Bulletin No. 2023–17

HIGHLIGHTS

OF THIS ISSUE





Bulletin No. 2023–17

April 24, 2023

These synopses are intended only as aids to the reader in

identifying the subject matter covered. They may not be

relied upon as authoritative interpretations.

ADMINISTRATIVE

REG 121709-19, page 789.

This document contains proposed regulations regarding

supervisory approval of penalties. The proposed regulations

are necessary to address uncertainty regarding various

aspects of supervisory approval of penalties that have arisen

due to recent judicial decisions. The proposed regulations

affect the IRS and persons assessed certain penalties by

the IRS.

ADMINISTRATIVE, INCOME TAX

Announcement 2023-12, page 799.

Announcement 2023-12 informs taxpayers and practitioners

that the Internal Revenue Service has revised Form 3115,

Application for Change in Accounting Method, and its instructions. The Form 3115 (Rev. December 2022) is the current

Form 3115 (December 2022 Form 3115) and replaces the

December 2018 version of the Form 3115. Announcement

2023-12 also provides guidance to allow for a reasonable

period for taxpayers to transition to the December 2022

Form 3115.

ADMINISTRATIVE, SPECIAL

ANNOUNCEMENT

Announcement 2023-11, page 798.

This announcement notifies the public that a proposed regulation is being issued that identifies certain micro-captive

Finding Lists begin on page ii.

transactions as listed transactions within the meaning of

§ 1.6011-4(b)(2) of the Income Tax Regulations, and that

certain other micro-captive transactions are being identified

as transactions of interest within the meaning of § 1.60114(b)(6).

EXEMPT ORGANIZATIONS

Rev. Proc. 2023-12, page 768.

This revenue procedure has been drafted in order to modify

specific language in Rev. Proc. 2023-5 to allow for the new

electronic submission process of the Form 8940, Request

for Miscellaneous Determination. This revenue procedure

also provides a 90-day transition relief period, during which

paper Form 8940 and letter applications will be accepted

and processed by EO Determinations.

EXEMPT ORGANIZATIONS,

INCOME TAX

Notice 2023-30, page 766.

This notice publishes the safe harbor deed language for extinguishment and boundary line adjustment clauses required by

§ 605(d)(1) of the SECURE 2.0 Act of 2022, enacted as Division T of the Consolidated Appropriations Act, 2023, Public

Law 117-328, 136 Stat. 4459 (December 29, 2022). This

notice also clarifies the process certain donors may use to

amend an easement deed to substitute the safe harbor language for the corresponding language in the original deed,

as provided by § 605(d)(2) of the SECURE 2.0 Act.

INCOME TAX

for Federal income tax purposes under § 139 of the Internal

Revenue Code.

Announcement 2023-7, page 797.

REG 109309-22, page 770.

This announcement informs Federal civilian employees

and other civilians who are not employed by the Federal

government who received certain payments in 2022 and

2023 from the Department of Defense (DOD) in reimbursement for lodging, meals, and personal property damage

expenses after the release of petroleum from the Red Hill

Bulk Fuel Storage Facility on O‘ahu, Hawaii (Red Hill Fuel

Spill) that such payments are excludable from gross income

The proposed regulations identify transactions that are

the same as, or substantially similar to, certain micro-captive transactions as listed transactions and certain other

micro-captive transactions as transactions of interest for

purposes of §1.6011-4 and sections 6111 and 61112,

and provides guidance as to the reporting requirements

for participants in and material advisors to the identified

transactions.

The IRS Mission

Provide America’s taxpayers top-quality service by helping

them understand and meet their tax responsibilities and

enforce the law with integrity and fairness to all.

Introduction

The Internal Revenue Bulletin is the authoritative instrument

of the Commissioner of Internal Revenue for announcing official rulings and procedures of the Internal Revenue Service

and for publishing Treasury Decisions, Executive Orders, Tax

Conventions, legislation, court decisions, and other items of

general interest. It is published weekly.

It is the policy of the Service to publish in the Bulletin all

substantive rulings necessary to promote a uniform application of the tax laws, including all rulings that supersede,

revoke, modify, or amend any of those previously published

in the Bulletin. All published rulings apply retroactively unless

otherwise indicated. Procedures relating solely to matters

of internal management are not published; however, statements of internal practices and procedures that affect the

rights and duties of taxpayers are published.

Revenue rulings represent the conclusions of the Service

on the application of the law to the pivotal facts stated in

the revenue ruling. In those based on positions taken in rulings to taxpayers or technical advice to Service field offices,

identifying details and information of a confidential nature are

deleted to prevent unwarranted invasions of privacy and to

comply with statutory requirements.

Rulings and procedures reported in the Bulletin do not have the

force and effect of Treasury Department Regulations, but they

may be used as precedents. Unpublished rulings will not be

relied on, used, or cited as precedents by Service personnel in

the disposition of other cases. In applying published rulings and

procedures, the effect of subsequent legislation, regulations,

court decisions, rulings, and procedures must be considered,

and Service personnel and others concerned are cautioned

against reaching the same conclusions in other cases unless

the facts and circumstances are substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.

This part includes rulings and decisions based on provisions

of the Internal Revenue Code of 1986.

Part II.—Treaties and Tax Legislation.

This part is divided into two subparts as follows: Subpart A,

Tax Conventions and Other Related Items, and Subpart B,

Legislation and Related Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.

To the extent practicable, pertinent cross references to these

subjects are contained in the other Parts and Subparts. Also

included in this part are Bank Secrecy Act Administrative

Rulings. Bank Secrecy Act Administrative Rulings are issued

by the Department of the Treasury’s Office of the Assistant

Secretary (Enforcement).

Part IV.—Items of General Interest.

This part includes notices of proposed rulemakings, disbarment and suspension lists, and announcements.

The last Bulletin for each month includes a cumulative index

for the matters published during the preceding months. These

monthly indexes are cumulated on a semiannual basis, and are

published in the last Bulletin of each semiannual period.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

April 24, 2023 

Bulletin No. 2023–17

Part III

Conservation

Easements – Safe

Harbor Deed Language

for Extinguishment and

Boundary Line Adjustment

Clauses

Notice 2023-30

SECTION 1. OVERVIEW

.01 This notice sets forth the safe harbor deed language for extinguishment and

boundary line adjustment clauses required

by § 605(d)(1) of the SECURE 2.0 Act of

2022 (SECURE 2.0 Act), enacted as Division T of the Consolidated Appropriations

Act, 2023, Public Law 117-328, 136 Stat.

4459 (December 29, 2022). This notice

also describes the process donors may use

to amend an original eligible easement

deed to substitute the safe harbor language for the corresponding language in

the original deed, as provided by § 605(d)

(2) of the SECURE 2.0 Act.

.02 This safe harbor notice addresses

only amendments to extinguishment

and boundary line adjustment clauses in

accordance with § 605(d) of the SECURE

2.0 Act. This safe harbor notice does not

address any other deed amendments.

Donors are not required to make the

amendments described in this notice.

SECTION 2. BACKGROUND

.01 Section 170(a) of the Internal

Revenue Code (Code) provides, subject

to certain limitations and requirements,

a deduction for any charitable contribution, as defined in § 170(c), payment of

which is made within the taxable year.1

Section 170(f)(3)(A) denies a deduction

under § 170 in the case of a contribution

of a partial interest in property, except as

provided in § 170(f)(3)(B). Section 170(f)

(3)(B)(iii) provides an exception to the

deduction denial in the case of a qualified

conservation contribution as defined in

§ 170(h).

1

.02 Under § 170(h)(1), the term qualified conservation contribution means a

contribution of a qualified real property

interest to a qualified organization exclusively for conservation purposes. For this

purpose, a qualified real property interest

is defined in § 170(h)(2)(C) to include a

restriction (granted in perpetuity) on the

use that may be made of the real property.

Under § 1.170A-14(b)(2), a perpetual

conservation restriction includes an easement or other interest in real property that

under state law has attributes similar to an

easement. Section 170(h)(3) defines the

term qualified organization (donee organization). Section 170(h)(4) defines the

term conservation purpose, which must

be protected in perpetuity for the qualified

conservation contribution to be treated

as exclusively for conservation purposes

pursuant to § 170(h)(5).

.03 Section 1.170A-14 provides further

guidance on qualified conservation contributions. Section 1.170A-14(g) requires

that such a restriction be enforceable in

perpetuity. Section 1.170A-14(g)(6)(i)

provides a rule pertaining to extinguishment. It provides that if a subsequent

unexpected change in the conditions surrounding the property that is the subject

of a perpetual conservation restriction

makes it impossible or impractical to

continue to use the property for conservation purposes, the conservation purpose

can nonetheless be treated as protected in

perpetuity if (1) the restrictions are extinguished by judicial proceeding and (2) all

of the donee’s proceeds (determined under

§ 1.170A-14(g)(6)(ii)) from a subsequent

sale or exchange of the property are used

by the donee organization in a manner

consistent with the conservation purposes

of the original contribution.

.04 Section 1.170A-14(g)(6)(ii) provides that, for a deduction to be allowed

under § 170(a), at the time of the gift,

the donor must agree that the donation

of the perpetual conservation restriction

gives rise to a property right, immediately

vested in the donee organization, with a

fair market value that is at least equal to

the proportionate value that the perpetual

conservation restriction at the time of the

gift bears to the value of the property as

a whole at that time. That proportionate

value of the donee’s property rights must

remain constant. Accordingly, under §

1.170A-14(g)(6)(ii), if a change in conditions gives rise to the extinguishment of

a perpetual conservation restriction under

§ 1.170A-14(g)(6)(i), the donee organization, on a subsequent sale, exchange,

or involuntary conversion of the subject

property, must be entitled to a portion of

the proceeds at least equal to that proportionate value of the perpetual conservation

restriction, unless state law provides that

the donor is entitled to the full proceeds

from the conversion without regard to the

terms of the prior perpetual conservation

restriction.

.05 Neither the Code nor the regulations specifically address boundary line

adjustments. Under § 170(h)(2)(C), however, the restriction the donor grants on

the use of the real property subject to the

conservation easement must be made in

perpetuity. See also § 170(h)(5)(A).

.06 The SECURE 2.0 Act was signed

into law on December 29, 2022. Section 605(d)(1) of the SECURE 2.0 Act

directs the Secretary of the Treasury or

her delegate (Secretary) to publish safe

harbor deed language for extinguishment

clauses and boundary line adjustment

clauses within 120 days after the date of

the enactment of the SECURE 2.0 Act

(that 120th day is April 28, 2023). Section 605(d)(2) of the SECURE 2.0 Act

provides that, beginning on the date the

safe harbor language is published by the

Secretary, donors have a 90-day period in

which to amend an original eligible easement deed to substitute the safe harbor

language for the corresponding language

in the original deed. Since this notice is

published in the Internal Revenue Bulletin on April 24, 2023, the 90th day is July

22, 2023. Because that date is a Saturday,

§ 7503 extends the date until Monday, July 24, 2023. The amended deed

must be signed by the donor and donee

and recorded by July 24, 2023, and the

amendment must be treated as effective

Unless otherwise specified, all “section” and “§” references are to the Internal Revenue Code or the Income Tax Regulations (26 CFR Part 1).

April 24, 2023

766

Bulletin No. 2023–17

as of the date of the recording of the original easement deed.

.07 Section 3 of this notice describes

the process donors may use to amend

an eligible easement deed to substitute

the safe harbor language for the corresponding language in the original eligible

easement deed, and which easement deeds

are eligible to be amended, as provided

by § 605(d)(2) of the SECURE 2.0 Act.

Section 4 of this notice sets forth safe

harbor deed language for extinguishment

and boundary line adjustment clauses as

required by § 605(d)(1) of the SECURE

2.0 Act.

SECTION 3. PROCEDURE TO AMEND

ELIGIBLE EASEMENT DEEDS

.01 In general. In accordance with

§ 605(d)(2) of the SECURE 2.0 Act, to

amend an original eligible easement deed

to substitute the safe harbor language in

section 4.01 or 4.02 of this notice for the

corresponding language in the original

deed—

(1) The amended deed must be signed

by the donor and donee and recorded on or

before July 24, 2023; and

(2) The amendment must be treated as

effective as of the date of the recording of

the original easement deed. See section

3.03 of this notice.

.02 Exceptions. The term eligible easement deed does not include an easement

deed relating to any contribution—

(1) Which is part of a reportable transaction (as defined in § 6707A(c)(1)), or

is described in Notice 2017-10, 2017-4

I.R.B. 544;

(2) Which, by reason of § 170(h)(7),

is not treated as a qualified conservation

contribution;

(3) If a deduction under § 170 has been

disallowed by the Secretary, and the donor

is contesting such disallowance in a case

that is docketed in a Federal court on a

date before the date the amended deed is

recorded by the donor; or

(4) If a claimed deduction for such

contribution under § 170 resulted in an

underpayment to which a penalty under

§ 6662 or § 6663 applies and either—

(i) The penalty has been finally determined administratively; or

(ii) If the penalty is challenged in

court, the judicial proceeding with respect

Bulletin No. 2023–17

to such penalty has been concluded by a

decision or judgment which has become

final.

.03 Effect of correction. If a donor

substitutes the safe harbor language in

sections 4.01 or 4.02 (or sections 4.01 and

4.02) of this notice for the corresponding

language in the original eligible easement

deed and the amended deed is signed by

the donor and donee and recorded on or

before July 24, 2023, the amended eligible

easement deed will be treated as effective

for purposes of § 170, § 605(d)(2) of the

SECURE 2.0 Act, and section 3.01(2)

of this notice as of the date the eligible

easement deed was originally recorded,

regardless of whether the amended

eligible easement deed is effective retroactively under relevant state law.

SECTION 4. SAFE HARBOR DEED

LANGUAGE

.01 Extinguishment clause. The safe

harbor deed language for extinguishment

clauses is:

 ursuant to Notice 2023-30, Donor

P

and Donee agree that, if a subsequent

unexpected change in the conditions surrounding the property that

is the subject of a donation of the

perpetual conservation restriction

renders impossible or impractical the

continued use of the property for conservation purposes, the conservation

purpose can nonetheless be treated

as protected in perpetuity if (1) the

restrictions are extinguished by judicial proceeding and (2) all of Donee’s

portion of the proceeds (as determined below) from a subsequent sale

or exchange of the property are used

by the Donee in a manner consistent

with the conservation purposes of the

original contribution.

 etermination of Proceeds. Donor

D

and Donee agree that the donation of

the perpetual conservation restriction

gives rise to a property right, immediately vested in Donee, with a fair

market value that is at least equal to

the proportionate value that the perpetual conservation restriction, at the

time of the gift, bears to the fair market value of the property as a whole at

767

that time. The proportionate value of

Donee’s property rights remains constant such that if a subsequent sale,

exchange, or involuntary conversion

of the subject property occurs, Donee

is entitled to a portion of the proceeds

at least equal to that proportionate

value of the perpetual conservation

restriction, unless state law provides

that the donor is entitled to the full

proceeds from the conversion without

regard to the terms of the prior perpetual conservation restriction.

.02 Boundary line adjustments clause.

The safe harbor boundary line adjustment

clause is:

 ursuant to Notice 2023-30, Donor

P

and Donee agree that boundary line

adjustments to the real property subject to the restrictions may be made

only pursuant to a judicial proceeding to resolve a bona fide dispute

regarding a boundary line’s location.

.03 Similar terms with the same meaning. In substituting deed language, the

donor may use the precise terms used in

sections 4.01 and 4.02 of this notice, or the

donor may use terms that have the same

meaning as the terms in sections 4.01 and

4.02. For example, if the original deed

uses the terms “Grantor” and “Grantee”

instead of “Donor” and “Donee,” the

donor can use either “Grantor” and

“Grantee” or “Donor” and “Donee”

because these terms have the same meaning. Also, for example, if the original deed

uses the term “easement” or “servitude”

instead of “restriction,” the donor may

use any of those terms, provided the term

refers to a qualified real property interest

within the meaning of § 170(h)(2)(C) and

§ 1.170A-14(b)(2).

SECTION 5. DRAFTING AND

CONTACT INFORMATION

The principal authors of this notice

are Elizabeth Boone and Hannah Kim

of the Office of Associate Chief Counsel

(Income Tax & Accounting). For further

information regarding this notice, contact

Ms. Boone at (202) 317-5100, or Ms. Kim

at (202) 317-7003 (not toll-free numbers).

April 24, 2023

26 CFR 601.201: Rulings and determination letters.

Rev. Proc. 2023-12

SECTION 1. PURPOSE

This revenue procedure modifies Revenue Procedure 2023-5, 2023-1 I.R.B.

265, updating the procedures for Exempt

Organizations determination letters with

respect to the electronically submitted

Form 8940, Request for Miscellaneous

Determination, which is the form used

to request miscellaneous determinations.

The modifications to Rev. Proc. 2023-5

made by this revenue procedure provide

that the electronic submission process

is the exclusive means of submitting a

completed Form 8940, except for submissions eligible for the 90-day transition

relief provided in section 4 of this revenue

procedure.

