Captives Seek IRS Change Of Mind

Dec 26, 2007

NU Online News Service, Dec. 26, 1:13 p.m. EST

Groups representing captive insurers made a concerted appeal to the Internal Revenue Service asking it to withdraw a proposal that would change the way captives deduct losses, saying that the ruling is contrary to existing legal precedent.

The IRS’ proposed regulation would require captives to deduct losses on a cash basis rather than an accrual basis by changing the existing treatment of inter-company transactions to match rules governing manufacturing companies not those governing property-casualty insurance companies.

Two groups, the Coalition for Fairness to Captive Insurers, which was set up to contest the rule, and the Vermont Captive Insurance Association, in comment letters to the IRS, asked the IRS and the Treasury Department to hold a public hearing on the issue.

The IRS proposed the rule change on Sept. 28 as a revenue-raiser, prompting united opposition from the captive insurance industry. The period for comment on the proposed changes closes Friday.

Besides the Coalition for Fairness to Captive Insurers and the Vermont captive insurers’ trade group, groups representing captives in South Carolina and Montana have also voiced opposition to the proposal in comment letters.

The South Carolina Captive Insurance Association said that, “Numerous judicial decisions have made it clear that the intent of the legislation was to permit captive insurers to deduct losses on an accrual basis, not a cash basis,” citing six court cases. “Given such strong legal precedent, the use of administrative procedures for consolidated tax returns to eliminate this ability to deduct losses on an accrual basis circumvents legislative and judicial intent,” the group said.

In its comment letter to the IRS, the Montana Captive group said, “in the long run, the proposed rule will not enhance government revenues,” but instead would “likely have a negative impact on captive domiciles such as Montana.”

Another impact, the letter said, would be to encourage captives to move offshore, “where they will not be required to pay U.S. income taxes.

“With this movement offshore, Montana jobs will be lost to offshore domiciles, and the related payroll taxes, personal income taxes and state premium tax revenues will decline significantly,” the letter noted.

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