“Looking at Small Captives in a Post-Pandemic World"

Article by Phil Karter and Pat McCann on “Looking at Small Captives in a Post-Pandemic World"

In an article published on December 21, 2020 in Bloomberg Tax, Chamberlain Philadelphia-based Shareholder Phil Karter and Atlanta-based Associate Pat McCann discuss how the Internal Revenue Service (IRS) is continuing to crack down on small captive insurance companies even as captive insurance has been a lifeline for some businesses during the pandemic to provide coverage that wasn’t available from traditional sources.

“As the world looks eagerly towards turning the page on a very difficult year, putting 2020 in the rearview mirror is unlikely to change the near-term prospects for property and casualty insurance companies electing federal tax treatment under Tax Code Section 831(b),” explain Karter and McCann. “Unfortunately, businesses relying on these small insurance companies to manage risk will continue to face heightened scrutiny in the new year.”

Karter and McCann further explain the issue with the IRS’s attack on small captives is that there is no distinction between an abusive small captive insurance transaction and the legitimate types of captive insurance structures that were encouraged through the enactment and expansion of Section 831(b).

“When the dust finally settles, it remains possible that the IRS and the captive insurance industry can come closer to a meeting of the minds,” said Karter and McCann. “Although no one can deny that the industry has been susceptible to periodic abuses, there should be agreement that well-structured captive insurance companies established and run in a bona fide manner to meet the risk-management needs of the businesses they insure can fill an important role in protecting a business in both good times and bad.”

To view the article on Bloomberg Tax, click  here.