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Washington Tax Alert October 19, 2007 (Captive insurance companies)

Washington Tax Alert from Don Barnes, dbarnes@washingtontaxlaw.com
October 19, 2007

Treasury recently issued proposed regulations that would significantly limit the tax benefits accorded many insurance companies which are members of an affiliated group filing a consolidated tax return ( see REG 107592, September 27, 2007). Under current regulations, if a member provides insurance to another member in an intercompany transaction, the transaction is taken into account on a separate company basis rather than a single entity basis.

The proposed regulations would change this result. The intercompany insurance transaction would be treated in a manner comparable to self-insurance by a single corporation. The insurance company's losses incurred on insurance provided to other members of its consolidated group would be deductible under the normal accrual and economic performance rules of IRC § 461, not under the insurance reserve method. The new proposed regulations would apply if 5% or more of the insurance company's business arises from insurance provided to other members.

Although the proposed regulations are not limited to captive insurance companies, Treasury noted that the proposed regulations were prompted by "the increasing prevalence of captive insurance arrangements within consolidated groups."