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Tax Notes Quotes Rachel Partain on IRS Exams of Captive Pooling
Caplin & Drysdale

Tax Notes Quotes Rachel Partain on IRS Exams of Captive Pooling

Date: 2/15/2018

The IRS’s approach for reviewing captive pooling arrangements — following the Tax Court’s related 2017 seminal decision — can give taxpayers a roadmap to avoid pitfalls that could invalidate the transactions.

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Rachel Partain of Caplin & Drysdale said IRS exam agents are issuing information document requests loaded with questions to determine if the captive has a valid pooling arrangement. For example, she said some questions deal with who took part in developing the arrangement and whether it’s a contractual arrangement only or whether an actual insurance company is involved. Other IDR topics focus on the use of multiple lines or a single line of coverage — which was an issue in Avrahami — and inquire about the amount and type of exposure units covered, Partain said.

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Partain noted that the IRS is asking about the participants in the arrangements, namely about whether they receive information and perform due diligence. The IRS also wants to know about the frequency of pool claims — the more the better — and the maximum amount of loss for participants relative to what they pay, she said. The IDRs also request information on claims administration, Partain added.

In Avrahami, the court delved into the actuary’s method for determining premiums, so it’s not surprising that the IRS is reviewing pooling arrangements with written coverage and asking whether premiums were actuarially determined and what the actuary’s method was, Partain said.

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Another potential trap for unwary taxpayers is the confidentiality agreement that prevents them from distributing pool-related information, which could hinder their ability to provide information to the IRS, Partain said. That means taxpayers need to think about how to structure that agreement, she added.

For the full article, please visit Tax Notes’ website (subscription required).

Excerpt taken from the article “IRS Exams of Captive Pooling Reveal Invalidating Pitfalls” by Emily L. Foster for Tax Notes.

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