratios of 40 

percent and frequently make section 

831(b) elections; or (5) establishing 

variations of the Loss Ratio Factors for 

specific regions or States. These 

recommendations are addressed in turn 

in this part II.E. of the Summary of 

Comments and Explanation of 

Revisions. 

1. Premium Pricing Methodology 

Many commenters stated that they 

believe a better standard for assessing 

whether a micro-captive transaction 

should be identified as a listed 

transaction is to evaluate whether an 

independent, licensed actuary annually 

determines the premiums. Some 

commenters suggested that the IRS’s 

real concern is whether premiums are 

priced fairly, and that if taxpayers can 

demonstrate that the premiums were 

priced by a credentialed actuary, 

employing actuarial techniques to 

establish premium rates that 

appropriately reflect the risk of loss and 

applicable costs, the transaction should 

be of no concern to the IRS. 

The determination of whether a 

transaction is insurance for Federal tax 

purposes is based on the totality of the 

circumstances, but these regulations are 

not defining insurance for either Federal 

or State law purposes. Rather, these 

regulations identify a set of recurring 

and consistent fact patterns indicating 

the lack of a non-tax business purpose 

in related-party transactions that 

purport to offer insurance for Federal 

tax purposes. In related party 

transactions, the lack of arm’s length 

dealing is often a source of abuse. In the 

micro-captive cases tried to date, the 

participation of an actuary or other 

professional in the computation of the 

premiums (and the taxpayer’s insistence 

that pricing was at arm’s length) was not 

sufficient to make the premiums 

reasonable, as is necessary for a valid 

insurance transaction for Federal tax 

purposes. See, e.g., Avrahami, 149 T.C. 

at 196; Syzygy, T.C. Memo. 2019–34, at 

*34–36; Caylor, T.C. Memo. 2021–30, at 

*45–47; Keating, T.C. Memo. 2024–2, at 

*61–62; Swift, T.C. Memo. 2024–13, at 

*41–44; Patel, T.C. Memo. 2024–34, at 

*49–50; and Royalty Mgmt., T.C. Memo. 

2024–87, at *46–47; see also Reserve 

Mech., T.C. Memo. 2018–86, at *55–56, 

61; cf. Harper Grp., 96 T.C. at 59 

(premiums were stipulated to be priced 

at arm’s length); Securitas, T.C. Memo. 

2014–225, at *12 n.4 (‘‘Respondent does 

not challenge the reasonableness of 

premiums.’’). 

For example, in Avrahami, the 

premiums were priced by a credentialed 

actuary. The Tax Court was 

unpersuaded that the actuary’s 

involvement resulted in reasonable 

premiums and found that the actuary’s 

‘‘calculations [were] aimed not at 

actuarially sound decision-making but 

at justifying total premiums as close as 

possible to $1.2 million—the target— 

without going over.’’ 149 T.C. at 196. 

The Tax Court expressed similar 

skepticism in subsequent micro-captive 

cases. See, e.g., Syzygy, T.C. Memo. 

2019–34, at *17–18, 34–36 (finding that 

premiums were not actuarially 

determined after concluding that there 

was no evidence demonstrating that 

actuarial methods were followed; that a 

feasibility study completed by an 

actuarial consulting firm and an 

actuarial review completed by the State 

of Delaware Department of Insurance 

were focused on solvency, not the 

reasonableness of premiums; and that 

the advice of a credentialed actuary was 

ignored regarding the allocation of 

premiums between layers in a layered 

reinsurance arrangement); Caylor, T.C. 

Memo. 2021–30, at *45–47 (finding that 

a captive manager’s pricing 

methodology was not actuarially 

sound); Keating, T.C. Memo. 2024–2, at 

*30 n.30 (actuary’s opinion that pricing 

methodology was reasonable did not 

address specific policies). Further, 

while section 482 and the regulations 

thereunder provide standards for when 

a transaction between related parties is 

considered arm’s length, such 

determination is wholly fact specific to 

each arrangement and thus 

inappropriate as a metric for identifying 

reportable transactions. 

Accordingly, the final regulations do 

not adopt the commenters’ 

recommendation to replace the Loss 

Ratio Factors with a metric evaluating 

pricing methodology. While 

commenters were critical of the Loss 

Ratio Factors and suggested that the IRS 

evaluate pricing methodology, they 

provided no specific pricing 

methodology or reliable commercial 

market source that would enable the IRS 

to better distinguish between 

transactions that are or may be tax 

avoidance transactions and those that 

are not. The final regulations do not 

adopt any changes based on this 

recommendation. 

2. Qualified Insurance Company Rules 

Section 1297 of the Code sets forth the 

rules for determining whether a foreign 

corporation is a passive foreign 

investment company (PFIC), which can 

result in adverse Federal tax 

consequences to a U.S. shareholder of 

that corporation. Generally, pursuant to 

section 1297(a), a foreign corporation is 

a PFIC if: (1) 75 percent or more of its 

gross income for the taxable year is 

passive income or (2) the average 

percentage of assets held by such 

corporation during the taxable year 

which produce passive income or which 

are held for the production of passive 

income is at least 50 percent. However, 

section 1297(b)(2)(B) provides that 

passive income does not include income 

derived in the active conduct of an 

insurance business by a QIC. Generally, 

to be a QIC, the foreign insurer must: (1) 

be a corporation that would be subject 

to tax under Subpart L if it were a 

domestic corporation and (2) have 

‘‘applicable insurance liabilities’’ (AILs) 

that exceed 25 percent of its total assets, 

as provided in section 1297(f)(1), which 

is referred to as the ‘‘AIL test’’ in this 

preamble. 

The commenter stated that QIC status 

creates a rebuttable presumption that 

the purported insurer is a bona fide 

insurance company and that applying 

the same QIC test to domestic insurers 

that have elected to be taxed under 


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section 831(b) should create a similar 

rebuttable presumption in these 

regulations. 

The Treasury Department and the IRS 

have determined that QIC status is not 

appropriate for determining whether a 

micro-captive transaction is a tax 

avoidance transaction or has the 

potential to be a tax avoidance 

transaction. Foremost, QIC status does 

not create a rebuttable presumption that 

the foreign company is a bona fide 

insurance company. Rather, QIC status 

depends on the foreign company being 

a bona fide insurance company, as that 

is a prerequisite to satisfying the first 

prong of the QIC test, that it would be 

subject to tax under subchapter L (that 

is, would be taxable as an insurance 

company for Federal tax purposes) if it 

were a domestic corporation. The 

commenter’s proposed test is 

unworkable because it is circular. 

Further, the entities identified as 

Captives by the proposed and final 

regulations claim eligibility to be taxed 

under section 831(b) of subchapter L 

and therefore would presumably take 

the position that they are subject to tax 

under subchapter L. However, as 

discussed more fully in parts I.E. and 

VI.C. of this Summary of Comments and 

Explanation of Revisions, litigation and 

audit experience demonstrate that many 

micro-captive transactions do not meet 

the requirements for taxation as 

insurance under the Code. 

Nor is the second prong of the QIC 

test, the AIL test, suitable for 

determining whether a company is a 

bona fide insurance company or for 

identifying micro-captive listed 

transactions or transactions of interest. 

The AIL test is based on the ratio of a 

foreign corporation’s applicable 

insurance liabilities to its total assets as 

reported on the foreign insurance 

company’s applicable financial 

statement for a taxable year, as those 

terms are defined in § 1.1297–4. 

The AIL test is appropriate in the 

PFIC context because the objective of 

the PFIC provisions generally, that is, 

independent of insurance 

considerations, is identifying foreign 

companies with U.S. shareholders that 

are predominately passive investment 

vehicles focused on holding investment 

assets and earning investment income. 

The AIL test achieves this objective by 

identifying foreign insurance companies 

that, though they are engaged in the 

active conduct of an insurance business, 

are nevertheless predominantly passive 

investment vehicles because they have a 

very large amount of total assets 

compared to their insurance liabilities. 

By failing the AIL test, such foreign 

insurance companies do not constitute 

QICs and therefore do not qualify for the 

PFIC insurance exception under section 

1297(b)(2)(B). 

The AIL test is not part of the 

determination of whether a foreign 

corporation would be an insurance 

company taxable under subchapter L if 

it were a domestic company. Further, a 

foreign insurance company that fails the 

AIL test would still be a PFIC even if it 

is a bona fide insurance company and 

is engaged in the active conduct of an 

insurance business. It is thus 

inappropriate to use the AIL test in 

determining if a company is a bona fide 

insurance company or to identify microcaptive listed transactions or 

transactions of interest. Instead, the Loss 

Ratio Factors are appropriate for this 

purpose, in part because one indicium 

of tax avoidance in a micro-captive 

transaction is excessive premium 

payments (which taxpayers claim are 

deductible to the Insured and not 

taxable to the Captive pursuant to the 

section 831(b) election) when compared 

to liabilities incurred for insured losses 

and claim administration expenses. 

3. Commercial and Special Markets 

Comparison 

Commenters compared micro-captives 

to commercial carriers and special 

markets, such as commercial E&S 

(excess and surplus lines) carriers. 

Commenters pointed out that many 

commercial insurance business lines 

and geographical locations consistently 

have loss ratios of less than 65 percent, 

and some recommended the loss ratio 

percentage be based on each line of 

coverage written by the Captive or 

similar coverages written by commercial 

carriers. One commenter identified 

specific commercial lines of coverage, 

including Boiler & Machinery, Burglary 

& Theft, Earthquake, Fidelity, Surety, 

and Other Liability-Claims Made, as 

examples of lines of coverage that many 

micro-captives offer and stated that 

micro-captives therefore have similar 

loss and loss ratio distributions to these 

commercial lines. 

Generally, commercial E&S carriers 

cover risks that are too uncommon, too 

large, or too unquantifiable to be 

insured by admitted carriers. In a 

commercial E&S market, multiple 

financial backers, grouped in 

syndicates, come together to pool and 

spread diversified risks that are placed 

with the syndicates through authorized 

brokers. Certain Captives may share 

some similarities with a commercial 

E&S carrier, but as a general matter, a 

typical micro-captive does not comport 

itself consistently with insurers 

operating in the commercial E&S 

market. For example, the risks covered 

by a micro-captive are often those of 

relatively few insureds who are 

concentrated in a small geographic 

region. See, e.g., Caylor, T.C. Memo. 

2021–30, at *38 (risks were 

concentrated in a group operating in a 

specific geographic location); Swift, T.C. 

Memo. 2024–13, at *31 (risks were 

concentrated in a specific industry in a 

small geographical area). Commenters 

did not explain what aspect of a 

commercial E&S carrier’s loss ratio is 

substantially comparable to the average 

loss ratio for a typical micro-captive or 

how a more reliable metric to identify 

tax avoidant micro-captives can be 

derived from a commercial E&S carrier’s 

loss ratio. Thus, loss ratio comparisons 

between micro-captives and commercial 

E&S carriers would not constitute an 

improvement over the current Loss 

Ratio Factors. 

With respect to comments suggesting 

alternatives based on comparable 

commercial lines, the Treasury 

Department and the IRS have 

determined sufficient relief is afforded 

by the reductions to the Loss Ratio 

Factors for both Micro-captive Listed 

Transactions and Micro-captive 

Transactions of Interest, as discussed 

further in parts II.C. and II.D. of this 

Summary of Comments and Explanation 

of Revisions. With respect to comments 

suggesting comparison to certain 

business lines, the Treasury Department 

and the IRS are not persuaded that the 

few specific lines identified by the 

commenters better represent the variety 

of lines offered by micro-captives than 

the case law and national averages for 

property and casualty companies 

(excluding certain consumer and 

business lines), as discussed further in 

parts II.C. and II.D. of this Summary of 

Comments and Explanation of 

Revisions. The final regulations do not 

adopt any changes based on these 

recommendations. 

4. County Mutual Insurance Company 

Comparisons 

A commenter suggested comparing 

micro-captives to county mutual 

insurance companies, which the 

commenter said have loss ratios of 40 

percent and frequently make section 

831(b) elections. Like commercial E&S 

and special markets, county mutual 

insurance companies are similarly 

inappropriate for comparison. Although 

they may also cover risks concentrated 

in a small geographical area, county 

mutual insurance companies are subject 

to different incentives and constraints 

compared to micro-captive insurance 

companies because they are wholly 

owned by their many unrelated 

policyholders in a manner that does not 


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resemble the closely held nature of 

micro-captive insurance companies. For 

example, if premiums collected by a 

county mutual insurance company are 

not used to pay claims, the unrelated 

policyholders would expect that the 

county mutual insurance company will 

reduce future premiums or return some 

portion of the excess funds to the 

owners as a dividend or return 

premiums. Micro-captive insurance 

companies, on the other hand, face no 

such expectation. The final regulations 

do not adopt any changes based on this 

recommendation. However, for the 

reasons described in part II.C. of this 

Summary of Comments and Explanation 

of Revisions, and consistent with the 

request by commenters regarding the 

loss ratios of county mutual insurance 

companies, the final regulations lower 

the Loss Ratio Factor for purposes of 

identification as a listed transaction 

under § 1.6011–10 to 30 percent. 

5. Variations for Regions or States 

Some commenters recommended 

establishing variations of the Loss Ratio 

Factors for specific regions or States. 

Accounting for disparities in loss 

experience from region to region would 

not be administrable, and, within a 

given region, different coverages would 

be subject to different disparities, which 

would further complicate the analysis. 

The final regulations do not adopt any 

changes based on this recommendation 

because the Treasury Department and 

the IRS have determined that sufficient 

relief is afforded by the changes to the 

Loss Ratio Factors described in parts 

II.C. and II.D. of this Summary of 

Comments and Explanation of 

Revisions. 

F. Inclusion of Policyholder Dividends 

in Loss Ratio Factor Computation 

Commenters expressed concerns 

about the inclusion of policyholder 

dividends in the computation, 

indicating that issuance of policyholder 

dividends may require regulatory 

approval and is not a common practice 

of micro-captives, thereby situating a 

micro-captive to fail the test for 

insurance in the commonly accepted 

sense. The Loss Ratio Factors are 

modified loss ratios, determined for 

Federal tax purposes, and the inclusion 

of policyholder dividends in the 

computation is intended to afford 

taxpayers a means of correcting 

inappropriately accumulated premiums, 

thereby avoiding characterization of 

their micro-captive arrangements as 

‘‘transactions of interest’’ or ‘‘listed 

transactions.’’ The Loss Ratio Factors 

have no other purpose or relevance and 

do not in any way affect or impede the 

functioning of a Captive. Further, 

removing policyholder dividends from 

the computation would unfairly 

disadvantage Captives that choose to 

use policyholder dividends to correct 

overpriced policies. The Treasury 

Department and the IRS are not 

persuaded that the issuance of 

policyholder dividends by itself would 

cause a transaction to fail the commonly 

accepted sense prong of the four-prong 

test for insurance for Federal tax 

purposes described in part I. of the 

Background of this Preamble. Courts 

consider many factors to determine 

whether an arrangement constitutes 

insurance in the commonly accepted 

sense, including whether policies are 

valid and binding, whether premiums 

were reasonable and the result of arm’s 

length transactions, and whether claims 

were paid, and no one factor within the 

commonly accepted sense prong is 

dispositive. See, e.g., Avrahami, 149 

T.C. at 191–97; Caylor, T.C. Memo. 

2021–30, at *41–48; and Keating, T.C. 

Memo. 2024–2, at *53–64. The final 

regulations do not modify the Loss Ratio 

Factors in response to these comments. 

