Electronic submission via the Federal eRulemaking Portal\
http://www.regulations.gov (IRS REG--107592--00)

  ----------------------------------- -----------------------------------
  CC:PA:LPD:PR (REG--107592--00)\     
  Room 5203\                          
  Internal Revenue Service,\          
  P.O. Box 7604\                      
  Ben Franklin Station,\              
  Washington, DC 20044.\              
  Attn: Kelly Banks                   

  ----------------------------------- -----------------------------------

Re: [Comments on IRS REG-107592-00]{.underline}

Gentlemen:

As a general observation about the Notice of Proposed Rulemaking
REG-107592 pertaining to the consolidated tax return treatment of
captive insurance subsidiaries, it appears that the proposed regulations
provide a solution to a non-problem. The perceived "problem" is that
insurance company reserve accounting is inconsistent with the matching
principle for intercompany transactions within a consolidated group. The
reason that this "problem" is not genuine is because insurance company
accounting differs fundamentally from accounting for non-insurance
companies regardless of whether the insurer and the insured are members
of a consolidated group. Our further thoughts on that point are
published in the December 2007 edition of Captive Insurance Company
Reports, a publication of the Captive Insurance Company Association
(copy attached).

We would also like to offer the following two comments about the
proposed regulations.

Our firm, Anderson Kill & Olick, is a law firm that is best known for
its market leadership in insurance litigation. Anderson Kill & Olick
represents the interests of policyholders with respect to captive
insurance companies that have been formed by them.

Comment #1:\
Accident & health insurance risk and group term life insurance risk is
unrelated party risk

The proposed regulations would disallow insurance company reserve
accounting for intercompany insurance of risk "of" another member. This
raises the question, what is risk "of" another member? In particular,
under Rev. Rul. 92-93 accident & health risk and group term life
insurance risk is considered to be risk of an employee, not risk of the
employer. Accordingly, accident & health risk and group term life
insurance risk should be outside the scope of the proposed regulations.
We ask Treasury to confirm this point.

Since 2000, a number of captive insurance subsidiaries have been formed
that insure accident & health risk and/or group term life insurance risk
in compliance with terms of prohibited transaction exemptions from the
Department of Labor. These captives have relied on the understanding
that the risk they have insured is not risk of the employers but is
instead the risk of employees.

In keeping with Rev. Rul. 80-95, when an insurer insures an employer's
risk of uncertainty as to timing and amount of accident & health cost
reimbursements to employees, the insured risk is treated as an accident
& health risk even though the employees are not party to the insurance
contract. Under Rev. Rul. 92-93, when an employer pays accident & health
insurance premiums or group term life insurance premiums directly to a
captive insurance subsidiary, the premium is deemed to be fringe benefit
compensation to the employees (therefore deductible by the employer),
and the captive treats the premium as if received from unrelated
parties, namely from the employees. The employer's risk of loss is
identical with the employee's risk of loss. In substance, captive
insurance of accident & health risk and group term life insurance risk
amounts to insurance of unrelated risk. This is so regardless of whether
the premium is paid to the captive from the employees directly, from a
trust formed for the benefit of the employees, or from the employer
directly.

By clarifying that captive insurance of accident & health risk and group
term life insurance risk constitutes unrelated risk (as would be
consistent with current tax law), the consolidated return regulations
would avoid the needless complication of distinguishing between employer
vs. employee accident & health risk. For ERISA purposes, there exists a
distinction as to whether accident & health insurance premiums are paid
from employee benefit plan assets or from assets of the employer. This
distinction can be difficult to draw and therefore is potentially
controversial. For example, where an employer pays premiums to an
insurer directly but employees are informed that the insurer has
purchased coverage for their benefit, the mere fact that the employees
know about the arrangement may give them property rights to the
insurance coverage under common law principles. In such a situation it
may be ambiguous for ERISA purposes whether the insurance has been
purchased with employer assets or employee benefit plan assets. Tax law
has steered clear of this ambiguity. Tax law holds that when an employer
pays an accident & health insurance premium directly to a captive
insurance subsidiary, the premium constitutes constructive compensation
to the employees such that the captive's risk is a risk of the employee,
not the employer. If the proposed regulations are adopted, we would
recommend Treasury to interpret them in a way that is consistent with
current tax law as reflected in Rev. Ruls. 92-93 and 80-95.

See Appendix I for further discussion of the constructive compensation
theory behind Rev. Rul. 92-93.

Comment #2:\
Transitional rules should define "transaction" occurring prior to the
effective date

As drafted, the proposed regulations apparently would effectively
encourage members of a group to purchase multi-year insurance coverage
from their captive insurance affiliate prior to the effective date of
the regulations, if adopted. For example, if the regulations are adopted
in 2008 with an effective date of January 1, 2009 for a calendar year
taxpayer, a member could purchase a 10-year insurance policy from the
captive in 2008 so that reserves for any loss events between 2008 and
2017 would be attributable to an intercompany insurance transaction
entered into before the effective date of the regulations.

