IRS Extends Due Date for Disclosing 831(b) Captive Transactions

As I wrote in early November 2016, the IRS issued Notice 2016-66 requiring participants in and material advisors to certain transactions involving IRC Sec. 831(b) captive insurance companies to file disclosure statements on Form 8886 and Form 8918.  In Notice 2017-08, the IRS has extended the due date for initial disclosure statements from January 30, 2016 to May 1,...

IRS Notice 2016-66: 831(b) captives must report to help IRS combat abuses

The IRS has issued long-anticipated notice, in the form of Notice 2016-66, of its intent to combat real and perceived abuses of small captive insurance companies that have made the 831(b) election. Recognizing that many 831(b) captives are legitimate, and without sufficient information to determine captive transactions that amount to tax avoidance or evasion, the IRS has stopped short of designating all 831(b) captive arrangements as a “Listed Transactions,” but has designated certain forms of 831(b) captive arrangements to be “Transactions of Interest.” The “Transaction of Interest” designation requires taxpayers and material advisors involved with captive arrangements that meet criteria in the Notice to file Form 8886 “Reportable Transaction Disclosure Statement” or Form 8918 “Material Advisor Disclosure Statement.” Certain of the criteria (including those for non-mutual captives that have incurred insured losses and claims administration expenses of less than 70% of earned premiums over a five-year period) are so broad that most 831(b) captive insurance arrangements will fall within these Form 8886 and Form 8918 reporting requirements. Persons who have participated in such 831(b) captive arrangements (particularly captives, insureds, and owners of passthrough insureds), in any taxable year after November 2, 2006 for which the period of limitations for assessment of tax is open, have until January 30, 2017 May 1, 2017 (updated December 29, 2016 – see Notice 2017-08) to file the required disclosure statements. Taxpayers involved in an 831(b) captive insurance arrangement should contact an experienced captive insurance tax advisor immediately to determine whether their captive meets the Form 8886 filing criteria. Advisors involved in an 831(b) captive insurance arrangement should review the material advisor reporting requirements to determine...

2016 NC Captive Insurance Act Update

The NC Captive Insurance Act was updated effective June 30, 2016. The updated legislation made five significant changes: A NC captive is now exempt from the annual in-state board meeting requirement if the captive uses the services of at least 2 NC service providers (legal, accounting, actuarial, investment advisor, captive manager, or other service providers acceptable to the NC Insurance Commissioner); The NC Insurance Commissioner now may allow lower minimum capital and surplus requirements for a protected cell captive; NC now allows a business entity organized outside of NC (e.g., Delaware) to be licensed as a captive insurance company in North Carolina.  The likely most significant effect of this change will be to allow series LLC captives from other states such as Delaware and Montana to obtain NC captive licenses; A captive license applicant now may obtain provisional approval for a period of up to 90 days; and A captive now may be granted an extension of time to file an annual report. Riser Adkisson LLP has extensive experience with captive insurance companies, including North Carolina protected cell insurance companies and protected cells.  Contact Chris Riser for more...

Business Tax Changes in 2016 Appropriations Act

The recently enacted 2016 Consolidated Appropriations Act,  Pub. L. No. 114-113,  extends, modifies, and/or adds numerous business-related provisions that affect business of all sizes. A summary of the many changes follows. Health Care Related Changes • Delay of excise tax on high cost employer-sponsored health coverage – The Act provides for a two-year delay of the excise tax on high-cost employer-sponsored health coverage (also known as the “Cadillac” tax); thus, the tax will become effective in 2020 rather than 2018. • Deductibility of excise tax on high cost employer-sponsored health coverage – The Act allows the excise tax on high-cost employer-sponsored health coverage to be deductible as a business expense. • Moratorium on medical device excise tax – The Act delays the implementation of the 2.3% excise tax imposed on the sale of medical devices until 2018. Tax Credits, Depreciation, and Other Provisions Extended and/or Modified Several major items were addressed by the new legislation: The research and development credit – The Act permanently extends the R&D credit. Beginning in 2016, eligible small businesses ($50 million or less in gross receipts) may claim the credit against alternative minimum tax liability, and the credit can be used by certain small businesses against the employer’s payroll tax (i.e., FICA) liability. Increased expensing limitations and treatment of certain real property as §179 property -The Act retroactively retains the 2015 limits, i.e., a taxpayer may elect to expense up to $500,000 of equipment costs (with a phase-out for purchases in excess of $2,000,000). The Act also permanently extends the higher expensing limitation and phase-out amounts. Starting in 2016, the limitations will be indexed for inflation. The...

New Rules for 831(b) Captive Insurance Companies

On December 18, 2015, Congress passed, and President Obama signed into law, a 2016 appropriations bill, which includes the Protecting Americans from Tax Hikes Act of 2015 – the PATH Act.  The PATH Act includes the first significant changes to Internal Revenue Code section 831(b) in nearly 30 years. Section 831(b) currently allows a small property and casualty insurance company with $1.2 million or less in premium income to make an election to be taxed only on investment income (and, therefore, not on its insurance underwriting income). Section 831(b) insurance companies (often called 831(b) “captive insurance” companies, because they insure the risks of parent or brother-sister entities) are widely used by small- and mid-sized businesses to insure risks that are costly or unavailable in the commercial insurance market. There have been two major changes to Section 831(b). First, the $1.2 million premium limit will increase to $2.2 million and will be indexed to the Consumer Price Index. Second, to make an 831(b) election, an insurance company must meet one of two alternative tests for each year in which it is taxed under Section 831(b). To meet the first test, a diversification test, no more than 20% of the insurance company’s premiums can come from any one policyholder. The broad definition of ‘policyholder’ applies the attribution rules of Sections 267(b) and 707(b) and a modified version of the controlled group rules of Section 1563(a).  In general, diagnosis if one policyholder is related to another, those policyholders will be treated as one policyholder for this diversification test. The second test, an alternative to the first, essentially requires that ownership of insured...

