1. International Captive Insurance Companies June 22, 2017
David M. Henderson, CPA, CFP, J.D., LL.M.
DUGGAN BERTSCH, LLC
303 West Madison Street
Suite 1000
Chicago, Illinois
Website:

2. DAVID M. HENDERSON, CPA, CFP, J.D., LL.M.
David M. Henderson, CPA, CFP, J.D. LL.M Mr. Henderson is a partner and co-founder with DUGGAN BERTSCH, LLC and practices in DUGGAN BERTSCH'S Private Client Practice Group. Mr. Henderson is a founding partner of DUGGAN BERTSCH where he focuses his time advising closely-held businesses and their owners. His extensive experience and education focuses on the interrelated disciplines of taxation, wealth planning and business law. Prior to joining DUGGAN BERTSCH, LLC, Mr. Henderson practiced as a senior associate with a Chicago based law firm and as a Certified Public Accountant in a Chicago based public accounting firm. Mr. Henderson earned a Bachelor of Sciences degree with dual majors in Accounting and Finance from Indiana University, a certificate of Certified Public Accountant from the University of Illinois at Urbana-Champaign, a Juris Doctor degree from the John Marshall Law School (Cum Laude) in Chicago, Illinois while working full-time, and a Juris Doctor Certificate in Tax Law from the John Marshall Law School. Mr. Henderson was the sole recipient of the Dean’s Award for outstanding academic achievement upon completion of his Juris Doctor degree. Mr. Henderson also completed his Masters of Law (LL.M.) (Highest Honors) in Taxation Degree with concentrations in Estate Planning at the John Marshall Law School. Mr. Henderson also holds a certified financial planner (CFP) designation from the certified financial planner board. Mr. Henderson is an adjunct professor of law at the John Marshall Law School where he teaches in the Masters of Laws program courses in federal taxation and estate planning.. Mr. Henderson is also a member of the American, Illinois State and Chicago Bar Associations, the American Institute of Certified Public Accountants and the Illinois Society of Certified Public Accountants. Mr. Henderson frequently presents to various organizations. Recently Mr. Henderson presented to the WealthCounsel, American Institute of Certified Public Accountants at their Tax Strategies for the High-Income Individual and appeared on WTTW’s Chicago Tonight as well as ABC7 WLS’s Chicago Sunday Morning. Mr. Henderson can be reached at either or

3. Current IRS “Initiatives”
Notice = Certain captive [ i.e. most 831(b)s] are now a transaction of interest
Form 8886 filings – What will the IRS do? – June 1-2, 2016 Federal Bar Insurance Tax Seminar “IRS’s Office of Tax Shelter Analysis has commenced review of thousands of forms.” Filing deadline was 5/1/16.
Forms 8918 for advisors (including the tattletale rule)
Captives are now a LB&I audit “campaign”
Highly coordinated but not technically a coordinated issue
Specialty Chief Counsel litigation team
ALL OF THE ABOVE = A current need to prepare yourselves and your clients

4. International Taxation of Captives
Taxation and reporting WILL DEPEND on whether a 953(d) election is made and is valid
For 953(d) captives
- U.S. Corporation for U.S. Tax Purpose
- Worldwide Income Taxation
- BUT 831(b) issues may shelter underwriting income
For non 953(d)
- Complex U.S. Income Taxation Regime
- 831(b) may shelter underwriting income BUT only to the extent it gives rise to U.S. ECI

5. Non 953(d) Taxation Issues
Income Taxed under IRC Section 882 (“ECI”) if activity gives rise to a US trade or business
Deductions allowed (if return is timely filed) and taxed at graduated corporate rates (or lower treaty rate) but withholding at the highest rate
Generally does not apply to foreign insurance carriers due to the nature of their operations in U.S.
Insurance premiums subject to Chapter 4 (i.e. “FATCA”) withholding and reporting
Chapter 4 (“FATCA”) applies before Chapter 3 (i.e. section 881)
Insurance Premiums from U.S. sources
Withholding rate is lower of 30% or treaty withholding rate, if applicable, ONCE proper owner documentation is received
As of 1/1/17, FATCA withholding applies to insurance premiums from U.S. sources even if premium excise tax applies (Double taxation on a GROSS basis due to premium excise tax)
Income Taxed under IRC Section 881 (“FDAP”) for US source payments
Withholding rate is lower of 30% or treaty withholding rate, if applicable
No FDAP withholding or reporting if premium is subject to premium excise tax
Excise taxation (1-4%) on premiums (Section 4371)
Gross taxation on premiums covering defined US risks (e.g., life, health, P&C)
Treaty may reduce (e.g. Bermuda)

6. IRS goes after 953(d) elections
Generic Legal Advice Memorandum AM
Invalidity = CFC Status ($10,000 penalty/$50,000 max)
Note - Special lower ownership thresholds (0%/25% thresholds versus normal 10%/50% thresholds) for CFC determination as well as subpart F inclusion rules for insurance income
Reasonable cause exception
Invalidity = 926 reporting issues ($10,000 penalty/$50,000 max)
Reasonable cause and not due to willful neglect exception
Invalidity = Open statute of limitations
IRC Section 6501(c)(18) = TOTAL RETURN IS OPEN
Invalidity = Possible Form 1120-F non-compliance for EIC and if not EIC then FATCA and premium excise taxations and reporting

7. What does this look like?

8. How to Add Value to Your Clients with Captives
First = Due Diligence (Review files for past issues)
Second = Proactively Develop IRS response strategy (Think through the likely issues)
Third = Consider the Future. (Keep in Place? Redomicile?)