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California Offers Resolution for Abusive Micro-Captive Insurance Transactions

Tax Development Jun 08, 2023

California Offers Resolution for Abusive Micro-Captive Insurance Transactions

On May 31, 2023, the California Franchise Tax Board (FTB) issued FTB Notice 2023-02 - Resolution of Micro-Captive Insurance and Syndicated Conservation Easement Transactions, which provides a process of relief to eligible taxpayers. Eligible taxpayers may submit closing agreements to reverse the tax benefits and receive reduced penalties for any applicable tax year.

A “captive insurer” is an insurance company organized for the purpose of insuring the liabilities of its owners and/or related entities. Under Internal Revenue Code (IRC) Sec. 831(b), if the captive insurance company has received $2,650,000 (2023 limit) or less in gross premiums, it is eligible to elect to be taxed on only its investment income, as a “micro-captive,” and not taxed on the insurance premiums received. The company insured under the policies, however, is still allowed to deduct the full amount of premiums paid as an ordinary and necessary business expense under IRC Sec. 162. These tax benefits make micro-captive arrangements attractive but also predisposed to potential abuse. 

Eligible Taxpayers 

The following taxpayers are eligible to participate in the limited time offer of reduced penalties provided in FTB 2023-02:

  1. Taxpayers currently under examination by the FTB or under examination by the Internal Revenue Service (IRS) or at appeals with the IRS regarding their participation in a micro-captive insurance transaction.
  2. Taxpayers who have received a notice of proposed assessment from FTB with respect to their participation in such transactions and are at protest with FTB or are at appeal before the Office of Tax Appeals.
  3. Taxpayers in litigation with the IRS with respect to such transactions but does not include taxpayers who are in litigation with the FTB regarding such transactions.
  4. Taxpayers who are a direct or indirect partner in a partnership that is currently under examination by the IRS or FTB or that is in litigation with the IRS.
  5. A partnership that is required to report final federal adjustments pursuant to RTC Section 18622.5 or which has reported such adjustments, with respect to such transactions.
  6. A “tiered partner,” as defined under RTC Section 18622.5(b)(12), of a partnership.

Eligible taxpayers must submit a complete and signed Notice 2023-02 Closing Agreement between July 10, 2023 and November 17, 2023, and pay all taxes, applicable penalties, and accrued interest by November 17, 2023, or enter into an installment payment arrangement to pay the full amount over a period not to exceed 12 months.

As this is a limited time offer, please contact one of the Ryan professionals listed below for assistance with this application process as soon as possible.


Mark L. Nachbar

Mary Bernard

The material presented in this communication is intended to provide general information only and should solely be seen as broad guidance and not directed to the particular facts or circumstances of any individual who may read this publication. No liability is accepted for acts or omissions taken in reliance upon the content of this piece. Before taking (or not taking) any action, readers should seek professional advice specific to their situation from Ryan, LLC or other tax professionals. For additional information about this topic, please contact us at