Additionally, this revenue procedure

modifies existing procedures so that

Form 8940 will be used by government

entities to request voluntary termination

of exempt status under § 501(c)(3) (previously a letter request), by Canadian

registered charities to request inclusion in

Tax Exempt Organization Search database

of organizations eligible to receive tax-deductible charitable contributions (Pub. 78

data) or a determination on public charity

classification (previously a letter request),

and by private foundations giving notice

of intent to terminate private foundation

status under § 507(b)(1)(B) (previously

provided on Form 8940 or by general

correspondence).

SECTION 2. CHANGED

SUBMISSION PROCESS

The IRS revised and updated Form

8940 and provided for it to be electronically submitted at www.pay.gov. The

electronic submission process for Form

8940 replaces the paper submission process for Form 8940 effective for Forms

8940 submitted on or after April 4, 2023,

subject to the transition relief provided in

section 4 of this revenue procedure. Section 3 of this revenue procedure modifies

Rev. Proc. 2023-5 to set forth procedures for issuing determination letters

in response to electronically submitted

Form 8940 applications. Unless otherwise

April 24, 2023

modified in this revenue procedure, the

provisions of Rev. Proc. 2023-5 continue

to apply.

SECTION 3. MODIFICATIONS TO

REVENUE PROCEDURE 2023-5

.01 Section 4.02(6) of Rev. Proc.

2023-5 is modified to read as follows:

(6) Form 8940 request for miscellaneous determination. An organization

seeking a miscellaneous determination

or a request must electronically submit a

completed Form 8940, Request for Miscellaneous Determination, at www.pay.

gov. The Form 8940 is used for the following determination letter requests and

notices—

(a) Advance approval of certain setasides described in § 4942(g)(2);

(b) Advance approval of voter registration activities described in § 4945(f);

(c) Advance approval of scholarship

procedures described in § 4945(g);

(d) Exception from Form 990 filing

requirements;

(e) Advance approval that a potential grant or contribution constitutes an

unusual grant;

(f) Change in Type (or initial determination of Type) of a § 509(a)(3)

organization;

(g) Reclassification of foundation status, including a voluntary request from

a public charity for private foundation

status;

(h) Termination of private foundation

status under § 507(b)(1)(B)—advance ruling request;

(i) Notice Only – Termination of private foundation status under section

507(b)(1)(B);

(j) Termination of private foundation

status under § 507(b)(1)(B)—60-month

period ended;

(k) Voluntary termination of § 501(c)

(3) recognition by a government entity;

and

(l) Canadian registered charities: listing on Pub. 78 Data and/or public charity

classification.

.02 The first paragraph of section

4.09(1) of Rev. Proc. 2023-5 is modified

to read as follows:

(1) Procedures for requesting

expedited handling. In the case of the

electronically submitted Form 1023,

768

Form 1024, Form 1024-A, or Form 8940,

a request for expedited handling must be

indicated on the form and a supporting

written statement must be submitted as an

attachment with the completed form.

.03 Section 7.02 of Rev. Proc. 2023-5

is modified to read as follows:

.02 A request described in section

4.02(6) of this revenue procedure must

be electronically submitted on Form

8940 at www.pay.gov (except where

otherwise permitted, including when

such request is made as part of an application for recognition of exemption),

along with all information, documentation, and other materials required by

Form 8940 and the instructions thereto,

as well as the appropriate user fee provided in Appendix A. Form 8940 must

be electronically signed by an authorized

individual under penalties of perjury (see

sections 4.04 and 4.06 of this revenue

procedure). For complete information

about filing requirements and the submission process, refer to Form 8940 and

the Instructions for Form 8940.

.04 Section 14.03 of Rev. Proc. 2023-5

is modified to read as follows:

.03 Actions that do not require the

payment of a user fee include—

(1) Elections pertaining to automatic

extensions of time under Treas. Reg. §

301.9100-1;

(2) Confirmation of tax-exempt status

(affirmation letter) (to replace lost tax-exempt status letter and to reflect name and

address changes); and

(3) Notice of intent to terminate private

foundation status under § 507(b)(1)(B)

without a request for an advance ruling.

.05 Section 14.06(1) of Rev. Proc.

2023-5 is modified to read as follows:

(1) Payment of user fees for applications of recognition of exemption on

Form 1023, Form 1023-EZ, Form 1024,

Form 1024-A, or requests on Form

8940. User fees for applications for recognition of exemption on Form 1023, Form

1023-EZ, Form 1024, Form 1024-A, or

requests on Form 8940 must be paid at

www.pay.gov.

.06 Section 14.07 of Rev. Proc. 2023-5

is modified to read as follows:

.07 Form 8718 should be attached to

applications or requests other than those

made on Form 1023, Form 1023-EZ,

Form 1024, Form 1024-A, or Form 8940,

Bulletin No. 2023–17

to transmit a check in the amount of the

required user fee.

.07 Section 15.01(1) of Rev. Proc.

2023-5 is modified to read as follows:

(1) The following types of requests and

applications handled by the EO Determinations Office should be sent to the

Internal Revenue Service Center, at the

address in section 15.01(2):

(a) applications for recognition of

exemption on Form 1028; and

(b) requests submitted by letter.

.08 Section 15.02 of Rev. Proc. 2023-5

is modified to read as follows:

.02 Applications for recognition of

exemption on Form 1023, Form 1023-EZ,

Form 1024, Form 1024-A, and requests

on Form 8940 are handled by the EO

Determinations Office but must be submitted electronically online at www.pay.

gov. Paper submissions of Form 1023,

Form 1023-EZ, Form 1024, Form 1024A, and Form 8940 will not be accepted for

processing.

.09 Section 15.03 of Rev. Proc. 2023-5

is modified to read as follows:

.03 Requests for exempt status affirmation letters should be sent to the Internal

Revenue Service at the address shown

below.

Internal Revenue Service

P.O. Box 2508

Cincinnati, OH 45201

.10 The Note of Appendix A, item (4)

of Rev. Proc. 2023-5 is modified to read

as follows:

Bulletin No. 2023–17

Note: In accordance with the income

tax treaty between the United States and

Canada, and pursuant to a mutual arrangement between the competent authorities

of the two countries, Canadian registered

charities are automatically recognized as

exempt under § 501(c)(3) without filing

an application for recognition of exemption. For details, see Notice 99-47, 1999-2

CB 391. Therefore, no user fee is required

when a Canadian registered charity submits a Form 8940 to request to be listed in

Tax Exempt Organization Search database

for organizations eligible to receive tax-deductible charitable contributions (Pub. 78

data), or to request a determination on its

public charity classification. For additional

information about the submission process,

refer to the Form 8940 Instructions.

.11 Appendix A of Rev. Proc. 2023-5

is modified to include new item (15) as

follows:

(15) Notice of intent to

terminate private foundation

status under § 507(b)(1)

(B) without a request for an

advance ruling.

None

SECTION 4. TRANSITION RELIEF

.01 Except as provided in section 4.02,

an organization seeking a miscellaneous

determination using Form 8940 must

electronically submit the form and user

fee online at www.pay.gov.

769

.02 The Internal Revenue Service will

accept for processing a completed paper

Form 8940, letter request from a government entity voluntarily terminating §

501(c)(3) recognition, letter request from

a Canadian registered charity, or correspondence providing notice of intent to

terminate private foundation status under

§ 507(b)(1)(B), accompanied by the correct user fee (if any), as described in Rev.

Proc. 2023-5, if the submission is postmarked on or before the date that is 90

days after the effective date of this revenue procedure.

SECTION 5. EFFECT ON OTHER

DOCUMENTS

Rev. Proc. 2023-5 is modified.

SECTION 6. EFFECTIVE DATE

This revenue procedure is effective

April 4, 2023.

SECTION 7. DRAFTING

INFORMATION

The principal author of this revenue

procedure is Ingrid Vatamanu of the Office

of Associate Chief Counsel (Employee

Benefits, Exempt Organizations, and

Employment Taxes). For further information regarding this revenue procedure

contact Ms. Vatamanu at (202) 317-4541

(not a toll-free number).

April 24, 2023

Part IV

Notice of Proposed

Rulemaking

Micro-captive Listed

Transactions and Microcaptive Transactions of

Interest

REG-109309-22

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Notice of proposed rulemaking

and notice of public hearing.

SUMMARY: This document contains

proposed regulations that identify transactions that are the same as, or substantially

similar to, certain micro-captive transactions as listed transactions, a type of

reportable transaction, and certain other

micro-captive transactions as transactions

of interest, another type of reportable

transaction. Material advisors and certain

participants in these listed transactions

and transactions of interest are required to

file disclosures with the IRS and are subject to penalties for failure to disclose. The

proposed regulations affect participants

in these transactions as well as material

advisors. This document also provides

notice of a public hearing on the proposed

regulations.

DATES: Electronic or written comments

must be received by June 12, 2023. The

public hearing on these proposed regulations is scheduled to be held by

teleconference on July 19, 2023, at 10

a.m. ET. Requests to speak and outlines of

topics to be discussed at the public hearing must be received by June 12, 2023.

If no outlines are received by June 12,

2023, the public hearing will be cancelled.

Requests to attend the public hearing

must be received by 5 p.m. ET on July 17,

2023. The telephonic public hearing will

be made accessible to people with disabilities. Requests for special assistance

during the telephonic hearing must be

received by July 14, 2023.

April 24, 2023

ADDRESSES: Commenters are strongly

encouraged to submit public comments

electronically. Submit electronic submissions via the Federal eRulemaking Portal

at https://www.regulations.gov (indicate

IRS and REG-109309-22). Once submitted to the Federal eRulemaking Portal,

comments cannot be edited or withdrawn.

The Department of the Treasury (Treasury Department) and the IRS will publish

any comments to the public docket. Send

paper submissions to: CC:PA:LPD:PR

(REG-109309-22), Room 5203, Internal

Revenue Service, P.O. Box 7604, Ben

Franklin Station, Washington, DC, 20044.

For those requesting to speak during

the hearing, send an outline of topic

submissions, electronically via the Federal eRulemaking Portal at https://

www.regulations.gov (indicate IRS and

REG-109309-22).

Individuals who want to testify (by

telephone) at the public hearing must

send an email to publichearings@irs.

gov to receive the telephone number and

access code for the hearing. The subject line of the email must contain the

regulation number REG-109309-22 and

the word TESTIFY. For example, the

subject line may say: Request to TESTIFY at Hearing for REG-109309-22.

The email should include a copy of the

speaker’s public comments and outline

of discussion topics. Individuals who

want to attend (by telephone) the public hearing must also send an email to

publichearings@irs.gov to receive the

telephone number and access code for

the hearing. The subject line of the email

must contain the regulation number

REG-109309-22 and the word ATTEND.

For example, the subject line may say:

Request to ATTEND hearing for REG109309-22. To request special assistance

during the telephonic hearing, contact

the Publications and Regulations Branch

of the Office of Associate Chief Counsel

(Procedure and Administration) by sending an email to publichearings@irs.gov

(preferred) or by telephone at (202) 3176901 (not a toll-free number).

FOR FURTHER INFORMATION

CONTACT: Concerning the proposed

770

regulations, Elizabeth M. Hill of the Office

of Associate Chief Counsel (Financial

Institutions & Products), (202) 317-4458;

concerning the submission of comments

or the hearing, Vivian Hayes at (202) 3176901 (not toll-free numbers) or by email at

publichearings@irs.gov (preferred).

SUPPLEMENTARY INFORMATION:

Background

This document contains proposed

additions to 26 CFR part 1 (Income Tax

Regulations) under section 6011 of the

Internal Revenue Code (Code) regarding transactions identified as listed

transactions and transactions of interest

for purposes of section 6011.

I. Overview of the Reportable

Transaction Regime

Section 6011(a) generally provides that,

when required by regulations prescribed

by the Secretary of the Treasury or her

delegate (Secretary), “any person made

liable for any tax imposed by this title, or

with respect to the collection thereof, shall

make a return or statement according to

the forms and regulations prescribed by

the Secretary. Every person required to

make a return or statement shall include

therein the information required by such

forms or regulations.”

On February 28, 2000, the Treasury

Department and the IRS issued a series

of temporary regulations (TD 8877;

TD 8876; TD 8875) and cross-referencing notices of proposed rulemaking

(REG-103735-00;

REG-110311-98;

REG-103736-00) under sections 6011,

6111, and 6112. The temporary regulations

and cross-referencing notices of proposed

rulemaking were published in the Federal

Register (65 FR 11205, 65 FR 11269; 65

FR 11215, 65 FR 11272; 65 FR 11211, 65

FR 11271) on March 2, 2000 (2000 Temporary Regulations). The 2000 Temporary

Regulations were modified several times

before March 4, 2003, the date on which

the Treasury Department and the IRS,

after providing notice and opportunity

for public comment and considering the

Bulletin No. 2023–17

comments received, published final regulations (TD 9046) in the Federal Register

(68 FR 10161) under sections 6011, 6111,

and 6112 (2003 Final Regulations). The

2000 Temporary Regulations and 2003

Final Regulations consistently provided

that reportable transactions include listed

transactions and that a listed transaction is

a transaction that is the same as or substantially similar to one of the types of

transactions that the IRS has determined

to be a tax avoidance transaction and has

identified by notice, regulation, or other

form of published guidance as a listed

transaction.

Following the 2003 promulgation of

§1.6011-4, Congress passed the American

Jobs Creation Act of 2004 (AJCA), Public Law 108-357, 118 Stat. 1418 (October

22, 2004), which added sections 6707A,

6662A, and 6501(c)(10) to the Code, and

revised sections 6111, 6112, 6707, and

6708 of the Code. See sections 811-812

and 814-817 of the AJCA. The AJCA’s

legislative history explains that Congress

incorporated in the statute the method

that the Treasury Department and the

IRS had been using to identify reportable

transactions, and provided incentives, via

penalties, to encourage taxpayer compliance with the new disclosure reporting

obligations. As the Committee on Ways

and Means explained in its report accompanying H.R. 4520, which became the

AJCA:

The Committee believes that the best

way to combat tax shelters is to be

aware of them. The Treasury Department, using the tools available, issued

regulations requiring disclosure of

certain transactions and requiring organizers and promoters of tax-engineered

transactions to maintain customer

lists and make these lists available to

the IRS. Nevertheless, the Committee

believes that additional legislation is

needed to provide the Treasury Department with additional tools to assist its

efforts to curtail abusive transactions.

Moreover, the Committee believes

that a penalty for failing to make the

required disclosures, when the imposition of such penalty is not dependent

on the tax treatment of the underlying

transaction ultimately being sustained,

will provide an additional incentive

for taxpayers to satisfy their reporting

Bulletin No. 2023–17

obligations under the new disclosure

provisions.

House Report 108-548(I), 108th Cong.,

2nd Sess. 2004, at 261 (June 16, 2004)

(House Report).

In Footnote 232 of the House Report,

the Committee on Ways and Means notes

that the statutory definitions of “reportable

transaction” and “listed transaction” were

intended to incorporate the pre-AJCA regulatory definitions while providing the

Secretary with leeway to make changes to

those definitions:

The provision states that, except as provided in regulations, a listed transaction

means a reportable transaction, which

is the same as, or substantially similar

to, a transaction specifically identified

by the Secretary as a tax avoidance

transaction for purposes of section

6011. For this purpose, it is expected

that the definition of “substantially

similar” will be the definition used in

Treas. Reg. sec. 1.6011–4(c)(4). However, the Secretary may modify this

definition (as well as the definitions

of “listed transaction” and “reportable

transactions”) as appropriate.

Id. at 261 n.232.

Section 6707A(c)(1) defines a “reportable transaction” as “any transaction with

respect to which information is required

to be included with a return or statement

because, as determined under regulations

prescribed under section 6011, such transaction is of a type which the Secretary

determines as having a potential for tax

avoidance or evasion.” A “listed transaction” is defined by section 6707A(c)

(2) as “a reportable transaction which is

the same as, or substantially similar to, a

transaction specifically identified by the

Secretary as a tax avoidance transaction

for purposes of section 6011.”

Section 6111(a), as revised by the

AJCA, provides that each material

advisor with respect to any reportable

transaction must make a return setting

forth (1) information identifying and

describing the transaction, (2) information describing any potential tax benefits

expected to result from the transaction,

and (3) such other information as the

Secretary may prescribe. Such return

must be filed not later than the date specified by the Secretary. Section 6111(b)(2)

provides that a reportable transaction has

771

the meaning given to such term by section 6707A(c).

Section 6112(a), as revised by the

AJCA, provides that each material advisor

with respect to any reportable transaction

(as defined in section 6707A(c)) must

(whether or not required to file a return

under section 6111 with respect to such

transaction) maintain a list (1) identifying

each person with respect to whom such

advisor acted as a material advisor, and

(2) containing such other information as

the Secretary may by regulations require.

On November 2, 2006, the Treasury

Department and the IRS published a

notice of proposed rulemaking (REG103038-05) in the Federal Register (71

FR 64488) under section 6011 (November

2006 Transaction of Interest (TOI) Regulations) proposing to add a new category of

reportable transaction requiring disclosure

under section 6011. The preamble to the

November 2006 TOI Regulations (71 FR

64488) explains that these transactions,

referred to as transactions of interest, are

transactions that the Treasury Department

and the IRS believe have the potential for

tax avoidance or evasion, but for which

the Treasury Department and the IRS lack

enough information to determine whether

the transaction should be identified as a

listed transaction. The November 2006

TOI Regulations proposed that transactions of interest would be identified by the

IRS via notice, regulation, or other form

of published guidance.

