The tax shelter micro captive bubble is set to burst in 2018, resulting in large numbers of such companies to surrender their licenses, as many did last year, predicts Jay Adkisson, partner at Riser Adkisson.
According to Adkisson, these captives, which are set up to appear to meet the requirements of the Internal Revenue Code to create a deduction and choose the 831(b) tax election but in fact lack true economic substance, may face a punishing 2018.
An example of these micro captive tax shelters are the Puerto Rico micro captives, set up as an insurance company under the ownership of a Puerto Rican local.
Adkisson says these captives “are being openly marketed as deduction-generating vehicles as opposed to true insurance vehicles”.
He added: “They suffer from the same defects of ordinary domestic 831(b) tax-shelter captives, for example, the premiums are unjustifiably large, there is no true risk distribution, there are few if any claims being paid, and nearly all the premium money winds back up in the owner's pocket tax-free or tax-deferred.”
Adkisson identified the Puerto Rico captives as a danger to those involved as “in addition to the ordinary penalties that all abusive 831(b) captive arrangements face, they may also face additional penalties as controlled foreign corporations”.
Adkisson anticipates that the end may be in sight for these abusive captive arrangements.
He said: “The Avrahami decision certainly serves as a stark warning to those who are abusing 831(b), but of course not all 831(b) captives are abusive.”
“It is going to be a tough year for those attempting to sell 831(b) captives as tax shelters, as it should be.In other words, I expect the licensing of captives qualifying under 831(b) to return to the numbers that they should be at, prior to the recent bubble of 831(b) tax-sheltered captives.”
“I also expect large numbers of 831(b) companies that were formed as tax shelters to surrender their licenses, as companies did in substantial numbers in 2017.”