OTHER 200531019: Reinsurer agrees to prospective loss of exemption

Plain-English summary

The IRS revoked a reinsurer's section 501(c)(15) exemption from a redacted effective date, with the organization's agreement. The final letter and examination report both say the IRS found no evidence supporting revocation for the year it examined. The report describes declining credit life and accident and health insurance production, and says the organization was considering closing. It recommends accepting the organization's proposal to end exemption for later years while closing the examined year. The public release does not disclose the effective year.

Ruling snapshot

• Question: Should the reinsurer's section 501(c)(15) exemption continue after the examined year?
• Outcome: Revocation effective on a redacted date, with the organization's agreement.
• Key authorities: IRC §§ 501(c)(15), 953(d), 7428.

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
1100 Commerce Street
Dallas, TX. 75242

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Date November 18, 2004

Number: 200531019
Release Date: 8/05/2005
TE:GE:EO

UIL: 501.15-00

Legend:
A= Name of Organization
B= Employer Identification Number
C= Tax Year Ended
D= Local Tax\Advocate’s Office
Date1= Date of the letter
Date2= Effective Date

Taxpayer Identification Number:
B
Form:
Tax Year(s) Ended:
C
Person to Contact/ID Number:
Contact Numbers:
Telephone:

CERTIFIED MAIL – RETURN RECEIPT REQUESTED

Dear [illegible]:

This is our final adverse determination letter as to your exempt status under
§ 501(c)(15) of the Internal Revenue Code. Although for the year of the examination, there was no evidence to support revocation, we have determined, and you have agreed, that for years beginning Date 2, you were not operated as an “insurance company” within the meaning of § 501(C)(15) of the Internal Revenue Code. Your exempt status is revoked effective Date 2.

Our decision is outlined in the Technical Advice Memorandum that is enclosed which further explains why we believe an adjustment of your organization’s exempt status is necessary.

Although you have agreed to our determination that your excempt status under Internal Revenue Code section 501(c)(3) is revoked for all years beginning, Date 2, we have also enclosed Publication 892, Exempt Organization Appeal Procedures for Unagreed Issues, and Publication 3498, The Examination Process. These publications include information on your rights as a taxpayer and they explain appeal rights.

Because this case involves exemption under I.R.C. § 501(c)(15), you cannot contest the adverse determination in a declaratory judgment action under I.R.C. § 7428. You can, however, contest the revocation of exempt status in the context of any related deficiency case involving adjustments that flow from the loss of exemption. Thus, you may file suit in United States Tax Court, the United States Court of Federal Claims, or United States District Court, from any deficiency notice issued in this case or a related case after satisfying procedural and jurisdictional requirements as described in Publications 3498 and 892.

You are required to file federal income tax returns for the tax period(s) shown above, for all years still open under the statute of limitations, and for all later years. File the federal tax return for the tax period(s) shown above with the Ogden Service Center within 60 days from the date of this letter, unless a request for an extension of time is granted. File returns for later tax years with the appropriate service center indicated in the instructions for those returns.

You have the right to contact the office of the Taxpayer Advocate. Taxpayer Advocate assistance is not a substitute for established IRS procedures, such as the formal appeals process. The Taxpayer Advocate cannot reverse a legally correct tax determination, or extend the time fixed by law that you have to file a petition in a United States court. The Taxpayer Advocate can, however, see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling. You may call toll-free 1-877-777-4778 and ask for Taxpayer Advocate Assistance. If you prefer, you may contact your local Taxpayer Advocate at:

If you have any questions, please call the contact person at the telephone number shown in the heading of this letter. If you write, please provide a telephone number and the most convenient time to call if we need to contact you.

Thank you for your cooperation.

Sincerely,

R. C. Johnson
Director, EO Examinations

Enclosures:
Publication 892
Publication 3498
Technical Advice Memorandum

Form 886-A EXPLANATION OF ITEMS Schedule No. or Exhibit
Name of Taxpayer
Year/Period Ended

Issue:

Whether [illegible] continues to qualify for exemption under section 501(c)(15) of the Internal Revenue Code?

Facts:

[illegible] was organized in [illegible], in the [illegible] and [illegible]. In
[illegible] they filed Application for Recognition of Exemption Under Section 501(a), Form 1024. On September 8, [illegible] they filed the 953(d) election. On December 19, [illegible] they received their exemption under section 501(c)(15) from the Service.

The purpose of the organization is to reinsure various risks. They assume risks from direct writing insurance companies. In December [illegible] they signed a reinsurance agreement with [illegible], which ceded 80% of liability under credit life insurance certificates and credit disability insurance certificates. In October of [illegible], Consolidated recaptured the entire unearned portion of the risks covered and ceded.

