A foreign insurer received more time for domestic and small-company elections

Plain-English summary

A foreign property and casualty insurer intended to elect under section 953(d) to be treated as a domestic corporation and under section 831(b) to be taxed as a small insurance company. Its return included both elections, but the section 953(d) statement was not also filed with the designated IRS office as required. Without a valid domestic election, the foreign insurer was ineligible to make the small-company election. The IRS found that the insurer acted in good faith and that relief would not prejudice the government. It granted 60 days to complete the section 953(d) election and 90 days to make the section 831(b) election, conditioned on aggregate tax liability not being lower than with timely elections.

Ruling snapshot

• Question: Could the foreign insurer make late section 953(d) and section 831(b) elections?
• Outcome: Approved, with separate 60-day and 90-day deadlines and a tax-liability condition.
• Key authorities: IRC §§ 831(b), 953(d); Treas. Reg. §§ 301.9100-1, 301.9100-3, 301.9100-8; Rev. Proc. 2003-47

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201744009                                              Third Party Communication: None
Release Date: 11/3/2017                                        Date of Communication: Not Applicable
Index Number: 953.06-00, 9100.22-00,
              831.00-00, 831.02-00                             Person To Contact:
                                                               ------------------, ID No. --------------------
----------------------------------------------                 Telephone Number:
---------------------                                          ----------------------
-------------------------                                      Refer Reply To:
---------------------------------------                        CC:INTL:B02
                                                               PLR-104961-17
                                                               Date:
                                                               August 03, 2017

                  TY: -------

Legend

Taxpayer                   =        ----------------------------------------------
                           EIN -----------------
Date 1                     =        ---------------------------
Date 2                     =        ----------------------
Date 3                     =        ----------------------------
Date 4                     =        ---------------------------
Country X                  =        -----------------------------
Individual A               =        ------------------
Individual B               =        --------------------
Company Y                  =        -----------------------
                           EIN -----------------
Accounting Firm Z =                 ---------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
Tax Year 1                 =        -------


Dear --------------------

      This is in response to a letter received by our office on February 9, 2017, and
subsequent submissions, submitted on behalf of Taxpayer by its authorized
representative, requesting an extension of time under Treas. Reg. § 301.9100-3 to
make the elections provided under (1) section 953(d) and (2) section 831(b)(2)(A) for
Taxpayer’s taxable year beginning Date 1.

      The ruling contained in this letter is predicated upon facts and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by an appropriate party. This office has not verified any of the material submitted in
PLR-104961-17                                 2

support of the request for a ruling. Verification of the factual information,
representations, and other data may be required as part of the audit process.

FACTS

       On Date 1, Taxpayer was established and licensed to issue various property and
casualty insurance contracts, including warranty policies, under the laws of Country X.
Taxpayer is owned by Individual A (60% owner) and Individual B (40% owner).
Taxpayer represents that it meets the requirements to be taxed as an insurance
company for federal income tax purposes. Taxpayer is managed by an independent
insurance management company, Company Y. Company Y, under the direction and
control of the Board of Directors for Taxpayer, is responsible for certain management
and administrative services, accounting services, and preparation of statistical reports.
Taxpayer has also engaged legal and actuarial counsel, as well as Accounting Firm Z,
to prepare and file Taxpayer’s federal income tax returns, including making valid
elections when appropriate.

       Prior to Date 2, Accounting Firm Z timely filed Form 7004 Application for
Automatic Extension of Time to File Certain Business Income Tax, Information, and
Other Returns for Tax Year 1, extending the due date of Taxpayer’s federal income tax
return to Date 3. Accounting Firm Z prepared and, on Date 4, filed Taxpayer’s federal
income tax return for Tax Year 1 which included the section 953(d) election to be
treated as a domestic corporation and section 831(b) election to be treated as a small
insurance company. Taxpayer failed to timely file the section 953(d) election statement
with the IRS Plantation, Florida office as prescribed by Rev. Proc. 2003-47, 2003-2 C.B.

