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Elliot Pisem and David E. Kahen

The Internal Revenue Code (IRC) provides favorable tax treatment to “small” casualty insurance companies the premium income of which does not exceed a specified dollar threshold each year. Such a small insurance company, when owned by the same persons as own the businesses that are insured by it, is commonly known as a “micro-captive.” In 2016 the IRS issued a notice (IRS Notice 2016-66, 2016-47 IRB 745, modified by IRS Notice 2017-8, 2017-IRB 423) identifying micro-captive transactions as potentially abusive “transactions of interest” requiring special tax return reporting, and, earlier this year, the Tax Court issued a decision (Avrahami v. Commissioner, 149 T.C. No. 7) concluding that amounts paid to a micro-captive did not constitute “insurance premiums” for income tax purposes and could not be deducted. Notwithstanding the increasing scrutiny of such transactions, the relevant provision of the Internal Revenue Code (§831(b)) was amended in 2015 to increase the revenue ceiling below which insurers may qualify for treatment as “small” insurance companies. These developments are reviewed below.

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