PLR 200810031: Insurer in receivership keeps tax exemption during transition period

Plain-English summary

An insolvent insurance company was being liquidated under a state court receiver. After transferring policies to other insurers, it had no new written premiums and had previously been recognized as exempt under section 501(c)(15). The IRS ruled that the company met the transition rule in the Pension Funding Equity Act because it satisfied the old exemption requirements and was in court supervised receivership on April 1, 2004. It remained exempt until the earlier of the end of liquidation or December 31, 2007. The letter warns that final distributions after December 31, 2007 are outside this ruling's protection.

Ruling snapshot

• Question: Did final creditor distributions and closing the receivership affect the insurer's section 501(c)(15) exemption?
• Outcome: Approved: the exemption continues during the statutory transition period.
• Key authorities: IRC §§ 501(a), 501(c)(15), 816(a); Pension Funding Equity Act § 206(e)(2).

Full text (IRS public release)

200810031

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Date: December 12, 2007 Contact Person:
Release Date: 3/7/08 Identification Number:
Telephone Number:

Employer Identification Number:
XXXXXXXXXX

Uniform Issue List:

501.15-00

Legend

Receiver = XXXXXX
Insurance Company = XXXXXX
Guaranty Fund = XXXXXX
State Court = XXXXXX
State = XXXXXX
Date 1 = XXXXXX
Date 2 = XXXXXX
Date 3 = XXXXXX
Date 4 = XXXXXX
Date 5 = XXXXXX
Date 6 = XXXXXX
Dear
:

We have considered your ruling request for a determination that Insurance Company will suffer no adverse Federal tax consequences under section 501(c)(15) of the Internal Revenue Code ("Code") with regard to Receiver's final creditor distributions and the closing of the receivership estate.

Facts

Insurance Company is an insolvent insurance company being liquidated under the supervision and control of the court appointed statutory receiver. On Date 1, the State Court placed Insurance Company in receivership due to its financial condition and, as a result, Guaranty Fund became responsible for Insurance Company's insurance obligations. Receiver represents that Insurance Company has been continuously in receivership since that time. As such, Receiver has been selling assets, pursuing litigation, and transferring Insurance Company liabilities. Additionally, Receiver and Guaranty Fund negotiated assumption transactions whereby all of Insurance Company's annuity and blood plan policies were assumed by other

200810031

2

XXXXXX

insurers by the end of Date 2. Receiver represents that the result of these transfers was that Insurance Company has received no direct written premiums and no net written premiums since Date 3.

After these transfers, Receiver applied for exemption under section 501(c)(15) of the Code on behalf of Insurance Company. Insurance Company was recognized as exempt from federal income tax under section 501(a) as an organization described in section 501(c)(15) commencing Date 3 for tax years when Insurance Company met the definition of an insurance company, other than a life insurance company, under section 816(a) and when Insurance Company's net written premiums (or if greater, direct written premiums) did not exceed the
$350,000 limit as prescribed by section 501(c)(15).

Receiver now represents that it plans to complete final distributions and close the receivership estate by the end of the current year.

Ruling Requested

Receiver seeks a ruling that Insurance Company will suffer no adverse federal income tax consequences under section 501(c)(15) of the Code with regard to the final distributions to creditors and the closing of its receivership estate.

Law and Analysis

Section 501(a) of the Code provides that an organization described in section 501(c) of the Code is exempt from federal income tax.

Prior to 2004, section 501(c)(15)(A) of the Code provided that an insurance company, other than a life insurance company, was tax-exempt if its net written premiums (or, if greater, its direct written premiums) did not exceed $350,000.

The Pension Funding Equity Act, P.L. 108-218, ("Act") was enacted on April 10, 2004. Section 206 of the Act made several changes to section 501(c)(15) of the Code that, in general, are effective for taxable years beginning after December 31, 2003. Specifically, the Act amended section 501(c)(15) of the Code to provide for the exemption of insurance companies (as defined in section 816(a)), other than life insurance companies (including interinsurers and reciprocal underwriters), if the gross receipts for the taxable year do not exceed $600,000 and more than 50% percent of such gross receipts consist of premiums.

The Act provides a special transition rule with respect to certain insurance companies in receivership or liquidation. Section 206(e)(2) of the Act provides that if an insurance company meets the requirements of section 501(c)(15)(A) of the Internal Revenue Code of 1986, as in effect for the last taxable year beginning before January 1, 2004, for the taxable year which includes April 1, 2004, and on April 1, 2004, is in a receivership, liquidation, or similar proceeding under the supervision of a State court, then amendments made by this section shall only apply to taxable years beginning after the earlier of the date such proceeding ends or December 31, 2007.

