It’s tax time again, which means many people will be writing checks to the Internal Revenue Service. But not a lawyer in Los Angeles, who last year put all of his earnings, $840,000, into a tax shelter and plans to put $1 million in this year. He doesn’t have to pay any income tax.
In fact, he was able to borrow back some of the money to live on and write off the interest on the loan.
The attorney accomplished this feat by putting his earnings into a captive insurance company, a vehicle that allows companies to insure themselves against risks that are too expensive to buy coverage for in the regular insurance market or to cover events that are unlikely to happen but would be costly if they actually did.
Until a decade or so ago, most captives, as they are known, were set up by large companies.
But captives have gained in popularity among small-business owners who see another benefit: They can be designed so that the risks they insure are so unlikely that the captives will never pay out a claim and all those premiums will go back to the business owners or their heirs with little or no tax.
Stephen M. Moskowitz, a tax lawyer and certified public accountant in San Francisco who advised the California lawyer, said he also worked with a dentist who set up a captive to insure against a terrorist attack in his dental office.
He said in an interview that he was confident he was following the letter of the law. “All these Fortune 500s that make billions in profits and don’t pay any income taxes? How do they do that? They follow the rules,” he said. “My personal opinion is these rules were put in to benefit the big boys, and the medium boys got a hold of them.”
The question is whether these small captives have gone too far. This year, the Internal Revenue Service placed them on its annual “Dirty Dozen list of tax scams.” Small captives now share space with phishing, identity theft and offshore tax avoidance.
Continue reading the main story
FROM OUR ADVERTISERS
Wealth Matters Insights from Paul Sullivan on the mindset and strategies of the affluent. A Presidential Collectible’s Value? Depends on the President JUL 1 Investing in an Emotional Trust Fund for Your Children JUN 24 Insurance May Have You Covered, but It Might Not Be Worth It JUN 17 Deciding if a Financial Adviser Is Right for the Job JUN 10 Needing Cash, Some Small Business Owners Bypass the Bank JUN 3 See More »
In its commentary, the I.R.S. criticized wealthy individuals who canceled or greatly reduced their income by putting money into small captives. The agency took particular exception to promoters who drafted policies “to cover ordinary business risks or esoteric, implausible risks for exorbitant ‘premiums,’ while maintaining their economical commercial coverage with traditional insurers.”
Yet promoters of captives persist, seemingly undaunted.
“They said a couple of things that are extremely general — one about unscrupulous promoters,” said Celia Clark, a lawyer in New York who wrote an article in Trusts and Estate Magazine last year about the asset protection and estate planning benefits of small captive insurance companies. “But when you’re dealing with that level of generality, I don’t get anything out of that that would be useful. We’re waiting to hear how it plays out in court.”
Other lawyers are warning their business-owning clients to be wary of the siren song of captives — or at least to make sure they have a real insurance need and are not blinded by other supposed benefits of captives.
(a) General rule. Under § 1.6011–4(d) and the Instructions to Form 8886, Reportable Transaction Disclosure Statement, the required disclosure must identify and describe the transaction in sufficient detail for the IRS to be able to understand the tax structure of the reportable transaction and the identity of all parties involved in the transaction.
(b) Information required of all participants. For all participants, describing the transaction in sufficient detail includes, but is not limited to, describing on Form 8886 when and how the taxpayer became aware of the transaction.
(c) Information required of Captive. For Captive, describing the transaction in sufficient detail includes, but is not limited to, describing the following on Form 8886:
(1) whether Captive is reporting because (i) the amount of the liabilities incurred by Captive for insured losses and claim administration expenses during the Computation Period is less than 70 percent of the amount specified in section 2.01(e)(1) of this notice; (ii) Captive has at any time during the Computation Period made available as financing or otherwise conveyed or agreed to make available or convey any portion of the payments under the Contract to A, Insured, or a person related (within the meaning of § 267(b) or 707(b)) to A or Insured through a separate transaction, such as a guarantee, a loan, or other transfer; or (iii) both (i) and (ii); (2) under what authority Captive is chartered; (3) a description of all the type(s) of coverage provided by Captive during the year or years of participation (if disclosure pertains to multiple years); (4) a description of how the amounts treated as premiums for coverage provided by Captive during the year or years of participation (if disclosure pertains to multiple years) were determined, including the name and contact information of any actuary or underwriter who assisted in these determinations; (5) a description of any claims paid by Captive during the year or years of participation (if disclosure pertains to multiple years), and of the amount of, and reason for, any reserves reported by Captive on the annual statement; and (6) a description of the assets held by Captive during the year or years of participation (if disclosure pertains to multiple years); that is, the use Captive has made of its premium and investment income, including but not limited to, securities (whether or not registered), loans, real estate, or partnerships or other joint ventures, and an identification of the related parties involved in any transactions with respect to those assets. .06 Penalties Persons required to disclose these transactions under § 1.6011–4 who fail to do so may be subject to the penalty under § 6707A. Persons required to disclose these transactions under § 6111 who fail to do so may be subject to the penalty under § 6707(a). Persons required to maintain lists of advisees under § 6112 who fail to do so (or who fail to provide such lists when requested by the IRS) may be subject to the penalty under § 6708(a). In addition, the IRS may impose other penalties on parties involved in these transactions, including the accuracy-related penalty under § 6662 or § 6662A.
