Is the IRS Cracking Down on "Stuffed" Captives?

Two recent rulings reflect increased Internal Revenue Service (IRS) scrutiny of offshore insurance companies. These rulings do not bode well for offshore captives sometimes referred to as "stuffed" captives.

According to the two IRS rulings,¹ some offshore companies are not doing enough insurance business to be considered "insurance companies" for federal income tax purposes. As a result, the IRS has revoked the tax-exempt status previously granted to a pair of offshore corporations under § 501(c)(15) of the tax code. That provision allows taxexempt status for property and casualty insurers that are very small (based upon annual premiums or, under recent legislation, a formula that takes account of both total gross receipts and annual premiums).