On the same date that the November

2006 TOI Regulations were published,

the Treasury Department and the IRS

also published two separate notices of

proposed rulemaking (REG-103039-05;

REG-103043-05) in the Federal Register (71 FR 64496, 71 FR 64501) under

sections 6111 and 6112, respectively

(November 2006 Regulations). The

November 2006 Regulations proposed

to modify the then-existing regulations

relating to the disclosure of reportable

transactions by material advisors under

section 6111, and the list maintenance

requirements of material advisors with

respect to reportable transactions under

section 6112, in part, to account for the

changes made by the AJCA and, in part,

to make corresponding updates to the

material advisor rules to account for the

treatment of transactions of interest as

April 24, 2023

reportable transactions as proposed by the

November 2006 TOI Regulations.

After providing notice and opportunity

for public comment and considering the

comments received, on August 3, 2007,

the Treasury Department and the IRS published the November 2006 Regulations

and the November 2006 TOI Regulations

as final regulations (TD 9350, TD 9351,

and TD 9352) in the Federal Register

(72 FR 43146, 72 FR 43157, and 72 FR

43154) under sections 6011, 6111, and

6112.

II. Disclosure of Reportable Transactions

by Participants and Penalties for Failure

to Disclose

Section 1.6011-4(a) provides that

every taxpayer that has participated in a

reportable transaction within the meaning of §1.6011-4(b) and who is required

to file a tax return must file a disclosure

statement within the time prescribed in

§1.6011-4(e).

Sections 1.6011-4(d) and (e) provide

that the disclosure statement — Form

8886, Reportable Transaction Disclosure

Statement (or successor form) — must be

attached to the taxpayer’s tax return for

each taxable year for which a taxpayer

participates in a reportable transaction. A

copy of the disclosure statement must be

sent to IRS’s Office of Tax Shelter Analysis (OTSA) at the same time that any

disclosure statement is first filed by the

taxpayer pertaining to a particular reportable transaction.

Reportable transactions include listed

transactions, confidential transactions,

transactions with contractual protection, loss transactions, and transactions

of interest. See §1.6011-4(b)(2) through

(6). Consistent with the definitions previously provided in the 2000 Temporary

Regulations and later in the 2003 Final

Regulations, as promulgated in 2007,

§1.6011-4(b)(2) continues to define a

“listed transaction” as a transaction that

is the same as or substantially similar to

one of the types of transactions that the

IRS has determined to be a tax avoidance transaction and identified by notice,

regulation, or other form of published

guidance as a listed transaction. Section

1.6011-4(b)(6) defines a “transaction of

interest” as a transaction that is the same

April 24, 2023

as or substantially similar to one of the

types of transactions that the IRS has identified by notice, regulation, or other form

of published guidance as a transaction of

interest.

Section 1.6011-4(c)(4) provides that a

transaction is “substantially similar” if it

is expected to obtain the same or similar

types of tax consequences and is either

factually similar or based on the same or

similar tax strategy. Receipt of an opinion regarding the tax consequences of the

transaction is not relevant to the determination of whether the transaction is the

same as or substantially similar to another

transaction. Further, the term substantially

similar must be broadly construed in favor

of disclosure. For example, a transaction

may be substantially similar to a listed

transaction or a transaction of interest even

though it may involve different entities or

use different Code provisions.

Section 1.6011-4(c)(3)(i)(A) provides

that a taxpayer has participated in a listed

transaction if the taxpayer’s tax return

reflects tax consequences or a tax strategy

described in the published guidance that

lists the transaction under §1.6011-4(b)

(2). Published guidance also may identify other types or classes of persons that

will be treated as participants in a listed

transaction. Published guidance may identify types or classes of persons that will

not be treated as participants in a listed

transaction. Section 1.6011-4(c)(3)(i)(E)

provides that a taxpayer has participated

in a transaction of interest if the taxpayer

is one of the types or classes of persons

identified as participants in the transaction

in the published guidance describing the

transaction of interest.

Section 1.6011-4(e)(2)(i) provides that

if a transaction becomes a listed transaction or a transaction of interest after the

filing of a taxpayer’s tax return reflecting

the taxpayer’s participation in the transaction and before the end of the period of

limitations for assessment for any taxable

year in which the taxpayer participated in

the transaction, then a disclosure statement must be filed with OTSA within 90

calendar days after the date on which the

transaction becomes a listed transaction or

transaction of interest. This requirement

extends to an amended return and exists

regardless of whether the taxpayer participated in the transaction in the year the

772

transaction became a listed transaction or

transaction of interest. The Commissioner

of Internal Revenue may also determine

the time for disclosure of listed transactions and transactions of interest in

the published guidance identifying the

transaction.

Participants required to disclose these

transactions under §1.6011-4 who fail to

do so are subject to penalties under section 6707A. Section 6707A(b) provides

that the amount of the penalty is 75 percent of the decrease in tax shown on the

return as a result of the reportable transaction (or which would have resulted from

such transaction if such transaction were

respected for Federal tax purposes), subject to minimum and maximum penalty

amounts. The minimum penalty amount is

$5,000 in the case of a natural person and

$10,000 in any other case. For listed transactions, the maximum penalty amount is

$100,000 in the case of a natural person

and $200,000 in any other case. For other

reportable transactions, including transactions of interest, the maximum penalty is

$10,000 in the case of a natural person and

$50,000 in any other case.

Additional penalties may also apply.

In general, section 6662A imposes a

20 percent accuracy-related penalty on

any understatement (as defined in section 6662A(b)(1)) attributable to an

adequately disclosed reportable transaction. If the taxpayer had a requirement

to disclose participation in the reportable transaction but did not adequately

disclose the transaction in accordance

with the regulations under section 6011,

the taxpayer is subject to an increased

penalty rate equal to 30 percent of the

understatement. See section 6662A(c).

Section 6662A(b)(2) provides that section 6662A applies to any item which is

attributable to any listed transaction and

any reportable transaction (other than a

listed transaction) if a significant purpose

of such transaction is the avoidance or

evasion of Federal income tax.

Participants required to disclose listed

transactions who fail to do so are also subject to an extended period of limitations

under section 6501(c)(10). That section

provides that the time for assessment of

any tax with respect to the transaction

shall not expire before the date that is one

year after the earlier of the date the partic-

Bulletin No. 2023–17

ipant discloses the transaction or the date

a material advisor discloses the participation pursuant to a written request under

section 6112(b)(1)(A).

III. Disclosure of Reportable

Transactions by Material Advisors and

Penalties for Failure to Disclose

Section 301.6111-3(a) of the Procedure and Administration Regulations

provides that each material advisor with

respect to any reportable transaction, as

defined in §1.6011-4(b), must file a return

as described in §301.6111-3(d) by the date

described in §301.6111-3(e).

Section 301.6111-3(b)(1) provides that

a person is a material advisor with respect

to a transaction if the person provides any

material aid, assistance, or advice with

respect to organizing, managing, promoting, selling, implementing, insuring, or

carrying out any reportable transaction,

and directly or indirectly derives gross

income in excess of the threshold amount

as defined in §301.6111-3(b)(3) for the

material aid, assistance, or advice. Under

§301.6111-3(b)(2)(i) and (ii), a person

provides material aid, assistance, or advice

if the person provides a tax statement,

which is any statement (including another

person’s statement), oral or written, that

relates to a tax aspect of a transaction that

causes the transaction to be a reportable

transaction as defined in §1.6011-4(b)(2)

through (7).

Material advisors must disclose transactions on Form 8918, Material Advisor

Disclosure Statement (or successor form),

as provided in §301.6111-3(d) and (e).

Section 301.6111-3(e) provides that the

material advisor’s disclosure statement for

a reportable transaction must be filed with

OTSA by the last day of the month that

follows the end of the calendar quarter in

which the advisor becomes a material advisor with respect to a reportable transaction

or in which the circumstances necessitating an amended disclosure statement

occur. A person may become a material

advisor with respect to transactions that

are later identified as listed transactions

or transactions of interest. See §301.61113(b)(4). The disclosure statement must be

sent to OTSA at the address provided in

the Instructions for Form 8918 (or successor form).

Bulletin No. 2023–17

Section 301.6111-3(d)(2) provides

that the IRS will issue to a material advisor a reportable transaction number with

respect to the disclosed reportable transaction. Receipt of a reportable transaction

number does not indicate that the disclosure statement is complete, nor does

it indicate that the transaction has been

reviewed, examined, or approved by the

IRS. Material advisors must provide the

reportable transaction number to all taxpayers and material advisors for whom the

material advisor acts as a material advisor

as defined in §301.6111-3(b). The reportable transaction number must be provided

at the time the transaction is entered into,

or, if the transaction is entered into prior

to the material advisor receiving the

reportable transaction number, within 60

calendar days from the date the reportable

transaction number is mailed to the material advisor.

Additionally, material advisors must

prepare and maintain lists identifying each

person with respect to whom the advisor

acted as a material advisor with respect

to the reportable transaction in accordance with §301.6112-1(b) and furnish

such lists to the IRS in accordance with

§301.6112-1(e).

Section 6707(a) provides that a material advisor who fails to file a timely

disclosure, or files an incomplete or

false disclosure statement, is subject to

a penalty. Pursuant to section 6707(b)

(2), for listed transactions, the penalty

is the greater of (A) $200,000, or (B) 50

percent of the gross income derived by

such person with respect to aid, assistance, or advice which is provided with

respect to the listed transaction before

the date the return is filed under section

6111. Pursuant to section 6707(b)(1),

the penalty for other reportable transactions, including transactions of interest,

is $50,000.

A material advisor may also be subject to a penalty under section 6708 for

failing to maintain a list under section

6112(a) and failing to make the list available upon written request to the Secretary

in accordance with section 6112(b) within

20 business days after the date of such

request. Section 6708(a) provides that the

penalty is $10,000 per day for each day

of the failure after the 20th day. However,

no penalty will be imposed with respect to

773

the failure on any day if such failure is due

to reasonable cause.

IV. Micro-captive Transactions and

Notice 2016-66

As enacted by section 1024 of the Tax

Reform Act of 1986, Public Law 99-514,

100 Stat. 2085, 2405 (October 22, 1986),

section 831(a) generally imposes tax on

the taxable income (determined under

the special rules for calculating taxable

income of insurance companies in part II

of subchapter L of chapter 1 of the Code)

of every insurance company other than a

life insurance company (nonlife insurance

company), for each taxable year computed

as provided in section 11 of the Code.

However, certain small nonlife insurance

companies may elect to be subject to the

alternative tax imposed by section 831(b).

Upon election by an eligible nonlife

insurance company (eligible electing company) to be taxed under section 831(b), in

lieu of the tax otherwise imposed by section 831(a), section 831(b) imposes tax on

the company’s income computed by multiplying the taxable investment income of

the eligible electing company (determined

under section 834 of the Code) for the taxable year by the rates provided in section

11(b) of the Code. Premium income of a

nonlife insurance company is included

in taxable income under section 831(a),

but not taxable investment income under

section 834. Thus, an eligible electing

company pays no tax on premium income

for taxable years for which its election is

in effect.

Congress enacted section 333 of the

Protecting Americans from Tax Hikes

Act of 2015 (PATH Act), div. Q. of Public Law 114-113, 129 Stat. 2242, 3040

(December 18, 2015), to both tighten

and expand the requirements for qualifying under section 831(b), effective for

taxable years beginning after December

31, 2016. As amended by the PATH Act,

section 831(b) requires an eligible electing company to be an insurance company

(within the meaning of section 816(a) of

the Code) having net written premiums or,

if greater, direct written premiums, for the

taxable year not exceeding $2.2 million as

adjusted for inflation (net written premium

limitation) and to meet the diversification

requirements of section 831(b)(2)(B). The

April 24, 2023

last sentence of section 831(b)(2)(A) provides that an election under section 831(b)

applies to the taxable year for which it is

made and all subsequent taxable years for

which the net written premium limitation

and the diversification requirements are

met and may be revoked only with the

Secretary’s consent. In addition, section

831(d) requires every eligible electing

company that has a section 831(b) election in effect to furnish to the Secretary

“at such time and in such manner as the

Secretary shall prescribe such information

for such taxable year as the Secretary may

require with respect to” the diversification

requirements of section 831(b)(2)(B).

On November 21, 2016, the Treasury

Department and the IRS published Notice

2016-66, 2016-47 I.R.B 745, which identified certain micro-captive transactions

as transactions of interest. On January 17,

2017, the IRS published Notice 2017-08,

2017-3 I.R.B. 423, which modified Notice

2016-66 by providing for an extension of

time for participants and material advisors

to file their disclosures.

Notice 2016-66 alerted taxpayers and

their representatives pursuant to §1.60114(b)(6) and for purposes of §1.6011-4(b)

(6) and sections 6111 and 6112, that the

Treasury Department and the IRS identified as transactions of interest certain

micro-captive transactions in which a

taxpayer attempts to reduce the aggregate

taxable income of the taxpayer, related

persons, or both, using contracts that the

parties treat as insurance contracts and a

related company that the parties treat as an

insurance company. Notice 2016-66 also

alerted persons involved with the identified

transactions that certain responsibilities

may arise from their involvement.

Notice 2016-66 describes the following

micro-captive transaction as a transaction

of interest: (1) a company that the parties

treat as an insurance company (Captive)

elects to exclude premiums from taxable

income under section 831(b); (2) at least

20 percent of the voting power or value

of the outstanding stock of Captive is

directly or indirectly owned by the insured

entity (Insured), owners of Insured, or

persons related to Insured or its owners

(20-percent relationship factor); and (3)

either or both of the following apply: (i)

Captive has at any time during a defined

Computation Period (referred to as the

April 24, 2023

Notice Computation Period) directly or

indirectly made available as financing,

or otherwise conveyed or agreed to make

available or convey, to certain related persons in a transaction that did not result in

taxable income or gain to the recipient

any portion of the payments treated as

premiums, such as through a guarantee, a

loan, or other transfer of Captive’s capital (financing factor), or (ii) the amount of

liabilities incurred by Captive for insured

losses and claim administration expenses

during the Notice Computation Period is

less than 70 percent of the amount equal to

premiums earned by Captive during that

period less policyholder dividends paid

by Captive during that period (70-percent

loss ratio factor).

Notice 2016-66 defines the Notice

Computation Period as the most recent

five taxable years of Captive or, if Captive

has been in existence for less than five taxable years, the entire period of Captive’s

existence. For purposes of the preceding

sentence, if Captive has been in existence

for less than five taxable years and Captive is a successor to one or more Captives

created or availed of in connection with

a transaction described in the notice, taxable years of such predecessor entities are

treated as taxable years of Captive. A short

taxable year is treated as a taxable year.

Notice 2016-66 also provides that the

arrangement is not treated as a transaction

of interest if the micro-captive arrangement provides insurance for employee

compensation or benefits and the arrangement is one for which the Employee

Benefits Security Administration of the

U.S. Department of Labor has issued a

Prohibited Transaction Exemption. A Prohibited Transaction Exemption may be

granted by the U.S. Department of Labor

on an individual basis or may fall under

the class exemption for captives. The

Prohibited Transaction Exemption procedures are published as final regulations

in the Federal Register (76 FR 66637).

The Department of Labor’s proposed

amendments to the Prohibited Transaction

Exemption procedures were published on

March 15, 2022, in the Federal Register

(87 FR 14722).

Notice 2016-66 requires disclosure of

the information specified in §1.6011-4(d)

and the Instructions to Form 8886 (or successor form), which includes identifying

774

and describing the transaction in sufficient

detail for the IRS to be able to understand

the tax structure of the reportable transaction and identity of all parties involved in

the transaction. Notice 2016-66 provides

that for all participants, describing the

transaction in sufficient detail includes,

but is not limited to, describing on Form

8886 (or successor form) when and how

the taxpayer became aware of the transaction. The notice further provides that

for Captive, describing the transaction in

sufficient detail includes, but is not limited

to, describing the following on Form 8886

(or successor form): (1) whether Captive

is reporting because (i) the 70-percent loss

ratio factor is met for the taxable year; (ii)

the financing factor is met for the taxable

year; or (iii) both (i) and (ii); (2) under

what authority Captive is chartered;

(3) all the type(s) of coverage provided by

Captive during the year or years of participation (if disclosure pertains to multiple

years); (4) how the amounts treated as premiums for coverage provided by Captive

during the year or years of participation

(if disclosure pertains to multiple years)

were determined, including the name

and contact information of any actuary or

underwriter who assisted in these determinations; (5) any claims paid by Captive

during the year or years of participation (if

disclosure pertains to multiple years), and

the amount of, and reason for, any reserves

reported by Captive on the annual statement; and (6) the assets held by Captive

during the year or years of participation (if

disclosure pertains to multiple years).

V. Comments Submitted in Response to

Notice 2016-66

Comments submitted in response to

Notice 2016-66 were carefully considered in the development of these proposed

regulations. Although the Administrative

Procedure Act (APA), 5 U.S.C. 551-559,

does not require a response to those comments, the comments are described here

in an effort to assist taxpayers in understanding the provisions of the proposed

regulations described in the Explanation

of Provisions section.

