Dormant reinsurance fund loses section 501(c)(15) exemption

Plain-English summary

The IRS revoked the section 501(c)(15) exemption of a reinsurance fund formed under a state's small-employer health coverage law. During the year examined, the fund had no participants, insurance or reinsurance policies, premiums, claims, or loss reserves. Its activity consisted of holding investment accounts, receiving investment income, and assessing members to cover administrative costs. The IRS concluded that the fund was not operating as an insurance company because it did not issue insurance, reinsure risks, or provide risk shifting and risk distribution. Revocation applied from the first day of the year under examination, relief from retroactive revocation under section 7805(b) was denied, and the fund was required to file Form 1120. A section 831(b) election had never been filed and could not later be made retroactive to prior years.

Ruling snapshot

• Question: Did a fund with no active insurance or reinsurance business remain exempt under IRC § 501(c)(15), and what followed if it did not?
• Outcome: Revoked, with no relief from retroactive revocation.
• Key authorities: IRC §§ 501(c)(15), 7805(b), 831(b); Treas. Reg. §§ 1.801-3(a)(1), 301.9100-8.

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE

TAX EXEMPT AND

GOVERNMENT ENTITIES
DIVISION Date: 8/14/2014
Release Number: 201445016
Release Date: 11/7/2014 Employer Identification Number:

UIL Code: 501.15-00
Person to Contact/ID Number:

Contact Numbers:
Voice
Fax

CERTIFIED MAIL — RETURN RECEIPT REQUESTED
Dear

In a determination letter dated in 20XX, you were held to be exempt from Federal
income tax under section 501(c)(15) of the Internal Revenue Code (the Code).

Based on recent information received, we have determined you have not
operated in accordance with the provisions of section 501(c)(15) of the Code.
Accordingly, your exemption from Federal income tax is revoked effective
January 1, 20XX. This is a final adverse determination letter with regard to your
status under section 501(c)(15) of the Code.

We previously provided you a report of examination explaining why we believe
revocation of your exempt status is necessary. At that time, we informed you of
your right to contact the Taxpayer Advocate, as well as your appeal rights. On
February 6, 20XX, you signed Form 6018-A, Consent to Proposed Action,
agreeing to the revocation of your exempt status under section 501(c)(15) of the
Code.

You have filed taxable returns on Form 1120, U.S. Corporation Income Tax Return, for
the year ended December 31, 20XX with us. For future periods, you are required to file
Form 1120 with the appropriate service center indicated in the instructions for the
return.

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:

Taxpayer Advocate Service

If you have any questions, please contact the person whose name and telephone
number are shown at the beginning of this letter.

Sincerely,

Sunita Lough
Director, EO Examinations

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE

TAX EXEMPT AND

GOVERNMENT ENTITIES December 16, 2008
DIVISION ,

Taxpayer Identification Number:
Form:

Tax Year(s) Ended:

Person to Contact/ID Number:

Contact Numbers:
Telephone:
Fax:

Dear

We have enclosed a copy of our report of examination explaining why we believe an
adjustment of your organization’s exempt status is necessary.

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, including administrative
appeal procedures within the Internal Revenue Service.

If you request a conference with Appeals, we will forward your written statement of
protest to the Appeals Office, and they will contact you. For your convenience, an
envelope is enclosed. If you and Appeals do not agree on some or all of the issues
after your Appeals conference, the Appeals Office will advise you of its final decision

If you elect not to request Appeals consideration but instead accept our findings, please
sign and return the enclosed Form 6018-A, Consent to Proposed Adverse Action. We
will then send you a final letter modifying or revoking your exempt status under I.R.C. §
501(c)(15). If we do not hear from you within 30 days from the date of this letter, we will
process your case on the basis of the recommendations shown in the report of
examination and send a final letter advising of our determination.

In either situation outlined in the paragraph above (execution of Form 6018-A or failure
to respond within 30 days), 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 this agent
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 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,

Vicki L. Hansen by M.E.B.

Vicki L. Hansen
Acting Director, EO Examinations

Enclosures:
Publication 892
Publication 3498
Form 6018-A

Report of Examination
Envelope

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
December 31,
20XX
ISSUES

1. Does qualify as an insurance

company under Internal Revenue Code Section 501(c)(15), for the years
beginning January 1, 20XX?