In re Ferrante: Tax-Flawed QPRT Ruled Part of Bankruptcy Estate in Voluntary Chapter 7 Bankruptcy Case

EXECUTIVE SUMMARY: The Ninth Circuit’s Bankruptcy Appellate Panel has affirmed the decision of a California bankruptcy court that a qualified personal residence trust (QPRT) would not defeat a creditor of the settlor, largely because the QPRT was poorly drafted to begin with, and then was not updated to comply with later Treasury Regulations. Perhaps a bigger issue, though, is that the debtor should never have filed for bankruptcy on these facts to begin with. FACTS: Former lawyer Robert Ferrante owned a lavish waterfront home in Newport Beach, California. In 1994, he transferred the home to a qualified personal residence trust (QPRT), called the 518 Trust, and which had a 20-year term. A QPRT is an estate technique to transfer a personal residence at a reduced gift and estate tax cost to the grantor.  The grantor transfers a personal residence to the QPRT, retaining the right to use of the residence for a term of years.  During this term, the grantor has the full and exclusive use of the home and is responsible for all expenses, and with limited exceptions no additional property can be transferred to the trust. At the end of the term, either the trust terminates and the trust property is distributed to the remainder beneficiaries, or the trust continues for the remainder beneficiaries, but the grantor no longer has the right to use the residence unless the grantor enters into an arm’s-length lease agreement. If the grantor dies before the end of the QPRT term, the trust property reverts to the grantor’s estate, with no estate tax savings. There are a number of technical provisions and...

Our long national nightmare of alternative birthday songs is over!

Waiters, waitresses, and everyone planning to have a birthday dinner at Applebee’s have a reason to celebrate. No more of this: Because yesterday, a federal judge ruled invalid the copyright for the song “Happy Birthday,” which had been generating an estimated $2 million per year in royalties for Warner/Chappel Music. The avoidance of paying royalties had been responsible for atrocities such as the Applebee’s birthday chant and countless other alternative birthday songs forced upon waitstaff and customers at large chain...

Why does Sean Penn’s lawyer probably wish Lee Daniels was English?

Today, media outlets reported that actor Sean Penn has sued Lee Daniels, actor, director, producer and creator of the hit TV series, Empire, for defamation.  The gist of Penn’s claim is that Daniels falsely accused Penn of hitting women by making the statement that fellow actor Terence Howard, star of Empire who has been accused of domestic violence on several occasions, “ain’t done nothing different than Marlon Brando or Sean Penn.” Despite the U.S.’s reputation for being plaintiff-friendly and lawsuit-mad, we’ve also got a reputation for – and a constitutional provision allowing for – big mouths.  The First Amendment’s broad protection of freedom of expression essentially allows a defendant to make derogatory false statements about public officials and public figures, like celebrities, without legal consequence, unless the plaintiff can prove that the statement was made with “actual malice,” which requires proof, by clear and convincing evidence (not by a mere preponderance of the evidence), that the defendant knew that the statement was false or was made with reckless disregard for the truth. In English courts, the standard of proof for defamation is lower. A derogatory statement is presumed to be false, and to be exonerated, the defendant must prove the statement true or that it is an honest opinion. Obviously this is  a more difficult standard to meet than the U.S. standard, particularly for journalists who may be unwilling to reveal sources. If Lee Daniels were living in Europe and had made the statement to an English newspaper, we probably would have seen Penn’s suit filed in England. But there’s a catch. Generally, an English judgment can be enforced in the U.S.  However, the U.S. SPEECH Act (Securing the Protection...

Can a band stop a politician from using its song at a public event?

Music and politics have been in the news together most recently when the band Survivor objected to the use of its iconic song “Eye of the Tiger” by Rowan County, Kentucky Clerk of Court Kim Davis. If a politician – or anyone else, for that matter – wants to use a song at an event, a license is required.  Many venues such as hotels, convention centers and arenas have blanket “public performance” licenses from performing rights organizations like ASCAP and BMI, but those licenses exclude music used during conventions, political campaign events, etc.  Anyone holding such an event and using music should obtain a public performance license for the event.  Obtaining such a license would ensure compliance with copyright law. But is copyright law the only issue?  What if the recording artist, like Survivor, doesn’t want its music used by a particular person or event?  Even if a proper public performance license has been obtained, the artist could attempt to hold the persons using the song liable for violations of the band’s “right of publicity” under state law, violation of the federal Lanham Act for unauthorized use of a trademark (such as a band’s name), or for “false endorsement” under state law. Even if a public performance license is obtained, using a recording of the appearance containing the song on a website or TV ad would require additional licensing, and failure to obtain such licenses could lead to a lawsuit,  as the Newt Gingrich campaign discovered – courtesy of the publisher of “Eye of the Tiger” – in 2012. So, if you’re an artist who doesn’t want your song used by a political campaign,...

When is an LLC manager liable for what an LLC “did wrong”?

A recent Delaware Superior Court decision succinctly explains when a corporate officer or LLC manager may be personally liable for a wrong committed by the company. Just knowing of the wrongdoing isn’t enough. On the other hand, deep and direct involvement isn’t required.  An officer or manager who encourages or directs the conduct may be held liable. “[C]orporate officers are not derivatively liable for the torts of the corporation; however, corporate officers are directly liable for the torts they personally commit, whether on behalf of the corporation or otherwise.” (emphasis added) In other words, a corporation or LLC won’t save you from yourself. Yavar Rzayev LLC v. Roffman, Del. Super. C.A. S14L-12-035 MJB (August 31,...