SECTION 4. REQUEST FOR COMMENTS The Treasury Department and the IRS request comments on how the transaction might be addressed in published guidance.
Comments should be submitted in writing on or before January 30, 2017. Send submissions to CC:PA:LPD:PR (Notice 2016–66), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand-delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (Notice 2016–66), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC 20224. Comments may also be sent electronically, via the following e-mail address: Notice.comments@irscounsel.treas.gov. Please include “Notice 2016–66” in the subject line of any electronic communications. All comments submitted will be available for public inspection and copying.
VEBA PLAN LLC leverages its years of experience with protecting taxpayers to help its clients navigate the complex world of captive insurance compliance, with its team of former high-ranking IRS executives, key congressional personnel and experienced litigators ensuring that each client has the strongest defense possible in the event of an audit.Doing What's Best For You Or Your ClientWhether You Are A CPA...If your client has a captive, you need to evaluate whether they are compliant or not. The IRS is looking at business owners with captives, as well as the CPAs and financial advisors that serve them.Let us help you and your client.Or A Business Owner...It doesn’t matter if you’re under audit or not, making sure your captive is compliant should be top priority.alliantNational can help lower the risk of the IRS cracking down on your insurance arrangement, and will dramatically improve your case against the agency if you are audited.What Is A Captive Insurance Company?Insurance costs can be a big problem for successful companies. Oftentimes a company may find that third party insurance is commercially unavailable or the commercial insurance that is available may be overly expensive. A company can put up its own capital to form a wholly owned subsidiary insurance company to solve these problems. These types of subsidiaries are known as captive insurance companies.Captive insurance companies can not only fill in gaps in existing coverage but they also provide deductibles on existing coverage. Contributions to the captive insurance company can also be tax deductions under Internal Revenue Code section 831(b). Captive insurance companies also provide pricing stability and program control. Small Captives are on the IRS hit list and are being audited. Want to fight IRS and get all your money back from the promoter who sold you the abusive Captive. As an expert witness Lance Wallach has never lost a case. His partners have decades of experience working for the IRS and as tax professors.
It’s tax time again, which means many people will be writing checks to the Internal Revenue Service. But not a lawyer in Los Angeles, who last year put all of his earnings, $840,000, into a tax shelter and plans to put $1 million in this year. He doesn’t have to pay any income tax.
ReplyDeleteIn fact, he was able to borrow back some of the money to live on and write off the interest on the loan.
The attorney accomplished this feat by putting his earnings into a captive insurance company, a vehicle that allows companies to insure themselves against risks that are too expensive to buy coverage for in the regular insurance market or to cover events that are unlikely to happen but would be costly if they actually did.
Until a decade or so ago, most captives, as they are known, were set up by large companies.
But captives have gained in popularity among small-business owners who see another benefit: They can be designed so that the risks they insure are so unlikely that the captives will never pay out a claim and all those premiums will go back to the business owners or their heirs with little or no tax.
Stephen M. Moskowitz, a tax lawyer and certified public accountant in San Francisco who advised the California lawyer, said he also worked with a dentist who set up a captive to insure against a terrorist attack in his dental office.
He said in an interview that he was confident he was following the letter of the law. “All these Fortune 500s that make billions in profits and don’t pay any income taxes? How do they do that? They follow the rules,” he said. “My personal opinion is these rules were put in to benefit the big boys, and the medium boys got a hold of them.”
The question is whether these small captives have gone too far. This year, the Internal Revenue Service placed them on its annual “Dirty Dozen list of tax scams.” Small captives now share space with phishing, identity theft and offshore tax avoidance.
Continue reading the main story
FROM OUR ADVERTISERS
Wealth Matters
Insights from Paul Sullivan on the mindset and strategies of the affluent.
A Presidential Collectible’s Value? Depends on the President
JUL 1
Investing in an Emotional Trust Fund for Your Children
JUN 24
Insurance May Have You Covered, but It Might Not Be Worth It
JUN 17
Deciding if a Financial Adviser Is Right for the Job
JUN 10
Needing Cash, Some Small Business Owners Bypass the Bank
JUN 3
See More »
In its commentary, the I.R.S. criticized wealthy individuals who canceled or greatly reduced their income by putting money into small captives. The agency took particular exception to promoters who drafted policies “to cover ordinary business risks or esoteric, implausible risks for exorbitant ‘premiums,’ while maintaining their economical commercial coverage with traditional insurers.”
Yet promoters of captives persist, seemingly undaunted.