2. If did not qualify as an
   insurance company under Internal Revenue Code Section 501(c)(15), can

rely on the determination letter granted by
the Service allowing it to claim tax exempt status pursuant to Internal Revenue
Code Section 501(c)(15)?

3. If cannot rely on the
   determination letter granted by the Service allowing it to claim tax exempt status
   pursuant to Internal Revenue Code Section 501(c)(15), is it entitled to relief
   under Internal Revenue Code Section 7805(b)?

4. If cannot rely on the
   determination letter granted by the Service allowing it to claim tax exempt status
   pursuant to under Internal Revenue Code Section 501(c)(15), what is the
   effective date of the revocation?

5. If cannot rely on the
   determination letter granted by the Service allowing it to claim tax exempt status
   pursuant to Internal Revenue Code Section 501(c)(15), based on the facts that it
   does not meet the requirements of an insurance company under Internal
   Revenue Code Section 501(c)(15), what are the tax consequences?

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service

Page: -1-

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
December 31,
20XX

FACTS

was formed in the State of
in the 19XX’s through Section 56-7-2201, Insurance Laws,
Small Employer Group Health Coverage Reform Act. As part of the formation of
, a Plan of Operations (PLAN) was developed. The Plan provides:

• Definitions and explanations of the structure, operations procedure and powers
of the Pool.

• Definitions of the role and responsibilities of all parties involved: Board of
Directors, Administering Carrier and Participating Carrier.

• Definitions of the interpretation of terminology found in the legislation,
• Documentation of the rules of reinsurance operations and procedures.

The PLAN provided the following purposes:

• Promoting the availability of accident and health insurance coverage to small
employers

• To provide reinsurance as a mechanism to fairly share the risk.

• To improve the efficiency and fairness of the small group accident and health
insurance marketplace

The PLAN states that membership consists of all reinsuring carriers, as defined in
, issuing or providing health benefit plans in this state, (as defined in

)).

A copy of the Application Form 1024, Application for Recognition of Exemption Under
Section 501(a), and the determination letter was not provided by the organization.
Agent requested a copy of the application form from the EO Determination Records
Unit in and from the . Neither location was able to provide a
copy. According to the information in the Service’s database, received tax
exempt status under IRC 501(c)(15) in 20XX.

had no shareholders. There were board members. All were selected from
members. At least one director shall represent a domestic insurance company licensed
to transact accident and health insurance. At least shall represent Small Employer
Carriers. At least shall represent an HMO. At least shall represent a nonprofit
hospital.

During the year under examination, did not have any insurance or reinsurance
policies in force. No premiums were received. Only income received by the

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -2-

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
December 31,
20XX
organization was investment income. assessed its members to help cover

expenses, including a loan that was outstanding with a bank.

During the year there were no claims filed or paid. There were no policies for claims to
be filed. Only expenses incurred during the year included administrative expenses,
interest expense, and some professional fees.

At the beginning of the year, reported $ as Loss Reserves on its Form 990. In
Part II, Statement of Functional Expenses, of Form 990 for 20XX, reported a
reduction in expenses by the same amount and labeled it, “Health Benefits Recovered”.
At the end of 20XX, there were no Loss Reserves reported on Form 990.

Form 990 was filed for the 20XX tax year. The following is a breakdown of the Gross
Receipts received by for the year ending December 31, 20XX, and the percentage
of Written Premiums to Gross Receipts for the same years.

20XX

Premiums Written

Assessments

Total

Interest Income

Total Gross Receipts

Percentage- Gross
Premium/Reinsurance
Income to Gross Receipts

As stated above, was formed in the state of so a 953(d) election to
be considered a domestic organization for tax purpose was not filed or applicable.

An election under IRC 831(b) has never been filed. As of the writing of this report,
there has never been a filing of the election, either with the filing of the Forms 990 or
separately.

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -3-

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
December 31,
20XX
LAW AND ANALYSIS

1. Does qualify as an insurance company

under Internal Revenue Code Section 501(c)(15), for the years beginning
January 1, 20XX?