First, some commenters suggested that

changes to the Form 1120-PC, U.S. Property and Casualty Insurance Company

Income Tax Return, would be better suited

Bulletin No. 2023–17

to capture the information sought by

Notice 2016-66. Other commenters indicated that the information sought could be

readily obtained from the existing Forms

1120-PC being filed, so any additional

reporting would be unnecessarily duplicative and burdensome. However, changes

to the Form 1120-PC would at a minimum

impact all nonlife insurance companies

that make section 831(b) elections, not

only participants in the micro-captive

transactions described in the proposed

regulations. Also, some of the requested

information is not readily available from

filed Forms 1120-PC, such as the descriptions of the types of coverages provided

by a Captive and the name and contact

information of any actuary or underwriter

who assisted Captive in the determination of amounts treated as premiums.

Additionally, limiting the collection of

information to only those entities filing

the Form 1120-PC would be insufficient

to gather relevant information, as information regarding Insureds and promoters

of the transactions would not be included.

Second, commenters also suggested

that the reporting requirements under

Notice 2016-66 are contrary to Congressional intent in enacting section 333 of

the PATH Act, which, as noted earlier,

effective for taxable years beginning after

December 31, 2016, modified the section 831(b) eligibility rules for a property

and casualty insurance company to elect

to be taxed only on taxable investment

income. The provision increased the limit

on net written premiums (or, if greater,

direct written premiums) from $1,200,000

to $2,200,000 and indexed that amount for

inflation. The provision also added diversification requirements to the eligibility

rules. However, nothing in the statutory

language or legislative history of the

PATH Act suggests that Congress intended

to provide the benefits of section 831(b) to

companies that do not qualify as insurance

companies for Federal income tax purposes. As exemplified by the transactions

described in Avrahami v. Commissioner,

149 T.C. 144 (2017), Syzygy Insurance

Co., Inc. v. Commissioner, T.C. Memo.

2019-34, and Caylor Land & Development, Inc. v. Commissioner, T.C. Memo.

2021-30, some companies claiming the

benefits of section 831(b) do not meet

these basic eligibility requirements for

Bulletin No. 2023–17

such treatment. See also Reserve Mechanical Corp. v. Commissioner, 34 F.4th 881

(10th Cir. 2022) (concluding company filing as a tax-exempt entity under section

501(c)(15) did not qualify as an insurance

company for Federal income tax purposes

using similar analysis). The proposed

regulations, like Notice 2016-66, would

apply to entities that claim the benefits of

section 831(b) when certain factors indicate that they do not or may not qualify as

insurance companies for Federal income

tax purposes.

Third, other commenters indicated that

the reporting requirements were unduly

burdensome, as well as duplicative,

because the information sought could be

readily obtained from a smaller subgroup

of the participants in a transaction. However, the reporting and recordkeeping

required for reportable transactions from

each participant ensure that the Service

can identify all of the participants of a

particular transaction and that all participants are aware of their participation in

a reportable transaction. Nevertheless, the

proposed regulations significantly narrow

the information sought from participants

compared to that required by Notice 201666 and provide a disclosure safe harbor

to a significant number of participants,

thereby reducing the burden in reporting

to the maximum extent consistent with

sound tax administration. See proposed

§1.6011-10(e)(2) and (f) and proposed

§1.6011-11(e)(2) and (f).

Fourth, additional commenters on

Notice 2016-66 expressed concerns

regarding certain arrangements in which

a service provider, automobile dealer,

lender, or retailer (Seller) sells insurance

contracts to its customers in connection

with the products or services being sold

(Consumer Coverage). These commenters recommended that such Consumer

Coverage arrangements be excepted from

the disclosure requirements. The proposed

regulations provide a limited exception

for certain participants in Consumer

Coverage arrangements. See proposed

§§1.6011-10(d)(2) and 1.6011-11(d)(2).

Finally, commenters argued that the

20-percent relationship factor and the

70-percent loss ratio factor described in

sections 2.01(d) and 2.01(e)(2) of Notice

2016-66, respectively, are overly broad

and arbitrary. However, the Treasury

775

Department and the IRS have determined that the factors are objective and

reasonably determined based on existing

statutory provisions and available industry

data. The 20-percent relationship factor

was based on the diversification requirements established by section 333 of the

PATH Act. While one part of the PATH

Act diversification requirements is based

on the percentage of premiums from

related insureds, requiring that no more

than 20 percent of net written premiums

(or if greater, direct written premiums) for

a taxable year is attributable to any one

policyholder, the 20-percent threshold in

Notice 2016-66 is based on concentration of ownership of stock in a Captive

when Insured or Insured’s owner owns

Captive’s stock or is related to Captive’s

owner. Both requirements are based on

a lack of diversification and identify a

threshold at which a lack of diversification

may facilitate abuse.

Similarly, the 70-percent loss ratio

factor was informed by, but is less burdensome than, the 85 percent medical

loss ratio test enacted by Congress in section 833(c)(5) of the Code for Blue Cross

and Blue Shield organizations and other

health insurers that are entitled to certain

tax benefits that are not available to other

nonlife insurance companies, as well as

the medical loss ratio computed under

section 2718(b) of the Public Health Service Act, 42 U.S.C. 300gg-18. The loss

ratio factor in Notice 2016-66 compares

claims and expenses to premiums charged

in a manner similar to the medical loss

ratio test in section 833(c)(5) of the Code

and the medical loss ratio computed under

section 2718(b) of the Public Health Service Act. However, the medical loss ratio

has a narrower focus than the Notice

2016-66 loss ratio factor and is computed

as a percentage of the total premium revenue (excluding Federal and State taxes

and licensing or regulatory fees) an issuer

expends (1) on reimbursement for clinical services provided to enrollees under

such coverage and (2) for activities that

improve health care quality of enrollees.

The Treasury Department and IRS

also considered data from the National

Association of Insurance Commissioners

(NAIC) in determining the applicable loss

ratio factor. The NAIC, in its 2021 Annual

Property & Casualty and Title Insurance

April 24, 2023

Industries Report (2021 NAIC P&C

Report), indicated that annual loss ratios for

property and casualty companies averaged

72.5 percent for that year. See Insurance

Industry Snapshots and Analysis Reports

(July 21, 2022), https://content.naic.org/

cipr_topics/topic_insurance_industry_

snapshots_and_analysis_reports.htm (last

visited April 3, 2023). The 2021 NAIC

P&C Report is “produced from insurer

statutory filings and represent[s] approximately 99% of all insurers expected to

file the NAIC Financial Data Repository.”

Id. The single-year average loss ratio for

property and casualty companies ranged

between 67.2 and 76.2 percent per year

from 2012 to 2021. See U.S. Property &

Casualty and Title Insurance Industries

– 2021 Full Year Results (2022), https://

content.naic.org/sites/default/files/inlinefiles/2021%20Annual%20Property%20

%26%20Casualty%20and%20Title%20

Insurance%20Industry%20Report.pdf

(last visited April 3, 2023).

Commenters indicated that some Captives electing the alternative tax under

section 831(b) have loss ratios that fall

below the industry-wide average during

a given year of operation and suggested

that the loss ratio in Notice 2016-66 is set

too high. However, the average loss ratio

reported by the NAIC and the loss ratio

factor in Notice 2016-66 are computed

differently and are not directly comparable. First, the average loss ratio reported

by the NAIC reflects the ratio of net losses

incurred and loss expenses incurred to

net premiums earned, without adjustment

for policyholder dividends paid, whereas

Captive’s loss ratio factor under Notice

2016-66 subtracts policyholder dividends

paid from premiums earned by Captive.

This means that, for an entity that pays

policyholder dividends, the loss ratio

factor under Notice 2016-66 would be

higher than its NAIC loss ratio. Second,

the loss ratio factor in Notice 2016-66

reflects the ratio of insured losses and

claims administration expenses during the

Notice Computation Period, which may

be as long as five years. By contrast, the

average loss ratio reported by the NAIC is

a single-year average. Accordingly, even

Captives electing the alternative tax under

section 831(b) that have loss ratios that

fall below the industry-wide average for

property and casualty companies in any

April 24, 2023

particular year may not have loss ratio factors that cause a transaction to be described

in Notice 2016-66 or the proposed regulations. The Treasury Department and

the IRS therefore view the average loss

ratio data reported by the NAIC as supportive of the loss ratio factors provided

in Notice 2016-66 and in these proposed

regulations. See proposed §§1.6011-10(c)

(2) and 1.6011-11(c).

Despite commenters’ objections to the

20-percent relationship factor and 70-percent loss ratio factor, the commenters did

not identify different factors or industry-wide standards for small insurers that

would distinguish abusive from non-abusive transactions or provide examples of

non-abusive transactions for which disclosure was required as a result of these

factors. These objective factors in Notice

2016-66 have been effective in identifying

transactions for which disclosure should

be required and are reasonable given

existing statutory provisions and available

industry data.

To better ensure non-abusive transactions are not required to be reported

under the proposed regulations, however, the proposed regulations lower the

loss ratio factor for both the micro-captive transactions identified in proposed

§1.6011-10(a) as listed transactions

(Micro-captive Listed Transactions) and

the micro-captive transactions identified

in proposed §1.6011-11(a) as transactions

of interest (Micro-captive Transactions

of Interest) from 70 percent to 65 percent. See proposed §§1.6011-10(c)(2) and

1.6011-11(c). Additionally, the computation period used to determine the loss ratio

factor is extended from a Notice Computation Period of up to five taxable years

to a computation period of up to nine

taxable years (referred to as the Transaction of Interest Computation Period) for

the Micro-captive Transaction of Interest. See proposed §1.6011-11(b)(2). For

the Micro-captive Listed Transaction, the

computation period used to determine the

loss ratio factor (referred to as the Loss

Ratio Factor Computation Period) is ten

taxable years. See proposed §1.601110(b)(2)(ii).

For the foregoing reasons, the IRS

intends to challenge the purported tax

benefits from transactions identified in

proposed §1.6011-10(c) as listed trans-

776

actions, and the IRS may challenge the

purported tax benefits from transactions

identified in proposed §1.6011-11(c) as

transactions of interest. The IRS may also

challenge the purported tax benefits from

these transactions based on the economic

substance, business purpose, or other rules

or doctrines if applicable based on the

facts of a particular case.

VI. Purpose of Proposed Regulation

On March 3, 2022, the Sixth Circuit

issued an order in Mann Construction v.

United States, 27 F.4th 1138, 1147 (6th

Cir. 2022), holding that Notice 2007-83,

2007-2 C.B. 960, which identified certain

trust arrangements claiming to be welfare

benefit funds and involving cash value life

insurance policies as listed transactions,

violated the APA, because the notice was

issued without following the notice-andcomment procedures required by section

553 of the APA. The Sixth Circuit concluded that Congress did not clearly

express an intent to override the noticeand-comment procedures required by

section 553 of the APA when it enacted the

AJCA. 27 F.4th at 1148. The Sixth Circuit

reversed the decision of the district court,

which held that Congress had authorized

the IRS to identify listed transactions

without notice and comment. See Mann

Construction, Inc. v. United States, 539

F.Supp.3d 745, 763 (E.D. Mich. 2021).

In CIC Services, LLC v. IRS, the United

States District Court for the Eastern District of Tennessee, which is located in the

Sixth Circuit, viewed the analysis in Mann

Construction as controlling and vacated

Notice 2016-66, holding that the IRS

failed to comply with the APA’s noticeand-comment procedures. The Court

also held that the IRS acted arbitrarily

and capriciously based on the administrative record. CIC Services, LLC v. IRS,

2022 WL 985619 (E.D. Tenn. March 21,

2022), as modified by 2022 WL 2078036

(E.D. Tenn. June 2, 2022); see also Green

Valley Investors, LLC, et al. v. Commissioner, 159 T.C. No. 5 (Nov. 9, 2022)

(relying on Mann Construction in holding

that Notice 2017-10, 2017-4 I.R.B. 544

(identifying certain syndicated conservation easements as listed transactions) was

improperly issued because it was issued

without following the APA’s notice-and-

Bulletin No. 2023–17

comment procedures); Green Rock, LLC

v. IRS, No. 2:21-cv-01320-ACA, 2023

U.S. Dist. LEXIS 17670 (N.D. Ala. Feb.

2, 2023) (holding that notice and comment

procedures were required before issuance

of Notice 2017-10).

In light of the decision by the district

court in CIC Services, the IRS will not

enforce the disclosure requirements or

penalties that are dependent upon the procedural validity of Notice 2016-66. Thus,

the Treasury Department and the IRS are

issuing these proposed regulations to identify certain micro-captive transactions as

Micro-captive Transactions of Interest. In

addition, this document obsoletes Notice

2016-66 (as modified by Notice 2017-08).

The obsoletion of the notice, however, has

no effect on the merits of the tax benefits

claimed from the transactions themselves

and related litigation, or income tax examinations and promoter investigations

relating to micro-captive transactions.

The Treasury Department and the IRS

disagree with the Sixth Circuit’s decision in Mann Construction and the Tax

Court’s decision in Green Valley and

are continuing to defend the validity of

notices identifying transactions as listed

transactions in circuits other than the

Sixth Circuit. However, to help allow for

consistent enforcement throughout the

nation, the Treasury Department and the

IRS are proposing to identify certain other

micro-captive transactions as Micro-captive Listed Transactions by regulation.

Explanation of Provisions

A. Micro-captive Listed Transactions and

Micro-captive Transactions of Interest

This section generally describes the

micro-captive transactions that are the

focus of the proposed regulations and

why the Micro-captive Listed Transactions are abusive and the Micro-captive

Transactions of Interest have the potential for abuse. This section also describes

the proposed regulations identifying

Micro-captive Listed Transactions and

Micro-captive Transactions of Interest.

1. In general

The Treasury Department and the IRS

are aware of a micro-captive transaction,

Bulletin No. 2023–17

in which a taxpayer attempts to reduce

the aggregate taxable income of the taxpayer, persons related to the taxpayer, or

both, using contracts that the parties treat

as insurance contracts and a related Captive. In some cases, Captive enters into a

contract with a related entity that the parties treat as an insurance contract. In other

cases, Captive and a related entity enter

into separate contracts with one or more

unrelated intermediaries. For example,

the related entity and an intermediary may

enter into a contract that the parties treat

as an insurance contract, and Captive may

then enter into a separate contract with

the intermediary that the parties treat as a

reinsurance contract covering the “risks”

under the contract between the related

entity and the intermediary. Each entity

that makes payments to an intermediary

or Captive under these contracts treats

the payments as insurance premiums that

are within the scope of §1.162-1(a) and

deducts the payments as ordinary and necessary business expenses under section

162. Captive treats the payments received

from the related entity or intermediary

under a contract treated as an insurance

contract or reinsurance contract as premiums for insurance coverage.

Captive asserts that it is taxable as

a nonlife insurance company under the

Code and, if it is not a domestic corporation, makes an election under section

953(d) of the Code to be treated as a

domestic corporation for purposes of the

Code. Captive makes an election under

section 831(b) to be taxed only on taxable

investment income (defined in section

834). Captive accordingly excludes from

the computation of its taxable income the

payments received from the related entity

or intermediary treated as premiums. For

each taxable year in which the micro-captive transaction is in effect, the transaction

is structured so that Captive does not have

net premiums written (or, if greater, direct

premiums written) that exceed the statutory limit. For taxable years beginning

after December 31, 2016, the statutory

limit is $2,200,000, adjusted annually for

inflation ($2,650,000 for taxable years

beginning in 2023).

Since the publication of Notice 201666, examinations of taxpayers and

promoters and information received

through disclosures filed in response to

777

Notice 2016-66 have clarified the Treasury

Department’s and the IRS’s understanding

of micro-captive transactions, including

the scope of participation. Further, in the

three section 831(b) micro-captive cases

decided on their merits since the publication of Notice 2016-66, the U.S. Tax Court

held that the micro-captive transactions

at issue did not meet the requirements

for treatment as insurance for Federal

income tax purposes. See Avrahami v.

Commissioner, 149 T.C. at 144; Syzygy

v. Commissioner, T.C. Memo. 2019-34;

and Caylor v. Commissioner, T.C. Memo.

2021-30; see also Reserve Mechanical

Corp. v. Commissioner, 34 F.4th at 881

(concluding transactions entered into by

company filing as a tax-exempt entity

under section 501(c)(15) did not meet the

requirements for treatment as insurance

for Federal income tax purposes using

similar analysis). Taking into account

only the years in issue in these decisions,

the information included in the Court’s

opinions indicates that the transactions

at issue had the elements that would

require disclosure under Notice 2016-66.

Accordingly, the Treasury Department

and the IRS have determined that certain

micro-captive transactions are abusive tax

avoidance transactions and certain other

micro-captive transactions have the potential for tax avoidance or evasion.

