Resources
Relevant IRS Revenue Rulings and Notices, and IRS Manual section:
- Revenue Ruling 2001-31. This ruling announces the abandonment by the IRS of the "economic family" doctrine used to attack the risk shifting requirement for a bona fide insurance arrangement.
- Revenue Ruling 2002-89. This ruling establishes an IRS "safe harbor" threshold to satisfy the risk distribution requirement in captive insurance arrangements. The ruling finds that the underwriting of 50% unrelated risk by a captive is sufficient risk distribution for the IRS, while the underwriting of only 10% unrelated risk is not sufficient.
- Revenue Ruling 2002-90. This ruling finds that where a captive insurance company underwrites risk from 12 subsidiaries of a common parent, but writes no unrelated risk, the arrangement is sufficient to satisfy the risk distribution requirement.
- Revenue Ruling 2002-91. This ruling addresses the risk distribution requirement for group captive insurance arrangement. It finds that where the risk from any single group member does not exceed 15% of the total risk underwritten by the captive, the risk distribution requirement is satisfied.
- Notice 2003-34. This notice advises that captive insurance contracts must address true insurance risks and may not significantly limit the risk accepted by the captive under such contracts, and that the captive must use its capital and efforts primarily in the insurance business rather than primarily in investing activities.
- Notice 2003-35. This notice advises that in order for a captive insurance company to qualify as a tax exempt entity under §501(c)(15) of the I.R.C. it must meet all IRS requirements as an insurance company. It further advises that the IRS will scrutinize captive insurance arrangements under §501(c)(15) regardless of whether the captive has received a favorable determination letter regarding its tax exempt status.
- Notice 2004-64. This notice announces changes to I.R.C. § 501(c)(15) regarding tax exempt requirements for insurance companies, due to passage of the Pension Funding Equity Act of 2004.
- Revenue Ruling 2005-40. This ruling enhances Rev. Rul. 2002-90. It finds that if a captive insurance company insures the risk from 12 single-member LLCs owned by a common parent, the arrangement will only satisfy the risk distribution requirement if the LLCs are treated as associations for federal tax purposes, rather than as disregarded entities.
- Notice 2005-49. This notice "requests comments on additional guidance concerning the standards for determining whether an arrangement constitutes insurance for federal income tax purposes." Specifically the IRS solicits guidance regarding the treatment of 1) cell captive arrangements, 2) arrangements by captives involving the loan back of premiums to related parties, 3) the relevance to risk distribution of the homogeneity of risks underwritten by a captive, and 4) insurance transactions involving finite risk.
- Notice 2006-42. This notice clarifies the definition of "gross receipts" for insurance companies operating under I.R.C. § 501(c)(15).
- IRS manual 7.25.15. This section of the IRS Manual describes for IRS agents how to determine whether a small insurance company or association meets the requirements to be treated as a tax-exempt insurance company under I.R.C. § 501(c)(15). The information also provides guidance for operating an insurance company under I.R.C. § 831(b).