As stated above, had no participants in the program during the year under
examination. No premiums were collected, no claims were filed or payments made.
The only activity being conducted by was the maintaining of investment
accounts and receiving investment income from those accounts. did assess
its members as stated above to help cover administrative costs.

Neither I.R.C. 501(c)(15) nor its corresponding regulations define an “insurance
company.” Subchapter L of the Code (I.R.C. sections 801-848), however, addresses
the taxation of insurance companies. The term “insurance company” has the same
meaning under section 501(c)(15) as it does in Subchapter L. See H. Conf. Rep. No.
99-841, 99th Cong., 2nd Sess. (Vol. II) 370-71, reprinted in 1986-3 (Vol. 4) C.B. 370-71.

I.R.C. section 816 (formally I.R.C. section 801) defines a life insurance company. As
part of this definition, I.R.C. section 816 provides, “the term ‘insurance company’ means
any company more than half of the business of which during the taxable year is the
issuing of insurance or annuity contracts or the reinsuring of risks underwritten by
insurance companies.”

Treas. Reg. section 1.801-3(a)(1) defines an insurance company as;

A company whose primary and predominant business activity during the taxable
year is the issuing of insurance or annuity contracts or the reinsuring of risks
underwritten by insurance companies. Thus, though its name, charter powers, and
subjection to State insurance laws are significant in determining the business which a
company is authorized and intends to carry on, it is the character of the business
actually done in the taxable year which determines whether a company is taxable as an
insurance company under the Internal Revenue Code.

In this case, primary and predominant business activity was not the issuing of
insurance or annuity contracts or the reinsuring of risks underwritten by insurance
companies. was not involved in either of these two activities. Its sole

purpose was to collect investment income from the investment accounts.

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -4-

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
December 31,
20XX

Another aspect to consider in this case is that there are no insurance contracts that
provides both risk shifting and risk distribution. In AMERCO & Subsidiaries, 96 T.C. 18
(1991), a case affirmed by the 9th Circuit, the Tax Court adopted a three-part test The
three parts consist of; (1) Is the risk an insurance risk?; (2) Is there risk shifting and risk
distribution?; and (3) Is there insurance in its generally accepted sense?

Neither the Internal Revenue Code nor the Regulations specifically define the term
“insurance contract.” The courts have generally required that a transaction involve both
risk shifting (from the insured’s perspective) and risk distribution (from the insurer's
perspective) in order to be characterized as insurance. Helvering v. LeGierse, 312 U.S.
531, 539 (1941); Gulf Oil Corp. v. Commissioner, 914 F.2d 396, 411 (3rd Cir. 1990).

Risk shifting occurs when a person facing the possibility of a loss transfers some or all
of the financial consequences of the loss to the insurer. Rev. Rul. 88-72, 1988-2 C.B.
31, clarified by Rev. Rul. 89-61, 1989-1 C.B. 75. The risk transferred pursuant to an
insurance contract must be a risk of economic loss. Allied Fidelity Corp. v.
Commissioner, 66 T.C. 1068 (1976), aff’d., 572 F.2d 1190 (7th Cir. 1978), cert. denied,
439 U.S. 835 (1978).

It is exam’s position that risk distribution requires both a distribution of exposure units
and a distribution of a pool of premiums. In addressing distribution courts have focused
on one or the other, but no case has address both.

Risk distribution of exposure units refers to the operation of the statistical phenomenon
known as the “the law of large numbers.” When additional statistically independent risk
exposure units are insured, although the potential total losses increase, there is also an
increase in the predictability of average loss. This increase in the predictability of the
average loss decreases the amount of the capital that an insurance company needs per
risk unit to remain at a given solvency level. See Rev. Rul. 89-61, 1989-1 C.B. 75.

