Captive Insurance Company Premium Loan Backs: Proper Investment or Improper Return of Capital?

Abstract

Over the last decade, the use of Captive Insurance Companies ("CIC") has expanded from large entities to smaller, closely held companies when utilize the IRC 831(b) election. Correspondingly, the IRS has expanded its review of CIC arrangements, specifically targeting those CIC arrangements that utilize the IRC 831(b) elections for tax shelter reasons. To date, the vast bulk of IRS audits have focussed on the type of insurance provided by a CIC to its insured. In the future, additional IRS investigations may focus on the final transactions between the CIC and its respective owner, specifically circular cash flows created by premium loan backs from the CIC to the CIC owner.