Notice 2016-66 requires disclosure of

the information specified in §1.6011-4(d) and the Instructions to Form 8886 (or successor form), which includes identifying

and describing the transaction in sufficient detail for the IRS to be able to understand the tax structure of the reportable transaction and identity of all parties involved in the transaction. Notice 2016-66 provides that for all participants, describing the transaction in sufficient detail includes, but is not limited to, describing on Form 8886 (or successor form) when and how the taxpayer became aware of the transaction. The notice further provides that for Captive, describing the transaction in sufficient detail includes, but is not limited to, describing the following on Form 8886 (or successor form): (1) whether Captive is reporting because (i) the 70-percent loss ratio factor is met for the taxable year; (ii) the financing factor is met for the taxable year; or (iii) both (i) and (ii); (2) under what authority Captive is chartered; (3) all the type(s) of coverage provided by Captive during the year or years of participation (if disclosure pertains to multiple years); (4) how the amounts treated as premiums for coverage provided by Captive during the year or years of participation (if disclosure pertains to multiple years) were determined, including the name and contact information of any actuary or underwriter who assisted in these determinations; (5) any claims paid by Captive during the year or years of participation (if disclosure pertains to multiple years), and the amount of, and reason for, any reserves reported by Captive on the annual statement; and (6) the assets held by Captive during the year or years of participation (if disclosure pertains to multiple years).

V. Comments Submitted in Response to Notice 2016-66

Comments submitted in response to Notice 2016-66 were carefully considered in the development of these proposed regulations. Although the Administrative Procedure Act (APA), 5 U.S.C. 551-559, does not require a response to those comments, the comments are described here in an effort to assist taxpayers in understanding the provisions of the proposed regulations described in the Explanation of Provisions section.

First, some commenters suggested that changes to the Form 1120-PC, U.S. Prop- erty and Casualty Insurance Company Income Tax Return, would be better suited

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to capture the information sought by Notice 2016-66. Other commenters indicated that the information sought could be readily obtained from the existing Forms 1120-PC being filed, so any additional reporting would be unnecessarily duplicative and burdensome. However, changes to the Form 1120-PC would at a minimum impact all nonlife insurance companies that make section 831(b) elections, not only participants in the micro-captive transactions described in the proposed regulations. Also, some of the requested information is not readily available from filed Forms 1120-PC, such as the descriptions of the types of coverages provided by a Captive and the name and contact information of any actuary or underwriter who assisted Captive in the determination of amounts treated as premiums. Additionally, limiting the collection of information to only those entities filing the Form 1120-PC would be insufficient to gather relevant information, as information regarding Insureds and promoters of the transactions would not be included.

Second, commenters also suggested that the reporting requirements under Notice 2016-66 are contrary to Congressional intent in enacting section 333 of the PATH Act, which, as noted earlier, effective for taxable years beginning after December 31, 2016, modified the section 831(b) eligibility rules for a property and casualty insurance company to elect to be taxed only on taxable investment income. The provision increased the limit on net written premiums (or, if greater, direct written premiums) from $1,200,000 to $2,200,000 and indexed that amount for inflation. The provision also added diversification requirements to the eligibility rules. However, nothing in the statutory language or legislative history of the PATH Act suggests that Congress intended to provide the benefits of section 831(b) to companies that do not qualify as insurance companies for Federal income tax purposes. As exemplified by the transactions described in Avrahami v. Commissioner, 149 T.C. 144 (2017), Syzygy Insurance Co., Inc. v. Commissioner, T.C. Memo. 2019-34, and Caylor Land & Develop- ment, Inc. v. Commissioner, T.C. Memo. 2021-30, some companies claiming the benefits of section 831(b) do not meet these basic eligibility requirements for

such treatment. See also Reserve Mechan- ical Corp. v. Commissioner, 34 F.4th 881 (10th Cir. 2022) (concluding company filing as a tax-exempt entity under section 501(c)(15) did not qualify as an insurance company for Federal income tax purposes using similar analysis). The proposed regulations, like Notice 2016-66, would apply to entities that claim the benefits of section 831(b) when certain factors indicate that they do not or may not qualify as insurance companies for Federal income tax purposes.