55. Accordingly, Taxpayer did not have a valid section 953(d) election and as a foreign
insurance company for federal income tax purposes was ineligible to make a section
831(b) election.

         Taxpayer’s failure to make the elections was not discovered by the Internal
Revenue Service prior to the time it submitted its ruling request. In addition, Taxpayer
represents that it does not seek to alter a return position for which the accuracy related
penalty has been or could have been imposed under section 6662 at the time Taxpayer
requested relief, and the new position requires or permits a regulatory election for which
relief is requested. Taxpayer represents that it intended to make the section 953(d)
election but, having inadvertently failed to do so, it was ineligible to make the section
831(b) election. Finally, Taxpayer represents that it has not used hindsight to seek an
extension of time to make the election. Taxpayer represents that granting relief will not
result in a lower tax liability than it would have had if it had filed the section 953(d) and
section 831(b) elections timely.
PLR-104961-17                                 3


LAW AND ANAYLSIS

        Under section 953(d), certain foreign insurance companies may elect to be
treated as domestic corporations for U.S. tax purposes. The substantive and
procedural rules for making a section 953(d) election are contained in Notice 89-79,
1989-2 C. B. 392, and Rev. Proc. 2003-47, 2003-2 C.B. 55. Rev. Proc. 2003-47
provides that the election must be filed by the due date prescribed in section 6072(b)
(including extensions) for the U.S. income tax return that is due if the election becomes
effective. Rev. Proc. 2003-47, section 4.04(2). In addition, an electing corporation must
use the calendar year as its annual accounting period for U.S. tax purposes, unless it
joins in the filing of a consolidated return and adopts the parent corporation’s tax year.
Notice 89-79, section 1. In the present situation, Rev. Proc. 2003-47 fixes the time to
make the election under section 953(d). Therefore, the Commissioner has discretionary
authority under Treas. Reg. § 301.9100-1(c) to grant Taxpayer an extension of time,
provided that Taxpayer satisfies the standards set forth under Treas. Reg. § 301.9100-
3(a).

       Section 831(a) provides that taxes, computed as provided in section 11, are
imposed for each taxable year on the taxable income of every insurance company other
than a life insurance company. However, section 831(b) allows certain small
companies to make an election to be subject to tax on their taxable investment income
only. The election applies to the taxable year for which the company made the election
and, as long as the company continues to qualify, for all subsequent taxable years
unless revoked with the consent of the Secretary.

         The time and manner to make the section 831(b)(2)(A)(ii) election is not
prescribed by statute but rather is prescribed by Treas. Reg. § 301.9100-8. Pursuant to
Treas. Reg. § 301.9100-8(a)(2), the election is to be made by 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 to be effective by attaching a statement to the
tax return containing the information specified in Treas. Reg. § 301.9100-8(a)(3).
Accordingly, the section 831(b)(2)(A)(ii) election is a regulatory election. Treas. Reg.
§ 301.9100-1(b).

      Under Treas. Reg. § 301.9100-1(c), the Commissioner may grant a reasonable
extension of time under the rules set forth in Treas. Regs. §§ 301.9100-2 and
301.9100-3 to make a regulatory or statutory election.

       Treas. Reg. § 301.9100-2 does not provide relief for Taxpayer to make an
election under section 831(b)(2)(A)(ii) for any of the years for which relief is sought.
Requests for extensions of time for regulatory elections that do not meet the
requirements of Treas. Reg. § 301.9100-2 must be made under Treas. Reg.
PLR-104961-17                                  4

§ 301.9100-3. Treas. Reg. § 301.9100-3(a) provides that requests for relief will be
granted when the taxpayer provides the evidence to establish to the satisfaction of the
Commissioner that it “acted reasonably and in good faith" and that "the grant of relief
will not prejudice the interests of the Government."