G. Solvency Concerns 

Some commenters protested that 

establishing a minimum loss threshold 

by application of the Loss Ratio Factors 

would negatively impact solvency for 

captives, by requiring artificially low 

premiums or imprudent issuance of 

policyholder dividends. This concern is 

misplaced. Captive insurers would 

avoid insolvency in the same way they 

always have; that is, by insuring risks 

that are selected and duly reserved for 

in accordance with sound business 

judgement and the regulatory 

requirements of their domicile. Nothing 

in these regulations requires, 

encourages, or allows micro-captives to 

make contractual promises that exceed 

risk-bearing capabilities. The final 

regulations do not modify the Loss Ratio 

Factors in response to these comments. 

H. Clarifications Regarding Computation 

of Loss Ratio Factors 

Commenters argued that it may not be 

possible to calculate a loss ratio 

applicable to a given taxable year 

because losses under a policy may not 

be resolved for years (for example, longtail coverage), and sought some 

clarification in the computation of the 

Loss Ratio Factors. For example, 

commenters asked whether the 

‘‘liabilities incurred for insured losses’’ 

amount used in the Loss Ratio Factors 

computations includes losses incurred 

through participation in pooling 

arrangements, reinsurance agreements, 

and retrocession agreements, how 

micro-captives should compute the 

applicable loss ratio for long-tail 

coverage, and whether the current 

taxable year is included in the number 

of years being counted for the 

Computation Periods. 

The Computation Periods of ten years 

for Micro-captive Listed Transactions 

and up to ten years for Micro-captive 

Transactions of Interest, respectively, 

are intended to accommodate the 

existence of potential long-tail coverage. 

These commenters appear to 

contemplate situations in which a 

Captive incurs losses but for which 

claims have not been reported (incurred 

but not reported, or IBNR) or are 

undergoing further development 

(incurred but not enough reported, or 

IBNER). To clarify, the Loss Ratio Factor 

is computed using the amount of 

liabilities incurred for insured losses as 

such term is applied under the relevant 

accounting method used by the 

participant taxpayer, as of the end of the 

relevant taxable year(s). See, e.g., 

§ 1.446–1(c)(1)(ii) (defining when a 

liability is considered incurred for 

accrual method taxpayers). The final 

regulations do not adopt any changes 

based on these comments. 

With respect to whether the Loss 

Ratio Factors include losses incurred 

through pooling arrangements, 

reinsurance agreements, and 

retrocession agreements, the final 

regulations place no limitation on the 

source of losses incurred by the Captive. 

The Computation Periods as set forth in 

§§ 1.6011–10(b)(2)(i) and (ii) and 

1.6011–11(b)(2)(i) and (ii) include the 

most recent concluded taxable year in 

accordance with § 1.6011–4(e)(2), Rev. 

Proc. 2005–26, 2005–17 I.R.B. 965, and 

the Instructions to Form 8886. 

III. Comments and Changes Relating to 

the Financing Factor as Described in 

Proposed § 1.6011–10(c)(1) 

A few commenters argued that the 

Financing Factor should be removed as 

a factor for identifying listed 

transactions and transactions of interest. 

As proposed, such commenters assert 

that the Financing Factor fails to 

consider the circumstances for the 

financing, suggesting that a better 

measure of a transaction’s potential for 

tax avoidance is whether the financing 

reflects an overconcentration in illiquid 

assets. One commenter stated that 

nothing in the Code or existing 

precedent treats related-party financing 

that is arm’s length as abusive. 

Commenters noted that State regulators 

generally must approve financing in 

related-party transactions, and if 

approved by the State, financing should 

not be of concern to the IRS. 


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One of the key abuses seen in microcaptive transactions is the indefinite 

deferral of tax. Such abuses may be 

compounded by the use of tax-deferred 

income for the personal benefit of the 

related persons involved. See, e.g., 

Avrahami, T.C. 149 at 169–71 (portions 

of premiums paid made available as 

loans to related real estate holding 

company); Swift, T.C. Memo. 2024–13, 

at *18–19 (portions of premiums paid 

made available to invest in real estate 

and limited liability companies for the 

direct or indirect benefit of petitioners); 

and Patel, T.C. Memo. 2024–34, at *11 

(portions of premiums paid made 

available to invest in life insurance for 

the direct or indirect benefit of 

petitioners). In an abusive micro-captive 

transaction, an Insured entity deducts 

amounts paid directly or indirectly to 

the Captive that the parties treat as 

insurance premiums in an arrangement 

that does not constitute insurance for 

Federal tax purposes. Captives then 

exclude those amounts from taxable 

income under section 831(b). When a 

financing arrangement is involved, such 

Captives return some portion of those 

tax-deferred amounts directly or 

indirectly to the Insured or related 

parties via a loan, capital contributions 

to a special purpose vehicle, or other 

financing arrangement for which a 

current tax does not apply. Thus, in a 

financing arrangement involving an 

abusive micro-captive transaction, 

amounts paid as premiums have not 

only avoided ordinary taxation but have 

continued to avoid tax while back in the 

hands of the related parties who caused 

the premiums to be paid and deducted. 

This deliberate, continuing avoidance of 

income tax using benefits to which the 

participants are not entitled is abusive 

and identifying transactions with 

similar fact patterns as listed 

transactions is consistent with the IRS’s 

pronouncements with respect to microcaptives since before the publication of 

Notice 2016–66. See, e.g., ‘‘Captive 

Insurance,’’ IR–2015–19 (Feb. 3, 2015), 

https://www.irs.gov/newsroom/abusivetax-shelters-again-on-the-irs-dirtydozen-list-of-tax-scams-for-the-2015- 

filing-season (last visited Jan. 6, 2025.) 

Several commenters noted that 

related-party financing such as the 

arrangements described by the 

Financing Factor can be subject to 

substantial scrutiny, to the extent that 

State insurance regulators will permit 

such financing only after an extensive 

approval process. See, e.g., Avrahami, 

149 T.C. at 170 (‘‘Insurance regulators 

often raise bureaucratic eyebrows at 

related-party dealings.’’). Even so, the 

IRS has seen multiple transactions for 

which approval was required but not 

sought, or for which approval may have 

been granted but, nevertheless, the 

parties’ treatment of the financing 

arrangement did not comport with 

industry standards. Based on its 

experience, the IRS maintains that, in 

transactions structured as described in 

the proposed regulations, financing 

arrangements that create a tax-deferred 

circular flow of funds are indicative of 

tax avoidance. 

One commenter argued that inclusion 

of specific factors, such as the Loss 

Ratio Factor and the Financing Factor, 

improperly assumes insurance company 

status can be determined by reference to 

a single factor. However, the proposed 

regulations neither define insurance for 

Federal tax purposes nor identify 

transactions by a single factor. As 

discussed more fully in part I.E. of this 

Summary of Comments and Explanation 

of Revisions, these regulations do not 

presume to define insurance for Federal 

tax purposes; rather, the regulations 

identify fact patterns that are 

consistently associated with 

transactions that are or may be tax 

avoidance transactions. Regarding 

commenters’ suggestions that the 

liquidity of a captive is a better measure 

than the Financing Factor, the 

commenters did not specify what 

potential measure of liquidity (such as 

the character of assets, amount of assets, 

or comparison of assets to Captive’s 

liabilities) would better identify microcaptive transactions that are or may be 

tax avoidance transactions. Further, 

regardless of the specific measure of 

liquidity used, determinations thereof 

would be too fact-specific (and 

dependent upon individual policy terms 

and jurisdictional requirements) to be 

administrable. The use of amounts paid 

as premiums in a tax-preferred manner, 

and the return of such amounts directly 

or indirectly to the related parties who 

benefitted from the original tax 

deduction, is the tax avoidance 

addressed by the Financing Factor. 

While some participants may have 

obtained regulatory approval to issue 

the related-party financing, from a 

Federal tax perspective, the approval of 

a regulatory body does not answer the 

question of whether the transaction as a 

whole should be respected for Federal 

tax purposes. The final regulations 

therefore retain the Financing Factor. 

However, the Treasury Department 

and the IRS agree that the presence of 

related-party financing in a microcaptive transaction by itself may not rise 

to the level of tax avoidance, as it may 

be that such financing was determined 

at arm’s length or otherwise treated as 

a bona fide financing arrangement 

between the related parties. See 

Avrahami, 149 T.C. at 199–204 (finding 

that the economic reality of the relatedparty financing at issue, while a close 

question, could be treated as a bona fide 

debt obligation, notwithstanding the 

court’s determination that the 

Avrahami’s captive transaction was not 

insurance for Federal tax purposes). The 

concern with respect to financing 

arrangements is the continuing deferral 

of tax. Such deferral should not be 

considered tax avoidance unless 

coupled with the continued 

accumulation of tax-deferred amounts 

in a transaction involving circumstances 

inconsistent with insurance for Federal 

tax purposes, including the excessive 

pricing of premiums and artificially low 

or nonexistent claims activity. 

Accordingly, the final regulations have 

revised the factors identifying a listed 

transaction to reflect a conjunctive test: 

taxpayers who are engaged in a 

transaction described by the regulations 

that meets the Financing Factor as 

described in § 1.6011–10(c)(1), in 

conjunction with the Loss Ratio Factor 

as described in § 1.6011–10(c)(2), are 

identified as listed transactions in the 

final regulations. This change, to require 

both the Financing Factor and the Loss 

Ratio Factor in the identification of 

Micro-captive Listed Transactions, 

should provide substantial relief to 

taxpayers participating in transactions 

with loss ratios below 30 percent but for 

which the Financing Factor is not met. 

Because the potential for tax 

avoidance still exists when there is 

related-party financing, the final 

regulations include the Financing Factor 

in the identification of a Micro-captive 

Transaction of Interest. Taxpayers who 

are engaged in a transaction described 

by the regulations that meets the 

Financing Factor as described in 

§ 1.6011–11(c)(1), the Loss Ratio Factor 

as described in § 1.6011–11(c)(2), or 

both, are identified as participating in a 

transaction of interest in the final 

regulations. The Financing Computation 

Period for Micro-captive Transactions of 

Interest is the same as the Financing 

Computation Period for Micro-captive 

Listed Transactions. 

IV. Comments and Changes Relating to 

the Consumer Coverage Exception as 

Described in § 1.6011–10(d)(2) 

A ‘‘Consumer Coverage Arrangement’’ 

as described in the proposed regulations 

includes certain arrangements in which 

a service provider, automobile dealer, 

lender, or retailer (‘‘Seller’’) sells 

contracts that the parties treat as 

insurance contracts (‘‘Contracts’’ as 

defined in proposed § 1.6011–10(b)(3)) 

either issued or reinsured by a Captive 


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related to the Seller (‘‘Seller’s Captive’’) 

to its Unrelated Customers (as defined 

in proposed § 1.6011–10(b)(11)) in 

connection with the products or 

services being sold. As noted in the 

preamble to the proposed regulations, 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 under the 

proposed regulations because the 

insured is not sufficiently related to the 

Seller’s Captive. Generally, in a 

Consumer Coverage Arrangement, the 

Insureds under the Contracts that are 

issued or reinsured by the Seller’s 

Captive are Unrelated Customers of 

Seller, and these Unrelated Customers, 

their owners, and persons related to the 

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 Contract. 

Nonetheless, the proposed regulations 

would provide relief from identification 

as either a Micro-captive Listed 

Transaction or as a Micro-captive 

Transaction of Interest under §§ 1.6011– 

10(d)(2) and 1.6011–11(d)(2) 

(‘‘Consumer Coverage Exception’’) for 

certain Consumer Coverage 

Arrangements that would otherwise be 

Micro-captive Listed Transactions or 

Micro-captive Transactions of Interest. 

The proposed exception would apply to 

arrangements in which the following 

criteria are met: (1) the arrangement 

involves a Seller’s Captive (meaning a 

Captive related to Seller as defined in 

proposed § 1.6011–10(b)(10)); (2) 

Seller’s Captive insures or reinsures 

some or all of the Contracts sold by 

Seller; (3) 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 Seller; and 

(4) commissions or remunerations paid 

for the sale of such Contracts, as a 

percentage of the premiums paid by the 

Seller’s customers, is at least the greater 

of: (a) 50 percent; or (b) the unrelated 

commission percentage (meaning the 

highest commission for the sale of 

Contracts connected to Seller’s products 

that are not issued or reinsured by 

Seller’s Captive). Proposed § 1.6011– 

10(d)(2)(iv)(B) is referred to as the 

‘‘Unrelated Commissions Test’’; 

proposed § 1.6011–10(d)(2)(iv)(A) and 

(B) are collectively referred to as the 

‘‘Commissions Test.’’ 

As further discussed in this part IV. 

of the Summary of Comments and 

Explanation of Revisions, commenters 

expressed appreciation for the inclusion 

of the Consumer Coverage Exception but 

requested clarification of the Consumer 

Coverage Exception provisions and 

recommended changes to the exception, 

particularly with respect to the 

Commissions Test. 

A. The Commissions Test 

Several commenters recommended 

that the Commissions Test be 

eliminated from the Consumer Coverage 

Exception. One commenter 

recommended that if the Commissions 

Test is not eliminated from the 

Consumer Coverage Exception 

altogether, it should at least be 

eliminated for commercial insurers 

acting as Intermediaries (as such term is 

defined in proposed § 1.6011–10(b)(5)). 

Several commenters specifically 

requested the elimination of the 

Unrelated Commissions Test set forth at 

proposed § 1.6011–10(d)(2)(iv)(B), 

expressing concern about the ability of 

taxpayers to comply with the provision 

as written. 

To explain why the Commissions Test 

should be eliminated, one commenter 

argued that commissions seemingly 

have no applicability to the validity of 

the insurance arrangement. Two 

commenters remarked on the lack of a 

basis for the 50 percent threshold in the 

Commissions Test, as set forth in 

proposed § 1.6011–10(d)(2)(iv)(A). The 

commenters suggested that use of this 

percentage to determine ‘‘abusiveness’’ 

of the transactions does not necessarily 

have any substantive connection to the 

economic realities of the transaction, 

which is negotiated at arm’s length 

between customers and Sellers. 

Commenters noted that customers 

negotiate the purchase price of 

consumer coverage with Sellers without 

regard to the tax implications of Sellers’ 

participation in the underwriting profit 

of the consumer coverage, and Sellers 

sometimes agree to lower prices and 

lower commissions, not for any taxmotivated reason, but because otherwise 

the customer will not buy the product. 

One of these commenters said that, as a 

result, the Commissions Test sets an 

‘‘arbitrary’’ standard. The other 

commenter suggested that the proposed 

regulations would injure consumers by 

essentially requiring Sellers to caution 

their salespeople not to offer discounts, 

for fear of losing the Consumer Coverage 

Exception and triggering ‘‘transaction of 

interest’’ status. A third commenter 

noted that, for standard types of 

coverage written by commercial 

insurers, such as automobile service 

contracts, the market is strongly 

competitive, and the effect of the 

proposed regulations would be to 

reduce that competition by requiring 

consumers to pay a commission markup on consumer coverage of at least 100 

percent of the net premium charged by 

the insurer. 

One of the commenters remarked that 

the 50 percent threshold in the 

Commissions Test would only make 

sense if the IRS had reason to believe 

that the sale of products at a lower rate 

is an indication of a non-market driven 

effort to artificially transfer otherwise 

taxable revenue to the micro-captive. 

The commenter asserted that, in over 30 

years, the commenter had never seen 

this issue raised in examination, read 

cases of this happening, or heard that 

the IRS has actual evidence that it in 

fact occurs. The commenter further 

asserted that Consumer Coverage 

Arrangements ‘‘have already been 

examined, and deemed not to justify 

listed transaction treatment,’’ as 

evidenced by the listing of certain 

consumer coverage transactions in 

Notice 2002–70, 2002–2 C.B. 765, and 

subsequent ‘‘de-listing’’ of those 

transactions in Notice 2004–65, 2004–2 

C.B. 599. The commenter distinguished 

Consumer Coverage Arrangements from 

the micro-captive transactions 

determined by the Tax Court in recent 

cases not to be insurance for Federal tax 

purposes. To the extent the IRS has had 

successful Tax Court outcomes in the 

micro-captive area, the commenter 

asserted, those cases all concerned 

enterprise risk; none were concerned 

with unrelated third-party consumer 

risk arrangements. 

