Captive
(1) Captive. The term Captive means any entity that is described in each of the paragraphs (b)(1)(i), (ii), and (iii) of this section. (i) The entity elects under section 831(b) of the Internal Revenue Code (Code) to include in taxable income only taxable investment income (defined in section 834 of the Code) in lieu of the tax imposed under section 831(a). (ii) The entity issues a Contract to an Insured, reinsures a Contract of an Insured issued by an Intermediary, or both. (iii) At least 20 percent of the entity's assets or the voting power or value of its outstanding stock or equity interests is directly or indirectly owned, individually or collectively, by an Insured, an Owner, or persons Related to an Insured or an Owner. For purposes of this paragraph (b)(1)(iii), the rules of paragraph (b)(1)(iii)(A) or (B) of this section apply to the extent application of a rule (or rules) would increase such direct or indirect ownership. (A) A person that holds a derivative is treated as indirectly owning the assets referenced by the derivative. (B) The interest of each beneficiary of a trust or estate in the assets of such trust or estate must be determined by assuming the maximum exercise of discretion by the fiduciary in favor of such beneficiary and the maximum use of the trust's or estate's interest in the company to satisfy the interests of such beneficiary. (2) Computation periods(i) Financing Computation Period. The term Financing Computation Period means the most recent five taxable years (including the most recent concluded taxable year) of a Captive (or all taxable years of a Captive if the Captive has been in existence for less than five taxable years). (ii) Listed Transaction Loss Ratio Computation Period. The term Listed Transaction Loss Ratio Computation Period is the most recent ten taxable years (including the most recent concluded taxable year) of Captive. A Captive that does not have at least ten taxable years cannot have a Listed Transaction Loss Ratio Computation Period, and therefore is not described in paragraph (c)(2) of this section. (iii) Taxable years. For purposes of paragraphs (b)(2)(i) and (ii) of this section: (A) Each short taxable year is a separate taxable year. (B) If the Captive is a successor to one or more other Captives, taxable years of each such other Captive are treated as taxable years of the Captive. (iv) Successors. The term successor means any entity described in paragraph (b)(2)(iv)(A), (B), or (C) of this section. (A) A successor corporation as defined in 1.382-2(a)(5). (B) An entity that, directly or indirectly, acquires (or is deemed to acquire) the assets of another entity and succeeds to and takes into account the other entity's earnings and profits or deficit in earnings and profits. (C) An entity that receives (or is deemed to receive) any assets from another entity if such entity's basis in such assets is determined, directly or indirectly, in whole or in part, by reference to the other entity's basis in such assets. (3) Contract. The term Contract means any contract that is treated by a party to the contract as an insurance contract or reinsurance contract for Federal income tax purposes. (4) Insured. The term Insured means any person that conducts a trade or business, enters into a Contract with a Captive or enters into a Contract with an Intermediary that is directly or indirectly reinsured by a Captive, and treats amounts paid under the Contract as insurance premiums for Federal income tax purposes. (5) Intermediary. The term Intermediary means any entity that issues a Contract to an Insured or reinsures a Contract that is issued to an Insured, and such Contract is reinsured, directly or indirectly, by a Captive. A transaction may have more than one Intermediary. (6) Owner. The term Owner means any person who, directly or indirectly, holds an ownership interest in an Insured or its assets. For purposes of this paragraph (b)(6), the rules of paragraph (b)(6)(i) or (ii) of this section apply to the extent application of a rule (or rules) would increase such direct or indirect ownership. (i) The interest of a person that holds a derivative must be determined as provided in paragraph (b)(1)(iii)(A) of this section. (ii) The interest of each beneficiary of a trust or estate in the assets of such trust or estate must be determined as provided in paragraph (b)(1)(iii)(B) of this section. (7) Recipient. The term Recipient means any Owner, Insured, or person Related to an Owner or an Insured engaged in a transaction described in paragraph (c)(1) of this section. (8) Related. The term Related means having a relationship described in one or more of sections 267(b), 707(b), 2701(b)(2)(C), and 2704(c)(2) of the Code. (9) Seller. The term Seller means a service provider, dealer (including an automobile dealer), lender, wholesaler, or retailer that sells products or services to customers who purchase insurance contracts in connection with those products or services and at least 95 percent of sales of products or services by Seller for the taxable year to persons who purchase such insurance contracts are sales to Unrelated Customers. (10) Seller's Captive. The term Seller's Captive means a Captive Related to Seller, an owner of Seller, or individuals or entities Related to Seller or owners of Seller. (11) Substantially Similar. The term Substantially Similar is defined in 1.6011-4(c)(4). (12) Unrelated Customers. The term Unrelated Customers means persons who do not own an interest in, and are not wholly or partially owned by, Seller, an owner of Seller, or individuals or entities Related to Seller or owners of Seller.