Congressional representatives from both major parties have said they are looking into the issue of an insurance company tax loophole raised by The New York Times last week.

The companies operate under a little-known plan introduced in 1954 that allows individuals and companies to legally avoid US taxes. The plan allowed farmers and others having trouble finding insurance coverage to create their own tax-exempt insurance companies. Mutual insurance companies that were organised under the plan are considered tax-exempt if their insurance income does not exceed $350,000 a year.

Several of the companies have been used to shield millions of dollars from US taxes, quite legally - but not in the way in which the framers of the original legislation (which was amended in 1986) had intended.

The focus of the enquiries, for the moment, is billionaire Wall Street investor Peter R. Kellogg. His IAT Reinsurance, which has a Bermuda connection, reportedly legally avoided $78.6 million in US taxes in 2000 and 2001, and a total of $189 million of taxes between 1996 and 2001, according to information gained by the Times.

The loophole arises because, while Congress limited the amount of premiums which these companies could earn, no limits were set on the assets they could own without tax consequences. By setting aside enormous amounts for expected claims - amounts that hugely exceed premium income - the companies are legally enabled not to pay US taxes on their investment income.

A lack of concern by an understaffed US Internal Revenue Service has meant that, even when these companies close down, no tax has been paid, The New York Times reported.

Leading the charge against the companies is Bermuda critic, Representative Richard E. Neal, a Democrat of Massachusetts. Rep. Neal has been in the forefront of every attempt to close loopholes and change laws aimed at damaging Bermuda in recent years.

Although Bermuda has no control over the legislation, it has been drawn into the dispute because a small minority of the companies that have used the loophole are Bermuda-registered.

The Internal Revenue Service said late last week that it would begin an investigation into these companies, but if they have followed the letter of the law, there will be little the IRS can do. The only course of action that would work would be a change in the legislation, but that can be a long drawn-out process in the US.

Meanwhile, the House Ways & Means Committee is looking into the matter, as is the staff of the Congressional Joint Committee on Taxation.

At least 1,480 companies claim the exemption, the Times reported, although only a minority of these reportedly has a Bermuda connection. None of the companies has been audited by the IRS, which until now has maintained a hands-off approach to what, after all, is legal business activity.

At least eight of these companies have assets and annual revenues in excess of $50 million, the Times reported.