“They said a couple of things that are extremely general — one about unscrupulous promoters,” said Celia Clark, a lawyer in New York who wrote an article in Trusts and Estate Magazine last year about the asset protection and estate planning benefits of small captive insurance companies. “But when you’re dealing with that level of generality, I don’t get anything out of that that would be useful. We’re waiting to hear how it plays out in court.”
Other lawyers are warning their business-owning clients to be wary of the siren song of captives — or at least to make sure they have a real insurance need and are not blinded by other supposed benefits of captives.
(a) General rule. Under § 1.6011–4(d) and the Instructions to Form 8886, Reportable Transaction Disclosure Statement, the required disclosure must identify and describe the transaction in sufficient detail for the IRS to be able to understand the tax structure of the reportable transaction and the identity of all parties involved in the transaction.
ReplyDelete(b) Information required of all participants. For all participants, describing the transaction in sufficient detail includes, but is not limited to, describing on Form 8886 when and how the taxpayer became aware of the transaction.
(c) Information required of Captive. For Captive, describing the transaction in sufficient detail includes, but is not limited to, describing the following on Form 8886:
(1) whether Captive is reporting because (i) the amount of the liabilities incurred by Captive for insured losses and claim administration expenses during the Computation Period is less than 70 percent of the amount specified in section 2.01(e)(1) of this notice; (ii) Captive has at any time during the Computation Period made available as financing or otherwise conveyed or agreed to make available or convey any portion of the payments under the Contract to A, Insured, or a person related (within the meaning of § 267(b) or 707(b)) to A or Insured through a separate transaction, such as a guarantee, a loan, or other transfer; or (iii) both (i) and (ii);
(2) under what authority Captive is chartered;
(3) a description of all the type(s) of coverage provided by Captive during the year or years of participation (if disclosure pertains to multiple years);
(4) a description of how the amounts treated as premiums for coverage provided by Captive during the year or years of participation (if disclosure pertains to multiple years) were determined, including the name and contact information of any actuary or underwriter who assisted in these determinations;
(5) a description of any claims paid by Captive during the year or years of participation (if disclosure pertains to multiple years), and of the amount of, and reason for, any reserves reported by Captive on the annual statement; and
(6) a description of the assets held by Captive during the year or years of participation (if disclosure pertains to multiple years); that is, the use Captive has made of its premium and investment income, including but not limited to, securities (whether or not registered), loans, real estate, or partnerships or other joint ventures, and an identification of the related parties involved in any transactions with respect to those assets.
.06 Penalties
Persons required to disclose these transactions under § 1.6011–4 who fail to do so may be subject to the penalty under § 6707A. Persons required to disclose these transactions under § 6111 who fail to do so may be subject to the penalty under § 6707(a). Persons required to maintain lists of advisees under § 6112 who fail to do so (or who fail to provide such lists when requested by the IRS) may be subject to the penalty under § 6708(a). In addition, the IRS may impose other penalties on parties involved in these transactions, including the accuracy-related penalty under § 6662 or § 6662A.
SECTION 4. REQUEST FOR COMMENTS
The Treasury Department and the IRS request comments on how the transaction might be addressed in published guidance.
Comments should be submitted in writing on or before January 30, 2017. Send submissions to CC:PA:LPD:PR (Notice 2016–66), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand-delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (Notice 2016–66), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC 20224. Comments may also be sent electronically, via the following e-mail address: Notice.comments@irscounsel.treas.gov. Please include “Notice 2016–66” in the subject line of any electronic communications. All comments submitted will be available for public inspection and copying.
VEBA PLAN LLC leverages its years of experience with protecting taxpayers to help its clients navigate the complex world of captive insurance compliance, with its team of former high-ranking IRS executives, key congressional personnel and experienced litigators ensuring that each client has the strongest defense possible in the event of an audit.Doing What's Best For You Or Your ClientWhether You Are A CPA...If your client has a captive, you need to evaluate whether they are compliant or not. The IRS is looking at business owners with captives, as well as the CPAs and financial advisors that serve them.Let us help you and your client.Or A Business Owner...It doesn’t matter if you’re under audit or not, making sure your captive is compliant should be top priority.alliantNational can help lower the risk of the IRS cracking down on your insurance arrangement, and will dramatically improve your case against the agency if you are audited.What Is A Captive Insurance Company?Insurance costs can be a big problem for successful companies. Oftentimes a company may find that third party insurance is commercially unavailable or the commercial insurance that is available may be overly expensive. A company can put up its own capital to form a wholly owned subsidiary insurance company to solve these problems. These types of subsidiaries are known as captive insurance companies.Captive insurance companies can not only fill in gaps in existing coverage but they also provide deductibles on existing coverage. Contributions to the captive insurance company can also be tax deductions under Internal Revenue Code section 831(b). Captive insurance companies also provide pricing stability and program control. Small Captives are on the IRS hit list and are being audited. Want to fight IRS and get all your money back from the promoter who sold you the abusive Captive. As an expert witness Lance Wallach has never lost a case. His partners have decades of experience working for the IRS and as tax professors.
ReplyDelete