A coalition including two major captive associations is racing to meet an Internal Revenue Service deadline and submit arguments why a proposed IRS regulation would harm their industry.
The Coalition for Fairness to Captive Insurers (CFCI)–consisting of the Captive Insurance Companies Association, the Vermont Captive Insurance Association and more than 60 other members–have hired legal help to draft comments that must be submitted to the Internal Revenue Service by Dec. 27, according to CICA President Dennis P. Harwick.
"We're up and running," he said, explaining that the effort consists of two main components–the technical/legal response and the political response. "The technical/legal has a deadline of Dec. 27, which we will comfortably meet," he added.
Mr. Harwick said he has not yet seen the draft, which could run 35-to-40 pages.
"The key question is clear reflection of income," he said. Much of the response will be to outline the coalition's position, which is that the proposed regulation, "rather than creating a process that would clearly reflect income, actually does just the opposite."
The IRS proposal would reverse a longstanding tax treatment of captive insurers and put them on the same footing as self-insureds, which are unable to deduct a discounted reserve for estimated losses and expenses, whether or not claims have been filed.
With no prior hint of its plans, the IRS published its proposals in the Federal Register on Sept. 28.
The premise of the argument, according to Mr. Harwick, is that "insurance isn't like other products, where you pay and you get the product simultaneously. In insurance, you pay and then you wait to see if you're going to get the product."
The way to reflect financial status is to put the money in reserves, "so it's there if and when the product is delivered."
Once the draft is completed, Mr. Harwick said he and VCIA President Molly Lambert would give it to their association boards to read over. "Presumably they will give us the go-ahead to file it," he said. "We will file it in the name of the coalition."
The coalition, he noted, consists of domicile associations and captive owners from almost every U.S. domicile.
But the effort will not come cheap. Initial estimates for expenses were more than $350,000, according to Mr. Harwick.
"We're under no illusion that [the coalition] is going to pay for the out-of-pocket expense to do this," Mr. Harwick said. "CICA and VCIA agreed to backstop what they don't collect."
The goal of the coalition, he said, is to get the proposed regulation withdrawn–"not to turn it into a legislative battle but to convince the IRS that however well-meaning it was when they put it together, it doesn't work."
He said the "fundamental issue is that insurance is different. Banking has the same kind of thing, where there are different accounting rules and a lot of it is based on the fact that they are strongly regulated and regulators tell them they have to do things. They don't have any choice about how much to put into reserve, for example."
The second component–the political response–will begin to be addressed next week, he said, when coalition members are scheduled to meet with Senator Max Baucus, D-Mont., who chairs the Senate Finance Committee, which is the IRS oversight committee in the Senate.
As part of the response, the group will also request a hearing, he said, which he expects will happen within 60 days. This means "the earliest the IRS could promulgate this [regulation] would be some time later this spring," Mr. Harwick noted.
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