Third, other commenters indicated that the reporting requirements were unduly burdensome, as well as duplicative, because the information sought could be readily obtained from a smaller subgroup of the participants in a transaction. However, the reporting and recordkeeping required for reportable transactions from each participant ensure that the Service can identify all of the participants of a particular transaction and that all participants are aware of their participation in a reportable transaction. Nevertheless, the proposed regulations significantly narrow the information sought from participants compared to that required by Notice 201666 and provide a disclosure safe harbor to a significant number of participants, thereby reducing the burden in reporting to the maximum extent consistent with sound tax administration. See proposed §1.6011-10(e)(2) and (f) and proposed §1.6011-11(e)(2) and (f).

Fourth, additional commenters on Notice 2016-66 expressed concerns regarding certain arrangements in which a service provider, automobile dealer, lender, or retailer (Seller) sells insurance contracts to its customers in connection with the products or services being sold (Consumer Coverage). These commenters recommended that such Consumer Coverage arrangements be excepted from the disclosure requirements. The proposed regulations provide a limited exception for certain participants in Consumer Coverage arrangements. See proposed §§1.6011-10(d)(2) and 1.6011-11(d)(2).

Finally, commenters argued that the 20-percent relationship factor and the 70-percent loss ratio factor described in sections 2.01(d) and 2.01(e)(2) of Notice 2016-66, respectively, are overly broad and arbitrary. However, the Treasury

Department and the IRS have determined that the factors are objective and reasonably determined based on existing statutory provisions and available industry data. The 20-percent relationship factor was based on the diversification requirements established by section 333 of the PATH Act. While one part of the PATH Act diversification requirements is based on the percentage of premiums from related insureds, requiring that no more than 20 percent of net written premiums (or if greater, direct written premiums) for a taxable year is attributable to any one policyholder, the 20-percent threshold in Notice 2016-66 is based on concentration of ownership of stock in a Captive when Insured or Insured’s owner owns Captive’s stock or is related to Captive’s owner. Both requirements are based on a lack of diversification and identify a threshold at which a lack of diversification may facilitate abuse.

Similarly, the 70-percent loss ratio factor was informed by, but is less burdensome than, the 85 percent medical loss ratio test enacted by Congress in section 833(c)(5) of the Code for Blue Cross and Blue Shield organizations and other health insurers that are entitled to certain tax benefits that are not available to other nonlife insurance companies, as well as the medical loss ratio computed under section 2718(b) of the Public Health Service Act, 42 U.S.C. 300gg-18. The loss ratio factor in Notice 2016-66 compares claims and expenses to premiums charged in a manner similar to the medical loss ratio test in section 833(c)(5) of the Code and the medical loss ratio computed under section 2718(b) of the Public Health Service Act. However, the medical loss ratio has a narrower focus than the Notice 2016-66 loss ratio factor and is computed as a percentage of the total premium revenue (excluding Federal and State taxes and licensing or regulatory fees) an issuer expends (1) on reimbursement for clinical services provided to enrollees under such coverage and (2) for activities that improve health care quality of enrollees.

The Treasury Department and IRS also considered data from the National Association of Insurance Commissioners (NAIC) in determining the applicable loss ratio factor. The NAIC, in its 2021 Annual Property & Casualty and Title Insurance

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Industries Report (2021 NAIC P&C Report), indicated that annual loss ratios for property and casualty companies averaged 72.5 percent for that year. See Insurance Industry Snapshots and Analysis Reports (July 21, 2022), https://content.naic.org/ cipr_topics/topic_insurance_industry_ snapshots_and_analysis_reports.htm (last visited April 3, 2023). The 2021 NAIC P&C Report is “produced from insurer statutory filings and represent[s] approximately 99% of all insurers expected to file the NAIC Financial Data Repository.” Id . The single-year average loss ratio for property and casualty companies ranged between 67.2 and 76.2 percent per year from 2012 to 2021. See U.S. Property & Casualty and Title Insurance Industries

– 2021 Full Year Results (2022), https:// content.naic.org/sites/default/files/inlinefiles/2021%20Annual%20Property%20 %26%20Casualty%20and%20Title%20 Insurance%20Industry%20Report.pdf (last visited April 3, 2023).

