For the first time the Internal Revenue Service (IRS) has included certain small captive insurance companies in its annual list of 'dirty dozen' tax scams. On February 3 2015, the IRS released IR-2015-19, which identified the use of abusive small captive insurance companies as one of this year's dirty dozen. The release contains a specific discussion of abusive small captive insurance companies and lists several facts that the IRS believes are indicative of abuse.

The insured owners of a small captive insurance company can pay up to $1.2 million of deductible premiums to their small captive insurance company each taxable year. Under Section 831(b) of the Internal Revenue Code, small captive insurance companies can exclude the premiums received from income and pay tax only on investment income. The IRS release acknowledges that small captive insurance companies are a "legitimate tax structure". However, the IRS has identified small captive insurance companies as a structure that might be implemented abusively. Moreover, the IRS is focusing on captive insurance companies in income tax examinations relating to the deductibility of premiums paid to captive insurance companies.

For further information on this topic please contact Rachel L Partain or Mark D Allison at Caplin & Drysdale's New York office by telephone (+1 212 379 6000), fax (+1 212 379 6001) or email (rpartain@capdale.com or mallison@capdale.com). Alternatively, contact Christopher S Rizek or Charles M Ruchelman at Caplin & Drysdale's Washington DC office by telephone (+1 202 862 5000), fax (+1 202 429 3301) or email (crizek@capdale.com or cruchelman@capdale.com). The Caplin & Drysdale, Chartered website can be accessed at www.caplindrysdale.com.

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