Insurer gets 90 days to make late section 831(b) election

Plain-English summary

A non-life insurance company intended to elect the alternative tax on investment income under section 831(b) for its first year. Its captive-management company did not file the return because it incorrectly assumed the company could not file until the state issued its insurance license, which later applied retroactively to that first year. The omission was discovered after tax professionals were hired, before the IRS found it, and the company represented that relief would not lower its aggregate tax liability. The IRS granted 90 days to make the section 831(b) election. Penalties, interest, and additions relating to the late return remain applicable, and the IRS did not decide whether the taxpayer otherwise qualified as an insurance company.

Ruling snapshot

• Question: May the company make a late section 831(b) election for its first tax year?
• Outcome: Approved, with 90 days to make the election.
• Key authorities: IRC § 831(b)(2)(A); 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: 201923020                                              Third Party Communication: None
Release Date: 6/7/2019                                         Date of Communication: Not Applicable
Index Number: 831.00-00                                        Person To Contact:
                                                               ----------------------, ID No. ------------------
                                                               Telephone Number:
----------------------------------,                            ----------------------
--------------------------------------                         Refer Reply To:
---------------------------------------------                  CC:FIP:B04
---------------------------                                    PLR-124159-18
                                                               Date:
                                                               March 11, 2019




Taxpayer                                        = ------------------------------------------------------------------
                                                  ---------------------------------------------------------------
Year 1                                          = -------
Year 2                                          = -------
Year 3                                          = -------
State                                           = ----------------
Captive Management Company                      = -------------------------




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

This letter is in response to Taxpayer’s request for a ruling granting an extension of time
for making an election under § 831(b)(2)(A) of the Internal Revenue Code pursuant to
§ 301.9100-3 of the Procedure and Administrative Regulations, to be effective for the
tax year ending on December 31, Year 1.


FACTS

Taxpayer represents that it was established in State and qualified as a non-life
insurance company for federal income tax purposes in Year 1. Though Taxpayer did
not receive its insurance license from State until Year 2, the license was applied
retroactively through Year 1. Taxpayer reinsures health, welfare, and pharmaceutical
benefits.

Taxpayer hired Captive Management Company to obtain its State insurance license and
coordinate tax compliance. Captive Management Company represents it failed to file
PLR-124159-18                                 2

Taxpayer’s Year 1 tax return because it assumed Taxpayer would be unable to file its
return until it received its insurance license. The license was not received until after the
Year 1 filing due date. Had the Year 1 return been filed on time, Taxpayer would have
made the § 831(b) election.

In Year 3, Captive Management Company hired tax professionals and was informed of
the filings and elections that should have been made in Year 1. Taxpayer is now
seeking a ruling to permit the § 831(b) election to be filed with the late return for the
year ended December 31, Year 1.

Taxpayer’s request for relief was filed before the Internal Revenue Service discovered
the failure to make the regulatory election. The granting of relief by the Internal
Revenue Service will not result in a lower tax liability than Taxpayer would have had if
the § 831(b) election had been timely made. Taxpayer does not seek to alter a return
position for which the accuracy related penalty has been or could have been imposed
under § 6662 at the time Taxpayer requests relief, and the new position requires or
permits a regulatory election for which relief is requested. Taxpayer failed to file the
election inadvertently. Taxpayer has not used hindsight to seek an extension of time to
make the election. Taxpayer always had the intent to make the § 831(b) election.


LAW AND ANALYSIS

Insurance companies other than life insurance companies are taxable under § 831.
However, certain insurance companies can elect to pay an alternative tax provided in
§ 831(b) on only their taxable investment income. Section 831(b)(2)(A)(iii) requires that
a company elect the application of the alternative tax imposed by § 831(b). Pursuant to
§ 301.9100-8(a)(2)(i), this election must be made by the due date (taking into account
any extensions of time to file obtained by the taxpayer) for the first taxable year for
which the election is effective.

Under § 301.9100-1(c), the Commissioner may grant a reasonable extension of time
pursuant to §§ 301.9100-2 and 301.9100-3 to make a regulatory election Under
§ 301.9100-3(a), relief will be granted when the taxpayer provides the evidence to
establish to the satisfaction of the Commissioner that the taxpayer acted reasonably
and in good faith, and the grant of relief will not prejudice the interests of the
government.

Under § 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 the complexity of the return or issue), the taxpayer was
PLR-124159-18                                 3

unaware of the necessity for the election; (iv) reasonably relied on the 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 § 301.9100-3(c)(1)(i), the interests of the government are prejudiced if granting
relief would result in the 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). Section 301.9100-
3(c)(1)(ii) provides that the interests of the government are ordinarily prejudiced if the
taxable year in which the regulatory election should have been made or any taxable
years that would have been affected by the election had it been timely made are closed
by the period of limitations on assessment under section 6501(a) before the taxpayers’
receipt of a ruling granting relief under this section.

Section 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.


RULING

Based solely on Taxpayer’s representations and the additional information required
under § 301.9100-1(e), Taxpayer is granted an extension of time until 90 days following
the date of this letter to make the election to be subject to the alternative tax provided in
§ 831(b)(2)(A) for Year 1.


CAVEATS

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

Notwithstanding that an extension of time is granted under § 301.9100-3 to make an
election under § 831(b)(2)(A), additions, penalties and interest that would otherwise be
applicable, if any, continue to apply with respect to the tax return for Year 1.

No ruling has been requested, and no opinion is expressed (or implied) whether
Taxpayer is engaged in the issuing of insurance or annuity contracts or the reinsuring of
risks underwritten by insurance companies; or whether Taxpayer qualifies as an
insurance company under § 831(c) for Year 1.

A copy of this ruling letter should be attached with Taxpayer’s federal income tax return.
PLR-124159-18                                  4

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, a copy of this ruling is being
furnished to your authorized representatives.



                                        Sincerely,



                                        Rebecca L. Baxter
                                        Senior Technician Reviewer, Branch 4
                                        (Financial Institutions & Products)




cc: