Captives' Biggest Concern Is Securing Tax Deductions.

Qualifying for tax deductibility is the biggest issue facing the captive industry, said Derick White, assistant director of captives for the Vermont Department of Banking, Insurance, Securities and Health Care Ad ministration. He spoke at the 15th annual Vermont Captive Insurance Association Conference.

The challenge is to prove that there is the risk distribution necessary for premiums to be deductible. He pointed to the penalty imposed by the Internal Revenue Service on United Parcel Service regarding UPS' captive and the way it distributed its risk. In the 1999 UPS tax case, the U.S Tax Court deemed elements of UPS' offshore operations a sham."

One way to satisfy the risk-distribution requirements is with unrelated, or third-party, business, White said.

"If you can have enough unrelated business in your captive, then what you own is a regular insurance company, and you can deduct your premiums to your own captive, in addition to other premiums that other people are paying to your captive," he said. "But you can't have too much unrelated business."

Captives can expect an increasing number of court cases, White noted. "Right now, it seems the taxpayers are winning, but who knows about the future," he said.

Many companies want their captives to be able to handle premium income similar to the way a traditional insurance company does, White said. For example, when a company buys a policy from an insurer, it can deduct the premiums immediately.