Businesses often manage property and casualty risk through captive insurance companies. Details of captive arrangements vary, but in closely held situations, it is common for captive insurers to be owned by the owners of entities they insure.

For various reasons, a business that has managed risk through captive insurance may decide that the arrangement is no longer beneficial and choose not to continue it. Certain federal income tax considerations regarding the termination of captives are discussed below. Although many of them have broader applications, this discussion is limited to 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. It is also assumed that the owners have legitimate need for the captive's assets (or if they are sold, from the proceeds) in the insured business.