Prior insurance-company ruling revoked for roadside assistance contract

Plain-English summary

The IRS revoked a 1999 ruling that had treated a roadside assistance provider as an insurance company based on one vehicle manufacturer's contract. The contract refunded part of its per-vehicle fee when dispatches stayed below a cap and required the manufacturer to reimburse actual assistance costs above the cap. The IRS concluded that this structure lacked the fortuity needed for insurance risk and was economically equivalent to per-incident and reimbursement arrangements. Because a redacted large share of the company's revenue came from that contract, insurance was not its primary and predominant business when the earlier ruling was issued. The IRS continued to agree that a separate fixed per-vehicle contract qualified as insurance. It granted section 7805(b) relief that limited the revocation's retroactive effect and allowed specified existing per-incident contracts to retain insurance treatment for limited periods or until later amendment.

Ruling snapshot

• Question: Should the 1999 ruling that treated the taxpayer as an insurance company remain in effect?
• Outcome: Revoked, with limited nonretroactive relief
• Key authorities: IRC §§ 816(a), 831, 7805(b); Treas. Reg. § 1.801-3(a); Rev. Rul. 2007-47

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202443012 Third Party Communication: None
Release Date: 10/25/2024 Date of Communication: Not Applicable
Index Number: 831.00-00
Person To Contact:
-------------------- --------------------, ID No. -----------------
------------------------------------------------------ Telephone Number:
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---------------------------------- Refer Reply To:
---------------------------- CC:FIP:B04
PLR-104817-21
Date:
July 29, 2024

Legend:

c = ---
Date 1 = ---------------------
Date 2 = ------------------
Date 3 = --------------------------------------------------------------------------------------
-------
k = ---
Manufacturer X = -----------
Manufacturer Y = -------
Manufacturer Z = -----
Parent = -------------------------------------------------------------------------------
Prior Parent = ------------------------------------------------------------------
State = --------------------
Taxpayer = -------------------------------------------------------------------

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

On April 7, 1999, the Internal Revenue Service (the “Service”) issued PLR 199926033
(PLR-122660-98) (the “1999 PLR”) to Prior Parent, the parent of the consolidated group
of which Taxpayer was a member at the time the 1999 PLR was issued. The 1999 PLR
ruled that Taxpayer qualified as an insurance company for federal income tax purposes
and was subject to the provisions of parts II and III of Subchapter L of the Internal
Revenue Code (the “Code”). This ruling was based on a determination that Taxpayer’s
1997 contract with Manufacturer X, as described in the 1999 PLR (the “X Contract”),
was an insurance contract for federal income tax purposes.

On Date 1, the Service notified you that it was considering revoking the 1999 PLR
because the Service had tentatively concluded that the X Contract was not an insurance

PLR-104817-21 2

contract for federal income tax purposes. Section 12.04 of Rev. Proc. 99-1, 1999-1
C.B. 6, provides that a letter ruling found to be in error or not in accordance with the
current views of the Service may be revoked or modified.

The Service has now concluded that the 1999 PLR’s determination that the X Contract
was insurance for federal income tax purposes is not in accord with the current views of
the Service. As explained below, because this determination was a necessary
predicate for the 1999 PLR’s ruling that Taxpayer was taxable as an insurance
company, the 1999 PLR is hereby revoked, subject to the § 7805(b) relief described
below.

                                     FACTS

Taxpayer is a State corporation. When the 1999 PLR was issued, Taxpayer was wholly
owned by Prior Parent and joined Prior Parent in filing a consolidated federal income tax
return. Currently, Taxpayer is wholly owned by Parent and joins Parent in filing a
consolidated federal income tax return.

When the 1999 PLR was issued, Taxpayer contracted with manufacturers of vehicles
that offered purchasers of their vehicles a roadside assistance program entitling the
purchasers to 24-hour roadside assistance for flat tires, fuel delivery, mechanical
breakdowns, dead batteries, and lockouts. Pursuant to the contracts with the
manufacturers, Taxpayer arranged for the provision of the roadside assistance to the
purchasers of the manufacturers’ vehicles. Taxpayer did not perform any of the
roadside assistance itself but contracted with many different independent contractors
(including, for example, tow truck operators and locksmiths) throughout the United
States to provide the actual roadside assistance services.

Taxpayer generally entered into three different types of contracts under which it was
obligated to provide roadside assistance: Reimbursement Contracts, Per Vehicle
Contracts, and Per Incident Contracts.

Under a Reimbursement Contract, Taxpayer received from the vehicle manufacturer a
small fee for each vehicle sold by the manufacturer that was covered by the contract.
Taxpayer also charged the manufacturer a dispatch fee plus the actual cost of providing
any roadside assistance. Taxpayer’s contract with Manufacturer Z, as described in the
1999 PLR, exemplified a Reimbursement Contract.