As further discussed in sections B.1.

through B.3. of this Explanation of Provisions, the Treasury Department and the

IRS have determined that two categories

of micro-captive transactions, described

in proposed §1.6011-10(c)(1) and (c)(2),

are tax avoidance transactions, and thus

propose to identify such transactions as

listed transactions. The transactions in

both categories involve related parties,

including a Captive, at least 20 percent

of the voting power or the value of the

outstanding stock or equity interest of

which is owned, directly or indirectly, by

an Insured, an Owner, or persons Related

to an Insured or an Owner. See proposed

§1.6011-10(b)(1)(iii). The first category

of these transactions is identified by the

presence of a financing factor, described

in proposed §1.6011-10(c)(1). The second

category of these transactions is identified by a loss ratio factor that falls below

65 percent based on a Loss Ratio Computation Period of ten taxable years, as

April 24, 2023

described in proposed §1.6011-10(c)(2).

The proposed regulations therefore identify transactions that are the same as, or

substantially similar to, the Micro-captive

Listed Transaction described in proposed

§1.6011-10(a) as listed transactions for

purposes of §1.6011-4. As noted previously, a transaction is “substantially

similar” if it is expected to obtain the same

or similar types of tax consequences and

is either factually similar or based on the

same or similar tax strategy, even though it

may involve different entities or use different Code provisions.

As further discussed in sections B.1.

and B.3. of this Explanation of Provisions, the Treasury Department and the

IRS have also determined that a third

category of micro-captive transactions,

described in proposed §1.6011-11(c), has

a potential for tax avoidance or evasion,

and thus propose to identify such transactions as transactions of interest. This

category of micro-captive transactions

also involves related parties as described

in proposed §1.6011-10(b)(1)(iii) and is

identified by the presence of a loss ratio

factor that falls below 65 percent over a

shorter Transaction of Interest Computation Period, generally because Captives

involved have been in operation for

a shorter period of time. With respect

to this third category of transactions,

the Treasury Department and the IRS

require more information to determine

if the transactions are being used for tax

avoidance or evasion. The proposed regulations therefore identify transactions

that are the same as, or substantially

similar to, the Micro-captive Transaction of Interest described in proposed

§1.6011-11(a) as transactions of interest

for purposes of §1.6011-4(b)(6).

2. Abuses

In Micro-captive Listed Transactions and Micro-captive Transactions of

Interest, related parties claim the Federal income tax benefits of treating the

contracts as insurance (or reinsurance)

contracts. Insured deducts premiums paid

to Captive under section 162, while the

related Captive excludes the premium

income from its taxable income by electing under section 831(b) to be taxed only

on its taxable investment income.

April 24, 2023

Neither the Code nor the regulations

thereunder define the terms “insurance”

or “insurance contract.” The Supreme

Court has explained that for an arrangement to constitute insurance for Federal

income tax purposes, both risk shifting

and risk distribution must be present.

Helvering v. Le Gierse, 312 U.S. 531

(1941). The risk transferred must be risk

of economic loss. Allied Fidelity Corp. v.

Commissioner, 572 F.2d 1190, 1193 (7th

Cir. 1978). The risk must contemplate the

fortuitous occurrence of a stated contingency, Commissioner v. Treganowen, 183

F.2d 288, 290-91 (2d Cir. 1950), and must

not be merely an investment or business

risk. Rev. Rul. 2007-17, 2007-2 C.B. 127.

In addition, the arrangement must constitute insurance in the commonly accepted

sense. See, e.g., Rent-A-Center, Inc. v.

Commissioner, 142 T.C. 1, 10-13 (2014).

In many micro-captive transactions,

however, the manner in which the contracts are interpreted, administered, and

applied is inconsistent with arm’s length

transactions and sound business practices.

Captive typically does not behave as an

insurance company commonly would,

indicating that Captive is not issuing

insurance contracts and the transaction

does not constitute insurance for Federal

income tax purposes. For example, Captive may fail to adequately distribute risk

or fail to employ actuarial techniques to

establish premium rates that appropriately

reflect the risk of loss and costs of conducting an insurance business. Captive

may also use its premium income for purposes other than administering and paying

claims under the contract(s), including

routing funds that have not been taxed

to the Insured or a person related to the

Insured or its owners. A micro-captive

transaction may share other characteristics

with the purported insurance transactions

considered by the Tax Court in Avrahami,

Syzygy, and Caylor, or with the transactions considered in other cases in which

the courts determined the transactions

were not insurance for Federal income

tax purposes. See, e.g., Reserve Mechanical Corp. v. Commissioner, 34 F.4th 881

(10th Cir. 2022). The net effect of participating in this transaction is that the

Insured claims a tax deduction for transferring amounts treated as premiums to

Captive, which is owned by parties related

778

to Insured, and Captive is not taxed on the

corresponding income.

If the transaction does not constitute

insurance, Insured is not entitled to deduct

under section 162 as a trade or business

expense the amount treated as an insurance premium. In addition, if Captive does

not actually provide insurance, it does not

qualify as an insurance company and its

elections to be taxed only on its taxable

investment income under section 831(b)

and to be treated as a domestic insurance

company under section 953(d) are invalid.

These proposed regulations inform

taxpayers that participate in transactions

described in proposed §§1.6011-10(c)

and 1.6011-11(c), and substantially similar transactions, and persons who act as

material advisors with respect to these

transactions, and substantially similar transactions, that they must disclose

in accordance with the rules provided

in §1.6011-4(a) and section 6111(a),

respectively. Material advisors must also

maintain lists as required by section 6112.

As previously noted, the IRS intends

to challenge the claimed tax benefits from

Micro-captive Listed Transactions, and

may challenge the claimed tax benefits

from Micro-captive Transactions of Interest. Examinations of these micro-captive

transactions may result in adjustments

including full disallowance of claimed

micro-captive insurance premium deductions, inclusion in income of amounts

received by Captive, imposition of withholding tax liability under section 1461 of

the Code for failing to deduct and withhold tax on payments made to a foreign

Captive, imposition of a 20 percent or 40

percent penalty for lack of economic substance under section 6662(b)(6) or (i)(1)

of the Code, which may not be avoided

by a reasonable cause exception, and

imposition of other applicable taxes and

penalties.

3. Micro-captive Listed Transactions

Proposed §1.6011-10(a) provides

that transactions that are the same as,

or substantially similar to, transactions

described in proposed §1.6011-10(c)

are identified as listed transactions for

purposes of §1.6011-4(b)(2), except as

provided in proposed §1.6011-10(d). Proposed §1.6011-10(b) provides definitions

Bulletin No. 2023–17

of terms used to describe Micro-captive

Listed Transactions, including Captive,

Financing Computation Period, Loss Ratio

Computation Period, Contract, Insured,

Intermediary, Recipient, and Related. In

particular, Captive is defined as an entity

that elects under section 831(b) to be

taxed as an insurance company only on its

taxable investment income; issues a Contract to an Insured, reinsures a Contract

of an Insured issued by an Intermediary, or both; and has at least 20 percent

of its assets or voting power or the value

of its outstanding stock or equity interests directly or indirectly, individually

or collectively, owned by an Insured, an

Owner, or persons Related to an Insured

or Owner. The term Related is defined in

proposed §1.6011-10(b)(8) by reference

to sections 267(b), 707(b), 2701(b)(2)(C),

and 2704(c)(2). The definition incorporates the constructive ownership rules in

those sections. Proposed §1.6011-10(b)

also provides the rules for persons that

hold derivatives and for the treatment of

beneficiaries of trusts and estates. The

treatment of beneficiaries of trusts in proposed §1.6011-10(b) does not affect the

application of Subpart E of Subchapter

J of Chapter 1 of Subtitle A, which provides rules concerning when a grantor or

another person is treated as the owner of a

portion of that trust.

A transaction is described in proposed

§1.6011-10(c) if it is described in proposed §1.6011-10(c)(1), or (c)(2), or both.

Proposed §1.6011-10(c)(1) describes

transactions that involve a Captive that,

at any time during the Financing Computation Period, directly or indirectly

made available as financing or otherwise

conveyed or agreed to make available or

convey to a Recipient, in a transaction that

did not result in taxable income or gain to

the Recipient, any portion of the payments

under the Contract, such as through a

guarantee, a loan, or other transfer of Captive’s capital, including such financings or

conveyances made prior to the Financing

Computation Period that remain outstanding as of the taxable year in which

disclosure is required. Any amounts that

a Captive made available as financing or

otherwise conveyed or agreed to make

available or convey to a Recipient are

presumed to be portions of the payments

under the Contract to the extent such

Bulletin No. 2023–17

amounts when conveyed or made available are in excess of Captive’s cumulative

after-tax net investment earnings minus

any outstanding financings or conveyances. See section B.2. of this Explanation

of Provisions. The Financing Computation

Period is the most recent five taxable years

of Captive, or all taxable years of Captive,

if Captive has been in existence for less

than five taxable years. For purposes of

determining the Financing Computation

Period, each short taxable year is a separate taxable year and taxable years of

predecessor entities are treated as taxable

years of Captive.

Proposed §1.6011-10(c)(2) describes

transactions that involve a Captive for

which the amount of liabilities incurred for

insured losses and claim administration

expenses during a Loss Ratio Computation Period is less than 65 percent of the

amount equal to premiums earned by Captive during the Loss Ratio Computation

Period less policyholder dividends paid

by Captive during the Loss Ratio Computation Period. See section B.3. of this

Explanation of Provisions. The Loss Ratio

Computation Period is the most recent ten

taxable years of Captive, each short taxable year is a separate taxable year, and

the taxable years of predecessor entities

are treated as taxable years of Captive.

Proposed §1.6011-10(c)(2) does not apply

to any Captive that has been in existence

for less than ten taxable years, including

taxable years of predecessor entities.

Proposed §1.6011-10(d) provides

that a transaction described in proposed

§1.6011-10(c) is not classified as a listed

transaction if the transaction (1) provides

insurance for employee compensation or

benefits and is one for which the Employee

Benefits Security Administration of the

U.S. Department of Labor has issued a

Prohibited Transaction Exemption, or

(2) is a Consumer Coverage reinsurance arrangement described in proposed

§1.6011-10(d)(2). See section B.6. of this

Explanation of Provisions.

Proposed §1.6011-10(e)(1) provides

the rules for determining who is a participant in a listed transaction described

in proposed §1.6011-10(a). Proposed

§1.6011-10(e)(2) provides a safe harbor from the disclosure requirements for

certain persons. See section B.5. of this

Explanation of Provisions.

779

Proposed §1.6011-10(f) describes

information that participants must provide to satisfy the disclosure requirements

of §1.6011-4(d). See section B.4. of this

Explanation of Provisions.

Proposed §1.6011-10(g) provides

the applicability date for the proposed

regulations.

4. Micro-captive Transactions of Interest

Proposed §1.6011-11(a) provides

that transactions that are the same as,

or substantially similar to, transactions

described in proposed §1.6011-11(c) are

identified as transactions of interest for

purposes of §1.6011-4(b)(6), except as

provided in proposed §1.6011-11(d). Proposed §1.6011-11(b) provides definitions

of terms used to describe Micro-captive

Transactions of Interest by reference to the

relevant definitions in proposed §1.601110(b), except for the definition of the

computation period. Proposed §1.601111(b)(2) defines the Transaction of Interest

Computation Period for Micro-captive

Transactions of Interest as the most recent

nine taxable years, or the entire period of

Captive’s existence if Captive has been in

existence for less than nine taxable years.

For this purpose, each short taxable year

is a separate taxable year, and the taxable

years of predecessor entities are treated as

taxable years of Captive.

A transaction is described in proposed

§1.6011-11(c) if it involves the issuance of

a Contract to an Insured by a Captive, or

the reinsurance by a Captive of a Contract

issued to an Insured by an Intermediary,

and involves a Captive for which the

amount of liabilities incurred for insured

losses and claim administration expenses

during the Transaction of Interest Computation Period is less than 65 percent

of the amount equal to premiums earned

by Captive during the Transaction of

Interest Computation Period less policyholder dividends paid by Captive during

the Transaction of Interest Computation

Period. See section B.3. of this Explanation of Provisions.

Proposed §1.6011-11(d) provides

that a transaction described in proposed

§1.6011-11(c) is not classified as a

“transaction of interest” if the transaction (1) provides insurance for employee

compensation or benefits and is one for

April 24, 2023

which the Employee Benefits Security

Administration of the U.S. Department of

Labor has issued a Prohibited Transaction

Exemption, or (2) is a Consumer Coverage reinsurance arrangement described in

proposed §1.6011-11(d)(2). See section

B.6. of this Explanation of Provisions.

Additionally, proposed §1.6011-11(d)(3)

provides that a transaction described in

proposed §1.6011-11(c) is not classified as

a “transaction of interest” if the transaction is identified as a “listed transaction” in

proposed §1.6011-10(a). Under proposed

§1.6011-11(d)(3), a transaction that would

(but for that subsection) be identified as

both a “listed transaction” under proposed

§1.6011-10 and a “transaction of interest”

under proposed §1.6011-11, is identified

as a “listed transaction” only, and participants in the transaction must disclose it

as such. Material advisors that are uncertain about whether the transaction they are

required to disclose should be reported

as a Micro-captive Listed Transaction or

as a Micro-captive Transaction of Interest should disclose the transaction as a

Micro-captive Listed Transaction, and

will not be required to disclose the transaction a second time if it is determined

later that the transaction should have been

disclosed as a Micro-captive Transaction

of Interest.

Proposed §1.6011-11(e)(1) provides

the rules for determining who is a participant in a transaction of interest described

in proposed §1.6011-11(a). Proposed

§1.6011-11(e)(2) provides a safe harbor from the disclosure requirements for

certain persons. See section B.5. of this

Explanation of Provisions.

Proposed §1.6011-11(f) describes

information that participants must provide

to satisfy the disclosure requirements of

§1.6011-4(d) by reference to the information described in proposed §1.6011-10(f).

See section B.4. of this Explanation of

Provisions.

Proposed §1.6011-11(g) provides

the applicability date for the proposed

regulations.

2016-66 have clarified the Treasury

Department’s and the IRS’s understanding

of micro-captive transactions, including the scope of participation. Based on

such information, the Treasury Department and the IRS have determined that

certain changes to the micro-captive

transaction identified in Notice 201666 are appropriate for the proposed

regulations. The transactions described

in proposed §1.6011-10 and proposed

§1.6011-11 share common features with

the micro-captive transactions described

in Notice 2016-66, but with modifications

to the scope of the 20-percent relationship

factor and the factors used to distinguish

between listed transactions, transactions

of interest, and transactions that are not

reportable transactions under the proposed

regulations.

B. Changes to Transaction Identified in

Notice 2016-66

2. Changes to the Financing Factor

Examinations of taxpayers and promoters and information received through

disclosures filed in response to Notice

April 24, 2023

1. Changes to the Definition of Captive

The Treasury Department and the

IRS are aware that some promoters have

structured transactions in which Insureds,

Owners, or persons Related to an Insured

or an Owner do not have a direct or indirect interest in Captive’s voting power or

value of its outstanding stock or equity

interests, but have a relationship with

Captive that provides substantially similar

benefits and risks. For example, Captive

may issue various types of instruments

representing rights to all or a portion of

the assets held by Captive but not rights

to the voting power or equity interests in

Captive. All equity interests and voting

stock are held by individuals or entities

related to the promoter, not the taxpayers.

The promoters thereby seek to avoid the

20 percent related interest in the voting

stock or equity interests in Captive necessary for a transaction to be described in

Notice 2016-66. The proposed regulations

expand the scope of the definition of Captive to clarify that derivatives and interests

in the assets of Captive are taken into

account. See proposed §§1.6011-10(b)(1)

(A) – (C) and 1.6011-11(b)(1).

Transactions in which the financing factor is met based on a computation period

of Captive’s most recent five taxable years

(or all years of Captive’s existence if Cap-

780

tive has been in existence for less than five

taxable years), referred to as the Financing

Computation Period in the proposed regulations, are identified as transactions of

interest in Notice 2016-66 but are identified as listed transactions in the proposed

regulations. See proposed §1.6011-10(c)

(1). Presence of the financing factor in

related party micro-captive insurance

transactions indicates tax avoidance and

abuse of Captive’s status as a section

831(b)-electing insurance company.

3. Changes to the Loss Ratio Factor and

Computation Period

Notice 2016-66 identifies transactions

in which the loss ratio factor is less than

70 percent based on a Notice Computation Period of Captive’s most recent five

taxable years (or all years of Captive’s

existence if it has been in existence for less

than five taxable years) as transactions of

interest. The proposed regulations, however, identify as listed transactions those

transactions in which the loss ratio factor

is less than 65 percent for a computation

period extended to Captive’s most recent

ten taxable years (referred to as the Loss

Ratio Computation Period). See proposed

§1.6011-10(c)(2). Further, the proposed

regulations identify transactions in which

the loss ratio factor is less than 65 percent

based on a Transaction of Interest Computation Period consisting of Captive’s most

recent nine taxable years (or all years of

Captive’s existence if Captive has been in

existence for less than nine taxable years)

as transactions of interest. See proposed

§1.6011-11(c).

Regarding the reduction of the loss

ratio threshold from 70 percent to 65 percent, the Treasury Department and the

IRS are not aware of any non-abusive

transactions for which disclosure was

required under Notice 2016-66 as a result

of the 70-percent loss ratio factor set forth

therein. Nevertheless, for purposes of the

proposed regulations and to ensure that

disclosure is not required for non-abusive

transactions, the Treasury Department and

the IRS are lowering the applicable loss

ratio factor to 65 percent. See proposed

§§1.6011-10(c)(2) and 1.6011-11(c). The

loss ratio factor helps to identify transactions involving circumstances inconsistent

with insurance in the commonly accepted

Bulletin No. 2023–17

sense, including excessive pricing of premiums and artificially low or nonexistent

claims activity. The primary purpose of

premium pricing is to ensure funds are

available should a claim arise. The pricing

of premiums should naturally reflect the

economic reality of insurance operations.

