Comment on FR Doc # E7-19134

RE: IRS REG-107592-00 I am writing on behalf of the members of the Montana Captive Insurance Association, Inc. (MCIA) to respectfully request the withdrawal of Proposed Regulation in Section 1.1502-13(e) of the September 28th Federal Register that would negatively impact certain captive companies. After reviewing the regulation we feel the Internal Revenue Service, in issuing this regulation, has demonstrated a fundamental misunderstanding of insurance accounting. To illustrate why we present this conclusion, let me first distinguish the accounting for captive insurance companies from that of a manufacturing company, for example, as they differ in several respects. First, the principal judgment involved in balance sheet valuations for an insurance company is not the assets, but rather the liabilities. Just as cost of goods sold is the largest expense of a manufacturing company, incurred losses are the largest expense of an insurance company. To record these expenses on a cash basis is not in conformity with generally accepted accounting principles and disregards the single largest operating component of an insurance company ? its loss reserves. The IRS provides for discounting these liabilities to their present value for purposes of deducting the losses of an insurance company, so the insurance industry is already penalized compared to manufacturers without even thinking of totally ignoring the loss reserves in determining taxable income. Secondly, the insurance industry is already highly regulated. Loss reserves are monitored by departments of insurance, who require certification of the loss reserves annually by independent actuaries in addition to annual opinions from independent certified public accountants. Third, from a taxation perspective, the Internal Revenue Service has recognized the unique character of the insurance industry with a unique reporting Form 1120-PC that differs from the standard Form 1120 completed by a manufacturing company. The form is designed to address the unique nature of the insurance industry. Whether transactions are between a parent and its captive or between unrelated parties, it does not make a lot of sense to try to eliminate transactions between an insured and an insurer, which prepares an altogether different type of tax return. Putting aside the analogy of a manufacturing company transferring inventory to a subsidiary through inter-company sales, let me address some additional reasons why the proposed regulations should be withdrawn. Numerous judicial decisions have made it clear that the intent of legislators was to permit captive insurers to deduct losses on an accrual basis, not a cash basis. The courts have ruled in favor of the captive insurance industry in Humana Inc. vs. Commissioner; Gulf Oil Corp. vs. Commissioner; AMERCO, Inc. vs. Commissioner; The Harper Group vs. Commissioner; Sears, Roebuck & Co. vs. Commissioner; and Hospital Corp. of America vs. Commissioner. Given such strong legal precedent, the use of administrative procedures for consolidated tax returns to eliminate this ability to deduct losses on an accrual basis circumvents the legislative and judicial intent. The IRS committed not to pursue the economic family theory in Revenue Ruling 2001-31. At that time, the IRS indicated that each transaction would be evaluated on the facts and circumstances particular to the transaction. Having been encouraged by this Ruling, numerous captives have been formed since 2001. A reversal of the IRS? position, particularly by use of the Consolidated Return Regulations, is not fair to the many captives that have relied upon the commitment made in the 2001 Ruling. It is also important to mention that in the long run, the Proposed Regulation 1.1502-13(e) will not enhance government revenues. Instead, it will likely have a negative impact on captive domiciles such as Montana. Over the past few years, the captive insurance industry has been a great economic development success story for the state, which has benefited from the industry?s ability to generate high-paying professional jobs as well as revenue through state premium taxes and tourism. The proposed regulation would encourage captive insurance companies to move offshore where they will not be required to pay U.S. income taxes. With this movement offshore, Montana jobs will be lost to offshore domiciles, and the related payroll taxes, personal income taxes, and state premium tax revenues will decline significantly. In conclusion, we thank you for listening to industry representation. Once all facts have been considered, we strongly encourage you to withdraw the proposed regulations. Sincerely, Brenda M. Olson, MBA, ARM, CPCU Chairperson of the Board Montana Captive Insurance Association, Inc.