Micro-Captive Insurance Arrangements Disclosure

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CCA 202244010: What Constitutes Adequate Disclosure of Micro-Captive Insurance Arrangements

Introduction: Micro-captive Insurance Arrangements Disclosure

Micro-captive insurance arrangements are an area of focus for the IRS. As we have discussed in our prior post discussing Avrahami v. Commissioner, 149 T.C. No. 7 (2017), micro-captive insurance arrangements can be abusive if they are used improperly. As a result, the IRS requires disclosure of the material facts for a micro-captive insurance arrangement on certain information reporting forms. This disclosure gives the IRS the opportunity to analyze the underlying micro-captive insurance arrangement to determine whether it satisfies the requirements of section 831(b) and whether the arrangement constitutes “insurance” for federal tax purposes. The 40 percent accuracy-related penalty under section 6662(i) may apply for a taxyaper’s nondisclosed noneconomic substance transactions, which includes micro-captive insurance transactions. Chief Counsel Advice 202244010 addressed whether the taxpayers adequately disclosed a micro-captive insurance arrangement where they disclosed the material facts of the transactions as reportable transactions on Forms 8886, “Reportable Transaction Disclosure Statement” but did not separately disclose the transactions on Forms 8275, “Disclosure Statement” as required by Notice 2010-62.

Section 6662(i) Accuracy-Related Penalties for Nondisclosed Noneconomic Substance Transactions 

Taxpayers are liable for 20 percent accuracy-related penalties under section 6662(b)(6) for the disallowance of tax benefits as a result of a transaction lacking economic substance. These penalties are increased to 40 percent under section 6662(i) when taxpayers adequately fail to disclose transactions lacking in economic substance on a return or statement attached to a return. As of the date of CCA 202244010 no regulations had been issued under section 6662(i). However, interim guidance was set forth in Notice 2010-62.[1]

Notice 2010-62 Disclosure Requirements

In Notice 2010-62, the IRS stated that to avoid the 40 percent accuracy-related penalty under section 6662(i) taxpayers must disclose noneconomic substance transactions on Form 8275 or 8275-R. The Notice also requires that for transactions that are both reportable transactions under section 6011 and transactions lacking economic substance under section 6662(b)(6), taxpayers must disclose the transaction both on Form 8886 and Form 8275. Notwithstanding Notice 2010-62, on March 5, 2019, the Department of Treasury and the IRS released the 2019 Policy Statement on the Tax Regulatory Process which prevents the IRS from arguing that Notice 2010-62 has the force and effect of law.

CCA Analysis of the Micro-Captive Insurance Arrangement Disclosure

CCA 202244010 states that the IRS cannot argue that Notice 2010-62 imposes an obligation for taxpayers to file a Form 8275 because that position would contradict the March 5, 2019 Policy Statement on the Tax Regulatory Process. As explained in the Policy Statement, “[s]ubregulatory guidance is not intended to affect taxpayer rights or obligations independent from underlying statutes or regulations” and that the “Treasury Department and the IRS… will not argue that subregulatory guidance has the force and effect of law.” There are no regulations that require taxpayers to file a Form 8275 to disclose noneconomic substance transactions to defend against section 6662(i) penalties.

In the absence of regulations requiring a Form 8275 to disclose a non-economic substance transaction, the IRS relies on section 6662(i)(2) and relevant case law to determine if a disclosure is adequate. Section 6662(i)(2) defines a “nondisclosed noneconomic substance transaction” as “any portion of a transaction described in subsection (b)(6) with respect to which the relevant facts affecting the tax treatment are not adequately disclosed in the return nor in a statement attached to the return.”

The CCA noted that courts have not addressed what is adequate disclosure in the context of section 6662(i)(2); however, case law interpreting similar disclosure requirements provided helpful analogs. The guidance cited several cases that broadly stood for the proposition that disclosure is adequate if the taxpayer has provided data or information regarding the treatment of an item to alert the Commissioner of a potential controversy. Accordingly, CCA 202244010 concluded that where a Form 8886 is timely filed with a return or a qualified amended return and provides a complete description of the relevant facts of a noneconomic substance transaction, “taxpayers have a strong argument” that they adequately informed the IRS of the transaction as required under section 6662(i). However, CCA 202244010 notes that if the Form 8886 is deficient or does not contain material facts regarding the transaction it may not satisfy the disclosure requirement under section 6662(i).


In CCA 202244010, the IRS amplified the pronouncement from the 2019 Policy Statement that subregulatory guidance should not affect taxpayer rights or obligations independent from statutory or regulatory rules and moreover, such subregulatory guidance does not have the force and effect of law. Thus, in the context of micro-captive insurance arrangements, a taxpayer is not required to disclose the material facts of a micro-captive insurance arrangement on both a Form 8886 and a Form 8275. Instead, a taxpayer satisfies its disclosure requirement under section 6662(i) if the taxpayer adequately discloses on a Form 8886, all the material facts regarding the micro-captive insurance arrangement to alert the Commissioner of a potential controversy. In other words, the transaction should not be treated as a nondisclosed noneconomic substance transaction for purposes of section 6662(i)(2).

More broadly, the 2019 Policy Statement indicated a shift in Treasury and the IRS’s approach in using subregulatory guidance and reaffirmed the underlying principles of the notice-and-comment process that is required for regulatory rulemaking. This agency shift is also consistent with the recent Tax Court opinion in Green Valley Investors LLC v. Commissioner, 159 T.C. No. 5 (Nov. 9, 2022) which was discussed in detail in our prior blog post. In Green Valley Investors LLC, a majority of the Tax Court held that Notice 2017-10, which identified all syndicated conservation easement transactions beginning January 1, 2010, as “listed transactions” for purposes of Treas. Reg. § 1.6011-4(b)(2) (and therefore, subject to penalties under section 6662A), was a legislative rule improperly issued without the notice-and-comment procedures of the Administrative Procedures Act (“APA”). Additionally, a majority of the Tax Court further held that Notice 2017-10 must be set aside under the APA, rendering the section 6662A penalties unlawful.

The 2019 Policy Statement, CCA 202244010, and most recently, Green Valley Investors, LLC, seem to indicate a philosophical shift by both the Tax Court and Treasury and the IRS, disfavoring using notices to announce new legislative rules that impose new recording obligations and recordkeeping requirements. It is unclear whether the holding in Green Valley Investors LLC will be extended or used in other contexts. However, taxpayers should consider raising similar arguments to challenge other Treasury and IRS notices or subregulatory guidance that introduce new legislative rules outside of the APA notice-and-comment process.


Tax Litigation and Controversy Attorneys

If you need assistance with micro-captive insurance arrangement tax matters or tax litigation, Freeman Law can help you navigate these complex issues. We have experience with micro-captive insurance arrangements and tax litigation. We offer value-driven services and provide practical solutions to complex tax issues. Schedule a consultation or call (214) 984-3000 to discuss your tax concerns.


[1] (Sept. 13, 2010).