Citing papers filed by the Justice Department in a dispute involving Yum Brands, which owns the Pizza Hut, Taco Bell and KFC chains, the Times reported that the shelter, called Insureco, was sold by the accounting firm in the late 1990's.

The IRS is focusing on a transaction undertaken in late 1999 by Yum's wholly owned insurer, Glenharney. In that deal, Yum, then known as Tricon Global Restaurants, sold a small equity stake in Glenharney to Credit Suisse First Boston for $8 million.

However, the sale resulted in a $112.5 million tax loss to Yum because Glenharney held offsetting liabilities in the form of unpaid claims.

The IRS, which is auditing Yum for the tax years 1997, 1998 and 1999, argues that the sale served no legitimate business purpose other than to generate a tax loss for Yum, and the agency stated in court papers that it intends to disallow this tax loss.

Court documents show that Yum paid $750,000 in fees to KPMG for advice on Glenharney, according to the Times.

The case also raised the issue of how the IRS defines a "tax shelter". While the agency appeared to be saying that Insureco was a form of tax shelter known as a contingent liability shelter, which was outlawed in 2001, it has not specifically listed certain transactions involving captive insurance as illegal.

Nonetheless, an agency spokesman was quoted by the New York Times as stating that the IRS are "constantly alert to abuses within the captive insurance arena".