Captive insurer receives 90 days to make a late section 831(b) election

Plain-English summary

A newly formed captive insurance company intended to elect taxation under IRC § 831(b) for its first tax year. Its president directed the CPA to make the election, but the CPA omitted the required statement from the timely filed Form 1120-PC. The company discovered the mistake, filed an amended return with the statement, and sought relief before the IRS identified the omission. The IRS found that the company acted reasonably and in good faith and that relief would not prejudice the government. It granted 90 days to make the election, without deciding whether the company otherwise qualified as an insurance company or was eligible for § 831(b).

Ruling snapshot

• Question: Could the captive insurer make a late IRC § 831(b) small-insurance-company election?
• Outcome: approved
• Key authorities: IRC § 831(b)(2)(A); Treas. Reg. §§ 301.9100-3 and 301.9100-8(a)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201728017 Third Party Communication: None
Release Date: 7/14/2017 Date of Communication: Not Applicable
Index Number: 9100.22-00, 831.00-00
Person To Contact:
--------------------------------- ----------------------, ID No. ------------------
-------------------------------------------- Telephone Number:
--------------------------- ----------------------
------------------------------------ Refer Reply To:
CC:FIP:4
PLR-132549-16
Date:
April 14, 2017

Legend

Taxpayer = -------------------------------------------------------------------
State = ---------------------
Month A = ----------------
Date B = -------------------
Year 1 = -------
Individual = -------------------
CPA = -------------------
External Business Administrator = ----------------------------

Dear ------------------:

This letter is in response to Taxpayer’s request, pursuant to § 301.9100-3 of the
Procedure and Administration Regulations, for an extension of time to make the election
under § 831(b)(2)(A) of the Internal Revenue Code.

FACTS

Taxpayer was formed as a corporation in Month A of Year 1 under the laws of State and
was licensed as an insurance company in State. External Business Administrator was
engaged to assist with the formation of a captive insurance company, Taxpayer, and to
provide administrative services. Individual is Taxpayer’s president.

Taxpayer engaged CPA to prepare tax returns and provide accounting services. Based
upon discussions with CPA and External Business Administrator, Individual approved
the decision to make an election under § 831(b) for Taxpayer’s first tax year ending on
Date B of Year 1. Individual directed CPA to make the election. CPA indicated that he
would make such election in a timely fashion, in connection with the preparation of
Taxpayer’s initial return.
PLR-132549-16 2

Taxpayer filed a timely request for an extension of time to file its Form 1120-PC, U.S.
Property and Casualty Income Tax Return, for the tax year ending on Date B of Year 1.
Pursuant to this extension, Taxpayer timely filed its initial tax return for the tax year
ending on Date B of Year 1. CPA inadvertently omitted the § 831(b) election statement
from the originally filed return.

Upon learning of the error, CPA prepared an amended return (differing from the original
return only by the attachment of the election statement). Taxpayer then submitted the
amended return, and the letter ruling requesting relief pursuant to Treas. Reg.
§ 301.9100-3.

Taxpayer represents that upon granting of the requested extension, Taxpayer will not
have a lower tax liability in the aggregate for all taxable years affected by the election
than Taxpayer would have had if the election had been timely filed (taking into account
the time value of money). Further, Taxpayer represents that it requested relief before
the failure to make the election was discovered by the Internal Revenue Service.

Taxpayer represents that it qualifies as a property and casualty insurance company
under Part II of Subchapter L of the Internal Revenue Code.

RULING REQUESTED

Taxpayer requests a ruling that, in accordance with Treas. Reg. §§ 301.9100-1 and
301.9100-3, Taxpayer be granted a reasonable period of time to make the election
under § 831(b)(2)(A) for the taxable year ending on Date B of Year 1.

LAW AND ANALYSIS

Section 831(a) provides that taxes, computed as provided in § 11, are imposed for each
taxable year on the taxable income of every insurance company other than a life
insurance company. However, § 831(b) allows certain small companies to elect to be
subject to tax on their taxable investment income only. The election applies to the
taxable year for which the company made it and, as long as the company continues to
qualify, for all subsequent taxable years unless revoked with the consent of the
Secretary.

