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Tax Notes Quotes Rachel Partain: Global Settlement Offer for Captive Transactions Could be Tricky

May 31, 2018, Tax Notes

The IRS could resolve captive insurance transaction disputes with a global settlement, as it did for abusive transactions in the 2000s, but tax professionals say the trick is to root out the bad actors.

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Rachel L. Partain of Caplin & Drysdale, Chtd. also emphasized the binary nature of a son-of-BOSS transaction: either basis increased or it didn’t. Although the settlement covered different versions of the transaction, the issue primarily involved a legal interpretation of the statute concerning liability for purposes of determining basis, she said.
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Microcaptive Focus
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Partain said a global settlement is inevitable given the volume of cases in exam, appeals, and litigation, along with the IRS’s resource constraints, but said the predicament is in defining which section 831(b) transactions would be part of the agreement. She pointed out that the 2016 notice was far-reaching and “swept in a lot of ‘good’ captives” that lack the concerns the IRS listed in the announcement. Any global settlement will need a much narrower focus to avoid that issue, which makes setting the parameters more difficult, Partain added.
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Sweetening the Deal
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If the IRS does seek a global settlement, perhaps it will offer some version of the son-of-BOSS deal by reducing the statutory penalties and setting tiered penalty levels, Partain said
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Another possible enticement would be to allow captives to retain some of the tax benefits — a portion of the deductions allowed under section 831(b), Partain suggested. She noted that IRS Appeals had been allowing taxpayers to retain 20 percent of their deductions in some cases, which is better than the 10 percent or none of the deductions allowed in recent years.
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The Ultimate but Unlikely Dealmaker
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Partain agreed that the IRS would have to decide whether captives must terminate and liquidate the business as part of the settlement terms, which she noted would be different from prior initiatives that involved one-time transactions. That could be the deciding point for captives considering whether to participate in a settlement, Partain said, adding that she wouldn’t be surprised if the IRS required them to shut down.

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

Excerpt taken from the article “Global Settlement Offer for Captive Transactions Could be Tricky” by Emily L. Foster for Tax Notes.

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