The Courts have not spent a great deal of time explaining what they mean by risk
distribution. No court has squarely held that there can be no risk distribution if there is
only one, or a few, insureds. A fair reading of the court opinions addressing the issue,
however, supports the IRS’s position. See Barnes v. United States, 801 F.2d 984, 985
(7th Cir. 1986) (“Risk distributing is the spreading of the risk of loss among the
participants in an insurance program.”). See also, Commissioner v. Treganowan, 183
F.2d 288 , 291 (2nd Cir. 1950). Such spreading is effectuated by pooling among
unrelated insureds. “ [R]isk distribution means that the party assuming the risk
distributes his potential liability, in part, among others.” Beech Aircraft Corp. v. United
States, 797 F.2d 920, 922 (10th Cir. 1986). Risk distribution is accomplished where the
risk is distributed among insureds other than the entity that incurred the loss. See Ross
v. Odem, 401 F.2d 464 (5th Cir. 1968).

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -5-

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
December 31,
20XX

The Sixth Circuit touched on the issue of risk distribution in Humana, Inc. v.
Commissioner, 881 F.2d 247, 257 (6th Cir. 1989), noting that there was adequate risk
distribution, “where the captive insures several separate corporations within an affiliated
group and losses can be spread among the several distinct corporate entities.” The
Ninth Circuit has also measured risk distribution by explaining, “[i]nsuring many
independent risks in return for numerous premiums serves to distribute risk. By
assuming numerous relatively small, independent risks that occur randomly over time,
the insurer smoothes out losses to match more closely its receipt of premiums.”
Clougherty Packing Co. v. Commissioner, 811 F.2d 1297, 1300 (9th Cir. 1987)

did not issue or reinsure any policies. Its only activity was collecting investment
income from their investment accounts and assessing its members to help cover
administrative costs. There was no risk shifting and risk distribution with

because had no insurance policies.
Also, to show that was not an insurance company was the lack of reserves to
pay claims, and the payment of claims themselves. started the year with reserves

but during the year they decreased the reserve amount to zero and reported the
amount as a reduction in expenses labeled, “Health Benefits Recovered”. The reserves
were not needed because there were no claims or potential claims.

Therefore, it is of the Service’s position that did not qualify as an insurance
company under IRC 501(c)(15). To qualify for tax exempt status under IRC 501(c)(15),
an organization must be operating as an insurance company.

2. If did not qualify as an insurance
   company under Internal Revenue Code Section 501(c)(15), can
   rely on the determination letter granted by the Service allowing it to claim
   tax exempt status pursuant to Internal Revenue Code Section 501(c)(15)?

To qualify for tax exempt status under IRC 501(c)(15), an organization must be
operating as an insurance company. Since did not qualify as an insurance
company it did not qualify for tax exempt status under IRC 501(c)(15), therefore it can
not rely on the determination letter granted by the Service allowing it to claim tax
exempt status pursuant to IRC 501(c)(15). The organization’s tax exemption should be
revoked for years beginning January 1, 20XX.

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -6-

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
December 31,
20XX

3. If cannot rely on the

determination letter granted by the Service allowing it to claim tax exempt
status pursuant to Internal Revenue Code Section 501(c)(15), is it entitled
to relief under Internal Revenue Code Section 7805(b)?

An organization may ordinarily rely on a favorable determination letter received from the
Internal Revenue Service. Regulations 1.501(a)-1(a)(2); Rev. Proc. 2008-4, 14.02
(cross-referencing 13.01 et seq.) 2008-4 C.B. 121. An organization may not rely on a
favorable determination letter, however, if the organization omitted or misstated a
material fact, in its application or in supporting documents. In addition, an organization
may not rely on a favorable determination if there is a material change, inconsistent with
exemption, in the organization’s character, purposes, or methods of operation after the
determination letter is issued. Regulations 601.201(n)(3)(ii); Rev. Proc. 90-27, 13.02,
1990-1 C.B. 514. Any such changes must be reported to the Service so that continuing
recognition of exempt status can be evaluated.

The Commissioner may revoke a favorable determination letter for good cause.
Regulations 1.501(a)-1(a)(2). A favorable determination letter may be revoked by
written notice to the organization to whom the determination originally was issued.
Regulations 601.201(m) (cross-referencing Reg. 601.201(l)); Rev. Proc. 90-27, 14,
1990-1 C.B. 514, 518.

