The US Internal Revenue Service has challenged captive insurance company arrangements for half a century, typically to no avail. The latest challenge is a campaign targeting ‘‘micro-captive’’ insurance companies—small property and casualty insurance companies that can elect to be taxable only on their investment income. While such companies have powerful defenders in Congress, the Internal Revenue Service views transactions between micro-captives as carrying a ‘‘potential for tax avoidance or evasion.’’ This Legal Update analyzes developments during the past year and a half, including passage of the Protecting Americans from Tax Hikes Act (PATH) of 2015 as well as subsequent warnings from the IRS regarding micro-captives and the potential for abusive practices.
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