Prop. regs. will eliminate federal tax benefit for many captive insurance companies.

AuthorOwens, Kevin

The Service has issued proposed regulations (REG-107592-00 and REG-105964-98) that, if adopted, will eliminate the federal tax benefit associated with most captive insurance companies that are included in a consolidated federal return and insure other members of the consolidated group. The proposed regulations put intercompany insurance transactions between members of a consolidated group on the self-insurance method of accounting. The proposed regulations, if adopted, will apply to intercompany insurance transactions in consolidated return years beginning on or after the date the rules are published as final in the Federal Register.

Background--Deferred Intercompany Transactions

Regs. Sec. 1.1502-13 provides rules for taking into account items of income, gain, deduction, and loss of members resulting from intercompany transactions. The purpose of these regulations is to provide rules to clearly reflect the taxable income and tax liability of the group as a whole, by preventing intercompany transactions from creating, accelerating, avoiding, or deferring consolidated taxable income or consolidated tax liability.

The matching rule is the principal source of single-entity treatment for intercompany transactions (see Regs. Sec. 1.1502-13(c) and Notice 94-49). For each consolidated return year, the matching rule requires the seller and buyer to take into account their intercompany items and corresponding items to reflect the treatment of the seller and buyer as divisions of a single corporation. Single-entity treatment under the matching rule might entail redetermining the attributes of intercompany and corresponding items, including exclusion from gross income or treatment as a noncapital, nondeductible amount. As for timing, the seller's intercompany items are generally taken into account in each consolidated return year based on the difference between the corresponding items the buyer takes into account and recomputed corresponding items the buyer would take into account if the seller and buyer were divisions of a single corporation. Single-entity treatment is not possible for all intercompany items and corresponding items. The acceleration rule requires the seller and buyer to take into account their items from an intercompany transaction, to the extent the items cannot be taken into account to produce the effect of treating the seller and buyer as divisions of a single corporation.

The regulations adopt a simplifying rule for direct...

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