Pricing premiums far in excess of what is

reasonably needed to fund insurance operations results in a lower loss ratio and is

a strong indicator of abuse. Any Captives

that would be required to disclose as a

result of the loss ratio factor may consider

paying policyholder dividends to increase

the loss ratio and eliminate the need to

disclose.

The Treasury Department and the

IRS are considering whether a combined

ratio may be a better indicator for distinguishing abusive transactions from other

captive transactions. A combined ratio is

“an indication of the profitability of an

insurance company, calculated by adding

the loss and expense ratios.” NAIC Glossary of Insurance Terms, https://content.

naic.org/consumer_glossary#C (last visited April 3, 2023). The 2021 NAIC P&C

Report provides that the combined ratios

for property and casualty insurance companies ranged from 96 percent to 103.9

percent over the ten-year period from 2012

to 2021, for a ten-year average of approximately 99.5 percent. See U.S. Property &

Casualty and Title Insurance Industries

– 2021 Full Year Results (2022), https://

content.naic.org/sites/default/files/inlinefiles/2021%20Annual%20Property%20

%26%20Casualty%20and%20Title%20

Insurance%20Industry%20Report.pdf

(last visited April 3, 2023). The combined

ratio would compare losses incurred, plus

loss adjustment expenses incurred and

other underwriting expenses incurred by

Captive during the relevant computation

period to Captive’s earned premiums, less

policyholder dividends, for the relevant

computation period. For this purpose,

Captive’s other underwriting expenses

incurred would equal Captive’s expenses

incurred in carrying on an insurance business, other than loss adjustment expenses

and investment-related expenses. Transactions in which Captive’s combined ratio is

less than a certain percentage for a Loss

Ratio Computation Period of the most

recent ten taxable years of Captive would

be identified as listed transactions. Trans-

Bulletin No. 2023–17

actions in which Captive’s combined

ratio is less than a certain percentage for

a Transaction of Interest Computation

Period of the most recent nine taxable

years (or all years of Captive’s existence

if it has been in existence for less than

nine taxable years) would be identified

as transactions of interest. The Treasury

Department and the IRS invite comments

on whether a combined ratio would better distinguish abusive transactions than

the proposed loss ratio factor, and if so,

what combined ratio threshold would be

most effective in distinguishing abusive

transactions.

Regarding the computation periods for

the loss ratio factor, the Treasury Department and the IRS understand that it is

possible that a Captive with a loss history

of fewer than ten taxable years could have

a loss ratio that falls below 65 percent

solely because Captive provides coverage

for low frequency, high severity losses

and Insureds purchasing policies from

such Captive do not incur such losses in

every year. In recognition of this fact, the

proposed regulations categorize transactions as either transactions of interest or

listed transactions based on the length of

the computation period on which the loss

ratio is based. The Notice Computation

Period used by Notice 2016-66 to identify transactions of interest based on a loss

ratio factor was five taxable years, and it

has been more than five years since Notice

2016-66 was published. The Treasury

Department and the IRS have determined

that extending the computation period

by five years to a Loss Ratio Computation Period of ten taxable years (doubling

the Notice Computation Period) allows

Captives significant time to develop a reasonable loss history that supports the use

of Captive for legitimate insurance purposes, and a loss ratio that remains below

65 percent for a Loss Ratio Computation

Period of ten taxable years indicates a tax

avoidance transaction. Accordingly, the

proposed regulations identify transactions in which the loss ratio is less than 65

percent based on an extended Loss Ratio

Computation Period of Captive’s most

recent ten taxable years as listed transactions. See proposed §1.6011-10(b)(2).

However, the Treasury Department

and the IRS also have determined that

related party transactions in which the

781

loss ratio is less than 65 percent over a

shorter period of time have a potential for

tax avoidance or evasion. The proposed

regulations therefore identify transactions

in which Captive has a loss ratio of less

than 65 percent based on a Transaction

of Interest Computation Period of Captive’s most recent nine taxable years (or

all years of Captive’s existence if it has

been in existence for less than nine taxable

years) as transactions of interest, provided

such transactions are not otherwise characterized as listed transactions (that is,

due to the presence of the financing factor described in proposed §1.6011-10(c)

(1) or due to having a loss ratio factor of

less than 65 percent based on a Loss Ratio

Computation Period of Captive’s most

recent ten taxable years). See proposed

§1.6011-11(c) and (d)(3). Identification of

these transactions as transactions of interest will permit the Treasury Department

and the IRS to gather more information to

determine if these transactions are being

used for tax avoidance or evasion.

4. Information Sought from Participants

The proposed regulations significantly

reduce the information required to be

reported by Captives under §1.6011-4(d)

as compared to Notice 2016-66. See proposed §§1.6011-10(f) and 1.6011-11(f).

Unlike Notice 2016-66, the proposed

regulations do not require Captive participants to identify which factors of the

proposed regulations apply, state under

what authority Captive is chartered,

describe how amounts treated as premiums for coverage provided by Captive

were determined, provide the amounts of

reserves reported by Captive on its annual

statement, or describe the assets held by

Captive. The proposed regulations do,

however, require Captive to identify the

types of policies issued or reinsured, the

amounts treated as premiums written, the

name and contact information of actuaries and underwriters involved, and the

total amount of claims paid by Captive.

Additionally, proposed §§1.6011-10(b)(1)

and 1.6011-11(b)(1) include a 20-percent

relationship test in the definition of Captive, and the proposed regulations require

Captive participants to identify the name

and percentage of interest held directly or

indirectly by each person whose interest

April 24, 2023

in Captive meets the 20 percent threshold or is taken into account in meeting

the 20 percent threshold under proposed

§1.6011-10(b)(1)(iii). Also, the proposed

regulations require each Insured (as

defined in proposed §§1.6011-10(b)(4)

and 1.6011-11(b)(4)) subject to the disclosure requirements set forth in §1.6011-4(d)

to provide the amounts treated by Insured

as insurance premiums for coverage provided to Insured, directly or indirectly, by

Captive.

5. Disclosure Requirement Safe Harbor

for Owners

The Treasury Department and the IRS

believe that it is now feasible to generally

limit the persons from whom reporting

would be required under the proposed regulations to Captive, Insured, and material

advisors to the transaction. Accordingly,

the proposed regulations provide that any

person who, solely by reason of their direct

or indirect ownership interest in Insured,

is subject to the disclosure requirements

set forth in §1.6011-4 as a participant in

a Micro-captive Listed Transaction or a

Micro-captive Transaction of Interest, is not

required under §1.6011-4 to file a disclosure

statement with respect to that transaction

provided that person receives written or

electronic acknowledgment that Insured

has or will comply with its separate disclosure obligation under §1.6011-4(a) with

respect to the transaction. See proposed

§§1.6011-10(e)(2) and 1.6011-11(e)(2). The

acknowledgment can be a copy of the Form

8886, Reportable Transaction Disclosure

Statement (or successor form), filed (or to

be filed) by Insured and must be received by

Owner prior to the time set forth in §1.60114(e) in which Owner would otherwise be

required to provide disclosure. See proposed §§1.6011-10(e)(2) and 1.6011-11(e)

(2). However, the receipt of an acknowledgment that Insured has or will comply with

its disclosure obligation does not relieve

the Owners of Insured of their disclosure

obligations if Insured fails to disclose the

transaction in a timely manner.

6. Exception for Consumer Coverage

Arrangements

The proposed regulations provide a

limited exception from classification as

April 24, 2023

a Micro-captive Listed Transaction or

Micro-captive Transaction of Interest for

certain Consumer Coverage reinsurance

arrangements. See proposed §§1.601110(d)(2) and 1.6011-11(d)(2). In Consumer

Coverage arrangements, a “Seller” (that

is, a service provider, automobile dealer,

lender, or retailer) sells products or services to “Unrelated Customers” (that is,

customers who do not own an interest in

and are not wholly or partially owned by

Seller, an owner of Seller, or individuals

or entities related (within the meaning of

one or more of sections 267(b), 707(b),

2701(b)(2)(C), or 2704(c)(2)) to Seller or

owners of Seller). An Unrelated Customer

may also purchase an insurance contract

in connection with those products or services (Consumer Coverage contract). The

Consumer Coverage contract generally

provides coverage for repair or replacement costs if the product breaks down or

is lost, stolen, or damaged; coverage for

the customer’s payment obligations if

the customer dies or becomes disabled or

unemployed; coverage for the difference

between all or a portion of the value of the

product and the amount owed on the product’s financing, including a lease, if the

product suffers a covered peril; or a combination of one or more of the foregoing

types of coverage.

An entity related to or affiliated with

Seller may issue or reinsure the Consumer

Coverage contracts. In some arrangements, the Consumer Coverage contracts

name an unrelated third party, which may

be referred to as a “Fronting Company,” as

the provider of the coverage, and an entity

related to or affiliated with Seller reinsures

the Consumer Coverage contracts. In

other arrangements, the Consumer Coverage contracts may name an entity related

to or affiliated with Seller as the provider

of the coverage. In these arrangements,

an unrelated third party may reinsure the

contracts and may also then retrocede risk

under the contracts to the entity related to

or affiliated with Seller. The parties may

treat the entity related to or affiliated with

Seller as an insurance company that elects

under section 831(b) (and section 953(d)

if the corporation is foreign) to exclude

premium payments from taxable income.

As a general matter, participation in

this type of reinsurance arrangement is

neither a Micro-captive Listed Transac-

782

tion nor a Micro-captive Transaction of

Interest because the insured is not sufficiently related to the insurer or any

reinsurer. Generally, the Consumer Coverage contracts insure Unrelated Customers

of Seller, and Unrelated Customers, their

owners, and persons related to Unrelated

Customers or their owners do not directly

or indirectly own at least 20 percent of the

voting power or value of the outstanding

stock of any entity issuing or reinsuring

the Consumer Coverage contract. However, the 20-percent relationship factor in

proposed §§1.6011-10(b)(1) and 1.601111(b)(1) may be met in some of these

reinsurance arrangements. For instance,

in “dealer obligor” arrangements in which

the Seller would be legally required to pay

a claim under certain conditions, such as a

total loss of the covered product within a

certain time frame, the Seller could potentially be considered an Insured under a

Contract issued or reinsured by a Captive,

and thus be required to disclose.

The Treasury Department and the IRS

have determined that a limited exception

for taxpayers in Consumer Coverage

arrangements is appropriate, provided

commissions paid for Consumer Coverage contracts issued or reinsured by the

Seller’s Captive are comparable to the

commissions paid for Consumer Coverage contracts covering Seller’s products

or services that are not issued or reinsured

by the Seller’s Captive. See proposed

§§1.6011-10(d)(2) and 1.6011-11(d)(2).

C. Effect of Transaction Becoming a

Listed Transaction or a Transaction of

Interest Under these Regulations

Participants required to disclose these

transactions under §1.6011-4 who fail

to do so are subject to penalties under

section 6707A. Participants required to

disclose the listed transactions under

§1.6011-4 who fail to do so are also subject to an extended period of limitations

under section 6501(c)(10). Material advisors required to disclose these transactions

under section 6111 who fail to do so are

subject to the penalty under section 6707.

Material advisors required to maintain lists

of investors under section 6112 who fail

to do so (or who fail to provide such lists

when requested by the IRS) are subject to

the penalty under section 6708(a). In addi-

Bulletin No. 2023–17

tion, the IRS may impose other penalties

on persons involved in these transactions or substantially similar transactions,

including accuracy-related penalties under

section 6662 or section 6662A, the section

6694 penalty for understatements of a taxpayer’s liability by a tax return preparer,

the section 6700 penalty for promoting

abusive tax shelters, and the section 6701

penalty for aiding and abetting understatement of a tax liability.

Taxpayers who have filed a tax return

(including an amended return (or Administrative Adjustment Request (AAR) for

certain partnerships)) reflecting their participation in these transactions prior to the

date the Treasury decision adopting these

regulations as final regulations is published in the Federal Register and who

have not otherwise finalized a settlement

agreement with the Internal Revenue Service with respect to the transaction must

disclose the transactions as provided in

§1.6011-4(d) and (e) provided that the

period of limitations for assessment of

tax, including any applicable extensions,

for any taxable year in which the taxpayer

participated in the transaction has not

ended on or before the date the Treasury

decision adopting these regulations as

final regulations is published in the Federal Register.

In addition, material advisors have

disclosure requirements with regard to

transactions occurring in prior years.

However, notwithstanding §301.61113(b)(4)(i) and (iii), material advisors are

required to disclose only if they have

made a tax statement on or after six years

before the date of the Treasury decision

adopting these regulations as final regulations is published in the Federal Register.

A participant in a transaction that is a

Micro-captive Listed Transaction must

file a disclosure statement with OTSA

when required to do so under §1.60114(e), regardless of whether the participant

has previously disclosed the transaction

to OTSA pursuant to Notice 2016-66.

A participant in a transaction that is a

Micro-captive Transaction of Interest that

has previously filed a disclosure statement

with OTSA pursuant to Notice 2016-66

will be treated as having made the disclosure pursuant to the final regulations

for taxable years for which the taxpayer

filed returns before the final regulations

Bulletin No. 2023–17

are published in the Federal Register.

However, if a taxpayer described in the

preceding sentence participates in the

Micro-captive Transaction of Interest

in a taxable year for which the taxpayer

files a return on or after the date the final

regulations are published in the Federal

Register, the taxpayer must file a disclosure statement with OTSA at the same

time the taxpayer files their return for the

first such taxable year.

A material advisor with respect to a

transaction that is a Micro-captive Listed

Transaction or Micro-captive Transaction

of Interest must file a disclosure statement

with OTSA when required to do so under

§301.6111-3(e), regardless of whether

the material advisor has previously disclosed the transaction to OTSA pursuant

to Notice 2016-66.

The Treasury Department and the IRS

recognize that some taxpayers may have

filed tax returns taking the position that

they were entitled to the purported tax benefits of the types of transactions described

in these proposed regulations. Because the

IRS will take the position that taxpayers

are not entitled to the purported tax benefits of the listed transactions described

in the proposed regulations, and may take

such a position with respect to the transactions of interest described in the proposed

regulations, taxpayers should consider filing amended returns or AARs for certain

partnerships and ensure that their transactions are disclosed properly. Taxpayers

filing an amended individual return should

write “Microcaptive” at the top of the first

page of the amended return and mail the

amended return to:

Internal Revenue Service

2970 Market Street

Philadelphia, PA 19104

Taxpayers filing amended business

returns on paper should write “Microcaptive” at the top of the first page of the

amended return and mail to the address

listed in the instructions for the amended

return. Taxpayers filing amended business returns electronically should include

“Microcaptive” when explaining the reason for the changes.

Proposed Applicability Dates

Proposed §1.6011-10(a) would identify certain micro-captive transactions

783

described in proposed §1.6011-10(c) as

listed transactions effective as of the date

of publication in the Federal Register of

a Treasury decision adopting these regulations as final regulations. Similarly,

proposed §1.6011-11(a) would identify certain micro-captive transactions

described in proposed §1.6011-11(c) as

transactions of interest as of the date of

publication in the Federal Register of a

Treasury decision adopting these regulations as final regulations.

Effect on Other Documents

This document obsoletes Notice 201666 (2016-47 I.R.B. 745), as modified by

Notice 2017-08 (2017-3 I.R.B. 423), as of

April 11, 2023.

Special Analyses

I. Regulatory Planning and Review

The proposed regulations are not

subject to review under section 6(b) of

Executive Order 12866 pursuant to the

Memorandum of Agreement (April 11,

2018) between the Treasury Department

and the Office of Management and Budget (OMB) regarding the review of tax

regulations.

II. Paperwork Reduction Act

The collection of information contained

in these proposed regulations is reflected

in the collection of information for Forms

8886 and 8918 that have been reviewed

and approved by OMB in accordance

with the Paperwork Reduction Act (44

U.S.C. 3507(c)) under control numbers

1545-1800 and 1545-0865. Any disclosures with respect to the safe harbor for

owners as provided in §§1.6011-10(e)(2)

and 1.6011-11(e)(2) are in the nature of an

acknowledgment per 5 CFR 1320.3(h)(1),

and therefore do not constitute a collection of information under the Paperwork

Reduction Act.

To the extent there is a change in burden as a result of these regulations, the

change in burden will be reflected in the

updated burden estimates for the Forms

8886 and 8918. The requirement to

maintain records to substantiate information on Forms 8886 and 8918 is already

April 24, 2023

contained in the burden associated with

the control numbers for the forms and is

unchanged.

An agency may not conduct or sponsor,

and a person is not required to respond

to, a collection of information unless the

collection of information displays a valid

control number assigned by OMB.

III. Regulatory Flexibility Act

The Secretary of the Treasury hereby

certifies that the proposed regulations will

not have a significant economic impact on

a substantial number of small entities pursuant to the Regulatory Flexibility Act (5

U.S.C. chapter 6).

