PLR 1031001: IRS found a liquidating insurer eligible for section 831(b) treatment

Plain-English summary

The IRS ruled that a property and casualty insurer in liquidation qualified as an insurance company eligible to elect the tax treatment under IRC § 831(b) for 2009. The insurer had been placed into liquidation after insolvency and was primarily liquidating claims from its prior insurance business. Its tax-exempt status under IRC § 501(c)(15) had ended, and the ruling relied on representations that its investment activity did not exceed its requirements to pay claims and that it was not part of a controlled group. The ruling was based on the stated facts and the assumption that the insurer was not a member of a controlled group under § 831(b)(2)(B).

Ruling snapshot

• Question: Did the liquidating insurer qualify to elect the section 831(b) tax treatment for 2009?
• Outcome: Approved
• Key authorities: IRC §§ 831(b), 831(c), and 831(b)(2)(B)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201031001 Third Party Communication: None
Release Date: 8/6/2010 Date of Communication: Not Applicable
Index Number: 831.00-00
Person To Contact:
----------------------- -------------------------, ID No. -----------------
----------------------- -----------------------------------------------------
--------------------------------------------------------- Telephone Number:
--------------------- ---------------------
------------------------------------------------ Refer Reply To:
CC:FIP:B04
PLR-103031-10
Date:
April 29, 2010

Taxpayer = -----------------------------------------------------------------------
----------------------
State A = ----------------
Date 1 = --------------------------
B Court = --------------------------------------------------------------
Commissioner of C = -----------------------------------------------------------------------
----------------
Date 2 = ---------------------
n states = -----------------
Date 3 = ---------------------------
Date 4 = ----------------------
Date 5 = --------------------------
Tax Years D = -------------------------
p dollars = ----------------
Date 6 = --------------

Dear -------------:

  This is in response to the letter submitted by your authorized representatives

dated January 6, 2010, requesting a ruling that Taxpayer qualifies as an insurance
company that is eligible to elect the application of § 831(b) of the Internal Revenue
Code (the “Code”) for 2009.
PLR-103031-10 2

Facts

   Taxpayer is a corporation domiciled in State A. On Date 1, the B Court entered

an order finding Taxpayer to be insolvent and placed Taxpayer into rehabilitation under
the control of the Commissioner of C. On Date 2, the B Court terminated the
rehabilitation, placed Taxpayer in liquidation, and appointed the Commissioner of C to
marshal Taxpayer’s assets and to liquidate its liabilities.

   Before being placed in liquidation, Taxpayer was licensed to engage in the

property and casualty insurance business in n states. Taxpayer issued among other
types of policies, excess and umbrella insurance policies for commercial operations,
automobile physical damage and liability insurance, and commercial multi-peril
insurance.

     Since Taxpayer was placed in liquidation, its primary activity has related to the

effort to liquidate claims. Many of Taxpayer’s policies covered large manufacturing
companies that were the subject of massive environmental, asbestos, and other product
liability claims. The liabilities associated with those claims are uncertain as a result of
high severity, slow emergence, and legislative and judicial processes.

   In a determination letter dated Date 3, the Internal Revenue Service (the

“Service”) held Taxpayer to be exempt from federal income tax under § 501(c)(15) of
the Code. The tax exemption was in effect from Date 4 through Date 5, and for Tax
Years D, Taxpayer filed Forms 990.

     Taxpayer did not meet the new requirements under § 501(c)(15) of the Code

after it was amended by the Pension Funding Equity Act of 2004, Pub. L. 108-281, sec.
206, 118 Stat. 596, 610-611 (2004) (the “PFEA”); therefore, Taxpayer lost its tax-
exempt status January 1, 2008. For the 2008 tax year, Taxpayer filed a Form 1120-PC,
which reflected a net operating loss.

   As of December 31, 2008, Taxpayer had liabilities in excess of assets of

approximately p dollars. In addition, at no time during the period Taxpayer has been in
liquidation through the present could Taxpayer’s investment activity be considered in
excess of its requirements to pay claims. As a company in liquidation, Taxpayer has no
written premiums during 2009. Plus, Taxpayer does not own, directly or indirectly,
more than 50% of the stock of any other company.

   On Date 6, the B Court approved a liquidation closing plan for Taxpayer’s estate.

The current plan is for Taxpayer to distribute the bulk of its remaining assets within the
current year.
PLR-103031-10 3

Ruling Requested

    Taxpayer requests a ruling that it qualifies as an insurance company that is

eligible to elect the application of § 831(b) of the Code for 2009.

Law and Analysis

   Section 831(a) of the Code imposes a tax for each taxable year on the taxable

income (as determined under § 832) of every insurance company other than a life
insurance company (commonly referred to as property and casualty insurance
companies). Section 831(b) provides an alternative to the tax imposed in §831(a) for
certain small companies. Under § 831(b) a company may elect to be taxed only on its
taxable investment income if it is a property and casualty insurance company, and its
net written premiums (or, if greater, its direct written premiums) do not exceed
$1,200,000. For purposes of determining the amount of a company’s net written
premiums or direct written premiums under § 831(b), premiums received by all
members of a controlled group of corporations of which the company is part are taken
into account. Section 831(b)(2)(B) of the Code.

   The PFEA clarified that for purposes of § 831 of the Code, a company is an

“insurance company” if more than half of its business during the taxable year is issuing
of insurance or annuity contracts or the reinsuring of risks underwritten by insurance
companies. Pension Funding Equity Act of 2004, Pub. L. 108-281, sec. 206, 118 Stat.
596, 611 (2004); section 831(c) of the Code; section 816(a) of the Code. The legislative
history of Sec. 206 of the PFEA, Congress stated “[i]t is not intended that a company
whose sole activity is the run-off of risks under the company’s insurance contracts be
treated as a company other than an insurance company, even if the company has little
or no premium income.” H.R. Conf. Rep. No. 108-457, 2d Sess. 50-51 (2004).

   Based on Taxpayer’s representations and assuming Taxpayer is not a member

of a controlled group under § 831(b)(2)(B), Taxpayer is held to be an insurance
company that is eligible to elect the application of § 831(b) of the Code for 2009.

   Except as expressly provided herein, no opinion is expressed or implied

concerning the tax consequences of any aspect of any transaction or item discussed or
referenced in this letter.

  This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of

the Code provides that it may not be used or cited as precedent.
PLR-103031-10 4

     In accordance with the Power of Attorney on file with this office, a copy of this

letter is being sent to your authorized representative.

  The rulings contained in this letter are based upon information and

representations submitted by the taxpayer and accompanied by a penalty of perjury
statement executed by an appropriate party. While this office has not verified any of
the material submitted in support of the request for rulings, it is subject to verification on
examination.

                                    Sincerely,

                                      /S/

                                    Sheryl B. Flum
                                    Branch Chief, Branch 4
                                    (Financial Institutions & Products)