Furthermore, the proposed regulations may create an incentive for
captive insurance subsidiaries to strengthen their unpaid loss reserves
prior to the effective date of the regulations. The IRS and Treasury
have dealt with the topic of reserve strengthening in another context,
namely the fresh start provisions for loss reserve discounting under the
1986 Tax Reform Act.

We note that for a captive in a consolidated group, the complexity of
transitioning from insurance company reserve accounting to a
self-insurance method of accounting would arise largely from the fact
that the proposed regulations grandfather reserve accounting on a
transaction-specific basis for insurance policies issued before the
effective date of the regulations (if adopted) rather than simply
requiring a change in accounting method for both previously issued
insurance contracts and prospective insurance contracts.

We ask Treasury to confirm the following points of understanding:

-   In context of the rules pertaining to the effective date of the
    regulations (if adopted), the notion of an intercompany insurance
    "transaction" refers to the issuance an insurance policy, not the
    date of recognition of insurance company reserves.

-   Accordingly, if a captive insurance member of a consolidated group
    issues a multi-year insurance contract to another member prior to
    the effective date of the regulations (if adopted), insurance
    company reserve accounting would be permitted with respect to an
    unpaid loss reserve that is recorded under such contract but is
    recorded after the effective date of the regulations.

-   Furthermore, with respect to an intercompany insurance policy issued
    prior to the effective date of the regulations (if adopted), any
    reserve strengthening that is recorded prior to as well as after the
    effective date of the regulations will be deductible (subject to
    discounting under section 832(b)(5)).

We appreciate your consideration of our comments.

Very truly yours,\
\
\
\
/s/ Phillip England

**Appendix I\
Analysis of the Constructive Compensation Theory behind Rev. Rul.
92-93**

In Gulf Oil, 89 TC 1010 (1987), the taxpayer's 1974 tax year was at
issue in connection with the treatment of insurance premiums paid to its
captive insurance subsidiary. A portion of the taxpayer's premiums
purchased group long term disability coverage for employees of various
operating subsidiaries. The tax court held that, pursuant to the
economic family theory, none of the premiums paid were deductible as
insurance premiums.

Rev. Ruls. 92-93 and 92-94 subsequently held that the Gulf Oil court
erred in applying the economic family theory to captive insurance
coverage of long term disability risk. The IRS clarified that premiums
paid to a captive for accident & health (A&H) coverage, including long
term disability coverage, constituted a deductible expense for
compensation under section 162.

In Rev. Rul. 92-93, the IRS reasoned that where a captive insures
employer A&H risk, constructively the employer makes a compensatory
distribution of fringe benefits (namely health insurance coverage) to
the employees, followed by the employees' constructive payment of
premium to the captive. The employer may claim a compensation deduction
for the A&H premium paid to the captive regardless of whether the
captive otherwise meets the definitional criteria of an insurance
company for tax purposes. By implication, for tax purposes the captive's
A&H risk is constructively unrelated risk. The captive's A&H risk is
sourced as unrelated risk even if the employees have no privity of
contract with the captive, similarly as under the facts described in
Rev. Rul. 80-95.

In Rev. Rul. 80-95, a domestic corporation purchased an indemnity policy
from an unaffiliated foreign insurance company to cover claims made by
employees against the domestic corporation with regard to disability
plans it maintained covering its employees. The foreign insurer was not
a party to the employee disability plans and had no liability or
responsibility to either the plans or the employees. At issue as whether
the indemnity agreement was an indemnity type surety policy subject to a
4% excise tax under Section 4371(1) or a life, sickness, or accident
policy subject to 1% excise tax under Section 4371(2). Regarding the
excise tax rate, the IRS held that the policy was insurance, not
reinsurance. Regarding characterization of the policy -- and of more
interest to the present discussion \-- the IRS said that the arrangement
was "similar to one of reinsurance in which the primary insurer
transfers some or all the risk it has assumed to a second insurance
company," and as a result held the risk insured against by foreign
insurance is the risk of injury to employees and subject to the excise
tax on policies for "sickness and accident."

Both Rev. Rul. 92-93 and 80-95 provide a look-through rule, but the
premises are different. In Rev. Rul. 92-93, the premise is constructive
compensation. In Rev. Rul. 80-95, the premise is a longstanding
property/casualty insurance notion that the character of an insurance
contract is based on the nature of the underlying loss event.