If the Commissioner revokes the tax exempt status of an organization, the remaining
question is whether the revocation should be applied prospectively or retroactively.
Generally, revocation of a determination letter is prospective. Rev. Proc. 2008-4, 14.02
(cross-referencing 13.01 et seq.). Revocation of a determination letter may, however,
be retroactive if the organization omitted or misstated a material fact or operated in a
manner materially different from that originally represented. Regulations
601.201(n)(6)(i); Rev. Proc. 90-27, 14.01; Rev. Proc. 2008-4 14.02 (cross-referencing
13.01 et seq.).

In cases where the organization omitted or misstated a material fact, revocation may be
retroactive to all open years under the statute. Regulations 601.201(l)(1). In cases
where revocation is due to a material change, inconsistent with exempt status, in the
character, the purpose, or the method of operation, revocation will ordinarily take effect
as of the date of the material change. Regulations 601.201(n)(6)(i); Rev. Proc. 90-27.
In any event, revocation will ordinarily take effect no later than the time at which the
organization received written notice that its exemption ruling or determination letter
might be revoked. Regulations 601.201(n)(6)(i).

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -7-

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
December 31,
20XX

Under certain circumstances, however, the Commissioner may, in his discretion grant
relief from retroactive revocation under I.R.C. 7805(b) of the Code. Section 7805(b)(8)
of the Internal Revenue Code provides:

APPLICATION TO RULINGS. The Secretary may prescribe the extent, if any, to
which any ruling (including any judicial decision or any administrative
determination other than by regulation) relating to the internal revenue laws, shall
be applied without retroactive effect. Section 301.7805-1(b) of the regulations
delegates authority grated by I.R.C. 7805(b) to the Commissioner (or the
Commissioner’s delegate).

To request I.R.C. 7805(b) relief, the organization must submit a statement in support of
this application of I.R.C. 7805(b), as described in Rev. Proc. 2008-4, 14.02. See also
Rev. Proc. 2008-5, 19. The organization’s statement must expressly assert that the
request is being made pursuant to I.R.C. 7805(b). The organization’s statement must
also indicate the relief requested and give reasons and arguments in support of the
relief requested. It must also be accompanied by any documents bearing on the
request. The organization’s explanation and arguments should discuss the five factors
bearing on retroactivity listed in Rev. Proc. 2008-4, 14.02(1) (cross-referencing 13.05),
as they relate to the situation at issue. These five items are, in effect, the same as the
factors provided in Regulations 601.201(l)(5) and 601.201(m), Statement of Procedural
Rules, which states:

Except in rare or unusual circumstances, the revocation or modification of a
ruling will not be applied retroactively with respect to the taxpayer to whom the
ruling was originally issued or to a taxpayer whose tax liability was directly
involved in such a ruling if:

1. there has been no misstatement or omission of material facts;

2. the facts at the time of the transaction are not materially different from the
   facts on which the [determination letter] was based;

3. there has been no change in applicable law;

4. the [determination letter] was originally issued for a proposed transaction;
   and

5. the taxpayer directly involved in the [determination letter] acted in good
   faith in reliance upon the [determination letter] and revoking or modifying
   the [determination letter] retroactively would be to the taxpayer's
   determinant.

If relief is granted under I.R.C. 7805(b), the effective date of revocation of a
determination letter is no later than the date on which the organization first received
written notice that its exemption might be revoked. Regulations 601.201(n)(6)(i);
Virginia Education Fund v. Commissioner, 85 T.C. 743, 7522-3 (1985), aff’d 799 F.2d

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -8-

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
December 31,
20XX

903 (4th Cir. 1986). This does not preclude the effective date of revocation being earlier
than the date on which the organization first received written notice that its exemption
might be revoked. Virginia Education Fund v. Commissioner, 85 T.C. at 753.

The Supreme Court has held that the Commissioner has broad discretion under I.R.C.
7805(b) (and its predecessor) in deciding whether to revoke a ruling retroactively.
Automobile Club of Michigan v. Commissioner, 353 U.S. 180, 184 (1957). See also
Dixon v. United States, 381 U.S. 68, 74-75 (1965). The Commissioner’s determination
is reviewable by the courts only for abuse of that discretion. Virginia Education Fund v.
Commissioner, 85 T.C. 743, 752 (1985).

