Nobody really knows what the IRS was thinking when it proposed a regulation with the potential to undo two decades of legislation and other brick-laying required to build the U.S. captive industry.
The regulation--1.1502-13(e), proposed on Sept. 28, 2007--would have eliminated the tax deduction for reserves established by captives for insurance sold to affiliates, if the insureds and insurer file in the same consolidated return.
The effect would have been to discourage new captive formations and perhaps send a number of existing captives offshore, undermining an industry that now encompasses about 30 states with captive regulations on the books. Also out the door would have been the infrastructure supporting the domestic captive industry, generating jobs and income critical to states such as Vermont, the top U.S. domicile.
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