In TAMs 200453012 and 200453013, the IRS contemplated Rev. Ruls. 92-93
and 80-95 and considered them to be in harmony. The TAMs addressed the
following situation: A vehicle service contract was issued in the first
instance by a car dealer, then reinsured by an offshore company owned by
the car dealer. The IRS field agent argued that for tax purposes
"reinsurance" requires assuming risk from an insurance company, not from
a car dealer, therefore the offshore company failed to qualify as a
reinsurance company. The field agent also argued that the offshore
company failed to qualify as an insurance company because it insured
merely one policyholder, namely the car dealer, therefore there was
insufficient risk distribution. IRS National Office held against the
field agent and in favor of the taxpayer on basis of the observation
that from the offshore company's perspective, risk distribution existed
under a look-through principle: The risks of car buyers were pooled, and
the offshore company could look through the car dealer. The IRS cited
Rev. Rul. 80-95 as authority for the look-through principle. The IRS
also considered and mentioned Rev. Rul. 92-93 in the TAMs but relied on
Rev. Rul. 80-95 instead. The constructive compensation theory behind
Rev. Rul. 92-93 was superfluous to the IRS' holding in the TAMs, whereas
Rev. Rul. 80-95 was sufficiently authoritative. Thus, the TAMs apply
Rev. Rul. 80-95 as an equivalent substitute for Rev. Rul. 92-93
regarding authority for a look-through principle. If Rev. Ruls. 80-95
and 92-93 are harmonious, this is important to note because Rev. Rul.
80-95 clarifies that where an insurer covers an employer's group
self-insurance risk for long term disability, the A&H character of the
insurance contract exists because of the nature of the underlying loss
events even though employees have no privity of contract with the
insurer.

Rev. Rul. 92-93 is based on a constructive compensation theory. When an
employer pays a premium to the captive for A&H coverage, constructively
the employer provides fringe benefit compensation to the individuals. In
turn, constructively the individuals pay premiums to the captive. The
captive receives premiums constructively from unrelated parties (the
employees).

The constructive compensation theory meets with general acceptance from
experts in employee benefits taxation. For example, as noted in 390-3rd
T.M. VI-C: "Compensation may be paid through plans which permit the
employee to exclude from income part or all of the benefits enjoyed,
including accident and health plans....The employer\'s contribution to
these plans is a part of the employee\'s compensation even when the
contribution need not be included in the employee\'s gross income."

Just as an employer has an insurable interest in the lives of its
employees, an employer has an insurable interest in the health (and also
the medical costs) of its employees. Most large employers provide a
health cost subsidy to employees. When a group A&H insurance contract
runs from the captive to the employer, the employer holds insurance for
its risk as to timing and amount of required funding contributions to a
welfare benefit plan that in turn provides benefits to employees. An
employee's filing of an A&H claim against the welfare benefit plan gives
rise to an employer's filing of a claim against the captive. Thus in a
captive A&H insurance arrangement, there exists an identity of claim
from the employee and the employer.

Precedent for the constructive compensation theory that underlies Rev.
Rul. 92-93 includes the U.S. Supreme Court's decision in Haynes v. U.S.,
77 S.Ct. 649, 353 U.S. 81 (1957). In Haynes, an employee received
sickness disability payment benefits from his employer (the telephone
company), which had self-insured its sickness and disability risk. Under
applicable tax law, if the sickness disability payment had come from an
insurance company, the benefit would be tax-exempt to the employee. The
IRS argued that the sickness disability payment was taxable to the
employee because the benefit payment came from the telephone company
rather than from an insurance company. The Supreme Court held against
the IRS. The court found that from the employee's perspective, the
receipt of the sickness disability payment had the same character
regardless of whether it came from the telephone company or from a
health insurance company. As far as the employee was concerned, the
telephone company was his health insurer. The court broadly construed
\"health insurance\" as an undertaking by one person for reasons
satisfactory to him to indemnify another for losses caused by illness,
and am employer's self-insurance comes within this meaning. It made no
difference that the employees paid no fixed periodic premiums, there was
no definite fund created to assure payment of disability benefits, and
the amount and duration of the benefits varied with the length of
service.

The constructive third party character of A&H premiums applies only
where the constructive beneficiary of the policy is the employee(s), not
the employer. Rev. Rul. 92-93 explains that corporate-owned life
insurance (COLI) premiums do not qualify for third party
characterization. With COLI, an employer may have beneficial interests
that are not identical to the employee's risk.

It is well established that a captive can insure an affiliated
employer's A&H risk in a way that does not involve plan assets and
therefore does not create an ERISA prohibited transaction. See DOL
Advisory Opinions 93-14A, 92-02A, 94-31A. See also Belsky v. First
National Life Ins. Co., 818 F.2d 661 (CA 8), 5/12/1987. The tax law
contains a concept of "welfare benefit plan" that is different from the
ERISA definition of "welfare benefit plan". Under ERISA, the
distinguishing characteristic of plan assets is the existence of
employee property rights to such assets. Tax law looks to employees'
receipt of insurance coverage as quid pro quo of employment (a
contractual right), as distinguished from a property right to plan
assets.