Captive insurer receives 90 days to make a small-insurance-company election

Plain-English summary

A captive property and casualty insurer prepared a timely return and an election under section 831(b)(2) to be taxed only on taxable investment income. The company set the return aside for review but inadvertently failed to file it and the election by the extended due date. It discovered the unfiled return itself and sought relief before the IRS identified the failure. Based on the company's representations, the IRS found that it acted reasonably and in good faith and that relief would not prejudice the government. The IRS granted 90 days from the ruling date to file the election statement with the appropriate service center. It expressly did not decide whether the taxpayer qualified as an insurance company or was otherwise eligible for the section 831(b) election.

Ruling snapshot

• Question: May the captive insurer make a late section 831(b)(2) election for the year in which it failed to file its prepared return?
• Outcome: approved, with 90 days from the ruling date to file the election
• Key authorities: IRC §§ 11, 831(a), 831(b), and 6662; Treas. Reg. §§ 301.9100-1, 301.9100-3, and 301.9100-8

Full text (IRS public release)

Internal Revenue Service                                      Department of the Treasury
                                                              Washington, DC 20224

Number: 201945013                                             Third Party Communication: None
Release Date: 11/8/2019                                       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:B04
                                                              PLR-101911-19
                                                              Date:
                                                              August 09, 2019


Legend

Taxpayer                          =    --------------------------------------------------------------------------------
                                       ------------------------------------------------
State X                           =    -----------
Date A                            =    -------------------
Date B                            =    ------------------
Date C                            =    --------------
Date D                            =    --------------------------------------------------------------------------------
Date E                            =    --------------------------------------------------------------------------------
Date F                            =    -------------------------------------------
Captive Manager                   =    -----------------------------------
CPA Firm 1                        =    --------------------------------
CPA Firm 2                        =    -----------------------------------------------
Month Y                           =    --------------------------------------------------------------------------------
Year 1                            =    -----------------
Year 2                            =    -------
Year 3                            =    -------




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


This letter is in response to Taxpayer’s request for a ruling, pursuant to § 301.9100-3 of
the Procedure and Administration Regulations, for an extension of time to make the
PLR-101911-19                                  2

election under § 831(b)(2) of the Internal Revenue Code effective for the taxable year
ending on Date A of Year 2.

FACTS

On Date B of Year 1, Taxpayer was incorporated in State X. Effective on Date C of
Year 2, Taxpayer was authorized by the State X Department of Insurance to provide
property and casualty insurance coverage as a captive insurer. In accordance with
State X regulations, Taxpayer files an annual report for pure captive insurance
companies with the State X Department of Insurance.

Taxpayer has engaged Captive Manager for certain consulting and administrative
services on behalf of Taxpayer. Taxpayer has also engaged other parties to assist in
other insurance regulatory and tax compliance services, including CPA Firm 1 and CPA
Firm 2.

Prior to Date D of Year 3, Taxpayer timely filed Form 7004 (Application for Automatic
Extension of Time to File Certain Business Income Tax, Information, and Other
Returns) for Year 2, extending the due date of Taxpayer’s Year 2 federal income tax
return to Date E of Year 3. Taxpayer’s Year 2 Form 1120-PC (U.S. Property and
Casualty Insurance Company Income Tax Return), including an election statement to
be taxed under § 831(b)(2), was prepared and signed timely, on Date F of Year 3, by
CPA Firm 1. Taxpayer set the Year 2 tax return aside, intending to review, sign, and file
the Form 1120-PC containing the § 831(b)(2) election prior to Date E of Year 3.
However, Taxpayer inadvertently failed to file the Year 2 tax return and election
statement by that date. Taxpayer discovered the unfiled tax return in Month Y of Year

3. Taxpayer subsequently took corrective action, including filing this request for relief,
with the assistance of CPA Firm 2.

Taxpayer represents that it is an insurance company other than a life insurance
company for federal income tax purposes. Taxpayer further represents that its request
for relief was filed before the Internal Revenue Service (Service) discovered the failure
to make the regulatory election. Taxpayer represents that the granting of relief by the
Service will not result in a lower tax liability than Taxpayer would have had if the
§ 831(b)(2) election had been timely made. Taxpayer represents that it does not seek
to alter a return position for which the accuracy related penalty has been or could have
been imposed under § 6662 at the time Taxpayer requested relief, and the new position
requires or permits a regulatory election for which relief is requested. Taxpayer also
represents that it failed to file the § 831(b)(2) election inadvertently, that it has not used
hindsight to seek an extension of time to make the § 831(b)(2) election, and that it
always had the intent to make the § 831(b)(2) election.
PLR-101911-19                                  3

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 A of Year 2.

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 insurance 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) election is prescribed by Treas. Reg.
§ 301.9100-8(a). 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). Accordingly, the election under § 831(b) is a regulatory
election. Treas. Reg. § 301.9100-1(b).

Under Treas. Reg. § 301.9100-1(c), the Commissioner may grant a reasonable
extension of time under the rules set forth in Treas. Reg. § 301.9100-3 to make a
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:

       (i) Requests relief under this section before the failure to make the regulatory
       election is discovered by the 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;
PLR-101911-19                                  4

       (iv) Reasonably relied on the written advice of the 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), Taxpayer qualifies for an extension of time to make
the election under § 831(b)(2). 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
until 90 days following the date of this letter to make the election provided by
§ 831(b)(2) for the tax year ending on Date A of Year 2. 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.
PLR-101911-19                                 5


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 Taxpayer qualifies as
an insurance company under § 831, 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).

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code
provides that it may not be used or cited as precedent.

In accordance with the Power of Attorney on file with this office, copies of this ruling are
being sent to your authorized representatives.


                                                    Sincerely,


                                                    Kathryn M. Sneade
                                                    Senior Technician Reviewer
                                                    Branch 4
                                                    (Financial Institutions and Products)



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