      Under Treas. Reg. § 301.9100-3(b)(1), a taxpayer is deemed to have acted
reasonably and in good faith if it:

       (i) Requests relief under this section before the failure to make the regulatory
       election is discovered by the Internal Revenue Service;

       (ii) Failed to make the election because of intervening events beyond the
       taxpayer’s control;

       (iii) Failed to make the election because, after exercising reasonable diligence
       (taking into account the taxpayer’s experience and complexity of the return
       or issue), the taxpayer was unaware of the necessity for the election;

       (iv) Reasonably relied on the written advice of the Internal Revenue Service; or

       (v) Reasonably relied on a qualified tax professional, including a tax
       professional employed by the taxpayer, and the tax professional failed to
       make, or advise the taxpayer to make, the election.

      Under Treas. Reg. § 301.9100-3(b)(3), a taxpayer is deemed not to have acted
reasonably and in good faith if it:

       (i) Seeks to alter a return position for which an accuracy-related penalty has
       been or could be imposed under section 6662 at the time the taxpayer requests
       relief and the new position requires or permits a regulatory election for
       which relief is requested;

       (ii) Was informed in all material respects of the required election and related
       tax consequences, but chose not to file the election; or

       (iii) Uses hindsight in requesting relief.

       The Commissioner will grant a reasonable extension of time to make a regulatory
election only when the interests of the Government will not be prejudiced by the
granting of relief. Treas. Reg. § 301.9100-3(c)(1).

      The interests of the Government are prejudiced if granting relief would result in a
taxpayer having a lower tax liability in the aggregate for all taxable years affected by the
PLR-104961-17                                  5

election than the taxpayer would have had if the election had been timely made (taking
into account the time value of money). Treas. Reg. § 301.9100-3(c)(1)(i).

       Treas. Reg. § 301.9100-1(a) cautions that granting an extension of time to make
an election is not a determination that the taxpayer is otherwise eligible to make the
election.

       Based solely on the facts and information submitted, and the additional
information required under Treas. Reg. § 301.9100-3(e), Taxpayer qualifies for an
extension of time to make the elections under Treas. Reg. § 831(b)(2)(A)(ii) and 953(d).
Taxpayer is deemed to have acted in good faith, as defined by Treas. Reg. § 301.9100-
3(b), and the grant of relief will not prejudice the interests of the Government.

        Accordingly, Taxpayer is granted an extension of time of 60 days from the date of
this ruling letter to make the section 953(d) election, in accordance with the procedural
rules set forth in Rev. Proc. 2003-47, to be treated as a domestic corporation for federal
income tax purposes effective for Date 1.) Also, under Treas. Reg. § 301.9100-3,
Taxpayer is granted an extension of time until 90 days following the date of this letter to
make the election provided by section 831(b)(2)(A)(ii), effective for Tax Year 1.

       The above extension of time is conditioned on Taxpayer’s tax liability (if any)
being not lower, in the aggregate, for all years to which the section 953(d) and section
831(b) elections apply than it would have been if the elections had been timely filed
(taking into account the time value of money). No opinion is expressed as to
Taxpayer’s tax liability for the years involved. No opinion is expressed or implied
concerning the federal income tax consequences of any other aspect of this or other
transactions or item of income. Further, the granting of the above extension is not a
determination that Taxpayer qualifies as an insurance company under section 831(c) or
that Taxpayer is otherwise eligible to make the section 953(d) and section 831(b)
elections. Treas. Reg. § 301.9100-1(a). Also, no ruling is granted with respect to
Taxpayer’s entity classification for federal income tax purposes.

      This ruling is directed only to the taxpayer who requested it. Section 6110(k)(3)
provides that it may not be used or cited as precedent.

       Pursuant to a power of attorney on file in this office, copies of this ruling letter are
being furnished to your authorized representatives.


                                        Sincerely,

                                        Kristine A. Crabtree
                                        Senior Technical Reviewer, Branch 2
                                        (International)