Another commenter called the 

Commissions Test ‘‘vague, unworkable, 

anti-consumer and anti-competitive,’’ 

asserting that the IRS should not be 

requiring, or even encouraging, payment 

of high commission rates as a condition 

of the exception. The commenter 

observed that the Commissions Test 

seems to be based upon section 482 of 

the Code transfer-pricing concerns 

rather than failure of risk transfer and 

risk distribution and lack of arm’slength dealing and sound business 

practices, the issues identified by the 

preamble to the proposed regulations as 

the focus of the proposed regulations. 

The commenter asserted that the real 

concern of the regulations should be to 

ensure that the net premiums paid to 

the Captive are not excessive. The 

commenter observed that commercial 

insurers writing consumer coverage for 

sale through dealers typically specify a 

schedule listing various products and 

the applicable net premium for each 

(that is, after the dealer’s withheld 

commission) payable to the insurer for 

each, and that these net premiums are 

set by the commercial insurer based 

upon actuarial analysis of the risks to be 

covered. The commenter further 


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observed that the gross amount paid by 

the customer (including the amount 

above the specified net premium that 

the dealer retains as a commission) is 

subject to negotiation by each customer, 

and the commercial insurer may not be 

informed of the commission or who 

earns it. 

To address this commercial insurer 

scenario, the commenter proposed a safe 

harbor from material advisor and 

participant status for commercial 

insurers acting as Intermediaries (as 

defined in proposed § 1.6011–10(b)(5)) 

in transactions that do not involve the 

payment of excessive premiums to the 

captive. However, because the proposed 

safe harbor would be for any 

commercial insurer acting as an 

Intermediary in a micro-captive 

transaction, unless the commercial 

insurer (or related company) retrocedes 

risks with respect to consumer products 

and pays a reinsurance premium in 

excess of an arm’s length amount, the 

effect of this safe harbor would not be 

limited to Consumer Coverage 

Arrangements. Because the proposed 

safe harbor has implications beyond 

Consumer Coverage Arrangements, it is 

discussed in part V.B. of this Summary 

of Comments and Explanation of 

Revisions. 

Commenters also remarked that 

elimination of the Commissions Test 

would make application of the 

Consumer Coverage Exception more 

streamlined and efficient and less 

burdensome. One of the commenters 

expressed concern that not all Sellers 

capture information about sales and 

commissions in a way that will facilitate 

calculation of ‘‘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.’’ The commenter 

asserted that this additional cost and 

effort is not justified ‘‘to guard against 

a theoretical abuse in an industry where 

the Service has already found that 

insufficient evidence of abuse exists to 

justify listed transaction treatment.’’ 

After careful consideration of the 

comments received generally requesting 

the elimination of the Commissions Test 

and specifically requesting the 

elimination of the Unrelated 

Commissions Test, the Treasury 

Department and the IRS are persuaded 

that elimination of the Commissions 

Test in the Consumer Coverage 

Exception is appropriate. The tax 

avoidance or potential for tax avoidance 

that the Commissions Test intended to 

identify is distinguishable from the 

closely held arrangements associated 

with the fact patterns identified in 

§§ 1.6011–10(a) and 1.6011–11(a); for 

example, the ultimate policyholders are 

commonly Unrelated Customers in 

Consumer Coverage Arrangements. 

Accordingly, the Commissions Test is 

eliminated from the Consumer Coverage 

Exception in the final regulations. 

One commenter also sought 

clarification of certain aspects of the 

Commissions Test. However, because 

the Commissions Test is eliminated 

from the Consumer Coverage Exception 

in the final regulations, no further 

explanation is necessary. 

B. Restricting Consumer Coverage 

Arrangements Identified as Reportable 

Transactions Through Clarification of 

Defined Terms 

The definition of ‘‘Insured’’ set forth 

in proposed § 1.6011–10(b)(4) and 

incorporated in proposed § 1.6011– 

11(b)(4) is ‘‘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.’’ One commenter 

on the Consumer Coverage Exception 

recommended that the final regulations 

clarify that this definition is not 

intended to include someone who is 

only covered by the policy for a 

momentary period of time during which 

the underlying sales transaction is being 

finalized. The commenter noted that the 

preamble appears to indicate that 

guaranteed asset protection (GAP) 

products are an example of a ‘‘dealer 

obligor’’ arrangement in which a Seller 

could be considered the Insured for a 

short transitory time period occurring 

between the time the covered product is 

delivered to the Unrelated Customer of 

Seller and the financing to purchase the 

product is finalized for the Unrelated 

Customer. The commenter asserted that 

such situations should not trigger a 

reporting obligation since this is a 

temporary condition arising solely from 

an administrative need to allow third 

parties to process paperwork. 

Another commenter asked that the 

final regulations clarify that a Seller that 

only directly or indirectly reinsures 

Contracts that ultimately benefit 

Unrelated Customers, such as GAP 

contracts, is not an Insured, even if the 

Seller is technically a transitory or 

residual obligor under the contract. The 

commenter suggested that if this 

recommendation is not adopted, the 

definition of ‘‘Captive’’ set forth in 

proposed § 1.6011–10(b)(1) and 

incorporated in proposed § 1.6011– 

11(b)(1), should be modified to exclude 

any entity that only issues Contracts to 

Insureds, where the ultimate 

beneficiaries of such contracts are 

Unrelated Customers, to the extent that 

the total percentage of issued and 

reinsured GAP and similar Contracts 

provided to Insureds of such entity do 

not exceed 25 percent of the total issued 

and reinsured Contracts for such entity. 

The commenter noted that this 

definition would remove burdensome 

compliance data collection from what is 

essentially a minority of the entity’s 

contracts and would permit the IRS to 

focus on situations where there is 

greater potential for tax avoidance. 

The final regulations make no change 

to the definitions of Insured and Captive 

in response to these comments. A Seller 

is an Insured only if it ‘‘enters into a 

Contract with a Captive or enters into a 

Contract with an Intermediary that is 

directly or indirectly reinsured by a 

Captive.’’ A Seller is not an Insured if 

it facilitates an Unrelated Customer 

entering into a Contract with Seller’s 

Captive or an Intermediary but is not 

itself a party to the Contract. A Seller is 

an Insured only if it treats amounts paid 

under the Contract as insurance 

premiums for Federal tax purposes. To 

the extent a Seller receives and makes 

payments under a Contract as an agent 

of a party or parties to the Contract, the 

Seller would not treat amounts paid 

under a Contract as insurance premiums 

for Federal tax purposes. As a general 

matter, therefore, a Seller that only 

facilitates the direct or indirect 

insurance or reinsurance of Contracts 

that ultimately benefit Unrelated 

Customers, such as GAP contracts, and 

does not reflect the tax benefits of 

participating in a purported insurance 

transaction in its filed returns, will not 

be an Insured that is a participant under 

these regulations. A Seller that satisfies 

all the requirements of the definition of 

Insured is appropriately considered an 

Insured. However, in recognition of 

concerns expressed by commenters that 

such situations could potentially arise, 

the final regulations retain the 

Consumer Coverage Exception, which 

may prevent a Consumer Coverage 

Arrangement in which a Seller (or 

related person) is an Insured from being 

identified as a Micro-captive Listed 

Transaction or Micro-Captive 

Transaction of Interest. 

C. Revising Definition of Seller To 

Permit De Minimis Sales to Related 

Persons 

The definition of ‘‘Seller’’ set forth in 

proposed § 1.6011–10(b)(9) and 

incorporated in proposed § 1.6011– 

11(b)(8) is ‘‘a service provider, 

automobile dealer, lender, or retailer 

that sells products or services to 


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Unrelated Customers who purchase 

insurance contracts in connection with 

those products or services.’’ A 

commenter recommended modification 

of this definition to prevent an 

occasional sale of an automobile and 

insurance contract to a related party 

from disqualifying a Seller’s Captive 

from the Consumer Coverage Exception. 

The commenter also stated it is 

important to clarify that it is not a 

requirement for all purchasers of 

insurance contracts to be Unrelated 

Customers for the dealer to be a Seller. 

The commenter asserted that there is a 

low risk of tax avoidance if a majority 

of the Contracts being insured or 

reinsured by a Seller’s Captive are either 

directly sold to an Unrelated Customer 

or are for the ultimate benefit of an 

Unrelated Customer. The commenter 

suggested a de minimis exception for 

related party sales by establishing a five 

percent threshold for such transactions. 

In response to these comments, 

§ 1.6011–10(b)(9) of the final regulations 

clarify that a Seller is a service provider, 

dealer (including an automobile dealer), 

lender, wholesaler, or retailer that sells 

products or services to customers who 

purchase insurance contracts in 

connection with those products or 

services provided no more than five 

percent of all its sales of products or 

services to persons who purchase 

insurance contracts in connection with 

those products or services are to 

customers other than Unrelated 

Customers. Additionally, the Consumer 

Coverage Exception in §§ 1.6011– 

10(d)(2) and 1.6011–11(d)(2) of the final 

regulations is modified to require that 

no more than five percent of the Seller’s 

Captive’s business is issuing or 

reinsuring Contracts purchased by 

persons other than Unrelated Customers 

in connection with products or services 

sold by the Seller or persons Related (as 

defined in § 1.6011–10(b)(8) of the final 

regulations) to the Seller. 

D. Other Requests for Clarification 

A commenter asked for clarification of 

whether the Consumer Coverage 

Exception applies when the Seller’s 

Captive neither assumes reinsurance 

from an unrelated fronting company, 

nor cedes reinsurance to an unrelated 

insurer. The Consumer Coverage 

Exception set forth in proposed 

§ 1.6011–10(d)(2) and incorporated in 

proposed § 1.6011–11(d)(2) requires that 

‘‘Seller’s Captive issue or reinsure some 

or all of the Contracts sold to Unrelated 

Customers in connection with the 

products or services being sold by the 

Seller,’’ that ‘‘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 that the 

Commissions Test set forth in proposed 

§ 1.6011–10(d)(2)(iv) is met with respect 

to ‘‘the Contracts issued or reinsured by 

the Seller’s Captive.’’ The involvement 

of an unrelated fronting company or 

other unrelated insurer is not required. 

The commenter also asked if the 

Consumer Coverage Exception is 

intended to apply if Seller’s Captive 

directly insures an entity related to or 

affiliated with Seller for certain 

contracts described in the proposed 

regulations but without fronting or 

reinsurance attached. The Consumer 

Coverage Exception set forth in the 

proposed regulations would not apply 

in these circumstances because the 

Seller’s Captive is insuring an entity 

related to or affiliated with Seller (rather 

than Unrelated Customers of Seller). 

This would be the case whether or not 

a fronting company or reinsurer were 

involved. However, as discussed in part 

IV.C. of this Summary of Comments and 

Explanation of Revisions, under 

§§ 1.6011–10(d)(2)(iv) and 1.6011– 

11(d)(2) of the final regulations, the 

Consumer Coverage Exception may 

apply when a Seller’s Captive issues or 

reinsures Contracts purchased by 

persons other than Unrelated Customers 

in connection with products or services 

sold by the Seller or persons related to 

Seller, provided that no more than five 

percent of the Seller’s Captive’s 

business is issuing or reinsuring such 

Contracts. Accordingly, the Consumer 

Coverage Exception set forth in the final 

regulations would potentially apply in 

the circumstances described by the 

commenter. 

A commenter suggested that 

‘‘coverage for incurring diminished 

value’’ should be considered a type of 

consumer coverage. The preamble to the 

proposed regulations explains that a 

‘‘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.’’ However, 

this is a non-exclusive list. The 

Consumer Coverage Exception may 

apply when a Seller’s Captive issues or 

reinsures Contracts in connection with 

the products or services being sold by 

the Seller. Such Contracts could include 

those providing coverage for incurring 

diminished value. 

Another commenter noted that 

warranty products are also widely sold 

and reinsured outside the automotive 

space and often in the business-tobusiness environment, suggesting that 

this should be taken into account when 

drafting terminology in the final 

regulations related to consumer 

products and seller captive concepts. 

The description of the Consumer 

Coverage Exception and related 

definitions use generic terms intended 

to encompass a broad range of products 

and services, not limited to automotive 

products and services. Nonetheless, in 

response to this commenter’s apparent 

concern that the Consumer Coverage 

Exception as proposed may exclude 

arrangements ‘‘in the business to 

business environment,’’ the final 

regulations clarify that the term Seller 

includes a wholesaler that sells 

products or services to customers who 

purchase insurance contracts in 

connection with those products or 

services. 

Finally, one commenter asked that the 

final regulations apply prospectively to 

Seller’s Captives, meaning reporting 

would be required with respect to 

Seller’s Captives only for taxable years 

subsequent to the effective date of the 

final regulations, because otherwise a 

number of legitimate captives would be 

subjected to very burdensome 

information gathering, testing, and 

reporting for a very small amount of 

premium income per captive. The 

commenter suggested that changes such 

as a 50 percent commission threshold 

should be applied on a prospective basis 

only to provide notice to taxpayers. As 

discussed in the preamble to the 

proposed regulations, as a general 

matter, participation in Consumer 

Coverage Arrangements 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. 

The proposed regulations were not 

intended to change this, but nonetheless 

provide a potential exception for 

taxpayers considered to be participating 

in a reportable Consumer Coverage 

Arrangement. The clarifications and 

changes to the proposed regulations 

described in this part of the Summary 

of Comments and Explanation of 

Revisions are only intended to provide 

further reassurance that Consumer 

Coverage Arrangements generally do not 

give rise to a Micro-captive Listed 

Transaction or a Micro-captive 

Transaction of Interest. Further, if the 

Consumer Coverage Exception for 

Seller’s Captives applied only to taxable 


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years after the regulations are effective 

as suggested by the commenter, then the 

exception would not apply to otherwise 

open taxable years for which reporting 

would be required. This would 

disadvantage taxpayers who otherwise 

may have qualified for the Consumer 

Coverage Exception in open taxable 

years. Consequently, the final 

regulations do not adopt any changes in 

response to this comment. 

V. Comments and Changes Relating to 

Identification as Reportable 

Transactions and Reporting 

Requirements 

A. Comments Relating to Safe Harbors 

From Identification as Reportable 

Transactions 

1. Proposed Safe Harbors for Amended 

Returns 

A commenter requested a change to 

the proposed regulations that would 

allow taxpayers who file amended 

returns that remove tax benefits 

previously recognized from 

participation in the micro-captive 

transaction to not be designated as 

participating in a Micro-captive Listed 

Transaction or a Micro-captive 

Transaction of Interest. Taxpayers who 

file amended returns after the due date, 

including extensions, are considered 

participants in the transaction if their 

transaction otherwise meets the 

description of a Micro-captive Listed 

Transaction or a Micro-captive 

Transaction of Interest because their 

original return reflects the tax benefits 

of participation. In order for the IRS to 

obtain a complete picture of 

participation in these transactions, such 

taxpayers must file disclosures. 

However, a taxpayer whose timely-filed 

amended return is treated as the original 

return for the taxable year (that is, a 

superseding return) is not considered to 

have filed a return reflecting the tax 

benefits of participation in the 

transaction and would not be required 

to file disclosures under the final 

regulations. Further, whether amended 

returns determine participation is 

outside the scope of these regulations 

and the final regulations do not adopt 

any changes based on this request. 

