Transactions of Interest v. Listed Transactions – What is the Difference?
By Michael E. Lloyd
IRS Notice 2016-66. On November 1, 2016, the IRS published Notice 2016-66 which identifies certain small captive insurance companies as “transactions of interest.” Many owners of captive insurance companies and their advisors are wondering what does it mean to be a transaction of interest? Does it mean that captives are abusive or in disfavor by the IRS? Also, how is a transaction of interest the same or different from the more commonly used term by the IRS, a “listed transaction”?
Transaction of Interest. A “transaction of interest” is a transaction that the IRS and Treasury Department believe “has potential for tax avoidance or evasion, but lack sufficient information to determine whether the transaction should be identified specifically as a tax avoidance transaction.”
IRS Listing of Transactions of Interest. The IRS currently has five identified transactions of interest on their web site at https://www.irs.gov/businesses/corporations/transactions-of-interest, with Notice 2016-66 being the sixth. Once the IRS has collected information about the transaction, the IRS can remove the transaction from the list, move it to the listed transaction list or keep it as a transaction of interest.
Comparison to Listed Transactions. A “listed transaction” is a transaction that is the same or similar to a transaction that the IRS has determined to be a tax avoidance transaction. There are currently 35 listed transactions which can be found on the IRS web site at https://www.irs.gov/businesses/corporations/listed-transactions. Although both listed transactions and transaction of interest must report to the IRS, the penalties for not filing with respect to a listed transaction are much more severe.
IRS Favor. The captive insurance community has been aware for some time that the IRS has concern that some 831(b) captives are structured and operated in a manner that is not consistent with Congressional intent. The IRS has been careful, however, not to condemn all captives or even all 831(b) captives. Accordingly, IRS Notice 2016-66 should not be considered a change in IRS position, but a furtherance of their efforts to learn more about whether some captives are tax avoidance transactions.
For more information about Captives and the reporting requirements of IRS Notice 2016-66, please call Mike Lloyd at (412) 454-0225 or email him at firstname.lastname@example.org.