A small captive insurer gets IRS consent to revoke its section 831(b) alternative-tax election, conditioned on not re-electing for five years

Plain-English summary

A small captive insurance company had elected under section 831(b) to be taxed only on its investment income (an option available to insurers with limited premiums). That election is meant to be permanent: once made, it applies to every later year the company still qualifies and can be revoked only with IRS consent. Congress built in that consent requirement to stop companies from toggling the election on and off to dodge tax (for example, electing only in years without net operating losses). Here the company asked the IRS for permission to revoke the election starting in a later year. The IRS granted consent, but only on the condition that the company not make a new section 831(b) election for the five years following the revocation year. The company represented it had no net operating losses to carry forward and would not re-elect during that window. The IRS expressed no opinion on whether the company actually qualifies as an insurance company or was properly taxed under 831(b) in prior years.

Ruling snapshot

• Question: Will the IRS consent to a captive insurer revoking its section 831(b) alternative-tax election effective for a later year?
• Outcome: approved (consent granted, conditioned on no re-election for five years)
• Key authorities: IRC § 831(a), (b); § 834(a); § 1010(f)(1) of the Technical and Miscellaneous Revenue Act of 1988

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 202304006
Third Party Communication: None
Release Date: 1/27/2023
Date of Communication: Not Applicable
Index Number: 831.00-00
Person To Contact:
-----------------, ID No. -----------------
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Telephone Number:
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-------------------------------------------------- Refer Reply To:
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CC:FIP:B04
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PLR-110327-22
Date:
November 01, 2022

Taxpayer = ------------------------------------------------------------------ State = ------------ Year 1 = ------- Year 2 = -------

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

This letter is in reply to your request for consent to revoke Taxpayer’s election under section 831(b) of the Internal Revenue Code, effective for the taxable year beginning Year 2. This letter ruling is being issued electronically in accordance with section 6 of Rev. Proc. 2020-29, 2020-21 I.R.B. 859. A paper copy will not be mailed.

FACTS

Taxpayer is a licensed captive insurance company formed in Year 1 in State. Taxpayer represents that it is authorized by State to provide property, casualty (limited to vehicle and workers’ compensation and employer liability), and marine and transportation coverages. In Year 1, Taxpayer elected to be taxed only on its taxable investment income under section 831(b). Taxpayer represents that it has no net operating losses that could be carried forward. Taxpayer represents that it will not make a future section 831(b) election through and including the five taxable years after Year 2.

REQUESTED RULING

Taxpayer requests a ruling granting consent to revoke its section 831(b) election effective for Year 2.

LAW AND ANALYSIS

Section 831(a) imposes a tax for each taxable year on the taxable income of every insurance company other than a life insurance company.

Section 831(b) provides an alternative tax to the tax imposed by section 831(a) for certain insurance companies. The alternative tax for these companies is a tax computed for each year by multiplying the taxable investment income (defined in section 834(a)) of the company for the taxable year by the rates in section 11(b).

Section 831(b)(2)(A) provides that the alternative tax applies to every insurance company other than a life insurance company if (i) the company’s net written premiums (or, if greater, direct written premiums) for the taxable year do not exceed $2,200,000 (adjusted for inflation), (ii) the company meets the diversification requirements laid out in subparagraph (B) of section 831(b)(2), and (iii) the company elects the application of section 831(b) (the alternative tax) for the taxable year.

Section 1010(f)(1) of the Technical and Miscellaneous Revenue Act of 1988 added the flush paragraph following section 831(b)(2)(A)(ii) (now section 831(b)(2)(A)(iii)), which states the following:

The election under clause (iii) shall apply to the taxable year for which made and for all subsequent taxable years for which the requirements of the clauses (i) and (ii) are met.
Such an election, once made, may be revoked only with the consent of the Secretary.

This clarification reflects Congress’ intent that the election not be used as a means of eliminating tax liability (e.g., by making the election only for the years the taxpayer does not have net operating losses). S. Rep. No. 445, 100th Congress, 2d Sess. 127 (1988).

Taxpayer represents that it will not make a future section 831(b) election for the five taxable years following Year 2.

RULING

Consent is granted for Taxpayer to revoke its section 831(b) election effective for Year 2, provided Taxpayer does not make an election under section 831(b) for the five years following Year 2.

CAVEATS

The ruling contained in this letter is based upon information and representations submitted by the 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 request for ruling and it is subject to verification on examination.

Except as expressly provided herein, no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter. Specifically, no opinion is expressed or implied concerning (but not limited to) whether any part of Taxpayer’s business done for Year 1 or any subsequent year constitutes insurance; whether Taxpayer qualified as an insurance company under section 831(c) for Year 1 or any subsequent year; or whether Taxpayer was properly taxed under section 831(b) for Year 1 or any subsequent year.

This ruling is directed only to the taxpayer(s) requesting it. Section 6110(k)(3) provides that it may not be used or cited as precedent. A copy of this letter must be attached to any Federal income tax return to which it is relevant.

In accordance with a power of attorney on file in this office, a copy of this ruling is being furnished to your authorized representatives.

Sincerely,

John E. Glover
Senior Counsel, Branch 4
Associate Chief Counsel
(Financial Institutions and Products)

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