Several commenters expressed 

concern that the proposed regulations 

would require taxpayers to amend 

returns for approximately three to four 

taxable years prior to the promulgation 

of these regulations as final regulations. 

The regulations do not require taxpayers 

to file an amended return or an 

Administrative Adjustment Request 

(AAR) for certain partnerships. The 

proposed regulations would require 

taxpayers whose transactions are 

described in either § 1.6011–10(c) or 

§ 1.6011–11(c) to file a disclosure 

statement in the form and manner 

prescribed by § 1.6011–4. The preamble 

to the proposed regulations 

acknowledged that because the IRS will 

take or may take a position that 

taxpayers are not entitled to the 

purported tax benefits, taxpayers who 

have filed tax returns taking such 

positions should consider filing an 

amended return or AAR. The preamble 

to the proposed regulations provided a 

method for filing such amended returns 

or AARs, if so desired. The final 

regulations do not adopt any changes 

pursuant to these comments. 

2. Proposed Safe Harbors for Captives 

With Certain Features 

Commenters requested that the IRS 

clarify whether taxpayers who issue 

premium refunds or policyholder 

dividends to meet the Loss Ratio Factor 

will be designated as participating in a 

Micro-captive Listed Transaction or a 

Micro-captive Transaction of Interest. 

As described more fully in part II. of 

this Summary of Comments and 

Explanation of Revisions, the Loss Ratio 

Factors compare the amount of 

liabilities incurred for insured losses 

and claim administration expenses to 

the premiums earned less policyholder 

dividends paid by the Captive, over the 

course of the defined Computation 

Periods. Thus, if a taxpayer issues 

premium refunds or policyholder 

dividends, either of which would 

reduce the amount to which liabilities 

for insured losses and claim 

administration expenses over the 

relevant Computation Period are 

compared, the relevant loss ratio for 

purposes of identification as a Microcaptive Listed Transaction or Microcaptive Transaction of Interest will be 

higher. Further, as described more fully 

in parts II.B. and III. of this Summary of 

Comments and Explanation of Revisions 

and as clarified in the bright-line rules 

of § 1.6011–10(e) of the final 

regulations, only taxpayers participating 

in a transaction that (1) involves a 

Captive that elects under section 831(b) 

to include in taxable income only 

taxable investment income (defined in 

section 834) in lieu of the tax imposed 

under section 831(a) (that is, to exclude 

premiums from taxable income) and (2) 

meets both the Financing Factor and the 

Loss Ratio Factor, will be designated as 

participating in a Micro-captive Listed 

Transaction under the final regulations. 

That is, if Captive’s loss ratio is 30 

percent or more for the Listed 

Transaction Loss Ratio Computation 

Period, or if the Captive does not meet 

the Financing Factor, the transaction is 

not identified as a Micro-captive Listed 

Transaction. With respect to Microcaptive Transactions of Interest, if the 

taxpayer does not meet the Financing 

Factor, and has effectively lowered the 

percentage of premiums earned as 

compared to liabilities incurred for 

claims and administration by issuing 

policyholder dividends, the transaction 

is not identified as a Micro-captive 

Transaction of Interest under the final 

regulations. That is, if Captive’s loss 

ratio is 60 percent or more for the 

Transaction of Interest Loss Ratio 

Computation Period as set forth in 

§ 1.6011–11(b)(2) and Captive has not 

made Captive’s capital available in a 

way that furthers the deferral of tax, the 

taxpayer is already not a participant in 

a Micro-captive Transaction of Interest. 

This is clarified in the final regulations 

setting forth the bright-line rules at 

§ 1.6011–11(e). 

One commenter recommended that a 

transaction should not be designated as 

a Micro-captive Listed Transaction or 

Micro-captive Transaction of Interest if 

the Captive has paid claims in any 

amount, there is an annual rate and 

reserve study conducted by a qualified 

actuary, and there is commercial 

coverage available for the risks covered 

by the Captive. The commenter 

indicated that all of these factors 

together should be sufficient to 

demonstrate that a micro-captive 

transaction was not entered into for tax 

avoidance purposes. Several other 

commenters asserted that taxpayers who 

can demonstrate that the premiums 

charged in their transaction were 

actuarially determined by a credentialed 

actuary should not be designated as 

participating in a Micro-captive Listed 

Transaction or a Micro-captive 

Transaction of Interest. Additional 

commenters suggested that the existence 

of a feasibility study prepared by a 

credentialed actuary, or a third-party 

transfer pricing memorandum certifying 

the transaction, would provide better 

metrics for identification as a listed 

transaction or transaction of interest, 

and transactions for which such 

feasibility studies or third-party transfer 

pricing memoranda have been prepared 

should not be designated as 

participating in a Micro-captive Listed 

Transaction or a Micro-captive 

Transaction of Interest. 

With respect to proposed safe harbors 

involving claims, the Treasury 

Department and the IRS are aware of 

promoters encouraging the filing of 

claims under contracts that the parties 

treat as insurance contracts to establish 

the appearance of a legitimate insurance 

arrangement, regardless of business 

need. Because these transactions 


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involve closely held related entities, 

there is little to no barrier to the 

manufacture of claims in these 

arrangements. Further, in many of the 

micro-captive cases tried to date, the 

handling of claims was atypical of valid 

insurance arrangements, with claims 

paid despite lacking in substantiation 

and under the direction of the Insured 

or its Owners without regard to the 

validity of the claim. See, e.g., Caylor, 

T.C. Memo. 2021–30, at *42–43; 

Keating, T.C. Memo. 2024–2, at *63–64. 

The existence of paid claims in any 

amount is therefore not a viable metric 

for distinguishing between transactions 

that are or may be tax avoidance 

transactions and those that are not. 

With respect to the involvement of an 

actuary or other professional in the 

transaction, as observed in Avrahami 

and discussed more fully at part II.E.1. 

of this Summary of Comments and 

Explanation of Revisions, such 

involvement does not establish that the 

arrangement is not, and does not have 

the potential to be, a tax avoidance 

transaction, and further is not 

dispositive of a valid transaction for 

Federal tax purposes. 

Similarly, with respect to Captives 

covering risks for which commercial 

coverage is available, the presence of 

such risks is not dispositive of the 

validity of a transaction. Many abusive 

micro-captive transactions involve 

purported risks that would be a typical 

insurance risk for another company but 

would be inappropriate for the Insured 

to purchase given the nature of the 

Insured’s business, such as construction 

coverage for an entity that ‘‘wasn’t 

constructing anything.’’ Avrahami, 149 

T.C. at *196. 

In all micro-captive cases tried to 

date, courts have found the arrangement 

at issue not to be insurance for Federal 

tax purposes even though the factors 

identified by the commenters as 

appropriate for safe harbors were 

present—claims were paid; an actuary 

or other professional prepared pricing 

reports, feasibility studies, or the like in 

the transaction; and the captive covered 

some typical insurance-type risks. See 

Avrahami, 149 T.C. at *149–52, 167, 

186–87, 195–97; Syzygy, T.C. Memo. 

2019–34, at *15–17, 35, 44; Caylor, T.C. 

Memo. 2021–30, at *14, 19–23, 25–26, 

48–49; Keating, T.C. Memo. 2024–2, at 

*14, 20–25, 30, 33, 35, 63–64; Swift, T.C. 

Memo. 2024–13, at *12, 15–17, 44; 

Patel, T.C. Memo. 2024–34, at *9, 14– 

22, 29–30, 50–51; Royalty Mgmt., T.C. 

Memo. 2024–87, at *16–17, 21, 47; see 

also Reserve Mech., T.C. Memo. 2018– 

86, at *9, 11–20, 47–48, 61. 

Accordingly, the final regulations 

provide no exclusion from identification 

as a Micro-captive Listed Transaction or 

a Micro-captive Transaction of Interest 

in response to these comments. 

One commenter argued that if the 

following facts are present, the 

transaction should be excepted from 

identification as either a Micro-captive 

Listed Transaction or a Micro-captive 

Transaction of Interest: (a) 90 percent of 

the coverage written is coverage that is 

commercially available, (b) Insureds 

purchase or have purchased such 

coverage from commercial carriers in a 

similar amount to what is now 

purchased from the Captive, (c) the 

commercial carrier has credible loss 

experience for the types of coverage in 

the Insured’s location, and (d) 

commercial rates are used to extrapolate 

the Captive’s premiums, taking into 

account the Captive’s expenses and 

layers written. 

As discussed in this part V.A.2. of the 

Summary of Comments and Explanation 

of Revisions, the coverage of risks for 

which commercial coverage is available 

does not guarantee the validity of the 

transaction. The Tax Court has held 

multiple arrangements did not qualify 

as insurance arrangements for Federal 

tax purposes despite purporting to cover 

such risks. See, e.g., Avrahami, 149 T.C. 

at 150, 153–56, 159, 197 (administrative 

actions and employee fidelity); Keating, 

T.C. Memo. 2024–2, at *20–27, 64 

(workers’ compensation); Swift, T.C. 

Memo. 2024–13, at *7–8, 12, 14–15, 44 

(medical malpractice and terrorism); 

Patel, T.C. Memo. 2024–34, at *15–20, 

51 (business interruption and 

regulatory). Further, Insureds’ purchase 

of such coverage from commercial 

carriers in a similar amount to what is 

now purchased from the Captive does 

not guarantee the validity of the 

transaction. The availability of 

commercial coverage may indicate a 

lack of a business need for captive 

coverage. See, e.g., Keating, T.C. Memo. 

2024–2, at *59–60 (petitioners provided 

no credible evidence of a business need 

for captive coverage in light of 

comprehensive commercial coverage). 

Additionally, the commenter did not 

clarify whether the purchase of coverage 

from commercial carriers in a similar 

amount to what is now purchased from 

the Captive would include duplicative 

coverage, coverage of different layers of 

risk, or both. The commenter did not 

specify what commercial markets or 

rates are relevant nor what constitutes a 

‘‘similar amount’’ or a ‘‘credible loss 

experience’’ sufficient to exempt the 

participant’s identification under these 

regulations. Nor did the commenter 

explain how the experience of a 

commercial insurer would be known to 

the participants in the micro-captive 

transaction. The suggested factors are 

too subjective and complex to be 

administrable, and sufficient relief is 

afforded by the changes to the Loss 

Ratio Factors described in parts II.B. and 

II.C. of this Summary of Comments and 

Explanation of Revisions. 

One commenter recommended that 

transactions with Captives that have 

been rated highly by an independent 

third-party credit or rating agency 

specializing in insurance should not be 

designated as a Micro-captive Listed 

Transaction or Micro-captive 

Transaction of Interest. In general, such 

agencies rate the financial strength of 

Captives, that is, the ability to pay 

claims should they arise. Thus, their 

ratings are not informative regarding the 

nature of an entity or a transaction for 

Federal tax purposes. This 

recommendation is not adopted in the 

final regulations. 

A commenter suggested that 

transactions with Captives that are 

licensed or domiciled in a jurisdiction 

that regulates many Captives should not 

be designated as a Micro-captive Listed 

Transaction or Micro-captive 

Transaction of Interest. The commenter 

also suggested that taxpayers whose 

Captive uses template insurance 

policies accepted by the State regulator, 

or whose Captive offers coverage that 

has been accepted as adequate proof of 

insurance by other State or Federal 

agencies, should not be designated as a 

Micro-captive Listed Transaction or 

Micro-captive Transaction of Interest. 

Another commenter recommended a 

broader exception for all State-licensed 

domestic captives. 

However, whether a captive is 

regulated in a given domicile does not 

determine whether a transaction is 

abusive or has the potential for abuse for 

Federal tax purposes. See, e.g., 

Avrahami, 149 T.C. at 192 (captive 

regulated in St. Kitts); Syzygy, T.C. 

Memo. 2019–34, at *38 (captive 

regulated in Delaware); Caylor, T.C. 

Memo. 2021–30, at *41 (captive 

regulated in Anguilla); Keating, T.C. 

Memo. 2024–2, at *53 (captive regulated 

in Anguilla); Swift, T.C. Memo. 2024– 

13, at *37 (captive regulated in St. 

Kitts); Patel, T.C. Memo. 2024–34, at 

*46 (captives regulated in St. Kitts and 

Tennessee, respectively); cf. Royalty 

Mgmt., T.C. Memo. 2024–87, at *43–44 

(no regulatory oversight in Tribal 

domicile). As each micro-captive case 

describes, whether a company is 

organized and regulated as an insurance 

company is not the end of the inquiry, 

as courts ‘‘must look beyond the 

formalities and consider the realities of 

the purported insurance transaction.’’ 

Hospital Corp. of Am. v. Commissioner, 


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3552 Federal Register / Vol. 90, No. 8 / Tuesday, January 14, 2025 / Rules and Regulations 

T.C. Memo. 1997–482, 1997 WL 663283, 

at *24 (citing Malone & Hyde, Inc. v. 

Commissioner, 62 F.3d 835, 842–43 (6th 

Cir. 1995)). In the micro-captive 

transactions identified as transactions 

that are or may be tax avoidance 

transactions, the realities of the 

purported insurance transaction, 

including the closely held nature of the 

arrangement, the section 831(b) election, 

and the use of premiums primarily for 

investment or related-party financing 

(rather than to pay losses) indicate tax 

avoidance or the potential for tax 

avoidance. Further, a safe harbor 

identifying a specific domicile or 

specific domiciles would require the 

IRS to evaluate the manner in which the 

respective domicile regulates insurance, 

which would be administratively 

burdensome and inject uncertainty. 

Accordingly, the final regulations do not 

adopt these suggestions. 

A commenter indicated that taxpayers 

whose Captive covers risks with a 

specified number of Insureds or risk 

units, or pools risk with a specified 

distribution of the risk of loss, should 

not be designated as participating in a 

Micro-captive Listed Transaction or 

Micro-captive Transaction of Interest. 

However, these aforementioned factors 

only relate to the degree to which a 

transaction distributes risk. Risk 

distribution is just one of the four 

prongs used by the courts in 

determining whether an arrangement 

qualifies as insurance for Federal tax 

purposes and does not alone establish 

that a transaction has no potential for 

tax avoidance. See part I. of the 

Background section of this Preamble for 

further explanation of the four-prong 

test. The final regulations do not adopt 

these suggestions. 

3. Captives Providing Certain Types of 

Coverage or Serving Certain Industries 

Other commenters suggested that 

taxpayers who can demonstrate that the 

Captive directly or indirectly reinsures 

contracts issued by a commercial carrier 

should not be designated as participants 

in a Micro-captive Listed Transaction or 

Micro-captive Transaction of Interest. 

The final regulations do not adopt this 

suggestion. First, as discussed in part 

V.A.2. of this Summary of Comments 

and Explanation of Revisions, the 

involvement of commercially covered 

risks in the transaction does not 

guarantee the validity of the transaction. 

The commenter did not specify what 

commercial carriers are relevant nor 

what portion of reinsurance would be 

sufficiently significant to exempt the 

participants from identification under 

these regulations. Second, if the entirety 

of a captive’s business is the reinsurance 

of a commercially rated program, it is 

less likely that the transaction would be 

described by these regulations, as the 

individuals or entities insured would 

not be sufficiently related to the captive 

to meet the 20 Percent Relationship 

Test. Accordingly, a safe harbor based 

on a Captive’s direct or indirect 

reinsurance of contracts issued by a 

commercial carrier is not appropriate. 

A commenter recommended that 

taxpayers who operate as risk retention 

groups pursuant to the Federal Liability 

Risk Retention Act (FLRRA), 15 U.S.C. 