The time and manner to make the § 831(b)(2)(A) election is prescribed by Treas. Reg.
§ 301.9100-8(a)(1). Accordingly, the election under § 831(b) is a regulatory election.
Treas. Reg. § 301.9100-1(b). Pursuant to Treas. Reg. § 301.9100-8(a)(2), the election
is to be made by the due date (taking into account any extensions of time to file
obtained by the taxpayer) of the tax return for the first taxable year for which the election
is effective by attaching a statement to the tax return containing the information
specified in Treas. Reg. § 301.9100-8(a)(3).
PLR-132549-16 3

Under Treas. Reg. § 301.9100-1(c), the Commissioner may grant a reasonable
extension of time under the rules set forth in Treas. Reg. §§ 301.9100-2 and 301.9100-3
to make a regulatory or statutory election. Treas. Reg. § 301.9100-2 does not provide
relief for a taxpayer to make an election under § 831(b)(2)(A) for any of the years for
which relief is sought. Treas. Reg. § 301.9100-3(a) provides that a request for relief will
be granted when the taxpayer provides evidence to establish to the satisfaction of the
Commissioner that the taxpayer “acted reasonably and in good faith” and that “the grant
of relief will not prejudice the interests of the Government.”

Under Treas. Reg. § 301.9100-3(b)(1) a taxpayer is deemed to have acted reasonably
and in good faith if the taxpayer:

   (i) Requests relief under this section before the failure to make the regulatory
   election is discovered by the Internal Revenue Service;

   (ii) Failed to make the election because of intervening events beyond the
   taxpayer’s control;

   (iii) Failed to make the election because, after exercising reasonable diligence
   (taking into account the taxpayer’s experience and complexity of the return or
   issue), the taxpayer was unaware of the necessity for the election;

   (iv) Reasonably relied on the written advice of the Internal Revenue Service; or

   (v) Reasonably relied on a qualified tax professional, including a tax professional
   employed by the taxpayer, and the tax professional failed to make, or advise the
   taxpayer to make, the election.

Under Treas. Reg. § 301.9100-3(b)(3), a taxpayer is deemed not to have acted
reasonably and in good faith if the taxpayer:

   (i) Seeks to alter a return position for which an accuracy-related penalty has been
   or could be imposed under § 6662 at the time the taxpayer requests relief and
   the new position requires or permits a regulatory election for which relief is
   requested;

   (ii) Was informed in all material respects of the required election and related tax
   consequences, but chose not to file the election; or

   (iii) Uses hindsight in requesting relief.

The Commissioner will grant a reasonable extension of time to make a regulatory
election only when the interests of the Government will not be prejudiced by the
granting of relief. Treas. Reg. § 301.9100-3(c)(1).
PLR-132549-16 4

The interests of the Government are prejudiced if granting relief would result in a
taxpayer having a lower tax liability in the aggregate for all taxable years affected by the
election than the taxpayer would have had if the election had been timely made (taking
into account the time value of money). Treas. Reg. § 301.9100-3(1)(i).

Treas. Reg. § 301.9100-1(a) cautions that granting an extension of time to make the
election is not a determination that the taxpayer is otherwise eligible to make the
election.

Based solely on Taxpayer’s representations and the additional information required
under Treas. Reg. § 301.9100-3(e), Taxpayer qualifies for an extension of time to make
the election under § 831(b)(2)(A). Taxpayer is deemed to have acted in good faith, as
defined by Treas. Reg. § 301.9100-3(b), and the grant of relief will not prejudice the
interests of the Government.

RULING

Accordingly, under Treas. Reg. § 301.9100-3, Taxpayer is granted an extension of time
of 90 days following the date of this letter to make the election provided by
§ 831(b)(2)(A) for the tax year ending on Date B of Year 1. The election should be
made in a written statement filed with the appropriate service center. A copy of this
letter should be attached to the § 831(b) election.

CAVEATS

The ruling contained in this letter is based upon the information and representations
submitted by Taxpayer and accompanied by a penalty of perjury statement executed by
an appropriate party. This office has not verified any of the materials submitted in
support of the ruling request, and it is subject to verification on examination.

Except as provided above, no opinion is expressed or implied concerning the federal
income tax consequences of any other aspect of this or other transactions or item of
income of Taxpayer. Specifically, no ruling is made as to whether Taxpayer qualifies as
an insurance company under § 831(c) and the granting of the extension under Treas.
Reg. § 301.9100-1(a) should not be construed as a determination that Taxpayer is
eligible to make the election provided by § 831(b)(2)(A).

This ruling is directed only to the taxpayer that requested it. Section 6110(k)(3)
provides that this ruling may not be used or cited as precedent.
PLR-132549-16 5

In accordance with a power of attorney on file in this office, a copy of this letter is being
sent to your authorized representative.

                                       Sincerely,




                                       ALEXIS A. MACIVOR
                                       Branch Chief, Branch 4
                                       Office of the Associate Chief Counsel
                                       (Financial Institutions & Products)