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Micro-Captive Regulations for Automotive Dealers

See how new IRS micro-captive regulations may affect your dealership’s reinsurance company.

On January 14, 2025, the IRS published the newly finalized micro-captive regulations (1.6011-10 and 1.6011-11) that identify reportable transactions as either listed transactions or transactions of interest. Notably, the regulations provide a carve-out for certain reinsurance companies that meet a specific set of requirements as a seller’s captive, which is detailed further below. The regulations also clarify the Form 8886 (Reportable Transaction Disclosure Statement) requirements for these types of transactions. It is important to note that the intentional definitions included in the regulations, plus the Consumer Coverage Exception for Seller’s Captives, mean that many reinsurance companies (and related sellers) will no longer have to file Form 8886.

Newly Finalized Regulations & Potential Form 8886 Filing Exception

Before considering the various requirements that cause a reinsurance company to rise to the level of a listed transaction or transaction of interest, it is important to first understand three specific definitions highlighted in the regulations.

  1. The definition of the term “Insured” as described in the regulations is a conjunctive test and generally requires all of the following to be present:
    1. A person who conducts a trade or business,
    2. Enters into a contract with a captive or enters into a contract with an intermediary that is directly or indirectly reinsured by a captive, and
    3. Treats amounts paid under the contract as insurance premiums for federal income tax purposes.

Based on this specific definition, many reinsurance companies will not meet the definition of insured because they are not a party to the contract sold to an unrelated customer; they are simply facilitating the contract being sold to that customer. This is the case with most administrator obligor contracts. The preamble to the regulations addresses this by stating, “A Seller is not an Insured if it facilitates an Unrelated Customer entering into a contract with Seller’s Captive or an Intermediary but is not itself a party to the Contract.” If you do not meet the definition of insured, your company’s transaction falls outside the scope of these regulations and filing Form 8886 is not required.

Where the seller is a party to the contract, e.g., in a limited warranty product, the seller may be required to purchase a contractual liability insurance policy (CLIP), which is then expensed, either as cost of goods sold or insurance expense, on the seller’s books. It should be noted that the contract with the unrelated customer (who is also the ultimate beneficiary of the product) and the contract with the CLIP provider are two different contracts. The requirement to “treat amounts paid under the Contract as insurance premiums for federal income tax purposes” in 1c above is not met in this scenario because the amounts paid for the CLIP are paid under the separate contract with the CLIP provider, not paid under the contract with the unrelated customer who is the ultimate beneficiary of the product. In addition, CLIP providers are 831(a)—not 831(b)—companies, so the payment under the contract with the CLIP provider is not covered by these regulations.

If an insured does not exist, based on application of the definition above, the reinsurance company would fall outside the scope of these regulations and would not have a Form 8886 filing requirement. If an insured does exist, for example, in a situation where enterprise risk, i.e., insurance covering risks of the business and not unrelated customers, is present inside the reinsurance company, the relationship between the insured and the captive should continue to be evaluated.

  1. The definition of the term “Captive” as described in the regulations also has a conjunctive test and is defined as an entity that:
    1. Has an 831(b) election in place,
    2. Issues or reinsures (or both) a contract to an insured, and
    3. Has at least 20% common ownership (assets, vote or value, or considering attribution) between the captive and the insured, owner of an insured, or persons related to an insured or an owner.

If your reinsurance company does not meet all components of the definition of a captive as described above, the company is not a captive, these regulations do not apply, and the company does not have a Form 8886 filing requirement.

If a captive does exist per the definition above, testing should then be completed to determine whether the entity meets the Consumer Coverage Exception.

  1. The Consumer Coverage Exception, as described in the regulations, is also a conjunctive test and is defined as an arrangement where:
    1. More than 50% common ownership exists between the captive and the seller, an owner of the seller, or individuals or entities related to the seller or owners of the seller (attribution rules under Internal Revenue Code Sections 267(b), 707(b), 2701(b)(2)(c), and 2704(c)(2) must be considered),
    2. No enterprise risk is present within the captive,
    3. 100% of the business of the captive is issuing or reinsuring contracts in connection with products or services being sold by the seller or persons related to the seller, i.e., all products are treated as insurance for tax purposes in the captive, and
    4. More than 95% of the total ceded risk is insuring customers unrelated to the seller.

If the captive meets the requirements of the Consumer Coverage Exception, the company does not have a Form 8886 filing requirement. If the captive does not meet the requirements of the Consumer Coverage Exception, further testing must be completed to determine whether the captive rises to the level of a listed transaction or a transaction of interest, the rules of which are not covered in the scope of this article.

Next Steps for Your Dealership Reinsurance Entity

In summary, anyone evaluating a captive insurance company for the new micro-captive regulations may want to consider testing in the following order:

  1. Confirm an 831(b) election is in place.
  2. Determine if an insured exists.
  3. If necessary, determine if you are a captive under the final regulations (see bullets 2b and 2c above, in addition to the test already performed in 3a).
  4. If you are a captive by definition, test to see whether you meet the requirements of the Consumer Coverage Exception.
  5. If you don’t meet the requirements of the Consumer Coverage Exception, test further to determine whether you are a listed transaction or a transaction of interest and comply with all filing requirements of the regulations.

While these regulations are nuanced and specific, it’s important to apply them to each individual taxpayer because many will not be considered an insured or a captive by definition and should stop filing Form 8886 accordingly. Simply continuing to file Form 8886 under a now-obsolete Notice 2016-66 because it has always been filed protectively is an error in complying with the IRS’ final regulations on this matter and may put a taxpayer in a scrutinized bucket unnecessarily.

If you have questions about your dealership’s reinsurance company, reach out to a Dealerships professional at Forvis Mazars. Our team has individuals with deep experience in the reinsurance niche. We can help you understand the regulations, gauge whether your reinsurance company is impacted, and, if so, what your next steps are. Connect with us today!

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