3901, et. seq., should not be designated 

as participating in a Micro-captive 

Listed Transaction or Micro-captive 

Transaction of Interest because the 

FLRRA establishes that a risk retention 

group licensed in one State can transact 

business as an insurance company in 

every State, and the IRS does not have 

the authority to repeal the FLRRA. A 

risk retention group is ‘‘a group-owned 

insurer organized for the purpose of 

assuming and spreading the liability 

risks to its members.’’ NAIC Glossary of 

Insurance Terms, https://content.

naic.org/glossary-insurance-terms (last 

visited Jan. 6, 2025). Risk retention 

groups formed pursuant to the FLRRA 

are unlikely to be described by the 

proposed regulations as they would 

have too many member-owners to 

satisfy the 20 Percent Relationship Test. 

Further, the proposed regulations do not 

repeal the FLRRA. By identifying 

certain micro-captive transactions as 

reportable transactions, the proposed 

regulations impose disclosure 

requirements and provide notice that 

the tax treatment of the transactions will 

or may be challenged by the IRS. They 

do not in any way prevent any taxpayer 

from transacting business as an 

insurance company. The final 

regulations do not adopt this 

recommendation. 

Commenters expressed concern that 

community banks in particular will be 

negatively impacted by the proposed 

regulations to the detriment of their 

communities. Commenters 

recommended that community banks as 

a whole be exempted from identification 

as a Micro-captive Listed Transaction. 

Regardless of the industry, taxpayers 

engaged in transactions identified as 

listed transactions or transactions of 

interest in the final regulations must 

disclose such participation. There is no 

one industry whose constituents should 

be categorically exempted from 

identification as a Micro-captive Listed 

Transaction or as a Micro-captive 

Transaction of Interest. Adverse impacts 

to individual taxpayers or specific 

industries consequent to 

implementation of these regulations are 

limited to disclosure and recordkeeping 

requirements and are outweighed by the 

public interest in sound tax 

administration. Accordingly, the final 

regulations do not adopt any changes in 

response to this concern. 

A commenter argued for an exception 

for any micro-captive that ‘‘writes 

‘deductible reimbursement’ policies for 

the deductible or self-insured retention 

(‘SIR’) layer(s) underlying policies 

issued by Licensed Insurers and uses 

comparable rates taking into account the 

layer written and [the] micro-captive’s 

expenses.’’ The commenter did not 

provide any additional explanation, 

including why such an exception was 

appropriate. To the extent a transaction 

involving a Captive writing such 

policies otherwise falls within the 

description of Micro-Captive Listed 

Transaction or Micro-Captive 

Transaction of Interest, the transaction 

remains one that is or may be a tax 

avoidance transaction. The final 

regulations do not adopt any changes 

based on this comment. 

B. Comments Relating to Reporting 

Required Under Proposed §§ 1.6011– 

10(g) and 1.6011–11(g), Pursuant to 

§ 1.6011–4(d) and (e) 

With respect to Micro-captive Listed 

Transactions, proposed § 1.6011–10(g) 

would provide that participants must 

disclose their participation in the 

transaction pursuant to § 1.6011–4(d) 

and (e). Similarly, with respect to 

Micro-captive Transactions of Interest, 

proposed § 1.6011–11(g) would provide 

that participants must disclose their 

participation in the transaction pursuant 

to § 1.6011–4(d) and (e). 

Section 1.6011–4(d) and (e) provides 

that the disclosure statement—Form 

8886 (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 the OTSA at the same time 

that any disclosure statement is first 

filed by the taxpayer pertaining to a 

particular reportable transaction. 

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 

the 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 


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regardless of whether the taxpayer 

participated in the transaction in the 

year the transaction became a listed 

transaction or transaction of interest. 

Proposed §§ 1.6011–10(g)(2) and 

1.6011–11(g)(2) would provide relief 

from disclosure for participants in 

Micro-captive Listed Transactions and 

Micro-captive Transactions of Interest, 

respectively, who have finalized 

settlement agreements with the IRS with 

respect to the transaction. Such 

taxpayers do not need to disclose their 

participation in the transaction for years 

covered by the settlement agreement. 

Proposed § 1.6011–11(g)(2) provides 

similar relief for participants in a Microcaptive Transaction of Interest who 

disclosed their participation in the 

transaction under Notice 2016–66 and 

file no more returns reflecting 

participation in the transaction after the 

final regulations are finalized. 

One commenter expressed concern 

that settlements in litigation are not 

covered by the disclosure relief for 

taxpayers who have finalized settlement 

agreements that would be provided in 

proposed §§ 1.6011–10(g)(2) and 

1.6011–11(g)(2). This provision in the 

proposed regulations is intended to 

cover settlement agreements with 

respect to the transaction reached in 

litigation or during the course of 

examination. The final regulations 

clarify this provision by explicitly 

referencing litigation. See §§ 1.6011– 

10(h)(2) and 1.6011–11(h)(2) of the final 

regulations. 

Another commenter argued that 

excusing taxpayers from filing 

disclosure statements if they have 

finalized a settlement agreement with 

the IRS is an illusory reporting 

exemption because the IRS effectively 

requires Captives to wind up and 

liquidate as part of certain private 

settlement agreements. However, if this 

provision was removed from the 

regulations, taxpayers who had 

conclusively settled taxable years under 

audit that would otherwise be subject to 

the reporting requirements in the 

regulations would be forced to disclose 

for those years. It may not be clear that 

such disclosure would be unnecessary 

and, accordingly, the final regulations 

retain the exception. 

One commenter stated that reporting 

more than once is unjust to taxpayers 

and suggested that Form 8886 should 

only have to be filed with the IRS once 

with respect to each Micro-captive 

Listed Transaction or Micro-captive 

Transaction of Interest. Consistent with 

§ 1.6011–4, participation in a listed 

transaction that involves a purported 

insurance arrangement means that the 

taxpayer is claiming tax benefits each 

year to which the taxpayer is not 

entitled. Similarly, participation in a 

transaction of interest that involves a 

purported insurance arrangement means 

that the taxpayer may be claiming tax 

benefits each year to which the taxpayer 

may not be entitled (that is, the IRS 

needs more information to determine 

whether the transaction is a tax 

avoidance transaction). As discussed in 

part I.C. of this Summary of Comments 

and Explanation of Revisions, the 

reporting rules for listed transactions 

and transactions of interest under 

§ 1.6011–4 are outside the scope of these 

final regulations. The final regulations 

do not adopt any changes based on this 

comment; taxpayers must disclose their 

participation for each year in which 

such tax benefits are claimed unless 

otherwise relieved of the obligation in 

the regulations. 

A commenter requested an expansion 

of the proposed safe harbors set forth at 

§§ 1.6011–10(e)(2) and 1.6011–11(e)(2) 

(‘‘Disclosure Safe Harbor for Owners’’), 

which provide that an Owner of an 

Insured is not required under § 1.6011– 

4 to file a disclosure statement with 

respect to a Micro-captive Listed 

Transaction or Micro-captive 

Transaction of Interest provided that 

person receives written or electronic 

acknowledgment that Insured has or 

will comply with its separate disclosure 

obligation under § 1.6011–4(a) with 

respect to the transaction. The preamble 

to the proposed regulations explained 

that 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. The commenter requested that 

an Owner that relies on an 

acknowledgement pursuant to this safe 

harbor should be allowed to rely solely 

on the acknowledgement and should 

not also need to confirm that the 

Insured actually timely disclosed the 

transaction. However, such a position 

could result in non-filing by both an 

Owner and the Insured. To ensure that 

Insureds file, or Owners file if the 

Insured fails to do so, the final 

regulations do not adopt this 

recommendation. 

Commenters also requested that the 

final regulations expand the Disclosure 

Safe Harbor for Owners to all Insured 

entities for transactions in which the 

Captive entity reported, or to all Captive 

entities for transactions in which the 

Insured reported. The final regulations 

do not adopt this request because unlike 

Owners, who must only disclose the 

information required by § 1.6011– 

10(g)(1), Captives and Insureds must 

also provide the information required by 

§ 1.6011–10(g)(2) and (3), respectively. 

See §§ 1.6011–10(g) and 1.6011–11(g) of 

the final regulations. 

Commenters suggested that 

transactions for which disclosure 

statements were filed under Notice 

2016–66 should not be required to 

report under the proposed regulations. 

Proposed §§ 1.6011–10(g)(2) and 

1.6011–11(g)(2) already limit the 

disclosure requirements to taxpayers 

who have filed a tax return (including 

an amended return) reflecting their 

participation in a Micro-captive Listed 

Transaction or Micro-Captive 

Transaction of Interest prior to January 

14, 2025, and who have not finalized a 

settlement agreement with the IRS with 

respect to the transaction. Additionally, 

proposed § 1.6011–11(g)(2) already 

provides that taxpayers who have filed 

a disclosure statement regarding their 

participation in a transaction identified 

by the proposed regulations as a Microcaptive Transaction of Interest with the 

OTSA pursuant to Notice 2016–66, 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 January 14, 

2025. Similar relief should not be 

extended with respect to any transaction 

identified by the proposed regulations 

as a Micro-captive Listed Transaction 

because disclosure statements filed 

under Notice 2016–66 do not identify 

participation in a listed transaction. The 

final regulations do not adopt any 

changes based on this comment. 

One commenter stated that the 

requirement that taxpayers participating 

in transactions that become listed 

transactions under the proposed 

regulations must file again under the 

final regulations, even if they already 

filed Forms 8886 pursuant to Notice 

2016–66, is duplicative and a waste of 

taxpayers’ time because the IRS already 

has most of the necessary information 

about these transactions, and there is 

little marginal value to the IRS in 

obtaining another round of filings. The 

commenter suggested that there is no 

justification for this other than a 

transparent effort by the Treasury 

Department and the IRS to extend the 

applicable statute of limitations period 

under section 6501(c)(10) unilaterally 

for years where the limitations period 

has expired or is about to (such as 2021, 

for instance) and that requiring material 

advisors to file Forms 8918 with the 

OTSA, again irrespective of whether 

they previously filed under Notice 

2016–66, is similarly unnecessary. The 

commenter asserts that both these 

duplicate filing requirements run 

contrary to the Paperwork Reduction 


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Act (44 U.S.C. 3507(c)) and are 

themselves abusive. 

This additional disclosure for listed 

transactions is needed because Notice 

2016–66 only identified transactions of 

interest, so disclosure pursuant to 

Notice 2016–66 does not disclose that a 

transaction meets the threshold for 

listed transactions under the proposed 

regulations. Further, for Micro-captive 

Transactions of Interest, there are 

differences between the proposed 

regulations and Notice 2016–66 in both 

the scope of transactions identified and 

the information required to be 

disclosed. The final regulations also 

significantly narrow the scope of 

transactions identified as Micro-captive 

Listed Transactions compared to the 

proposed regulations, as further 

discussed in part II. of this Summary of 

Comments and Explanation of 

Revisions. Accordingly, disclosure 

under the final regulations will provide 

the IRS with new information, including 

identifying transactions that are now 

listed, and will not create unnecessary 

duplicative reporting requirements. The 

final regulations do not adopt any 

changes based on this comment. 

Commenters asserted that the 

requirement in § 1.6011–4(e)(2)(i) (to 

report to the OTSA) is unfair because it 

will require some taxpayers who were 

already subject to audits that closed 

without adjustment (to Captive) to 

report under this provision. Similarly, 

other commenters suggested that 

taxpayers who are under examination 

should not have to disclose because the 

IRS will have access to detailed 

taxpayer records through the 

examination process and should not 

need Form 8886 disclosures to identify 

participation in the transaction. The 

Form 8886 disclosure statements to the 

OTSA and the IRS are necessary, even 

if a taxpayer is in examination for the 

reporting year or was examined in an 

earlier year. While the IRS endeavors to 

resolve all tax issues in a given 

examination, examination may be 

specific to a given issue or return that 

does not clearly address the tax benefits 

of participating in a Micro-captive 

Listed Transaction or a Micro-captive 

Transaction of interest. The final 

regulations do not adopt these suggested 

changes. 

A commenter requested that taxpayers 

who are commercial insurers acting as 

Intermediaries (as defined in proposed 

§ 1.6011–10(b)(5)) and material advisors 

to such commercial insurers be 

excepted from reporting because 

commercial insurers ceding risks to a 

reinsurer need to be certain that the 

reinsurer will satisfy its financial 

obligations to the ceding company, a 

need that is generally met by requiring 

that the reinsurer provide security. With 

security in place, the commenter states 

that there is no business reason for the 

ceding company to investigate the 

reinsurer’s ownership, tax status, overall 

loss ratio (including any other business 

the reinsurer may write), or financing 

practices. The final regulations do not 

adopt this suggestion. Commercial 

insurers acting as Intermediaries should 

know as part of their due diligence the 

nature of the entity with which they 

have contracted. The material advisors 

to such commercial insurers, similarly, 

should know as part of their due 

diligence the nature of the transaction 

about which they are providing advice. 

Also, as a general matter, the most likely 

type of micro-captive transaction 

involving a commercial insurer is a 

Consumer Coverage Arrangement. The 

final regulations have significantly 

broadened the reporting exception set 

forth in the proposed regulations for 

Consumer Coverage Arrangements to 

eliminate their possible identification as 

a Micro-captive Listed Transaction, as 

discussed more fully at part IV. of this 

Summary of Comments and Explanation 

of Revisions, which should afford 

sufficient relief to commercial insurers 

acting as Intermediaries. 

VI. Other Comments and Requested 

Changes to the Proposed Regulations 

In addition to comments on the 

authority of the Treasury Department 

and the IRS to issue the proposed 

regulations, specific comments on the 

Loss Ratio Factor and the Financing 

Factor, comments on the Consumer 

Coverage Exception, and comments 

seeking safe harbors from identification 

as or disclosure of a Micro-captive 

Listed Transaction or a Micro-captive 

Transaction of Interest, commenters 

expressed additional concerns, sought 

clarification, and recommended 

additional changes to the proposed 

regulations. 

A. Request for Clarification Regarding 

Effect on Cannabis Businesses 

One commenter stated that because 

the sale of cannabis constitutes 

‘‘trafficking in controlled substances’’ 

under section 280E, cannabis businesses 

may not claim deductions for amounts 

paid or incurred during the taxable year, 

including amounts paid for insurance 

premiums. The commenter asked for 

guidance on how the proposed 

regulations will impact the cannabis 

industry. A cannabis business that 

enters into a Contract with a Captive 

would be an Insured under the 

proposed regulations if it treats amounts 

paid under the Contract as insurance 

premiums for Federal income tax 

purposes, even if it cannot deduct such 

amounts. Accordingly, a transaction 

between a cannabis business and 

Captive may meet the definition of a 

Micro-captive Listed Transaction or a 

Micro-captive Transaction of Interest 

under the proposed regulations. Any 

taxpayer engaged in such a transaction 

would be subject to the disclosure 

requirements set forth in the proposed 

regulations, except as otherwise 

provided therein, if their returns reflect 

the tax consequences of participation in 

the transaction. The tax return of an 

Insured that cannot deduct an amount 

paid or incurred for purported 

insurance payments by operation of 

section 280E is not likely to reflect the 

tax consequences of participation in a 

Micro-captive Listed Transaction or 

Micro-captive Transaction of Interest, 

and therefore, the Insured will likely not 

be a ‘‘participant’’ in the transaction 

under these regulations. However, 

others involved in the transaction, such 

as Captive, which generally will exclude 

amounts received as premiums from 

income based on the position that it is 

an insurance company, would therefore 

reflect the tax consequences of 

participation in their returns, and may 

nonetheless be considered 

‘‘participants’’ subject to the disclosure 

requirements set forth in these 

regulations. 

