The Internal Revenue Service announced on February 20, 2008 that it is withdrawing the proposed IRS Regulation §1.1502-13(e)(2)(ii)(C). The withdrawn regulation would have disallowed as a current deduction for federal income tax purposes any premium payments to an affiliate captive insurer if the captive received as little as 5% of its total premiums from affiliates on the same consolidated tax return. Under the proposed regulation, while premium income would have been recognized up front, the loss would only have been recognized as it was paid, not when it accrued. Click here to read our previous post on this issue.

Industry experts applauded the turnaround by the IRS. They feared that if the proposed regulations were enacted, domestic captive programs would be made much less attractive financially and lead to a flight of capital to offshore subsidiaries.

As a result, the planned public hearing on February 29, 2008 to discuss the proposed regulations has been cancelled. The IRS plans to publish a brief notice on this matter in the February 25, 2008 Federal Register.