Captive International
www.captiveinternational.com INTERVIEW: ELLEN CHARNLEY 7
R
ecent negative press coverage
surrounding 831(b) captives—
also known as microcaptives—in
part triggered by the outcome
of the recent court case Avrahami et al v
Commissioner, which ruled in favour of US tax
body the IRS, has not deterred mid-market
companies from exploring the potential of
captive structures.
That is according to Ellen Charnley, president
of Marsh Captive Solutions, who says that, if
anything, the number of enquiries from mid-market
companies interested in this form of
risk transfer has increased since the case—
although more education is now necessary on
the correct use of 831(b) captives.
“We’ve had a number of conversations and
perhaps more with potential captive owners than
we would have had prior to the case,” she says.
“There is a lot of media coverage out there.
If you were to type 831(b)s into the internet,
it’s quite likely you will see a bit of negative
press somewhere down the lines. So there’s an
extra level of conversation taking place on the
education side, around the fundamentals of
what 831(b)s are trying to achieve.”
In the Avrahami case the court ruled that
taxpayers Benyamin and Orna Avrahami, who
have set up a microcaptive arrangement to
protect their three jewellery stores from terrorist
attacks, can’t claim deductions for amounts paid
to their captive insurance company. While some
believe the circumstances of this case were
unique, others claim it will embolden the IRS to
question other microcaptive arrangements.
Charnley does not expect a drop-off in the
number of prospective owners looking at
these structures—in fact she believes captive
solutions for midsize companies is a growing
sector—but she thinks it will take companies
a bit longer to understand and get comfortable
with the 831(b) structure.
“It’s still a very valid structure if set up
properly. It can be extremely meaningful and
beneficial to companies,” she says.
Doing it the right way
Although the 831(b) election for captives has
existed since 1986, microcaptives have come
under increased scrutiny from the IRS after
it was labelled as a ‘transaction of interest’ in
Notice 2016-66 in November 2016.
One advantage of an 831(b) captive is that
earnings from premiums are not subject to
federal income taxes; only investment income
is taxed. The maximum annual premium was
$1.2 million, but this increased in 2017 and
again, to $2.3 million, on January 1, 2018.
“It’s still a very
valid structure if
set up properly.
It can be
extremely
meaningful and
beneficial to
companies.”