It is the Service’s position that the activities of the organization have changed
dramatically compared to the organizing documents above. If the organization would
seek exemption now, based on its current activities, there is a very high probability it
would not receive a determination letter from the Service granting tax exempt status
under IRC 501(c)(15). The insurance activities that were conducted when the
organization applied for exemption are no longer being conducted.

Therefore, it is appropriate for the Commissioner to NOT grant relief from retroactive
revocation of determination letter.

4. If cannot rely on the
   determination letter granted by the Service allowing it to claim tax exempt
   status pursuant to under Internal Revenue Code Section 501(c)(15), what is
   the effective date of the revocation?

is not entitled to relief under I.R.C. 7805(b). The
effective date of revocation should be for years beginning January 1, 20XX. This is the
first year under examination.

5. If cannot rely on the
   determination letter granted by the Service allowing it to claim tax exempt
   status pursuant to Internal Revenue Code Section 501(c)(15), based on the
   facts that it does not meet the requirements of an insurance company
   under Internal Revenue Code Section 501(c)(15), what are the tax
   consequences?

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service

Page: -9-

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
December 31,
20XX
Since tax exempt status should be revoked
for years beginning January 1, 20XX, would be responsible for filing Forms

1120 for years beginning January 1, 20XX.
IRC 831 discusses tax on insurance companies other than life insurance companies.

IRC 831(a) states as a general rule, “Taxes computed as provided in section 11 shall
be imposed for each taxable year on the taxable income of every insurance company
other than a life insurance company.”

IRC 831(b) provides an alternative tax for certain small companies. It states in IRC
831(b)(1) that, in general, “In lieu of the tax otherwise applicable under subsection (a),
there is hereby imposed for each taxable year on the income of every insurance
company to which this subsection applies a tax computed by multiplying the taxable
investment income of such company for such taxable year by the rates provided in
section 11(b).”

IRC 831(b)(2) discusses the companies to which this subsection applies.

(A) In general. This subsection shall apply to every insurance company other
than life (including interinsurers and reciprocal underwriters) if-
(i) the net written premiums (or, if greater, direct written premiums) for
the taxable year do not exceed $1,200,000, and
(ii) such company elects the application of this subsection for such
taxable year.
The election under clause (ii) shall apply to the taxable year for which made and
for all subsequent taxable years for which the requirements of clause (1) are
met. Such election, once made, may be revoked only with the consent of the
Secretary.

Regulations (Regs.) 301.9100-8(a)(2) discusses the time for making elections. Under
(i) it states in general that except as otherwise provided in this section, the elections
described in paragraph (a)(1) of this section, must be made by the later of-

(A) The due date (taking into account any extensions of time to file obtained by
the taxpayer) of the tax return for the first taxable year for which the election
is effective, or

(B) January 22, 1990 (in which case the election generally must be made by
amended return)

Regs. 301.9100-8(a)(1) mentioned above includes IRC 831(b)(2)(A).

Regs. 301.9100-8(a)(3) describes the manner of making elections. It states, “ Except
otherwise provided in this section, the elections described in paragraph (a)(1) of this

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -10-

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
December 31,
20XX

section must be made by attaching a statement to the tax return for the first taxable
year for which the election is to be effective.”

Based on the Code and Regulation sections above, is not entitled to the relief under
IRC 831(b), for 2006, because it did not meet the requirements of Regs 301.9100-
8(a)(2), and therefore would be required to report all income and expenses on Form
1120 for each year. As of this writing, the election has never been filed, either with the
filing of the Form or separately. When an election is filed, it would only allow the
organization to receive relief under IRC 831(b) in the year it is filed and all future years.
The election would not be retroactive to any prior years.

Therefore, would be responsible for filing Form 1120 for years beginning January
1, 20XX and the election under IRC 831(b) would not be applicable until the election is
made and for only the year it was made and subsequent years. The election can not
be made retroactively.

TAXPAYER’S POSITION

Unknown at the time of this writing

SUMMARY

It is the Service’s position, based on the above facts, law and analysis, that the tax
exemption status of for the years beginning January 1, 20XX should be revoked
based on not operating as an insurance company, thereby failing to meet the
qualifications for exemption under IRC 501(c)(15). Forms 1120 would be required to be
filed for years beginning January 1, 20XX.

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
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