Proposed Abusive Tax Transaction Status For Micro-Captives

Proposed regulations identifying micro-captives as abusive tax transactions have been issued by the Treasury Department and the IRS. They contemplate making certain micro-captive transactions as “listed transactions” and “transactions of interest.” Listed transactions are abusive tax transactions that must be reported to the IRS. Transactions of interest have the potential for tax avoidance and must also be reported. Material advisors and participants will have to file disclosures. Failure to disclose is penalized. The proposals follow decisions in the Court of Appeals for the Sixth Circuit and the US Tax Court that the IRS lacks authority to identify listed transactions and transactions of interest by notices, and must identify such transactions by following the existing notice and public comment procedures that apply to regulations. Treasury and the IRS disagree, but state they will “no longer take the position that transactions of interest can be identified without complying with notice and public comment procedures.” Previously, the IRS identified certain micro-captive transactions as transactions of interest in Notice 2016-66. The proposals will be finalized after public comments this year.