The Taxman Does Not Cometh

The captive community was positively giddy with today's news that the Internal Revenue Service had second thoughts about withdrawing the critical deduction such entities enjoy on reserves for insurance sold to affiliated clients, and rightfully so. After all, it was their intense lobbying and aggressive feedback that persuaded the IRS to back off rather than risk driving the thriving U.S. captive industry offshore.

While Uncle Sam might one day revisit the issue–the tax man warned that the IRS and the Treasury Department continue to study whether revisions to the rules for inter-company transactions are necessary to clearly reflect the taxable income of consolidated groups–for today at least, it's party time for the domestic captive industry.

(For full coverage of the IRS decision and reaction to it, click here.)

At a time when it's hard enough to convince American industries to keep their facilities here in the good, old USA, pulling the rug out from under the thriving domestic captive industry would have been lousy timing, perhaps even killing local development outright.

The IRS has never been comfortable with captives, no doubt suspicious of what they fear might turn out to be some sort of shell game to move assets around under one roof to avoid paying taxes.

But the fact is that captives play a key role these days in helping organizations manage their risks, without being left at the mercy of the roller coaster commercial insurance market. Buyers get direct access to the reinsurance markets via their captives, even out the highs and lows of the general pricing cycle, and create strong incentives to better control their exposures (since it is essentially their own money on the line). That's all for the good.

Thus, this is really a consumer issue, not a tax issue, and kudos to the IRS for listening to public opinion and backing off before they did something really damaging and counterproductive.

The captive industry should be congratulated for its well-coordinated campaign to convince the IRS to change course before it drove them off the road. They were all over this issue from the moment the IRS announced its proposed regulatory change last September. Various groups joined together or met separately with Treasury Department officials and members of Congress, while responding in droves to the IRS call for comment.

Reluctantly, but wisely, the IRS dropped the idea.

As you'll see in our March 3 Captive Domicile Roundup, more and more states are getting into the captive act, providing a growing number of options for buyers seeking alternative risk-transfer solutions. The IRS proposal might have stopped that movement in its tracks here in the U.S., or at least slowed its momentum to a crawl.

In other words, they done good.

What do you folks think?