It seems to me that, if the IRS were to cease its persecution of captive insurance companies, more tax would be generated rather than less. This being the case, the actions of the service in this regard are counterproductive at best and may be regarded as ill conceived and short sighted.

Each of the other 36 states created their own captive industries to take advantage of the economic benefits that this can bring. Some states have had greater success than others but all of them are better off as a result of captive insurance companies.

Now, let’s take a look at those 37 states, starting with Vermont which was the first in the field and the most successful. There are over 1000 captives in Vermont and they are supported by over 100 service companies, including captive managers, actuarial firms, auditors, law firms and investment managers, among others. Each of those captives pays license fees and premium taxes which contribute millions of dollars in direct revenue. Each employee of the service companies pays income tax and sales tax on most of the goods they buy. Their contribution to the economy of Vermont is significant. If the IRS were to achieve their goal of eliminating captives, Vermont would lose all of this income and economic development.

All of these elements contribute to extra taxable income that is likely to exceed the premiums paid to the captive which means that the corporation, because it is more profitable, will end up paying more in taxes to the IRS and the shareholders will also pay more taxes on their increased dividends.

If we take account of the additional benefits created by a captive, such as reduced costs, improvements in cash flow and better risk management, we can see that the profits generated by the captive go beyond its own profits from underwriting and investment.

We all know that insurance companies are in business to make profits for their shareholders. If a corporation is insured by its own captive, those profits stay within that corporation. In addition, its bottom line will be strengthened . The profits generated by the captive will add to the corporation’s taxable income and the additions to the bottom line can generate more dividends which in turn will create taxable income for the shareholders.

Captives are the most efficient form of insurance. They bring significant economic benefits, not only to the thousands of corporations that use them but also to the domiciles in which they are registered. It is no accident that 37 US States now have captive enabling legislation and that many smaller countries, such as Bermuda, thrive because they have a successful captive industry. Those states introduced captive facilities because they believe that it will bring them economic benefits.

In his presentation to the international meeting of the Self Insurance Institute of America, Nigel Bailey of Americap Solutions LLC suggested that the persecution of captives by the IRS is ill conceived and short sighted. Here’s why:

Why the IRS has it all wrong