Some Perspective (from an Unexpected Source) In Defense of the IRS’ Notice 2016-66
IRS Notice 2016-66 requiring dealers to file Forms 8886 to disclose Producer Owned Reinsurance Company (PORC-like activities) has created considerable uncertainty over what should be filed and by whom.
Over a decade ago, when the IRS specifically was looking at dealership PORCs, after a series of audit challenges and Technical Advice, the Service concluded that PORC arrangements were not, per se, tax shelters so long as they were operated as legitimate business activities.
It is my belief that most legitimate dealer PORCs should eventually obtain favorable interpretation/acceptance by the IRS on this point, and eventually, dealers and related parties will be excused from these onerous Form 8886 filing requirements.
In the meantime, I would suggest patience and understanding on the part of dealers and CPAs who have to put up with this uncertainty and the compliance work it engenders.
To appreciate the full magnitude of the outlandish arrangements which the IRS is faced with auditing, and to understand why Notice 2016-66 was issued, it is eye-opening to read two recently reported cases.
One case is “Owensboro Dermatology Associates PSC et al. v. Unites States; No. 4:16mc-00005” which involved the creation of multiple PORC entities.
The second case is “Crithfield, Duane et al. v. United States; No. 8:13-cr-00237.” This case did not involve the creation of a PORC entity, but it does fall within the ambit of being an arrangement substantially similar to what the IRS describes in Notice 2016-66. This case includes a list of 22 different potential risks against the happening of which individuals would purchase insurance and claim deductions in their tax returns. Here’s just a few to show you the imagination (and gullibility?): international communicable disease medical expense reimbursement … international kidnap/random investigation expense … key supplier loss expense reimbursement … market/CPGS fluctuation loss expense reimbursement … research and development expense overrun reimbursement, etc.
When one of the promoters was asked by a potential investor for a claim form, the promoter said, “There’s no claim form. No one has ever filed a claim. The whole idea is not to file a claim. But don’t worry, 85% of your premium will go into your trust account.”
In light of these and other situations where promoters and taxpayers try to take advantage, many advisors may feel that the Service is clearly not overreaching in casting a wide net initially to sort out the illegitimate from the legitimate insurance arrangements.