In [illegible] signed an agreement with [illegible], a wholly- owned subsidiary of [illegible]. [illegible] is licensed to sell life and disability policies in the state of [illegible].

The policies are sold through [illegible] to individuals who purchase vehicles from
[illegible] Nissan and [illegible] Honda. A breakdown of ownership of [illegible] Nissan, Honda, [illegible] is below:

Nissan

• 61.4% owned by [illegible]
• 4.2% owned by [illegible]
• 4.2% owned by [illegible]
• 4.2% owned by [illegible]
• 4.2% owned by [illegible]
• 4.2% owned by [illegible]
• remainder held by parents as custodians for their children

Department of the Treasury-Internal Revenue Service Form 886-A

Form 886-A EXPLANATION OF ITEMS Schedule No. or Exhibit
Name of Taxpayer
Year/Period Ended

Honda

• 75% owned by [illegible]
• 25% owned by [illegible]

[illegible] licensed to sell insurance in State of [illegible]. Sales of insurance products at dealerships through [illegible]

• 70% owned by [illegible]
• 30% remainder owned equally by [illegible]
• established under [illegible]
• administer policies sold at [illegible] Nissan and [illegible] Honda
• receives commission on life and disability policies sold at the dealerships

EXAMPLE OF FLOW OF FUNDS:

• Finance and insurance personnel at dealership collect the premium from customers when car is sold
• 100% of the premium is remitted to [illegible]
• 67.5% of the premium is remitted by [illegible] to the direct writing policy issuer,
• 32.5% of the premium is retained by [illegible] as commissions.
• [illegible] remits 6.5% back to the producing dealership as its commission
• [illegible] subtracts its administrative fee of 10.75% from its 67.5%. The remainder less cancellations and claims is remitted to this organization [illegible] along with a monthly cession statement
• For its 10.75% administrative fee, [illegible] provides all policy administration including policy forms, claims administration, and accounting administration.
• Therefore, 56.75% of the premiums collected are remitted to this organization.

Department of the Treasury-Internal Revenue Service Form 886-A

Form 886-A EXPLANATION OF ITEMS Schedule No. or Exhibit
Name of Taxpayer
Year/Period Ended

During the operation of [illegible], various loans have been made to shareholders. A breakdown of these loans follows:

PROMISSORY NOTES

NAME DATE AMOUNT INTEREST RATE PAYMENTS PAY-OFF DATE
[illegible] [illegible] $ [illegible] 5.88% $ [illegible] /yearly [illegible]
[illegible] [illegible] $ [illegible] 6.87% $ [illegible] /yearly [illegible]
[illegible] [illegible] $ [illegible] 5.54% $ [illegible] /quarterly [illegible]
[illegible] [illegible] $ [illegible] 6.2% $ [illegible] /yearly [illegible]
[illegible] [illegible] $ [illegible] 5.45% $ [illegible] /quarterly [illegible]
[illegible] [illegible] $ [illegible] 2.70% [illegible] [illegible]

A breakdown of Total Revenue from [illegible] is below:

[illegible] [illegible] [illegible] [illegible]
Premiums
[illegible] [illegible] [illegible] [illegible]
Interest/Dividends [illegible] [illegible] [illegible] [illegible]
Total Revenue
[illegible] [illegible] [illegible] [illegible]
Premium/Total Revenue 38.2% 43.6% 52.6% 31.5%

Department of the Treasury-Internal Revenue Service Form 886-A

Form 886-A EXPLANATION OF ITEMS Schedule No. or Exhibit
Name of Taxpayer
Year/Period Ended

An examination of the Form 990 for [illegible] disclosed no findings that warrant revocation of the organization’s tax exempt status. An examination of the related automobile dealerships by SBSE
[illegible] also disclosed no reason for revocation. During the examination, the organization indicated to this agent and [illegible] that they are seriously considering terminating this organization in the near future.

In a letter (attached) from the organization, dated June 15, [illegible], they proposed that we consider revocation of their exemption beginning December 31, [illegible] and they would file taxable returns for [illegible] and beyond. In exchange, the Service would close the [illegible] year and not pursue the
[illegible] year.

Conclusion:

The examination of this organization as well as the two automobile dealerships provided no evidence to support revocation of the organization's tax exempt status during the year under examination. However, the organization is aware that their credit life and accidental health insurance production has significantly declined in recent years. With this and the discussions with the organization about terminating their existence, it is felt that the proposal made by the organization in the attached letter should be accepted.

Department of the Treasury-Internal Revenue Service Form 886-A