Notice 2016-66 Respondents by Size

Receipts

Under 5M

5M to 10M

10M to 15M

15M to 20M

20M to 25M

Over 25M

TOTAL

This chart shows that the majority

of respondents reported gross receipts

under $5 million. Even assuming that

these respondents constitute a substantial

number of small entities, the proposed

regulations will not have a significant economic impact on these entities because the

proposed regulations implement sections

6111 and 6112 and §1.6011-4 by specifying the manner in which and time at

which an identified Micro-captive Listed

Transaction or Micro-captive Transaction

of Interest must be reported. Accordingly,

because the regulations are limited in

scope to time and manner of information

reporting and definitional information,

the economic impact of the proposal is

expected to be minimal.

Further, the Treasury Department and

the IRS expect that the reporting burden is

low; the information sought is necessary

for regular annual return preparation and

ordinary recordkeeping. The estimated

burden for any taxpayer required to file

Form 8886 is approximately 10 hours,

16 minutes for recordkeeping, 4 hours,

50 minutes for learning about the law or

the form, and 6 hours, 25 minutes for preparing, copying, assembling, and sending

the form to the IRS. The IRS’s Research,

Applied Analytics, and Statistics division

estimates that the appropriate wage rate

for this set of taxpayers is $77.50 (2020

April 24, 2023

Firms

78.65%

9.36%

4.39%

2.34%

1.17%

4.09%

100%

dollars) per hour. Thus, it is estimated that

a respondent will incur costs of approximately $1,667.27 per filing. Disclosures

received to date by the Treasury Department and the IRS in response to the

reporting requirements of Notice 2016-66

indicate that this small amount will not

pose any significant economic impact for

those taxpayers now required to disclose

under the proposed regulations.

For the reasons stated, a regulatory

flexibility analysis under the Regulatory Flexibility Act is not required. The

Treasury Department and the IRS invite

comments on the impact of the proposed

regulations on small entities. Pursuant to

section 7805(f) of the Code, this notice

of proposed rulemaking has been submitted to the Chief Counsel for the Office of

Advocacy of the Small Business Administration for comment on its impact on small

business.

IV. Unfunded Mandates Reform Act

Section 202 of the Unfunded Mandates

Reform Act of 1995 (UMRA) requires

that agencies assess anticipated costs and

benefits and take certain other actions

before issuing a final rule that includes any

Federal mandate that may result in expenditures in any one year by a State, local, or

Tribal government, in the aggregate, or by

784

As previously explained, the basis

for these proposed regulations is Notice

2016-66, 2016-47 I.R.B. 745 (as modified by Notice 2017-08, 2017-3 I.R.B.

423). The following chart sets forth the

gross receipts of respondents to Notice

2016-66, based on data for tax year

2020:

Filings

75.26%

10.20%

5.10%

2.55%

1.53%

5.36%

100%

the private sector, of $100 million (updated

annually for inflation). This proposed rule

does not include any Federal mandate that

may result in expenditures by State, local,

or Tribal governments or by the private

sector in excess of that threshold.

V. Executive Order 13132: Federalism

Executive Order 13132 (Federalism)

prohibits an agency from publishing any

rule that has federalism implications if

the rule either imposes substantial, direct

compliance costs on State and local governments, and is not required by statute,

or preempts state law, unless the agency

meets the consultation and funding

requirements of section 6 of the Executive order. This proposed rule does not

have federalism implications and does

not impose substantial direct compliance

costs on state and local governments or

preempt state law within the meaning of

the Executive order.

Comments and Public Hearing

Before these proposed amendments to

the regulations are adopted as final regulations, consideration will be given to any

comments that are submitted timely to the

IRS as prescribed in the preamble under

the ADDRESSES section. The Treasury

Bulletin No. 2023–17

Department and the IRS request comments

on all aspects of the proposed regulations.

The Treasury Department and the IRS specifically request comments on the following:

1. What are the specific and objective

metrics, factors, or standards, if any, that,

if reported, would allow for the IRS to

better identify and distinguish abusive

micro-captive transactions from other

micro-captive transactions?

2. With respect to proposed §§1.601110(c)(2) and 1.6011-11(c), whether the

loss ratio described therein, which compares “the amount of liabilities incurred

by Captive for insured losses and claim

administration expenses during the

[applicable] Computation Period” to the

“premiums earned by Captive during the

[applicable] Computation Period less policyholder dividends paid by Captive during

the [applicable] Computation Period”,

should be replaced by a combined ratio,

which compares “losses incurred, plus

loss adjustment expenses incurred and

other underwriting expenses incurred by

Captive during the [applicable] Computation Period” to “Captive’s earned

premiums, less policyholder dividends, for

the [applicable] Computation Period”, and

if so, what percentage would be an effective threshold for purposes of identifying

abusive transactions. For this purpose,

Captive’s “other underwriting expenses

incurred” would equal Captive’s expenses

incurred in carrying on an insurance business, other than loss adjustment expenses

and investment-related expenses.

3. With respect to the percentage

of premiums retained as commissions

for contracts as described at proposed

§§1.6011-10(d)(2) and 1.6011-11(d)(2),

what, if any, are the specific metrics, factors, or standards that, if reported, would

allow for the IRS to better identify and

distinguish abusive micro-captive transactions of this type from other such

micro-captive transactions?

Any comments submitted will be made

available at https://www.regulations.gov

or upon request.

A public hearing is scheduled to be

held by teleconference on July 19, 2023,

beginning at 10:00 a.m. ET unless no outlines are received by June 12, 2023.

The rules of 26 CFR 601.601(a)(3)

apply to the hearing. Persons who wish to

comment by telephone at the hearing must

Bulletin No. 2023–17

submit written or electronic comments and

an outline of the topics to be discussed as

well as the time to be devoted to each topic

by June 12, 2023, as prescribed in the preamble under the ADDRESSES section.

A period of ten minutes will be allocated to each person for making comments.

After the deadline for receiving outlines

has passed, the IRS will prepare an agenda

containing the schedule of speakers. Copies of the agenda will be made available

at https://www.regulations.gov, search

IRS and REG-109309-22. Copies of the

agenda will also be available by emailing a

request to publichearings@irs.gov. Please

put “REG-109309-22 Agenda Request” in

the subject line of the email.

Announcement 2020-4, 2020-17 I.R.B.

667 (April 20, 2020), provides that until

further notice, public hearings conducted

by the IRS will be held telephonically.

Any telephonic hearing will be made

accessible to people with disabilities.

Statement of Availability of IRS

Documents

The notices and revenue ruling cited

in this document are published in the

Internal Revenue Bulletin (or Cumulative Bulletin) and are available from the

Superintendent of Documents, U.S. Government Publishing Office, Washington,

DC 20402, or by visiting the IRS website

at https://www.irs.gov.

Drafting Information

The principal author of these proposed

regulations is Elizabeth M. Hill, Office

of Associate Chief Counsel (Financial

Institutions & Products). However, other

personnel from the Treasury Department

and the IRS participated in the development of these regulations.

List of Subjects in 26 CFR Part 1

Income Taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the

Regulations

Accordingly, the Treasury Department

and the IRS propose to amend 26 CFR

part 1 as follows:

785

PART 1—INCOME TAXES

Paragraph 1. The authority citation for

part 1 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

*****

Section 1.6011-10 also issued under 26

U.S.C. 6001 and 26 U.S.C. 6011.

Section 1.6011-11 also issued under 26

U.S.C. 6001 and 26 U.S.C. 6011.

*****

Par. 2. Section 1.6011-10 is added to

read as follows:

§ 1.6011-10 Micro-captive listed

transaction.

(a) Identification as listed transaction.

Transactions that are the same as, or substantially similar to, transactions described

in paragraph (c) of this section are identified as listed transactions for purposes of

§ 1.6011-4(b)(2), except as provided in

paragraph (d) of this section.

(b) Definitions. The following definitions apply for purposes of this section:

(1) Captive means any entity that:

(i) Elects under section 831(b) of the

Internal Revenue Code (Code) to exclude

premiums from taxable income;

(ii) Issues a Contract to an Insured,

reinsures a Contract of an Insured issued

by an Intermediary, or both; and

(iii) Has at least 20 percent of its assets

or the voting power or value of its outstanding stock or equity interests directly

or indirectly owned, individually or collectively, by an Insured, an Owner, or persons

Related to an Insured or an Owner. For

purposes of this paragraph (b)(1)(iii), the

following rules apply to the extent application of a rule (or rules) would increase

such direct or indirect ownership:

(A) A person that holds a derivative is

treated as indirectly owning the assets referenced by the derivative; and

(B) The interest of each beneficiary of

a trust or estate in the assets of such trust

or estate must be determined by assuming

the maximum exercise of discretion by the

fiduciary in favor of such beneficiary and

the maximum use of the trust’s or estate’s

interest in the company to satisfy the interests of such beneficiary.

(2) Computation periods—(i) Financing Computation Period. The Financing

Computation Period is the most recent five

April 24, 2023

taxable years of Captive (or all taxable

years of Captive, if Captive has been in

existence for less than five taxable years).

(ii) Loss Ratio Computation Period.

The Loss Ratio Computation Period is the

most recent ten taxable years of Captive.

A Captive that does not have at least ten

taxable years cannot have a Loss Ratio

Computation Period, and therefore is

not described in paragraph (c)(2) of this

section.

(iii) Rules for computation periods.

This paragraph (b)(2)(iii) applies for

purposes of determining the Financing

Computation Period and the Loss Ratio

Computation Period. Each short taxable

year is a separate taxable year. If Captive is

a successor to one or more other Captives,

taxable years of each such other Captive

are treated as taxable years of Captive. A

successor is any of the following:

(A) A successor corporation as defined

in § 1.382-2(a)(5);

(B) An entity that, directly or indirectly, acquires (or is deemed to acquire)

the assets of another entity and succeeds

to and takes into account the other entity’s

earnings and profits or deficit in earnings

and profits; or

(C) An entity that receives (or is

deemed to receive) any assets from another

entity if such entity’s basis is determined,

directly or indirectly, in whole or in part,

by reference to the other entity’s basis.

(3) Contract means any contract that

is treated by a party to the contract as an

insurance contract or reinsurance contract

for Federal income tax purposes.

(4) Insured means any person that

conducts a trade or business, enters into

a Contract with a Captive or enters into

a Contract with an Intermediary that is

directly or indirectly reinsured by a Captive, and treats amounts paid under the

Contract as insurance premiums for Federal income tax purposes.

(5) Intermediary means any entity that

issues a Contract to an Insured, or reinsures

a Contract that is issued to an Insured, and

such Contract is reinsured, directly or

indirectly, by a Captive. A transaction may

have more than one Intermediary.

(6) Owner means any person who,

directly or indirectly, holds an ownership interest in an Insured or its assets.

For purposes of this paragraph (b)(6), the

following rules apply to the extent appli-

April 24, 2023

cation of a rule (or rules) would increase

such direct or indirect ownership:

(i) The interest of a person that holds a

derivative must be determined as provided

in paragraph (b)(1)(iii)(A) of this section;

and

(ii) The interest of each beneficiary of

a trust or estate in the assets of such trust

or estate must be determined as provided

in paragraph (b)(1)(iii)(B) of this section.

(7) Recipient means any Owner,

Insured, or person Related to an Owner

or an Insured engaged in a transaction

described in paragraph (c)(1) of this

section.

(8) Related means having a relationship described in one or more of

sections 267(b), 707(b), 2701(b)(2)(C),

and 2704(c)(2) of the Code.

(9) Seller means a service provider,

automobile dealer, lender, or retailer that

sells products or services to Unrelated

Customers who purchase insurance contracts in connection with those products or

services.

(10) Seller’s Captive means a Captive

Related to Seller, an owner of Seller, or

individuals or entities Related to Seller or

owners of Seller.

(11) Unrelated Customers means persons who do not own an interest in, and

are not wholly or partially owned by,

Seller, an owner of Seller, or individuals

or entities Related to Seller or owners of

Seller.

(c) Transaction description. A transaction is described in this paragraph (c) if

the transaction is described in paragraph

(c)(1) of this section, paragraph (c)(2) of

this section, or both.

(1) The transaction involves a Captive

that, at any time during the Financing

Computation Period, directly or indirectly

made available as financing or otherwise

conveyed or agreed to make available or

convey to a Recipient, in a transaction that

did not result in taxable income or gain

to the Recipient, any portion of the payments under the Contract, such as through

a guarantee, a loan, or other transfer of

Captive’s capital, or made such financings

or conveyances prior to the Financing

Computation Period that remain outstanding or in effect at any point in the taxable

year for which disclosure is required. Any

amounts that a Captive made available

as financing or otherwise conveyed or

786

agreed to make available or convey to a

Recipient are presumed to be portions of

the payments under the Contract to the

extent such amounts when made available

or conveyed are in excess of Captive’s

cumulative after-tax net investment earnings minus any outstanding financings or

conveyances.

(2) The transaction involves a Captive for which the amount of liabilities

incurred for insured losses and claim

administration expenses during the Loss

Ratio Computation Period is less than 65

percent of the amount equal to premiums

earned by Captive during the Loss Ratio

Computation Period less policyholder

dividends paid by Captive during the Loss

Ratio Computation Period.

(d) Exceptions. A transaction described

in paragraph (c) of this section is not classified as a listed transaction for purposes

of this section and §1.6011-4(b)(2) if the

transaction:

(1) Provides insurance for employee

compensation or benefits and is one for

which the Employee Benefits Security

Administration of the U.S. Department of

Labor has issued a Prohibited Transaction

Exemption under the procedures provided

at 76 FR 66637 (Oct. 27, 2011) (or subsequent procedures); or

(2) Is an arrangement in which a Captive

meets all of the following requirements:

(i) Captive is a Seller’s Captive:

(ii) The Seller’s Captive issues or reinsures some or all of the Contracts sold to

Unrelated Customers in connection with

the products or services being sold by the

Seller:

(iii) 100 percent of the business of the

Seller’s Captive is insuring or reinsuring

Contracts in connection with products or

services being sold by the Seller or persons Related to the Seller: and

(iv) With respect to the Contracts issued

or reinsured by the Seller’s Captive, the

fee, commission, or other remuneration

earned by any person or persons, in the

aggregate, for the sale of the Contracts,

described as a percentage of the premiums

paid by the Seller’s customers, is at least

equal to the greater of:

(A) 50 percent; or

(B) The unrelated commission percentage (which is the highest percentage fee,

commission, or other remuneration known

to the Seller that is earned by any person

Bulletin No. 2023–17

or persons, in the aggregate, for the sale of

any extended warranty, insurance, or other

similar Contract sold to a customer covering products or services sold by the Seller.

(e) Special participation rules—(1) In

general. Whether a taxpayer has participated in the listed transaction identified

in paragraph (a) of this section will be

determined under § 1.6011-4(c)(3)(i)(A).

Participants include, but are not limited to,

any Owner, Insured, Captive, or Intermediary with respect to the transaction whose

tax return reflects tax consequences or a

tax strategy described in paragraph (a) of

this section, except as otherwise provided

in paragraph (e)(2) of this section.

(2) Disclosure safe harbor for Owners. An Owner who, solely by reason of

the Owner’s direct or indirect ownership

interest in an Insured, has participated

in the listed transaction described in this

section will not be required to disclose participation in the transaction under section

6011(a), notwithstanding § 1.6011-4(c)

(3), if the Owner receives an acknowledgment, in writing or electronically, from

the Insured that the Insured has or will

comply with the Insured’s separate disclosure obligation under § 1.6011-4 with

respect to the transaction and the Insured

discloses the transaction in a timely manner. The acknowledgment can be a copy

of the Form 8886, Reportable Transaction

Disclosure Statement (or successor form),

filed (or to be filed) by the Insured and

must be received by the Owner prior to the

time set forth in § 1.6011-4(e) in which

the Owner would otherwise be required

to provide disclosure. Owners who meet

the requirements of this safe harbor will

not be treated as having participated in an

undisclosed listed transaction for purposes

of § 1.6664-2(c)(3)(ii) or as having failed

to include information on any return or

statement with respect to a listed transaction for purposes of section 6501(c)(10).

(f)

Disclosure

requirements—(1)

Information required of all participants.

Participants must provide the information required under § 1.6011-4(d) and the

Instructions to Form 8886 (or successor

form). For all participants, describing the

transaction in sufficient detail includes,

but is not limited to, describing on Form

8886 (or successor form) when, how, and

from whom the participant became aware

of the transaction, and how the participant

Bulletin No. 2023–17

participated in the transaction (for example, as an Insured, a Captive, or other

participant). Paragraphs (f)(2) and (3) of

this section describe information required

of a Captive and an Insured, respectively.

(2) Information required of a Captive.

For a Captive, describing the transaction

in sufficient detail includes, but is not limited to, describing the following on Form

8886 (or successor form):

(i) All the type(s) of policies issued or

reinsured by Captive during the year of

participation or years of participation (if

disclosure pertains to multiple years);

(ii) The amounts treated by Captive as

premiums written for coverage provided

by Captive during the year of participation

or each year of participation (if disclosure

pertains to multiple years);

(iii) The name and contact information

of each and every actuary or underwriter

who assisted in the determination of the

amounts treated as premiums for coverage provided by Captive during the year

or each year of participation (if disclosure

pertains to multiple years);

(iv) The total amount of claims paid by

Captive during the year of participation or

each year of participation (if disclosure

pertains to multiple years); and

(v) The name and percentage of interest

directly or indirectly held by each person

whose interest in Captive meets the 20

percent threshold or is taken into account

in meeting the 20 percent threshold under

§ 1.6011-10(b)(1)(iii).