Commenters indicated that some Captives electing the alternative tax under section 831(b) have loss ratios that fall below the industry-wide average during a given year of operation and suggested that the loss ratio in Notice 2016-66 is set too high. However, the average loss ratio reported by the NAIC and the loss ratio factor in Notice 2016-66 are computed differently and are not directly comparable. First, the average loss ratio reported by the NAIC reflects the ratio of net losses incurred and loss expenses incurred to net premiums earned, without adjustment for policyholder dividends paid, whereas Captive’s loss ratio factor under Notice 2016-66 subtracts policyholder dividends paid from premiums earned by Captive. This means that, for an entity that pays policyholder dividends, the loss ratio factor under Notice 2016-66 would be higher than its NAIC loss ratio. Second, the loss ratio factor in Notice 2016-66 reflects the ratio of insured losses and claims administration expenses during the Notice Computation Period, which may be as long as five years. By contrast, the average loss ratio reported by the NAIC is a single-year average. Accordingly, even Captives electing the alternative tax under section 831(b) that have loss ratios that fall below the industry-wide average for property and casualty companies in any

particular year may not have loss ratio factors that cause a transaction to be described in Notice 2016-66 or the proposed regulations. The Treasury Department and the IRS therefore view the average loss ratio data reported by the NAIC as supportive of the loss ratio factors provided in Notice 2016-66 and in these proposed regulations. See proposed §§1.6011-10(c) (2) and 1.6011-11(c).

Despite commenters’ objections to the 20-percent relationship factor and 70-percent loss ratio factor, the commenters did not identify different factors or industry-wide standards for small insurers that would distinguish abusive from non-abusive transactions or provide examples of non-abusive transactions for which disclosure was required as a result of these factors. These objective factors in Notice 2016-66 have been effective in identifying transactions for which disclosure should be required and are reasonable given existing statutory provisions and available industry data.

To better ensure non-abusive transactions are not required to be reported under the proposed regulations, however, the proposed regulations lower the loss ratio factor for both the micro-captive transactions identified in proposed §1.6011-10(a) as listed transactions (Micro-captive Listed Transactions) and the micro-captive transactions identified in proposed §1.6011-11(a) as transactions of interest (Micro-captive Transactions of Interest) from 70 percent to 65 percent. See proposed §§1.6011-10(c)(2) and 1.6011-11(c). Additionally, the computation period used to determine the loss ratio factor is extended from a Notice Computation Period of up to five taxable years to a computation period of up to nine taxable years (referred to as the Transaction of Interest Computation Period) for the Micro-captive Transaction of Interest. See proposed §1.6011-11(b)(2). For the Micro-captive Listed Transaction, the computation period used to determine the loss ratio factor (referred to as the Loss Ratio Factor Computation Period) is ten taxable years. See proposed §1.601110(b)(2)(ii). For the foregoing reasons, the IRS intends to challenge the purported tax benefits from transactions identified in proposed §1.6011-10(c) as listed trans

actions, and the IRS may challenge the purported tax benefits from transactions identified in proposed §1.6011-11(c) as transactions of interest. The IRS may also challenge the purported tax benefits from these transactions based on the economic substance, business purpose, or other rules or doctrines if applicable based on the facts of a particular case.

VI. Purpose of Proposed Regulation

On March 3, 2022, the Sixth Circuit issued an order in Mann Construction v. United States, 27 F.4th 1138, 1147 (6th Cir. 2022), holding that Notice 2007-83, 2007-2 C.B. 960, which identified certain trust arrangements claiming to be welfare benefit funds and involving cash value life insurance policies as listed transactions, violated the APA, because the notice was issued without following the notice-andcomment procedures required by section 553 of the APA. The Sixth Circuit concluded that Congress did not clearly express an intent to override the noticeand-comment procedures required by section 553 of the APA when it enacted the AJCA. 27 F.4th at 1148. The Sixth Circuit reversed the decision of the district court, which held that Congress had authorized the IRS to identify listed transactions without notice and comment. See Mann Construction, Inc. v. United States, 539 F.Supp.3d 745, 763 (E.D. Mich. 2021).

In CIC Services, LLC v. IRS, the United States District Court for the Eastern District of Tennessee, which is located in the Sixth Circuit, viewed the analysis in Mann Construction as controlling and vacated Notice 2016-66, holding that the IRS failed to comply with the APA’s noticeand-comment procedures. The Court also held that the IRS acted arbitrarily and capriciously based on the administrative record. CIC Services, LLC v. IRS, 2022 WL 985619 (E.D. Tenn. March 21, 2022), as modified by 2022 WL 2078036 (E.D. Tenn. June 2, 2022); see also Green Valley Investors, LLC, et al. v. Commis- sioner, 159 T.C. No. 5 (Nov. 9, 2022) (relying on Mann Construction in holding that Notice 2017-10, 2017-4 I.R.B. 544 (identifying certain syndicated conservation easements as listed transactions) was improperly issued because it was issued without following the APA’s notice-and

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