Extra time granted for a captive insurer to make the section 831(b) small-company election

Plain-English summary

A small non-life insurance company can elect under section 831(b) to be taxed only on its investment income rather than on its underwriting income, a popular structure for "captive" insurers owned by a parent business. That election has to be attached to a timely filed return. Here a parent corporation set up a wholly owned subsidiary as a captive insurer and always intended it to be a section 831(b) company, but a miscommunication between the group's CPA subsidiary and its outside business manager meant the election statement was never filed with the timely return. Once the CPA discovered the omission, the taxpayer asked the IRS for a late-filing extension under the "9100 relief" regulations, which forgive a missed regulatory election when the taxpayer acted reasonably and in good faith and relief will not prejudice the government. Because the taxpayer reasonably relied on tax professionals who failed to make the election and caught the error before the IRS did, the IRS granted 90 days to file the section 831(b) election. As usual, the IRS cautioned that this extension is not a ruling that the subsidiary actually qualifies as an insurance company or is otherwise eligible for the election. This is the standard fix when a captive-insurance election is missed due to preparer error.

Ruling snapshot

• Question: Should the IRS grant a late-filing extension under Treas. Reg. § 301.9100-3 for a captive insurer to make the section 831(b)(2)(A) election it missed due to a professional's error?
• Outcome: approved (90-day extension to make the section 831(b) election granted)
• Key authorities: IRC § 831(a), (b); Treas. Reg. §§ 301.9100-1, 301.9100-3, 301.9100-8

Full text (IRS public release)

Internal Revenue Service                                     Department of the Treasury
                                                             Washington, DC 20224

Number: 201910003                                            Third Party Communication: None
Release Date: 3/8/2019                                       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-118356-18
                                                             Date:
                                                             November 30, 2018




Taxpayer                    = ------------------------------------------------------------------------------------
                              --------------------------------------------
Subsidiary                  = ------------------------------------------------------------------------------------
                              ---------------------------------------------------
Date A                      = ---------------------------
CPA Subsidiary              = ------------------------------------------------------------------------------------
                              -----
Date B                      = ---------------------------
State                       = -------------
External Business           = --------------------------------
Manager
Date C                      = ---------------------------
Date D                      = -----------------------


Dear -------------

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

FACTS

Taxpayer is the parent corporation and lead member of a consolidated return group
which reports its federal income tax on a calendar year basis. Subsidiary is a wholly
owned subsidiary of Taxpayer and a member of Taxpayer’s consolidated group.
Taxpayer represents that Subsidiary qualifies as a non-life insurance company for
federal income tax purposes. CPA Subsidiary provides auditing, tax and a number of
PLR-118356-18                                2

other professional services and is also wholly owned by Taxpayer and is a member of
Taxpayer’s consolidated return group.

On Date B, Subsidiary was incorporated and licensed in State to issue various direct
insurance coverages. Taxpayer and Subsidiary engaged CPA Subsidiary to advise on
all aspects of tax compliance. Taxpayer also engaged External Business Manager to
assist in the formation and management of Subsidiary.

In the course of forming and initiating the operations of Subsidiary, Taxpayer and its
officers always intended that Subsidiary be a § 831(b) captive insurance corporation.
There was a miscommunication between CPA Subsidiary and External Business
Manager, resulting in Subsidiary’s failure to timely make a § 831(b) election for the tax
year ended on Date A.

On Date C, CPA Subsidiary became aware of the failure to include an § 831(b) election
statement with Taxpayer’s tax return, which was timely filed on Date D.

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). 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 extension 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).

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 statutory or regulatory election. 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:
PLR-118356-18                                  3


       (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). 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(c)(1).

Treas. Reg.§ 301.9100-1(a) cautions that granting an extension of time to make an
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), Subsidiary qualifies for an extension of time to
make the election under § 831(b)(2)(A). Subsidiary is deemed to have acted in good
PLR-118356-18                                  4

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, Subsidiary is granted an extension of
time until 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 A. 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 material 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 Subsidiary qualifies
as an insurance company under § 831(c) and the granting of the extension under
§ 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.

In accordance with a power of attorney on file in this office, copies of this letter are
being sent to your authorized representatives.

                                                   Sincerely,


                                                   Rebecca L. Baxter
                                                   Senior Technician Reviewer, Branch 4
                                                   (Financial Institutions & Products)