(3) Information required of Insured.

For Insured, describing the transaction

in sufficient detail includes, but is not

limited to, describing on Form 8886 (or

successor form) the amounts treated by

Insured as premiums for coverage provided to Insured, directly or indirectly, by

Captive or by each Captive (if disclosure

pertains to multiple Captives) during the

year or each year of participation (if disclosure pertains to multiple years), as well

as the identity of all persons identified as

Owners to whom the Insured provided an

acknowledgment described in paragraph

(e)(2) of this section.

(g) Applicability date—(1) In general.

This section identifies transactions that

are the same as, or substantially similar

to, the transactions described in paragraph

(a) of this section as listed transactions for

purposes of § 1.6011-4(b)(2) effective the

787

date the regulations are published as final

regulations in the Federal Register.

(2) Obligations of participants with

respect to prior periods. Pursuant to §

1.6011-4(d) and (e), taxpayers who have

filed a tax return (including an amended

return) reflecting their participation in

transactions described in paragraph (a) of

this section prior to the date these regulations are published as final regulations in

the Federal Register, who have not otherwise finalized a settlement agreement with

the Internal Revenue Service with respect

to the transaction, must disclose the transactions as required by § 1.6011-4(d) and

(e) provided that the period of limitations

for assessment of tax (as determined

under section 6501 of the Code, including section 6501(c)) for any taxable year

in which the taxpayer participated has not

ended on or before the date the regulations

are published as final regulations in the

Federal Register.

(3) Obligations of material advisors

with respect to prior periods. Material

advisors defined in § 301.6111-3(b) of

this chapter who have previously made a

tax statement with respect to a transaction

described in paragraph (a) of this section

have disclosure and list maintenance obligations as described in §§ 301.6111-3 and

301.6112-1 of this chapter, respectively.

Notwithstanding § 301.6111-3(b)(4)(i)

and (iii) of this chapter, material advisors

are required to disclose only if they have

made a tax statement on or after the date

that is six years before the date the regulations are published as final regulations

in the Federal Register. Material advisors

that are uncertain whether the transaction

they are required to disclose should be

reported under this section or §1.601111 should disclose under this section, and

will not be required to disclose a second

time if it is later determined that the transaction should have been disclosed under

§1.6011-11.

Par. 3. Section 1.6011-11 is added to

read as follows:

§ 1.6011-11 Micro-captive transaction

of interest.

(a) Identification as transaction of

interest. Transactions that are the same

as, or substantially similar to, transactions

described in paragraph (c) of this section

April 24, 2023

are identified as transactions of interest for

purposes of § 1.6011-4(b)(6), except as

provided in paragraph (d) of this section.

(b) Definitions. The following definitions apply for purposes of this section:

(1) Captive has the same meaning as

provided in § 1.6011-10(b)(1).

(2) Transaction of Interest Computation Period means the most recent nine

taxable years of a Captive (or all taxable

years of Captive, if Captive has been in

existence for less than nine taxable years).

For purposes of this paragraph (b)(2),

each short taxable year is a separate taxable year, and if Captive is a successor to

one or more other Captives, taxable years

of each such other Captive are treated

as taxable years of Captive. A successor

has the same meaning as provided in §

1.6011-10(b)(2)(iii) for purposes of this

paragraph (b)(2).

(3) Contract has the same meaning as

provided in § 1.6011-10(b)(3).

(4) Insured has the same meaning as

provided in § 1.6011-10(b)(4).

(5) Intermediary has the same meaning

as provided in § 1.6011-10(b)(5).

(6) Owner has the same meaning as

provided in § 1.6011-10(b)(6).

(7) Related has the same meaning as

provided in § 1.6011-10(b)(8).

(8) Seller has the same meaning as provided in § 1.6011-10(b)(9).

(9) Seller’s Captive has the same meaning as provided in § 1.6011-10(b)(10).

(10) Unrelated Customers has the same

meaning as provided in § 1.6011-10(b)

(11).

(c) Transaction description. A transaction is described in this paragraph (c)

if the transaction involves a Captive for

which the amount of liabilities incurred

for insured losses and claim administration expenses during the Transaction of

Interest Computation Period is less than 65

percent of the amount equal to premiums

earned by Captive during the Transaction of Interest Computation Period less

policyholder dividends paid by Captive

during the Transaction of Interest Computation Period.

(d) Exceptions. A transaction described

in paragraph (c) of this section is not

classified as a transaction of interest for

purposes of this section and § 1.6011-4(b)

(6) if the transaction:

(1) Is described in § 1.6011-10(d)(1);

April 24, 2023

or

(2) Is described in § 1.6011-10(d)(2);

(3) Is identified as a listed transaction in § 1.6011-10(a), in which case the

transaction must be reported as a listed

transaction under § 1.6011-10.

(e) Special participation rules—(1)

In general. Whether a taxpayer has participated in the transaction of interest

identified in paragraph (a) of this section

will be determined under § 1.6011-4(c)

(3)(i)(E). Participants include, but are

not limited to, any Owner, Insured, Captive, or Intermediary with respect to the

transaction whose tax return reflects tax

consequences or a tax strategy described

in paragraph (a) of this section, except as

otherwise provided in paragraph (e)(2) of

this section.

(2) Disclosure safe harbor for Owners. An Owner who, solely by reason of

the Owner’s direct or indirect ownership

interest in an Insured, has participated

in the transaction of interest described

in this section will not be required to

disclose participation in the transaction

under section 6011(a), notwithstanding

§ 1.6011-4(c)(3), if the Owner receives

acknowledgment, in writing or electronically, from the Insured that the Insured has

or will comply with Insured’s separate disclosure obligation under § 1.6011-4 with

respect to the transaction and the Insured

discloses the transaction in a timely manner. The acknowledgment can be a copy

of the Form 8886, Reportable Transaction

Disclosure Statement (or successor form),

filed (or to be filed) by the Insured and

must be received by the Owner prior to the

time set forth in § 1.6011-4(e) in which

the Owner would otherwise be required to

provide disclosure.

(f) Disclosure requirements. Participants must provide the information

required under § 1.6011-4(d) and the

Instructions to Form 8886 (or successor

form). For all participants, describing the

transaction in sufficient detail includes, but

is not limited to, describing on Form 8886

(or successor form) when, how, and from

whom the participant became aware of the

transaction, and how the participant participated in the transaction (for example,

as an Insured, a Captive, or other participant). A Captive and an Insured must

also provide the information required in §

1.6011-10(f)(2) and (3), respectively.

788

(g) Applicability date—(1) In general.

This section identifies transactions that are

the same as, or substantially similar to, the

transaction described in paragraph (a) of

this section as transactions of interest for

purposes of § 1.6011-4(b)(6) effective the

date the regulations are published as final

regulations in the Federal Register.

(2) Obligations of participants with

respect to prior periods. Pursuant to §

1.6011-4(d) and (e), taxpayers who have

filed a tax return (including an amended

return) reflecting their participation in

transactions described in paragraph (a) of

this section prior to the date the regulations are published as final regulations in

the Federal Register, who have not otherwise finalized a settlement agreement with

the Internal Revenue Service with respect

to the transaction, must disclose the transactions as required by § 1.6011-4(d) and

(e) provided that the period of limitations

for assessment of tax (as determined under

section 6501, including section 6501(c))

for any taxable year in which the taxpayer

participated has not ended on or before the

date the regulations are published as final

regulations in the Federal Register. However, taxpayers who have filed a disclosure

statement regarding their participation

in the transaction with the Office of Tax

Shelter Analysis pursuant to Notice 201666, 2016-47 I.R.B. 745, will be treated as

having made the disclosure pursuant to

the final regulations for the taxable years

for which the taxpayer filed returns before

the final regulations are published in the

Federal Register. If a taxpayer described

in the preceding sentence participates in

the Micro-captive Transaction of Interest

in a taxable year for which the taxpayer

files a return on or after the date the final

regulations are published in the Federal

Register, the taxpayer must file a disclosure statement with the Office of Tax

Shelter Analysis at the same time the taxpayer files their return for the first such

taxable year.

(3) Obligations of material advisors

with respect to prior periods. Material

advisors defined in § 301.6111-3(b) of

this chapter who have previously made a

tax statement with respect to a transaction

described in paragraph (a) of this section

have disclosure and list maintenance obligations as described in §§ 301.6111-3 and

301.6112-1 of this chapter, respectively.

Bulletin No. 2023–17

Notwithstanding § 301.6111-3(b)(4)(i)

and (iii) of this chapter, material advisors

are required to disclose only if they have

made a tax statement on or after the date

six years before the date the regulations

are published as final regulations in the

Federal Register. Material advisors that

are uncertain whether the transaction they

are required to disclose should be reported

under this section or § 1.6011-10 should

disclose under § 1.6011-10, and will not

be required to disclose a second time if

it is later determined that the transaction

should have been disclosed under this

section.

Douglas W. O’Donnell,

Deputy Commissioner for Services

and Enforcement.

(Filed by the Office of the Federal Register April

10, 2023, 8:45a.m., and published in the issue of the

Federal Register for April 11, 2023, 88 FR 21547)

Notice of Proposed

Rulemaking

ADDRESSES: Commenters are strongly

encouraged to submit public comments

electronically. Submit electronic submissions via the Federal eRulemaking

Portal at www.regulations.gov (indicate

IRS and REG-121709-19) by following

the online instructions for submitting

comments. Once submitted to the Federal

eRulemaking Portal, comments cannot

be edited or withdrawn. The Department

of the Treasury (Treasury Department)

and the IRS will publish any comments

submitted electronically and comments

submitted on paper, to the public docket.

Send paper submissions to: CC:PA:LPD:PR (REG-121709-19), Room 5203,

Internal Revenue Service, P.O. Box 7604,

Ben Franklin Station, Washington, DC

20044.

FOR FURTHER INFORMATION

CONTACT: Concerning the proposed

regulations, David Bergman, (202)

317-6845; concerning submissions of

comments and requests for a public hearing, Vivian Hayes (202) 317-5306 (not

toll-free numbers) or by email at publichearings@irs.gov (preferred).

Rules for Supervisory

Approval of Penalties

SUPPLEMENTARY INFORMATION:

REG-121709-19

This document contains proposed

amendments to the Regulations on Procedure and Administration (26 CFR part

301) under section 6751(b) of the Internal

Revenue Code (Code). No regulations

have previously been issued under section

6751.

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document contains

proposed regulations regarding supervisory approval of certain penalties assessed

by the IRS. The proposed regulations are

necessary to address uncertainty regarding

various aspects of supervisory approval of

penalties that have arisen due to recent

judicial decisions. The proposed regulations affect the IRS and persons assessed

certain penalties by the IRS.

DATES: Electronic or written comments

and requests for a public hearing must be

received by July 10, 2023. Requests for a

public hearing must be submitted as prescribed in the “Comments and Requests

for a Public Hearing” section.

Bulletin No. 2023–17

Background

1. Legislative overview.

Section 6751 was added to the Code

by section 3306 of the Internal Revenue

Service Restructuring and Reform Act of

1998 (1998 Act), Public Law 105-206,

112 Stat. 685, 744 (1998). Section 6751(a)

sets forth the content of penalty notices.

Section 6751(b) provides procedural

requirements for the Secretary of the Treasury or her delegate (Secretary) to assess

certain penalties, including additions to

tax or additional amounts under the Code.

See section 6751(c).

Section 6751(b)(1), as added by the

1998 Act, provides that “[n]o penalty

789

under this title shall be assessed unless

the initial determination of such assessment is personally approved (in writing)

by the immediate supervisor of the individual making such determination or

such higher level official as the Secretary

may designate.” As an exception to this

rule, section 6751(b)(2), as added by the

1998 Act, provides that section 6751(b)

(1) “shall not apply to-- (A) any addition

to tax under section 6651, 6654, or 6655

[of the Code]; or (B) any other penalty

automatically calculated through electronic means.”

The report of the United States Senate

Committee on Finance regarding the 1998

Act (1998 Senate Finance Committee

Report) provides that Congress enacted

section 6751(b)(1) because of its concern

that, “[i]n some cases, penalties may be

imposed without supervisory approval.”

S. Rep. No. 105-174, at 65 (1998), 1998-3

C.B. 537, 601. The report further states

that “[t]he Committee believes that penalties should only be imposed where

appropriate and not as a bargaining chip.”

Id. The report provides that, to achieve

this goal, section 6751(b)(1) “requires the

specific approval of IRS management to

assess all non-computer generated penalties unless excepted.”

Section 212 of the Taxpayer Certainty

and Disaster Tax Relief Act of 2020,

which was enacted as Division EE of the

Consolidated Appropriations Act, 2021,

Public Law 116-260, 134 Stat. 1182, 3067

(2020), expanded the list of penalties

in section 6751(b)(2)(A) excepted from

the supervisory approval requirement of

section 6751(b)(1) by revising the end

of section 6751(b)(2)(A) to read “6654,

6655, or 6662 (but only with respect to an

addition to tax by reason of subsection (b)

(9) thereof);” (relating to the addition to

tax under section 6662(b)(9) of the Code

with regard to the special charitable contribution deduction under section 170(p)

of the Code for taxable years of individuals beginning in 2021). Section 605 of

Division T of the Consolidated Appropriations Act, 2023, Public Law 117-328, 136

Stat. 4459, 5395 (2022), further amended

section 6751(b)(2)(A) by striking “subsection (b)(9)” and inserting “paragraph

(9) or (10) of subsection (b).” Section

6662(b)(10) imposes an accuracy-related

penalty on underpayments attributable to

April 24, 2023

any disallowance of a deduction by reason

of section 170(h)(7).

2. Judicial treatment.

In 2016, a United States Tax Court (Tax

Court) majority read section 6751(b)(1)’s

silence about when supervisory approval

is required to mean that no specific timing

requirement exists and, thus, the approval

need only be obtained at some time, but

no particular time, prior to assessment.

Graev v. Commissioner, 147 T.C. 460,

477-81 (2016), superseded by 149 T.C.

485 (2017).

The United States Court of Appeals

for the Second Circuit (Second Circuit)

rejected the Graev court’s interpretation

of section 6751(b)(1), finding ambiguity in the statute’s phrase “initial

determination of such assessment.” Chai

v. Commissioner, 851 F.3d 190, 218-19

(2d Cir. 2017). The Second Circuit held

that, with respect to penalties subject to

deficiency procedures, section 6751(b)

(1) requires written approval of the initial penalty determination no later than

the date the IRS issues the notice of deficiency (or files an answer or amended

answer asserting such penalty). Id. at

221. The Second Circuit reasoned that for

supervisory approval to be given force,

it must be obtained when the supervisor

has the discretion to give or withhold it,

and, for penalties determined in a notice

of deficiency, this discretion no longer

exists upon the issuance of the notice.

Id. at 220. In Graev III, 149 T.C. 485

(2017), the Tax Court reversed its earlier

interpretation of section 6751(b) and followed Chai. Since then, the Tax Court has

imposed increasingly earlier deadlines by

which supervisory approval of the initial

penalty determination must be obtained

to be considered timely under the statute,

formulating tests that are difficult for IRS

employees to apply.

In Clay v. Commissioner, 152 T.C.

223, 249-50 (2019), the Tax Court held

that supervisory approval of penalties

was too late where it was obtained before

the IRS issued a notice of deficiency but

after the revenue agent sent the petitioner

a “30-day letter” proposing penalties and

giving the petitioner an opportunity to

request an administrative appeal. In Belair

Woods, LLC v. Commissioner, 154 T.C. 1,

April 24, 2023

13 (2020), the Tax Court held that supervisory approval must be obtained before

the IRS sends a notice that “formally

communicates to the taxpayer, the [IRS]

Examination Division’s unequivocal decision to assert a penalty.” In subsequent

cases, the Tax Court has held that supervisory approval must be obtained before the

first communication to the taxpayer that

demonstrates that an initial determination

has been made. See, e.g., Beland v. Commissioner, 156 T.C. 80 (2021); Kroner

v. Commissioner, T.C. Memo. 2020-73,

rev’d 48 F. 4th 1272 (11th Cir. 2022);

Carter v. Commissioner, T.C. Memo.

2020-21, rev’d 2022 WL 4232170 (11th

Cir. Sept. 14, 2022). The Tax Court has

applied this timing rule to penalties subject to pre-assessment review in the Tax

Court, as well as to assessable penalties.

Recently the United States Court of

Appeals for the Ninth Circuit (Ninth Circuit), the United States Court of Appeals

for the Tenth Circuit (Tenth Circuit), and

the United States Court of Appeals for

the Eleventh Circuit (Eleventh Circuit)

reversed the Tax Court’s “formal communication” timing rule, noting that it has no

basis in the text of the statute. Laidlaw’s

Harley Davidson Sales, Inc. v. Commissioner, 29 F.4th 1066 (9th Cir. 2022),

r

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