Small insurer receives extension for Section 831(b) election

Plain-English summary

An insurance company had qualified for exemption as a small insurer under Section 501(c)(15) in earlier years. Its return preparer discovered shortly before the filing deadline that gross receipts for a later year exceeded the exemption limit, but the deadline to extend its property and casualty insurer return had already passed. That prevented a timely Section 831(b) election to be taxed only on investment income. The company represented that it acted in good faith and that relief would not lower aggregate tax liability compared with a timely election. The IRS granted 90 days to file the election but did not decide whether the company otherwise qualified as an insurance company or for the election.

Ruling snapshot

• Question: Could the insurer receive additional time to make the Section 831(b) small-company election?
• Outcome: Approved; the taxpayer received 90 days to file the election statement.
• Key authorities: IRC § 831(b); Treas. Reg. §§ 301.9100-1, 301.9100-3, and 301.9100-8

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201821007 Third Party Communication: None
Release Date: 5/25/2018 Date of Communication: Not Applicable
Index Number: 9100.22-00, 831.00-00
Person To Contact:
---------------------------------------- ----------------------, ID No. ------------------
---------------------------------------------------- Telephone Number:
------------------- ----------------------
-------------------------- Refer Reply To:
CC:FIP:B4
PLR-126893-17
Date:
February 26, 2018

Taxpayer = -----------------------------------------------------------------------------------------------
-----------------------
State = ------------
Year 1 = -------
Year 2 = -------
Year 3 = -------
CPA = -------------------------

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

This letter is in response to Taxpayer’s request, pursuant to § 301.9100-3 of the
Procedure and Administration Regulations, for an extension of time to make the election
under § 831(b)(2)(A) of the Internal Revenue Code.

FACTS

Taxpayer was formed as a corporation in Year 1 under the laws of State and was
licensed as an insurance company in State. For a number of years prior to Year 2,
Taxpayer qualified as a small insurance company under § 501(c)(15), and Taxpayer
annually engaged CPA to prepare Taxpayer’s Form 990, Return of Organization
Exempt From Income Tax.

In Year 3, Taxpayer again engaged CPA to prepare Taxpayer’s Year 2 Form 990.
Shortly prior to the due date, CPA discovered that Taxpayer’s gross receipts for Year 2
exceeded the $600,000 limit allowed for qualification under § 501(c)(15). This discovery
was made after the date by which Taxpayer would have needed to file an extension for
the Form 1120-PC, U.S. Property and Casualty Insurance Company Income Tax
Return. Therefore, Taxpayer’s missed its opportunity to make the § 831(b) election,

because the Year 2 Form 1120-PC accompanied by an election statement was not
timely filed.

Taxpayer represents that it qualifies as a property and casualty insurance company
under Part II of Subchapter L of the Internal Revenue Code. Additionally, Taxpayer
represents that upon granting of the requested extension, Taxpayer will not have a
lower tax liability in the aggregate for all taxable years affected by the election than
Taxpayer would have had if the election had been timely filed (taking into account the
time value of money). Further, Taxpayer represents that it requested relief before the
failure to make the election was discovered by the Internal Revenue Service.

LAW AND ANALYSIS

Section 831(a) provides that taxes, computed as provided in § 11, are imposed for each
taxable year on the taxable income of every insurance company other than a life
insurance company. However, § 831(b) allows certain small companies to elect to be
subject to tax on their taxable investment income only. The election applies to the
taxable year for which the company made it 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 § 831(b)(2)(A) election is prescribed by Treas. Reg.
§ 301.9100-8. Accordingly, the election under § 831(b) is a regulatory election. Treas.
Reg. § 301.9100-1(b). 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 effective by
attaching a statement to the tax return containing the information specified in Treas.
Reg. § 301.9100-8(a)(3)).

Under Treas. Reg. § 301.9100-1(c), the Commissioner may grant a reasonable
extension of time under the rules set forth in Treas. Reg. §§ 301.9100-2 and 301.9100-3
to make a regulatory or statutory election. Treas. Reg. § 301.9100-3(a) provides that a
request for relief will be granted when the taxpayer provides evidence to establish to the
satisfaction of the Commissioner that the taxpayer “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 the taxpayer:

   (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 the taxpayer:

   (i) Seeks to alter a return position for which an accuracy-related penalty has been

or could be imposed under § 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
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).

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 Taxpayer’s representations and the additional information required
under Treas. Reg. § 301.9100-3(e), Taxpayer qualifies for an extension of time to make
the election under § 831(b)(2)(A). 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.

RULING

Accordingly, 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
§ 831(b)(2)(A) for the tax year ending on December 31 of Year 2. The election should
be made in a written statement filed with the appropriate service center. A copy of this
letter should be attached to the § 831(b) election.

CAVEATS

The ruling contained in this letter is based upon the information and representations
submitted by Taxpayer and accompanied by a penalty of perjury statement executed by
an appropriate party. This office has not verified any of the materials submitted in
support of the ruling request, and it is subject to verification on examination.

Except as provided above, 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 of Taxpayer. Specifically, no ruling is made as to whether Taxpayer qualifies as
an insurance company under § 831(c) and the granting of the extension under Treas.
Reg. § 301.9100-1(a) should not be construed as a determination that Taxpayer is
eligible to make the election provided by § 831(b)(2)(A).

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

In accordance with a power of attorney on file in this office, a copy of this letter is being
sent to your authorized representative.

                                    Sincerely,



                                    Alexis A. MacIvor
                                    Branch Chief, Branch 4
                                    Office of the Associate Chief Counsel
                                    (Financial Institutions & Products)

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