B. Comments Regarding the 20 Percent 

Relationship Test 

Some commenters suggested that the 

20 Percent Relationship Test set forth in 

proposed § 1.6011–10(b)(1)(iii) and 

incorporated in proposed § 1.6011– 

11(b)(1) is inconsistent with the 

diversification requirements of section 

831(b)(2)(B) as enacted pursuant to the 

PATH Act. 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 other part is based on 

the relative concentration of ownership 

in an insurance company and its 

policyholders. An insurance company 

must meet one of the PATH Act 

diversification requirements to make a 

section 831(b) election. However, the 

PATH Act diversification requirements 

are not sufficient to eliminate the 

possibility that a transaction is or may 

be a tax avoidance transaction. The final 

regulations describe fact patterns that 

strongly indicate tax avoidance or the 

potential for tax avoidance by entities 

that make a section 831(b) election and 

share a concentration in ownership with 


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any policyholder that exceeds the 20 

Percent Relationship Test. The final 

regulations do not adopt any changes 

based on these comments. 

Another commenter requested 

clarification regarding what kinds of 

derivatives will cause a taxpayer to meet 

the 20 Percent Relationship Test. The 

commenter expressed concern that as 

risk management vehicles, derivatives 

are not comparable to ownership of an 

entity through stock. To be clear, any 

derivative that is derived from a direct 

or indirect interest in the assets held by 

the Captive or the Captive’s stock is 

included in the definition of Owner for 

the Captive. Any derivative that is 

derived from a direct or indirect interest 

in the assets held by the Insured or the 

Insured’s stock is included in the 

definition of Owner for the Insured. 

While the commenter asserted that 

derivatives are generally used for risk 

management, the Treasury Department 

and the IRS are aware of promoters of 

abusive micro-captive transactions 

using derivatives to replicate ownership 

interests, specifically in response to 

Notice 2016–66. For example, a 

taxpayer may enter into a derivative 

contract such as a tracking stock warrant 

with respect to a Captive’s stock. Such 

a contract would lack the voting rights 

or equity interest considered ownership 

under Notice 2016–66, but the taxpayer 

is provided with the same or similar 

economic benefits as owning the 

Captive directly through its eligibility to 

exercise the warrant to obtain one or 

more shares in the Captive. The final 

regulations do not adopt any changes 

based on this comment. 

One commenter argued that the 20 

Percent Relationship Test is contrary to 

the micro-captive concept, asserting that 

micro-captives are typically structured 

with a single owner, who has a single 

business, that is also the sole 

policyholder of the micro-captive. The 

commenter appeared to suggest that 

section 831(b) was intended specifically 

for the benefit of such micro-captives, 

but this is not consistent with the 

history of section 831(b). Section 831(b) 

arose out of tax laws specific to certain 

small and mutual insurers, which are 

traditionally held by their members in a 

given geographical location ‘‘solely for 

the protection of their own property and 

not for profit.’’ Revenue Act of 1914, 

Public Law 63–217, 38 Stat. 745, 762. 

These small insurers, including groups 

of farmers and fire associations, were 

exempt from ordinary income tax laws 

and were understood to collect funds 

only up to what was needed for losses 

and expenses. See H.R. Rep. No. 69–1, 

at 9 (1925). Under the current Code, 

these and other types of small insurers 

use section 831(b) to exclude premiums 

from taxable income. Accordingly, 

while the Code does contemplate small 

insurers, such contemplation is not 

specific to a single captive covering a 

sole policyholder. The inclusion of the 

20 Percent Relationship Test in the 

proposed regulations was intended to 

exclude entities such as the mutual 

insurers, which are more likely to have 

diversified ownership and thus have 

significantly reduced potential for tax 

avoidance. The final regulations do not 

adopt any changes based on this 

comment. 

C. Recommendations To Eliminate or 

Delay Some or All of the Proposed 

Regulations 

Commenters recommended that the 

proposed regulations identifying MicroCaptive Listed Transactions should not 

be finalized. Commenters noted that 

captive transactions can differ 

significantly from one transaction to the 

next and because the test for whether a 

transaction is insurance for Federal tax 

purposes is a totality of the 

circumstances inquiry, it is 

unreasonable to designate any category 

of transactions as transactions known to 

be abusive. The final regulations do not 

adopt this recommendation. However, 

the final regulations significantly 

narrow the scope of § 1.6011–10 to 

decrease the likelihood that transactions 

that are not tax avoidance transactions 

are identified as listed transactions. As 

commenters noted, the IRS has received 

information on micro-captive 

transactions, whether in response to 

Notice 2016–66 or as part of 

examinations or litigation, for many 

years. The IRS is confident from its 

review of examinations and case law 

that the fact pattern described in the 

final regulations is a fact pattern that 

consistently gives rise to tax avoidance. 

Commenters recommended that 

finalization of these regulations be 

postponed until a decision is reached in 

Loper Bright Enterprises v. Raimondo, 

Sup. Ct. Dkt. No. 22–451 (certiorari 

granted on the question of ‘‘[w]hether 

the Court should overrule Chevron or at 

least clarify that statutory silence 

concerning controversial powers 

expressly but narrowly granted 

elsewhere in the statute does not 

constitute an ambiguity requiring 

deference to the agency’’). The Supreme 

Court issued its decision in this case on 

June 28, 2024, and as such, this 

recommendation is moot. Loper Bright 

Enterprises v. Raimondo, 144 S.Ct. 2244 

(2024). Further, as described more fully 

in the Authority section of this 

preamble, sections 6011 and 7805(a) 

provide express delegations of authority 

to the Secretary to identify the form and 

manner of taxpayer filing requirements 

and make rules, respectively. Section 

6707A provides an express delegation of 

authority to identify reportable 

transactions. The final regulations do 

not adopt any changes based on these 

comments. 

Commenters recommended 

modification of Form 1120–PC, U.S. 

Property and Casualty Insurance 

Company Tax Return, to capture the 

information required to be reported by 

Captives in the proposed regulations, in 

lieu of finalizing the proposed 

regulations. This recommendation was 

not adopted for the reasons explained in 

the preamble to the proposed 

regulations. 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 these 

regulations. 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, including information 

regarding Insureds and promoters of the 

transactions. Reporting for the specific 

transactions identified in these 

regulations is best captured in the 

manner of all reportable transactions, by 

requiring disclosure on Form 8886, for 

consistency in enforcement of the 

reportable transaction regime. 

Commenters expressed concern that 

the IRS should have sufficient 

information on micro-captives in the 

responses filed to Notice 2016–66 and 

thus the regulations are not needed. 

Commenters stated the IRS should not 

require any further reporting. As 

commenters also noted, the IRS has 

received information on micro-captive 

transactions for several years. The IRS is 

confident from its review of 

examinations and case law that the fact 

pattern described in the regulations is a 

fact pattern that consistently gives rise 

to tax avoidance or otherwise 

potentially gives rise to tax avoidance. 

However, promoters continue to 

promote participation in these 

transactions, and the IRS is aware of 

new entrants to these transactions. 

Thus, despite information collected to 

date, the IRS needs to continue 

collecting information to identify who 

the participants are and the nature of 


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their transactions. The final regulations 

do not adopt any changes based on 

these comments. 

Commenters recommended that the 

proposed regulations be withdrawn in 

their entirety and that guidance be 

issued instead on what would make a 

micro-captive arrangement an insurance 

arrangement for Federal tax purposes in 

the IRS’s estimation. As the Tax Court 

explained in Syzygy, ‘‘[a]n inherent 

requirement for a company to make a 

valid section 831(b) election is that it 

must transact in insurance.’’ T.C. Memo. 

2019–34, at *28; see also Reserve Mech., 

34 F.4th at 904. Like any insurance 

transaction, a valid micro-captive 

arrangement for Federal tax purposes is 

one that meets the four-prong test of 

insurance as detailed by the courts in a 

significant body of case law. See Le 

Gierse, 312 U.S. at 539; see also 

Avrahami, 149 T.C. at 181 (citing RentA-Center, 142 T.C. at 13–14) (additional 

citations omitted); Syzygy, T.C. Memo. 

2019–34, at *29; Caylor, T.C. Memo. 

2021–30, at *31–32; Keating, T.C. 

Memo. 2024–2, at *51–52; Swift, T.C. 

Memo. 2024–13, at *27; Patel, T.C. 

Memo. 2024–34, at *37–38; Royalty 

Mgmt., T.C. Memo. 2024–87, at *35. The 

IRS has issued guidance regarding what 

makes a captive insurance arrangement 

an insurance arrangement for Federal 

tax purposes that is applicable to all 

insurance companies, including those 

making section 831(b) elections. See, 

e.g., Rev. Rul. 2002–89, 2002–2 C.B. 

984; Rev. Rul. 2002–90, 2002–2 C.B. 

985; Rev. Rul. 2002–91, 2002–2 C.B. 

991; Rev. Rul. 2005–40, 2005–2 C.B. 4; 

Rev. Rul. 2007–47, 2007–2 C.B. 127; 

Rev. Rul. 2008–8, 2008–1 C.B. 340; and 

Rev. Rul. 2009–26, 2009–38 I.R.B. 366. 

Nonetheless, in many micro-captive 

transactions, the manner in which the 

contracts are interpreted, administered, 

and applied is inconsistent with arm’s 

length transactions, actuarial standards, 

and sound business practices. The 

captive typically does not behave as an 

insurance company commonly would, 

indicating that the captive is not issuing 

insurance contracts and the transaction 

does not constitute insurance for 

Federal tax purposes. The final 

regulations therefore do not adopt any 

changes based on these comments. 

D. Requests for Clarification Regarding 

Revoked or Inapplicable Section 831(b) 

Elections 

Commenters requested clarification 

whether reporting is still required for 

years in which a Captive’s section 

831(b) election has been revoked or is 

otherwise inapplicable for a given 

taxable year. Under section 831(b)(2)(A), 

a section 831(b) election, once made, 

may be revoked only with the consent 

of the Secretary. Once an election is 

made, the alternative tax under section 

831(b) applies only if the net written 

premiums (or, if greater, the direct 

written premiums) for the taxable year 

do not exceed the threshold set forth in 

section 831(b)(2)(A)(i) (as adjusted for 

inflation) and if the electing entity 

meets the diversification requirements 

set forth in section 831(b)(2)(B), for that 

taxable year. 

Under proposed §§ 1.6011–10(b)(1)(i) 

and 1.6011–11(b)(1), an entity would be 

a Captive only if it elects under section 

831(b) to exclude premiums from 

taxable income. Under proposed 

§§ 1.6011–10(a) and 1.6011–11(a), a 

transaction would be a Micro-Captive 

Listed Transaction or Micro-captive 

Transaction of Interest only if it 

involves a Captive. Separately, pursuant 

to § 1.6011–4(a), the disclosure 

requirements for reportable transactions 

apply to a taxpayer that is a participant 

in a reportable transaction for taxable 

years in which the taxpayer’s filed 

return reflects the tax consequences of 

participation in the transaction, as set 

forth in § 1.6011–4(c)(3)(i)(A). 

An entity that revokes its section 

831(b) election would not be a Captive 

under the proposed regulations 

beginning in the year of revocation. 

Similarly, for taxable years after a 

Captive has filed its final return, it has 

effectively revoked its section 831(b) 

election. See § 1.6011–10(b)(1)(i); but 

see §§ 1.6011–10(b)(2)(iv) and 1.6011– 

11(b)(2)(iii) (regarding successor 

corporations). Accordingly, for taxable 

years in which a Captive’s section 

831(b) election has been revoked or the 

Captive has previously filed its final 

return, the arrangement generally is not 

a Micro-Captive Listed Transaction or 

Micro-Captive Transaction of Interest 

under the proposed regulations in that 

taxable year. 

However, if the alternative tax under 

section 831(b) is inapplicable (either 

because premiums exceed the threshold 

or the entity fails the diversification 

requirements set forth in section 

831(b)(2)(B) for that year), because the 

section 831(b) election remains in effect, 

the entity may still be a Captive under 

the proposed regulations. Thus, in 

taxable years in which a Captive’s 

section 831(b) election is inapplicable 

but has not been revoked, and the 

arrangement is otherwise described in 

the regulations, the arrangement would 

still be a Micro-Captive Listed 

Transaction or Micro-Captive 

Transaction of Interest under the 

proposed regulations. The potential of 

using of the section 831(b) election for 

tax avoidance is not eliminated until the 

election is revoked. Taxpayers must 

disclose the transaction in such years if 

their returns reflect the tax 

consequences of participation. 

The effect of revocation or 

inapplicability of the section 831(b) 

election, as described with respect to 

the proposed regulations, is retained in 

the final regulations. However, in the 

interest of limiting the reporting 

required by these regulations, the final 

regulations provide transition relief for 

section 831(b) revocations. Specifically, 

if the Captive in a transaction identified 

as a Micro-captive Listed Transaction or 

Micro-captive Transaction of Interest in 

§§ 1.6011–10(a) and 1.6011–11(a) of the 

final regulations requests the Secretary’s 

consent to revoke its section 831(b) 

election on or before the date by which 

the participants’ disclosures must be 

filed with the OTSA, the transaction 

will not be identified as a Micro-captive 

Listed Transaction or Micro-captive 

Transaction of Interest for taxable years 

ending before January 1, 2026, pursuant 

to §§ 1.6011–10(h)(1) and 1.6011– 

11(h)(1). 

Additionally, the final regulations 

provide certainty regarding the 

disclosure obligations of taxpayers who 

have participated in a Micro-captive 

Listed Transaction or Micro-captive 

Transaction of Interest involving a 

Captive that has subsequently revoked 

its section 831(b) election and therefore 

ceased to be a Captive. With respect to 

taxable years in which the section 

831(b) revocation is effective, §§ 1.6011– 

10(f)(3) and 1.6011–11(f)(3) of the final 

regulations provide taxpayers involved 

in the transaction with a safe harbor 

from identification as participants in 

that transaction. 

Commenters also requested a 

streamlined method by which taxpayers 

could obtain the Secretary’s consent to 

revoke section 831(b) elections. 

Currently, consent is obtained through 

the private letter ruling procedures, 

published annually. See, e.g., Rev. Proc. 

2024–1, 2024–1 I.R.B. 1. The IRS 

intends to issue a Revenue Procedure 

that describes a simplified process for 

revocation of section 831(b) elections. 

E. Request for Clarification Regarding 

the Definition of Intermediary 

A commenter requested clarification 

on whether the defined term 

‘‘Intermediary,’’ as described in 

proposed §§ 1.6011–10(b)(5) and 

1.6011–11(b)(5), includes fronting 

companies. Generally, ‘‘fronting’’ is ‘‘an 

arrangement in which a primary insurer 

acts as the insurer of record by issuing 

a policy, but then passes the entire risk 

to a reinsurer in exchange for a 

commission. Often, the fronting insurer 


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is licensed to do business in a state or 

country where the risk is located, but 

the reinsurer is not.’’ NAIC Glossary of 

Insurance Terms, https://content.

naic.org/glossary-insurance-terms (last 

visited Jan. 6, 2025). The term 

‘‘Intermediary’’ as defined in the 

proposed regulations means an entity 

that issues Contracts to an Insured, 

which are then reinsured, directly or 

indirectly, by a Captive. A ‘‘fronting’’ 

company would fall within the 

definition of ‘‘Intermediary’’ if it issues 

Contracts to an Insured, which are then 

reinsured, directly or indirectly, by a 

Captive. 

F. Recommendation To Limit the 

Effective Period of Section 831(b) 

Elections for Companies That Do Not 

Meet Loss Ratio Threshold 

A commenter recommended that no 

loss ratio factor apply for the first five 

years of a section 831(b) election, after 

which any entity that elected the 

alternative tax under section 831(b) 

would automatically revert to an entity 

taxable under section 831(a) unless it 

meets a loss ratio threshold. The 

commenter did not specify what an 

appropriate loss ratio threshold would 

be, but implied that the loss ratio 

threshold should be lower than the Loss 

Ratio Factor percentages set forth in the 

proposed regulations. 

