IRS Notices
Notice 2003-34, 2003-23 I.R.B. 990. IRS announced that it would scrutinize offshore captives to determine whether they qualify as insurance companies for federal income tax purposes and, therefore, are exempt from the onerous passive foreign investment company rules. The Notice indicated that a captive may not qualify as an insurance company if the risks assumed by the captive are not “insurance risks,” the captive generates excess investment income relative to earned premiums or the terms of the purported insurance contracts significantly limit the risks assumed by the captive.
Notice 2003-35, 2003-23 I.R.B. 992. IRS reminded taxpayers that, in order to qualify as an organization exempt from federal income tax under IRC § 501(c)(15), the organization must qualify as an insurance company for federal income tax purposes. In general, that means that the captive’s primary and predominant business activity must be the issuance of insurance contracts. The IRS also announced that it will scrutinize the tax-exempt status of entities claiming to be described in IRC § 501(c)(15) and challenge the exemption of any entity that does not qualify as an insurance company.
Notice 2005-49, 2005-27 I.R.B. 1075. IRS requests taxpayer comments on four captive related subjects; (1) Finite risk policies as “insurance” (in captive arrangements); (2) Proper characterization of cell captive structures as “insurance” and mechanics of making elections; (3) Tax impact of loan-backs from a captive to its owner(s), and (4) Homogeneity of risk as a key element of risk distribution.
