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For various reasons, a business that has been managing risk through captive insurance may decide that the arrangement is no longer beneficial, and may choose not to continue it.

However, terminating a captive insurer results in some specific federal income tax considerations for U.S.–based businesses. Although many of these issues have broader applications, we will focus this discussion on domestic captives that have not been subject to or settled an IRS audit and that have one or more individual owners that directly hold the insured business through a single entity. We will also assume that the owners have a legitimate need for the captive's assets in the insured business (or, if the assets are sold, a need for the proceeds).

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