200810031

3

XXXXXX

Under section 206(e)(2)(A) of the Act, we must first determine whether for the taxable year which includes April 1, 2004, Insurance Company meets the requirements of section 501(c)(15)(A) of the Code as in effect for its last taxable year beginning before January 1, 2004. In order to meet the statutory language of section 501(c)(15), Insurance Company must be an insurance company other than a life insurance company, and its net written premiums (or, if greater, direct written premiums) must not exceed $350,000. Receiver represents that Insurance Company entered into a series of transactions which resulted in a transfer of its annuity and blood plan policies. As a result of these transactions, Receiver represents that Insurance Company no longer met the definition of a life insurance company under section 816(a). The Service sent a determination letter in Date 4 confirming Insurance Company's section 501(c)(15) status. Pursuant to Insurance Company's Form 990 for the Date 5 taxable year, Insurance Company was in the midst of liquidation, was still administering non-life insurance claims, and did not have net or direct written premiums exceeding $350,000. Thus, based on Insurance Company's representations and Form 990s, Insurance Company was tax- exempt for the Date 5 taxable year under the pre-2004 version of 501(c)(15) and, in turn, satisfies the requirements of section 206(e)(2)(A).

Under section 206(e)(2)(B) of the Act, we must then determine whether on April 1, 2004, Insurance Company was "in a receivership, liquidation, or similar proceeding under the supervision of a State court." Insurance Company is an insolvent insurance company, and Receiver represents that on April 1, 2004, Insurance Company was in receivership, liquidation, or similar proceeding under the supervision of State Court. In Date 6, Insurance Company was placed in receivership by State Court due to its financial condition. Insurance Company has represented, warranted, and provided documentation which establishes that it has been in receivership and liquidation by order of State Court since Date 6. Furthermore, Receiver is subject to the orders of State Court and final distributions are subject to approval by State Court. Accordingly, based on the representations and information included in the submission, on April 1, 2004, Insurance Company was "in a receivership, liquidation, or similar proceeding under the supervision of a State court" and, therefore, satisfies the requirements of section 206(e)(2)(B).

After establishing that the prior provisions of section 501(c)(15) of the Code apply to Insurance Company, we must determine whether Insurance Company continues to qualify for exemption. The Service's determination letter recognized Insurance Company's exempt status under the then current section 501(c)(15), provided that Insurance Company continue to meet the requirements of that version of 501(c)(15). Receiver's representations and a review of six years of Insurance Company's Form 990s confirm that Insurance Company had no written premiums and policy claims easily exceeded its reserves. Therefore, in accordance with the Service's prior determination, Insurance Company continues to qualify for section 501(c)(15) exemption.

Ruling

Insurance Company has established that it meets both requirements of section 206(e)(2) of the Act and, as a result, Insurance Company qualifies for the transition rule for companies in receivership or liquidation under the Act. Therefore, the Act's amendments to section 501(c)(15)

200810031

4

XXXXXX

of the Code do not apply to Insurance Company until taxable years beginning after the earlier of the date Insurance Company's liquidation ends or December 31, 2007.

Accordingly, Insurance Company continues to qualify as exempt from federal income tax under section 501(a) of the Code as an organization described in section 501(c)(15) until the applicable date in the transitional rule.

In addition to certain clarifications being made, the requirements for qualification as an insurance company under 501(c)(15) of the Code, as amended by section 206 of the Act, have changed. Insurance Company and Receiver may rely on this ruling only during the period in which the transition rule for companies in receivership or liquidation is in effect under section 206(e)(2). As such, Insurance Company should wind up all affairs by December 31, 2007. Any final distributions made after December 31, 2007 will not fall within the protection of this ruling:

This ruling is based on the understanding that there will be no material changes in the facts and representations upon which it is based. Except as we have ruled herein, we express no opinion as to the tax consequences of the transactions under other sections of the Code and Income Tax Regulations.

This ruling will be made available for public inspection under section 6110 of the Code after certain deletions of identifying information are made. For details, see enclosed Notice 437, Notice of Intention to Disclose. A copy of this ruling with deletions that we intend to make available for public inspection is attached to Notice 437. If you disagree with our proposed deletions, you should follow the instructions in Notice 437.

This ruling is directed only to the organization that requested it. Section 6110(k)(3) of the Code provides that it may not be used or cited by others as precedent.

This ruling is based on the facts as they were presented and on the understanding that there will be no material changes in these facts. Because it could help resolve questions concerning your federal income tax status, this ruling should be kept in your permanent records.

If you have any questions about this ruling, please contact the person whose name and telephone number are shown in the heading of this letter. Sincerely,
/s/
Robert C. Harper, Jr.
Manager, Exempt Organizations

Technical Group 3

Enclosure
Notice 437