An automatic conversion to a taxable 

insurance company under section 831(a) 

would be inconsistent with the statutory 

language of section 831(b). Valid 

insurers who rely on the section 831(b) 

election would be impermissibly 

harmed by this recommendation. To the 

extent the commenter intended to 

recommend a five-year grace period 

from formation of a Captive to 

identification as either a Micro-captive 

Listed Transaction or a Micro-captive 

Transaction of Interest, this could 

enable participants in micro-captive 

arrangements that are or may be tax 

avoidance transactions to permanently 

avoid reporting that would otherwise be 

required by, for instance, setting up a 

new Captive every five years. The final 

regulations do not adopt any changes 

based on this comment. 

G. Comments Regarding 

Constitutionality of Potential 

Adjustments if Transaction Examined 

Commenters expressed concern that 

the potential adjustments applicable to 

abusive transactions, as described in the 

preamble to the proposed regulations, 

are unconstitutional as double tax. 

Specifically, the preamble to the 

proposed regulations noted that 

examinations may result in adjustments 

including full disallowance of claimed 

micro-captive insurance premium 

deductions and the inclusion in income 

of amounts received by the Captive. 

These adjustments are consistent with 

the adjustments sustained against 

taxpayers in the relevant micro-captive 

court cases. See Avrahami, 149 T.C. at 

199 (disallowed premium deductions), 

Syzygy, T.C. Memo. 2019–34, at *45–46 

(disallowed premium deductions and 

required income inclusion by the 

Captive), Caylor, T.C. Memo. 2021–30, 

at *48–53 (disallowed premium 

deductions and penalties); Keating, T.C. 

Memo. 2024–2, at *65–66, 77 

(disallowed premium deductions and 

penalties); Swift, T.C. Memo. 2024–13, 

at *44–50 (disallowed premium 

deductions and penalties); Patel, T.C. 

Memo. 2024–34, at *52 (disallowed 

premium deductions), and Royalty 

Mgmt., T.C. Memo. 2024–87, at *49–50, 

52–53 (disallowed premium deductions 

and required income inclusion by the 

Captive); see also Reserve Mech., T.C. 

Memo. 2018–86, at *62–64 (income to a 

tax-exempt entity under section 

501(c)(15)). Further, while the IRS may 

challenge the tax benefits claimed in 

these transactions, adjustments will be 

asserted only to the extent warranted by 

the facts, following examination by the 

IRS. The final regulations do not adopt 

any changes based on these comments. 

H. Comments Regarding Impact on the 

Captive Insurance Industry 

Commenters expressed concern that 

the proposed regulations will negatively 

impact the captive insurance industry 

and would eliminate many benefits to 

its participants. Commenters stated that 

the benefits of captives include the 

following: providing coverage that is 

either unavailable or prohibitively 

expensive commercially, providing 

entry to reinsurance markets that are 

otherwise unavailable to participants, 

allowing for competition with 

commercial insurers, and serving to 

manage catastrophic risks for many 

businesses, such as the risks arising 

under the Coronavirus Disease 2019 

(COVID–19) pandemic. These benefits 

are available to all section 831(a) 

captives and to those section 831(b) 

captives that are not engaged in 

transactions that are tax avoidance 

transactions. These regulations do not 

hinder the formation of valid captives. 

Accordingly, the final regulations do not 

adopt any changes based on these 

comments. 

I. Comments Regarding Compliance 

Concerns 

Some commenters argued that the 

proposed regulations are retroactive in 

nature, that there would be no way for 

an existing micro-captive to ‘‘come into 

compliance with the proposed 

regulation,’’ and that there would be no 

way for a taxpayer to know whether 

they are entering into a reportable 

transaction. As previously stated in part 

I.C. of this Summary of Comments and 

Explanation of Revisions, the proposed 

regulations are not retroactive in nature; 

the final regulations will be effective as 

of January 14, 2025. Section 1.6011– 

4(e)(2)(i) is clear that reporting is 

required for transactions entered into 

and reflected on a tax return for a year 

prior to the publication of guidance 

identifying a transaction as a listed 

transaction or a transaction of interest, 

if the statute of limitations is still open 

on the effective date of the listing. While 

the disclosures mandated by § 1.6011–4 

may be with respect to prior periods, if 

the period of limitations on assessment 

for such periods has not expired, the 

disclosure obligation is itself not 

retroactive—it is a current reporting 

obligation. The comments regarding an 

impermissible retroactive burden are 

without merit and outside the scope of 

these final regulations. 

Moreover, existing participants in 

transactions identified under the final 

regulations as a Micro-Captive Listed 

Transaction or a Micro-Captive 

Transaction of Interest may successfully 

comply by fulfilling their reporting 

obligations as set forth in the final 

regulations at §§ 1.6011–10(g) and 

1.6011–11(g). Lastly, taxpayers are 

encouraged to make informed decisions 

and seek independent tax advice before 

entering into any transaction. Taxpayers 

have been placed on notice of the IRS’s 

concern with abuse of the section 831(b) 

election since at least 2015 when the 

IRS first identified micro-captive 

transactions on its annual Dirty Dozen 

list. The final regulations do not adopt 

any changes based on these comments. 

J. Comment Expressing Concerns About 

Access to Administrative Appeals 

Finally, a commenter expressed 

concern that taxpayers whose microcaptive transactions are examined do 

not have access to good faith 

administrative appeals. Appeals is an 

independent office of the IRS. Section 

7803(e)(3) of the Code provides that it 

is the function of Appeals to resolve 

Federal tax controversies without 

litigation on a basis which is fair and 

impartial to both the Government and 

the taxpayer, and promotes a consistent 

application and interpretation of, and 

voluntary compliance with, the Federal 

tax laws. The Appeals resolution 

process is generally available to all 

taxpayers. Appeals endeavors to be 

consistent in its approach with the goal 


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3558 Federal Register / Vol. 90, No. 8 / Tuesday, January 14, 2025 / Rules and Regulations 

of making a fair and reasoned 

determination on each case presented to 

it, considering the facts of the case and 

existing case law. Taxpayers concerned 

about their specific case and the 

handling thereof should raise the matter 

to the appropriate authorities within 

Appeals. 

Special Analyses 

I. Regulatory Planning and Review 

Pursuant to the Memorandum of 

Agreement, Review of Treasury 

Regulations under Executive Order 

12866 (June 9, 2023), tax regulatory 

actions issued by the IRS are not subject 

to the requirements of section 6 of 

Executive Order 12866, as amended. 

Therefore, a regulatory impact 

assessment is not required. 

II. Paperwork Reduction Act 

The collection of information 

contained in the final 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. 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 

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 Regulatory Flexibility Act (RFA) 

(5 U.S.C. part I, chapter 6) requires 

agencies to ‘‘prepare and make available 

for public comment an initial regulatory 

flexibility analysis,’’ which will 

‘‘describe the impact of the rule on 

small entities.’’ 5 U.S.C. 603(a). Section 

605(b) of the RFA allows an agency to 

certify a rule if the rulemaking is not 

expected to have a significant economic 

impact on a substantial number of small 

entities. 

The Secretary of the Treasury hereby 

certifies that the final regulations will 

not have a significant economic impact 

on a substantial number of small entities 

pursuant to the RFA. The basis for these 

final 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 taxable year 2022: 

NOTICE 2016–66—RESPONDENTS BY

SIZE

Receipts Firms 

(%) 

Filings 

(%) 

Under 5M .................. 74.45 70.87 

5M to 10M ................ 7.17 7.56 

10M to 15M .............. 4.36 4.76 

15M to 20M .............. 2.49 2.80 

20M to 25M .............. 1.87 2.24 

Over 25M .................. 9.66 11.76 

Total ................... 100 100 

This chart shows that the majority of 

respondents to Notice 2016–66 reported 

gross receipts under $5 million. Even 

assuming that these respondents 

constitute a substantial number of small 

entities, the final regulations will not 

have a significant economic impact on 

these entities because the final 

regulations implement sections 6111 

and 6112 and § 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 

final regulations is expected to be 

minimal. 

Further, the Treasury Department and 

the IRS expect the reporting burden to 

be low; the information sought is 

necessary for regular annual return 

preparation and ordinary recordkeeping. 

The estimated burden for any entity 

required to file Form 8886 (as revised 

Oct. 2022) 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 $73.48 (2022 dollars) per 

hour. Thus, it is estimated that a 

respondent will incur costs of 

approximately $1,581.05 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 final regulations. The 

Treasury Department and the IRS have 

concluded that the cost of filing the 

disclosure statements required by these 

regulations will not pose any significant 

economic impact. 

Some commenters expressed concern 

that the cost of filing disclosure 

statements is too onerous for taxpayers. 

Specifically, commenters stated that 

they incurred significant costs in 

responding to Notice 2016–66 and will 

again face those costs if new disclosures 

are required. In response to comments 

on Notice 2016–66 and the proposed 

regulations, the final regulations narrow 

the scope of transactions described in 

§§ 1.6011–10(h) and 1.6011–11(h). New 

disclosures are needed to identify 

participants in these transactions, but 

the final regulations provide in 

§ 1.6011–11(h)(2) that taxpayers who 

have filed a disclosure statement 

regarding their participation in a 

transaction that is the same as, or 

substantially similar to, the transaction 

described in § 1.6011–11(a) with the 

OTSA pursuant to Notice 2016–66, will 

be treated as having made the disclosure 

pursuant to the final regulations for the 

taxable years for which the taxpayer 

filed returns before January 14, 2025. 

One commenter asserted that the 

reporting obligations would be 

particularly onerous for arrangements 

using a pooled reinsurance structure 

with numerous participants and likened 

the cost of filling out a Form 8886 to 

effectively imposing a tax on the entire 

community of captive insurers electing 

the alternative tax under section 831(b). 

Taxpayer compliance burden is not 

equivalent to a tax, and the Instructions 

to Forms 8886 and 8918 make clear that 

the time needed to complete and file 

such forms will vary depending on 

individual circumstances. 

Two commenters indicated that the 

$77.50 (2020 dollars) wage rate per hour 

used to approximate the total cost of 

preparing and filing a Form 8886, as 

referenced in the proposed regulations, 

is too low. One of these commenters 

implied that the applicable average 

wage rate per hour is closer to $268.50. 

Given the availability of more recent 

data, the hourly rate estimate is revised 

in the final regulations to $73.48 (2022 

dollars). This updated figure does not 

address the substantial difference from 

the commenter’s estimate. The 

difference is likely attributable to the 

different methodologies used. The 

commenter likely used the hourly rate 

that an independent professional would 

charge a retail customer to prepare a 

Form 8886. 

These commenters also expressed 

disagreement with the estimated average 

amounts of time required to complete 

Forms 8886 and 8918, as indicated in 

the instructions to each of those forms. 

One commenter described the estimate 


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of 21.5 hours to comply as ‘‘significantly 

underestimated.’’ However, the 

commenter did not elaborate on the 

amount of time actually required for the 

commenter. Additionally, the 

Instructions to Forms 8886 and 8918 

make clear that the time needed to 

complete and file such forms will vary 

depending on individual circumstances. 

One of the commenters stated that based 

on a survey of 2,397 respondents, the 

average amount of time spent by each 

respondent ‘‘for compliance’’ under 

Notice 2016–66 (using it as a proxy for 

these final regulations) was 50.97 hours, 

which the commenter noted is above the 

estimated average amounts of time for 

completion indicated in the instructions 

to each of those forms. However, based 

on the information provided by this 

commenter regarding the same survey, 

the total number of hours spent on 

‘‘compliance’’ by all respondents was 

121,755 hours, and the total number of 

Forms 8886 and 8918 completed by 

respondents for this ‘‘compliance’’ was 

15,021. Consequently, the average 

amount of time spent per form by these 

respondents appears to be 

approximately 8.11 hours (that is, 

approximately 8 hours, 6 minutes). This 

amount falls below the estimated 

average time of 21 hours, 31 minutes for 

Form 8886 (as revised Oct. 2022) and 14 

hours, 31 minutes for Form 8918 (as 

revised Nov. 2021) as provided in the 

instructions to those forms, respectively. 

For the reasons stated, a regulatory 

flexibility analysis under the RFA is not 

required. Pursuant to section 7805(f)(1), 

the notice of proposed rulemaking 

preceding the final regulations was 

submitted to the Chief Counsel for the 

Office of Advocacy of the Small 

Business Administration for comment 

on its impact on small business, and no 

comments were received. 

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 in 1995 dollars, updated 

annually for inflation. This final 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 final 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. See also part I.B. of the Summary 

of Comments and Explanation of 

Revisions. 

VI. Congressional Review Act 

Pursuant to the Congressional Review 

Act (5 U.S.C. 801 et seq.), the Office of 

Information and Regulatory Affairs has 

designated this rule as not a ‘‘major 

rule,’’ as defined by 5 U.S.C. 804(2). 

Drafting Information 

The principal author of these 

regulations is Allan H. Sakaue, Office of 

Associate Chief Counsel (Financial 

Institutions and Products), IRS. 

However, other personnel from the 

Treasury Department and the IRS 

participated in their development. 

Availability of IRS Documents 

The notices cited in this preamble are 

published in the Internal Revenue 

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. 

List of Subjects in 26 CFR Part 1 

Income taxes, Reporting and 

recordkeeping requirements. 

Amendments to the Regulations 

Accordingly, the Treasury Department 

and the IRS amend 26 CFR part 1 as 

follows: 

PART 1—INCOME TAXES 

■ Paragraph 1. The authority citation 

for part 1 is amended by adding entries 

for §§ 1.6011–10 and 1.6011–11 in 

numerical order 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 6011. 

Section 1.6011–11 also issued under 26 

U.S.C. 6001 and 6011. 

* * * * * 

■ Par. 2. Section 1.6011–10 is added to 

read as follows: 

§ 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 § 1.6011– 

4(b)(2), except as provided in paragraph 

(d) of this section. 

(b) Definitions. The definitions in this 

paragraph (b) apply for purposes of this 

section: 

(1) Captive. The term Captive means 

any entity that is described in each of 

the paragraphs (b)(1)(i), (ii), and (iii) of 

this section. 

(i) The entity elects under section 

831(b) of the Internal Revenue Code 

(Code) to include in taxable income 

only taxable investment income 

(defined in section 834 of the Code) in 

lieu of the tax imposed under section 

831(a). 

(ii) The entity issues a Contract to an 

Insured, reinsures a Contract of an 

Insured issued by an Intermediary, or 

both. 

(iii) At least 20 percent of the entity’s 

assets or the voting power or value of its 

outstanding stock or equity interests is 

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 rules of 

paragraph (b)(1)(iii)(A) or (B) of this 

section 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. 

(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 

term Financing Computation Period 

means the most recent five taxable years 

(including the most recent concluded 

taxable year) of a Captive (or all taxable 

years of a Captive if the Captive has 

been in existence for less than five 

taxable years). 

(ii) Listed Transaction Loss Ratio 

Computation Period. The term Listed 

Transaction Loss Ratio Computation 

Period is the most recent ten taxable 

years (including the most recent 

concluded taxable year) of Captive. A 

Captive that does not have at least ten 

taxable years cannot have a Listed 


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3560 Federal Register / Vol. 90, No. 8 / Tuesday, January 14, 2025 / Rules and Regulations 

Transaction Loss Ratio Computation 

Period, and therefore is not described in 

paragraph (c)(2) of this section. 

(iii) Taxable years. For purposes of 

paragraphs (b)(2)(i) and (ii) of this 

section: 

(A) Each short taxable year is a 

separate taxable year. 

