Owners of 831(b) tax-elected captives, and their advisors, have watched with increasing alarm as the 30-year old 831(b) tax election has come under mounting scrutiny by the Internal Revenue Service (IRS) in an effort to combat certain abuses. With a place on its “Dirty Dozen” list since 2014, several high-profile tax court losses for certain 831(b) captives, and the establishment of 12 new special examination teams, the IRS clearly has its sights on bringing down abusive micro-captives – with little regard for the purpose and effectiveness of one of the most common risk management tools available.
An existing 831(b) captive can be re-organized into a non-insurance C Corp under a tax-free exchange process. Tax on accumulated assets is deferred until funds are distributed to the owner. This process allows an 831(b) captive owner to close down the 831(b) and defer taxes until such time as distribution of funds is made. Captive Alternatives advocates this approach for many 831(b) owners, particularly if they are committed to risk management and want to explore the private insurance solution.
With increasing awareness of the potential for catastrophic risks and their devastating effect on business, the rules of risk management continue to evolve. Nevertheless, the potential to insure one’s own risk remains a powerful and important tool in the risk management space.