Why, IRS, Why?

"Don't ask me what I want it for, if you don't want to pay some more," the tax man warns in the Beatles classic.

By Matthew Brodsky

But captive industry insiders had to ask. The viability of domestic domiciles was at risk after the IRS announced on Sept. 28 that many onshore captives might no longer be able to deduct discounted loss reserves. For weeks after, no one seemed to know why the IRS unleashed this new tax proposal. Some now claim to have the answer.

What was most confusing was that the proposal did not come out of the tax agency's insurance wing but rather from corporate consolidated returns. Whispers at industry events this past fall suggested that the insurance wing didn't even expect the proposal.

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Alternative Risk (08/01/11)
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Dialing Into Captive Profits (08/01/11)

To those inclined to watch JFK the movie or wonder whether man really walked on the moon, the going conspiracy here is that the IRS has it out for captives. The Feds have never believed that captives are legitimate insurance companies, the theory goes, and after losing repeatedly in court on this point for years, the IRS sought roundabout means to impose its views.

A less maliciously minded agency, another theory goes, could be just looking for a new revenue stream, simply ignorant of the mayhem it could cause for domestic domiciles.

Upon meeting with IRS and Treasury Department officials on Nov. 28, officers of the Self-Insurance Institute of America emerged with a third story: the government's official explanation.

The reason for the new proposal, said the government officials during an "extremely productive and professional dialogue," according to attendee Cliff Roberti, SIIA director of government relations, was that the IRS was seeking conformity and continuity in how consolidated returns are done across all industries.

With this technical and narrow intent, Roberti supposed, the tax man had not considered the broad negative effects of clamping down on captives. Government officials, he said, are now considering these macroeconomic repercussions.

Despite the dialogue started between industry officials and the IRS, "it will still be a fight," said Roberti.

The public comment period on the proposal ended Dec. 27. Roberti predicts that the agency could decide soon after that whether to go forward, though possible congressional public hearings on the subject could push back final word (and adoption) until spring. The Treasury Department could not be reached for comment.

MATTHEW BRODSKY is a Web editor/senior editor at Risk & Insurance®.

January 1, 2008

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