(B) If the Captive is a successor to one 

or more other Captives, taxable years of 

each such other Captive are treated as 

taxable years of the Captive. 

(iv) Successors. The term successor 

means any entity described in paragraph 

(b)(2)(iv)(A), (B), or (C) of this section. 

(A) A successor corporation as 

defined in § 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. 

(C) An entity that receives (or is 

deemed to receive) any assets from 

another entity if such entity’s basis in 

such assets is determined, directly or 

indirectly, in whole or in part, by 

reference to the other entity’s basis in 

such assets. 

(3) Contract. The term 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. The term 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. The term 

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, 

directly or indirectly, by a Captive. A 

transaction may have more than one 

Intermediary. 

(6) Owner. The term 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 rules of 

paragraph (b)(6)(i) or (ii) of this section 

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. 

(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. The term 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. The term 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. The term Seller means a 

service provider, dealer (including an 

automobile dealer), lender, wholesaler, 

or retailer that sells products or services 

to customers who purchase insurance 

contracts in connection with those 

products or services and at least 95 

percent of sales of products or services 

by Seller for the taxable year to persons 

who purchase such insurance contracts 

are sales to Unrelated Customers. 

(10) Seller’s Captive. The term 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) Substantially Similar. The term 

Substantially Similar is defined in 

§ 1.6011–4(c)(4). 

(12) Unrelated Customers. The term 

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 both paragraphs (c)(1) and 

(2) of this section. 

(1) The transaction involves a Captive 

that, at any time during the Captive’s 

Financing Computation Period, directly 

or indirectly, engages in a transaction 

described in paragraph (c)(1)(i) of this 

section, taking into account paragraph 

(c)(1)(ii) of this section. 

(i) The Captive 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, in whole or in part, any 

portion of the amounts received under 

a 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. 

(ii) 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 amounts received 

under a Contract to the extent that 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 described in 

paragraph (c)(2)(i) of this section is less 

than 30 percent of the amount described 

in paragraph (c)(2)(ii) of this section. 

(i) The amount of liabilities incurred 

for insured losses and claim 

administration expenses during the 

Listed Transaction Loss Ratio 

Computation Period. 

(ii) The amount equal to premiums 

earned by the Captive during the Listed 

Transaction Loss Ratio Computation 

Period, less policyholder dividends paid 

by the Captive during the Listed 

Transaction Loss Ratio Computation 

Period. 

(d) Exceptions. A transaction 

described in paragraph (c) of this 

section is not identified as a listed 

transaction for purposes of this section 

and § 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 29 CFR 2570.30 

through 2570.52; or 

(2) Is an arrangement in which a 

Captive meets all of the requirements 

described in this paragraph (d)(2). 

(i) The Captive is a Seller’s Captive. 

(ii) The Seller’s Captive issues or 

reinsures some or all of the Contracts 

purchased by 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 issuing or reinsuring 

Contracts in connection with products 

or services being sold by the Seller or 

persons Related to the Seller. 

(iv) At least 95 percent of the Seller’s 

Captive’s business for the taxable year is 

issuing or reinsuring Contracts 

purchased by Unrelated Customers in 

connection with products or services 

sold by Seller or persons Related to 

Seller. 

(e) Bright-line rules. A transaction is 

not considered Substantially Similar (as 

defined in paragraph (b)(11) of this 

section) to the listed transaction 

identified in this section if the 

transaction: 

(1) Does not involve an entity that has 

elected under section 831(b) to include 

in taxable income only taxable 

investment income (defined in section 


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Federal Register / Vol. 90, No. 8 / Tuesday, January 14, 2025 / Rules and Regulations 3561 

834) in lieu of the tax imposed under 

section 831(a); or 

(2) Involves a Captive for which the 

amount described in paragraph (c)(2)(i) 

of this section is 30 percent or more of 

the amount described in paragraph 

(c)(2)(ii) of this section. 

(f) Special participation rules—(1) In 

general. Whether a taxpayer has 

participated in the listed transaction 

identified in paragraph (a) of this 

section, including Substantially Similar 

transactions, will be determined under 

§ 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 identified 

in paragraph (a), except as otherwise 

provided in paragraphs (f)(2) and (3) 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) of the Code, 

notwithstanding § 1.6011–4(c)(3), if the 

Owner receives acknowledgement, in 

writing or electronically, from the 

Insured that the Insured has or will 

comply with the Insured’s separate 

disclosure obligation under § 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 § 1.6011–4(e) in which the 

Owner would otherwise be required to 

provide disclosure. Owners who meet 

the requirements of the safe harbor in 

this paragraph (f)(2) will not be treated 

as having participated in an undisclosed 

listed transaction for purposes of 

§ 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) of the Code. 

(3) Disclosure safe harbor for 

taxpayers in transactions with revoked 

section 831(b) elections. If the Captive 

has revoked its section 831(b) election, 

taxpayers who participated in the listed 

transaction with respect to that Captive, 

including any Insureds, Owners, and 

Intermediaries, will not be considered 

participants in the transaction under 

section 6011(a), notwithstanding 

§ 1.6011–4(c)(3), for any taxable year in 

which the section 831(b) revocation is 

effective, provided that a successor 

Captive has not been established as 

described in paragraph (b)(2)(iv) of this 

section. In addition, if the Captive has 

revoked its section 831(b) election, 

taxpayers who meet the requirements of 

this safe harbor, for any taxable year in 

which the section 831(b) revocation is 

effective, will not be treated as having 

participated in an undisclosed listed 

transaction for purposes of § 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). 

(g) Disclosure requirements—(1) 

Information required of all participants. 

Participants must provide the 

information required under § 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 (g)(2) and 

(3) of this section describe additional 

information required of a Captive and 

an Insured, respectively. 

(2) Additional information required of 

a Captive. For a Captive, describing the 

transaction in sufficient detail includes, 

but is not limited to, describing on Form 

8886 (or successor form) the items 

described in each of the paragraphs 

(g)(2)(i) through (v) of this section. 

(i) All the type(s) of policies issued or 

reinsured by the Captive during the year 

of participation or each year of 

participation (if disclosure pertains to 

multiple years). 

(ii) The amounts treated by the 

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 the 

Captive during the year or each year of 

participation (if disclosure pertains to 

multiple years). 

(iv) The total amounts of claims paid 

by the Captive during the year of 

participation or each year of 

participation (if disclosure pertains to 

multiple years). 

(v) The name and percentage of 

interest directly or indirectly held by 

each person whose interest in the 

Captive meets the 20 percent threshold 

or is taken into account in meeting the 

20 percent threshold under paragraph 

(b)(1)(iii) of this section. 

(3) Additional 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 paid for 

coverage provided to Insured, directly 

or indirectly, by the 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 (f)(2) of this section. 

(h) Applicability date—(1) In general. 

This section identifies transactions that 

are the same as, or Substantially Similar 

to, the transactions identified in 

paragraph (a) of this section as listed 

transactions for purposes of § 1.6011– 

4(b)(2), effective January 14, 2025, 

except as otherwise provided in this 

paragraph (h)(1). If, on or before the date 

prescribed for filing disclosure 

statements with the Office of Tax 

Shelter Analysis under § 1.6011–4(e), 

the Captive involved in the transaction 

has requested the consent of the 

Secretary to revoke its section 831(b) 

election, the transaction is not identified 

as a listed transaction for purposes of 

this section and § 1.6011–4(b)(2) for 

taxable years ending before January 1, 

2026. 

(2) Obligations of participants with 

respect to prior periods. Pursuant to 

§ 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 

January 14, 2025, must disclose the 

transactions as required by § 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 

January 14, 2025, except as otherwise 

provided in this paragraph (h)(2). 

Taxpayers who have finalized a 

settlement agreement with the Internal 

Revenue Service with respect to the 

transaction, in examination or litigation, 

will be treated as having made the 

disclosure for years subject to that 

agreement. 

(3) Obligations of material advisors 

with respect to prior periods. Material 

advisors defined in § 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 


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3562 Federal Register / Vol. 90, No. 8 / Tuesday, January 14, 2025 / Rules and Regulations 

maintenance obligations as described in 

§§ 301.6111–3 and 301.6112–1 of this 

chapter, respectively. Notwithstanding 

§ 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 January 14, 2025. Material 

advisors that are uncertain whether the 

transaction they are required to disclose 

should be reported under this section or 

§ 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 § 1.6011–11. 

■ Par. 3. Section 1.6011–11 is added to 

read as follows: 

§ 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 

§ 1.6011–4(b)(6), except as provided in 

paragraph (d) of this section. 

(b) Definitions. The definitions in this 

paragraph (b) apply for purposes of this 

section. 

(1) Captive. Captive has the same 

meaning as provided in § 1.6011– 

10(b)(1). 

(2) Computation periods—(i) 

Financing Computation Period. 

Financing Computation Period has the 

same meaning as provided in § 1.6011– 

10(b)(2)(i). 

(ii) Transaction of Interest Loss Ratio 

Computation Period. The term 

Transaction of Interest Loss Ratio 

Computation Period means— 

(A) The most recent ten taxable years 

of a Captive; or 

(B) In the case of a Captive that has 

been in existence for less than ten 

taxable years, all taxable year(s) of the 

Captive. 

(iii) Rules for computation periods. 

The rules provided in § 1.6011– 

10(b)(2)(iii) and (iv) for computation 

periods apply for purposes of this 

paragraph (b)(2). 

(3) Contract. Contract has the same 

meaning as provided in § 1.6011– 

10(b)(3). 

(4) Insured. Insured has the same 

meaning as provided in § 1.6011– 

10(b)(4). 

(5) Intermediary. Intermediary has the 

same meaning as provided in § 1.6011– 

10(b)(5). 

(6) Owner. Owner has the same 

meaning as provided in § 1.6011– 

10(b)(6). 

(7) Recipient. Recipient has the same 

meaning as provided in § 1.6011– 

10(b)(7). 

(8) Related. Related has the same 

meaning as provided in § 1.6011– 

10(b)(8). 

(9) Seller. Seller has the same meaning 

as provided in § 1.6011–10(b)(9). 

(10) Seller’s Captive. Seller’s Captive 

has the same meaning as provided in 

§ 1.6011–10(b)(10). 

(11) Substantially Similar. 

Substantially Similar has the same 

meaning as provided in § 1.6011– 

10(b)(11). 

(12) Unrelated Customers. Unrelated 

Customers has the same meaning as 

provided in § 1.6011–10(b)(12). 

(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 Captive’s 

Financing Computation Period, directly 

or indirectly, engages in a transaction 

described in paragraph (c)(1)(i) of this 

section, taking into account paragraph 

(c)(1)(ii) of this section. 

(i) The Captive 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, in whole or in part, any 

portion of the amounts received under 

a 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. 

(ii) 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 amounts received 

under a Contract to the extent such 

amounts, when made available or 

conveyed are in excess of a Captive’s 

cumulative after-tax net investment 

earnings minus any outstanding 

financings or conveyances. 

(2) The transaction involves a Captive 

for which the amount described in 

paragraph (c)(2)(i) of this section is less 

than 60 percent of the amount described 

in paragraph (c)(2)(ii) of this section. 

(i) The amount of liabilities incurred 

for insured losses and claim 

administration expenses during the 

Transaction of Interest Loss Ratio 

Computation Period. 

(ii) The amount equal to premiums 

earned by the Captive during the 

Transaction of Interest Loss Ratio 

Computation Period, less policyholder 

dividends paid by the Captive during 

the Transaction of Interest Loss Ratio 

Computation Period. 

(d) Exceptions. A transaction 

described in paragraph (c) of this 

section is not identified as a transaction 

of interest for purposes of this section 

and § 1.6011–4(b)(6) if the transaction: 

(1) Is described in § 1.6011–10(d)(1); 

(2) Is described in § 1.6011–10(d)(2); 

or 

(3) Is identified as a listed transaction 

in § 1.6011–10(a), in which case the 

transaction must be reported as a listed 

transaction under § 1.6011–10. 

(e) Bright-line rules. A transaction is 

not considered Substantially Similar (as 

defined in paragraph (b)(11) of this 

section) to the transaction of interest 

identified in this section if the 

transaction: 

(1) Does not involve an entity that has 

elected under section 831(b) of the 

Internal Revenue Code (Code) to include 

in taxable income only taxable 

investment income (defined in section 

834 of the Code) in lieu of the tax 

imposed under section 831(a); or 

(2) Involves a Captive for which the 

amount described in paragraph (c)(2)(i) 

of this section is 60 percent or more of 

the amount described in paragraph 

(c)(2)(ii) of this section. 

(f) Special participation rules—(1) In 

general. Whether a taxpayer has 

participated in the transaction of 

interest identified in paragraph (a) of 

this section, including Substantially 

Similar transactions, will be determined 

under § 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 identified 

in paragraph (a), except as otherwise 

provided in paragraphs (f)(2) and (3) 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 

§ 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 

Insured’s separate disclosure obligation 

under § 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 


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Federal Register / Vol. 90, No. 8 / Tuesday, January 14, 2025 / Rules and Regulations 3563 

form), filed (or to be filed) by the 

Insured and must be received by the 

Owner prior to the time set forth in 

§ 1.6011–4(e) in which the Owner 

would otherwise be required to provide 

disclosure. 

(3) Disclosure safe harbor for 

taxpayers in transactions with revoked 

section 831(b) elections. If the Captive 

has revoked its section 831(b) election, 

taxpayers who participated in the 

transaction of interest with respect to 

that Captive, including any Insureds, 

Owners, and Intermediaries, will not be 

considered participants in the 

transaction under section 6011(a), 

notwithstanding § 1.6011–4(c)(3), for 

any taxable year in which the section 

831(b) revocation is effective, provided 

that a successor Captive has not been 

established as described in paragraph 

(b)(2)(iii) of this section (referencing 

§ 1.6011–10(b)(2)(iii) and (iv)). 

(g) Disclosure requirements. 

Participants must provide the 

information required under § 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 § 1.6011– 

10(g)(2) and (3), respectively. 

(h) Applicability date—(1) In general. 

This section identifies transactions that 

are the same as, or Substantially Similar 

to, the transaction identified in 

paragraph (a) of this section as 

transactions of interest for purposes of 

§ 1.6011–4(b)(6) effective January 14, 

2025, except as otherwise provided in 

this paragraph (h)(1). If, on or before the 

date prescribed for filing disclosure 

statements with the Office of Tax 

Shelter Analysis under § 1.6011–4(e), 

the Captive involved in the transaction 

has requested the consent of the 

Secretary to revoke its section 831(b) 

election, the transaction is not identified 

as a transaction of interest for purposes 

of this section and § 1.6011–4(b)(6) for 

participants with respect to that Captive 

for taxable years ending before January 

1, 2026. 

(2) Obligations of participants with 

respect to prior periods. Pursuant to 

§ 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 

January 14, 2025, must disclose the 

transactions as required by § 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 

January 14, 2025, except as otherwise 

provided in this paragraph (h)(2). 

Taxpayers who have finalized a 

settlement agreement with the Internal 

Revenue Service with respect to the 

transaction, in examination or litigation, 

will be treated as having made the 

disclosure for years subject to that 

agreement. 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 

January 14, 2025. 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 

January 14, 2025, 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 § 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 

§§ 301.6111–3 and 301.6112–1 of this 

chapter, respectively. Notwithstanding 

§ 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 January 14, 2025. Material 

advisors that are uncertain whether the 

transaction they are required to disclose 

should be reported under this section or 

§ 1.6011–10 should disclose under 

§ 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. 

Approved: January 3, 2025. 

Aviva R. Aron-Dine, 

Deputy Assistant Secretary of the Treasury 

(Tax Policy). 

[FR Doc. 2025–00393 Filed 1–10–25; 4:15 pm] 

BILLING CODE 4830–01–P 


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