Tax Blog/Blawg

Effective January 14, 2025, the Treasury Department issued final regulations requiring disclosures by certain taxpayers and material advisors involved in a micro-captive listed transaction or transaction of interest. The original due date for making initial disclosures was April 14, 2025, but the IRS provided relief from penalties if such initial disclosures are filed by July 31, 2025. However, such taxpayers and material advisors may have to disclose the transaction if the statute of limitations for an original or amended tax return did not end on or before January 14, 2025.

Treasury Regulations Sections 1.6011–10 and 1.6011–11 impose additional reporting requirements for taxpayers and material advisors engaging in listed transactions or transactions of interest.

A transaction qualifies as a listed transaction if (1) during the micro-captive‘s most recent ten years, the micro-captive’s loss ratio factor is less than 30 percent and (2) during the micro-captive’s most recent five tax years or the entirety of the micro-captive‘s existence (if in existence for fewer than five tax years) the micro-captive engaged in financing transactions with a related party that did not result in any income or gain to the related party. Both the loss ratio factor and financing factor must be met to trigger the listed transaction reporting requirement. Such transactions must be reported on a Form 8886, Reportable Transaction Disclosure Statement.

A transaction qualifies as a transaction of interest if (1) during the  micro-captive’s most recent ten tax years or the entirety of the micro-captive’s existence (if in existence for fewer than five ten years)the micro-captive’s loss ratio factor is less than 60 percent or (2) during the micro-captive’s most recent five tax years or the entirety of the micro-captive’s existence (if in existence for fewer than five tax years) the micro-captive engaged in financing transactions with a related party that did not result in any income or gain to the related party. Meeting either the loss ratio factor or financing factor triggers the transaction of interest reporting requirement. Such transactions must be disclosed on a Form 8886.

The final regulations retained the reporting exemption for consumer coverage arrangements.

In June, Drake Insurance Co., Drake Plastics Ltd. Co, and Strategic Risk Alternatives, LLC d/b/a SRA 831(b) Admin filed suit against the Internal Revenue Service and Department of the Treasury in the United States District Court for the Southern District of Texas alleging that the final regulations exceed the IRS’ authority, are arbitrary and capricious, and violate the Administrative Procedure Act. See Drake Plastics Ltd. Co. et al v. Internal Revenue Service et al, No. 4:2025-cv-02570, Complaint (S.D. Tex. June 4, 2025), Docket No. 1. Although a nationwide injunction is unlikely given the recent Supreme Court ruling limiting lower courts’ ability to impose such injunctions, this case could conceivably impact the enforceability of the final regulations.

If you have any questions regarding the reporting requirements, or if we can be of any assistance, please reach out to our firm and we would be happy to assist.