Yet another legal loophole in the US tax regulations may be about to bite Bermuda. Like the relocation of US companies that last year caused Bermuda such poor public relations, this latest tax-avoidance practice is entirely legal.

Writing in The New York Times, under the headline "Help for Bad Times Now Helps Rich", David Cay Johnston this week described a little-known plan introduced in 1954 that allows individuals and companies to legally avoid US taxes.

The plan allowed farmers and others who were having trouble finding insurance coverage to create their own tiny, tax-exempt companies. The forerunners, in some ways, of the captives companies that now dominate alternative risk transfer globally, mutual insurance companies that were organised under the plan are considered tax-exempt if their insurance income does not exceed $350,000 a year.

Lack of income is not the problem. The 1954 plan, as amended in 1986, apparently makes no connection between income and expenses. Those running these companies, the Times charged, booked tiny amounts of income and then set aside enormous amounts for "potential claims". As an example, the Times cited one non-Bermuda-related company that booked $33,173 in premium income in the four tax years between 1996 and 1999 - and then booked claims large enough to exempt $315.1 million of unrelated investment income from taxation.

Such activity was legal, the Times said, although an audit by the Internal Revenue Service would quickly establish that the amounts booked for potential claims were preposterous. The IRS, however, appears to take no interest in these companies, not even pursuing them to pay whatever taxes might be due when they reverse the claims estimates and go out of business stuffed with untaxed profits.

The Times lists as examples nine companies who have taken advantage of this loophole, including two with Bermuda connections. IAT Reinsurance apparently avoided $110.3 million of taxes between 1996 and 1999 and SLK reinsurance avoided $1.2 million in 1999 and 2001, according to documents obtained by the Times.

David Harris, a lawyer in the IRS's office of Tax Shelter Analysis, told the Times he had heard of one "sales pitch" that works as follows:

"A business owner creates an insurance company, often in Bermuda or another tax haven where there are few regulations, but under rules subjecting it to US tax law. The owner then applies to the IRS to have the company taxed under Section 501(c)(15) of the tax code, which makes it exempt from taxes so long as it takes in less than $350,000 of premiums.

"The owner then insures his own businesses and, sometimes, solicits some business from others, in many cases collecting only a few thousand dollars in total premiums." It is the second and third steps that make the deal attractive, especially to someone with an asset that has soared in value.

By contributing the asset to the insurance company, any US capital gains taxes due would be avoided, since the company is tax-exempt.

It is not clear how many of these companies are in existence. The Times refers only to "dozens".

"This law was meant to let smaller insurance companies start and grow up to become tax-paying companies," said Jay Adkisson, a lawyer in Laguna Niguel, California who tracks tax frauds and who has helped clients create what he says are legitimate tax-exempt insurers. "That sounds well and good except for the people at the large accounting firms and the tax shelter promoters who are abusing this," Mr. Adkisson said.

The Times cited Peter R. Kellogg, a billionaire Wall Street investor, as having used the exemption for small insurance companies to escape more than $100 million in taxes on investments in four years.

Although some of the experts cited by the Times say that closer inspection by the IRS could stop the abuse of this programme, others argued that new legislation is required.

The only thing that is certain is that Bermuda is entirely free from any taint arising from this activity. The corporations and their practices are legal in the US and, if the companies pay their annual fees in Bermuda and maintain their operations in good standing locally, Bermuda would have no reason to interfere with such activities in any way.