Under a Per Vehicle Contract, Taxpayer received from the vehicle manufacturer a fee
for each vehicle sold by the manufacturer that was covered by the contract. Taxpayer
was not further compensated regardless of the number of times roadside assistance
was dispatched or the cost of providing such assistance. Taxpayer’s contract with
Manufacturer Y, as described in the 1999 PLR (the “Y Contract”), exemplified a Per
Vehicle Contract.

PLR-104817-21 3

Under a Per Incident Contract, Taxpayer received from the vehicle manufacturer a pre-
determined fee each time roadside assistance was provided to a vehicle covered by the
contract.

The X Contract was essentially the economic equivalent of a Per Incident Contract
combined with a Reimbursement Contract. Under the X Contract, Taxpayer received
from Manufacturer X a fee for each covered vehicle, which was a vehicle designated by
Manufacturer X as a 1998, 1999, or 2000 model year vehicle for delivery in the United
States. Vehicles were provided roadside assistance for a period of 3 years or 36,000
miles, whichever occurred first.

If the cumulative number of dispatches for covered vehicles of a particular model year
was below c% of the number of such covered vehicles (the “Model Year Cap”),
Taxpayer was to refund to Manufacturer X a certain amount per covered vehicle for
each percentage point that the actual usage rate (i.e., the number of dispatches divided
by the number of covered vehicles) was below c%. Thus, if the number of dispatches
was below the Model Year Cap, the X Contract was generally the economic equivalent
of a Per Incident Contract.

However, if the number of dispatches for a given model year exceeded the Model Year
Cap, Manufacturer X was required to reimburse Taxpayer for actual payments made to
provide roadside assistance for each such additional dispatch. This portion of the
contract was the economic equivalent of a Reimbursement Contract because Taxpayer
was reimbursed for actual payments made to provide roadside assistance.

When the 1999 PLR was issued, approximately k% of Taxpayer’s business was from
the X Contract.

                            LAW AND ANALYSIS

Insurance Risk

Section 831(a) provides that tax is imposed for each taxable year on the taxable income
of every insurance company other than a life insurance company. Section 831(c) states
that the term “insurance company” is defined in § 816(a). Section 816(a) defines
“insurance company” to mean a 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.

Section 831(c)’s reference to § 816(a) for purposes of defining an insurance company
was incorporated into the Code in 2004. Pension Funding Equity Act of 2004, Pub. L.
108-218, § 206(c), 118 Stat. 596, 611 (2004). Prior to that (including when the 1999
PLR was issued) reference was made to Treas. Reg. § 1.801-3(a), which provides:

PLR-104817-21 4

  The term “insurance company” means 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.

Neither the Code nor the Treasury regulations define insurance, but case law has held
that to be considered insurance an arrangement must involve risk-shifting, involve risk
distribution, involve insurance risk, and meet commonly accepted notions of insurance.
See, e.g., Avrahami v. Commissioner, 149 T.C. 144, 177 (2017).

In its discussion of insurance risk, the court in R.V.I. Guaranty Co. v. United States, 145
T.C. 206 (2015), stated:

  We have said that “[i]nsurance risk is involved when an insured faces some loss-
  producing hazard (not an investment risk), and an insurer accepts a payment,
  called a premium, as consideration for agreeing to perform some act if and when
  that hazard occurs.”

R.V.I., 145 T.C. at 235 (quoting Black Hills Corp. v. Commissioner, 101 T.C. 173, 182
(1993)).

Central to the notion of insurance is the concept of a “fortuitous event.” The court in
Commissioner v. Treganowan, 183 F.2d 288 (2d Cir. 1950), wrote: “From an insurance
standpoint there is no risk unless there is uncertainty or, to use a better term,
fortuitousness. It may be uncertain whether the risk will materialize in any particular
case.” Id. at 290 (quoting 8 Ency. Soc. Sc. 95). Similarly, the court in AMERCO, Inc. v.
Commissioner, 979 F.2d 162 (9th Cir. 1992), explained that “[i]nsurance risk is the
possibility that a particular event for which an insured will be held liable will occur.” Id. at

167. Thus, a contract that lacks the requisite fortuity does not have insurance risk and
     is not a contract that constitutes insurance for federal income tax purposes.

Rev. Rul. 2007-47, 2007-2 C.B. 127, involves an arrangement entered into by a
taxpayer as it began the operation of a business inherently harmful to people and
property. Government regulations required the taxpayer to remediate any harm after
the cessation of business. The taxpayer entered into an arrangement with an insurance
company under which the insurance company was to reimburse the taxpayer for the
remediation costs up to a certain limit. The revenue ruling concluded that the
arrangement between the taxpayer and the insurance company lacked insurance risk
and was not insurance for federal income tax purposes. In making its determination,
the ruling stated that no insurance risk or hazard, such as a hurricane or accident,
existed as to whether the taxpayer would have to incur the remediation costs, and it was
certain that the insurance company would have to pay for the remediation costs up to
the policy limit.

PLR-104817-21 5

Because of its particular fee refund provision, the X Contract did not have the requisite
fortuity to constitute an insurance risk. Accordingly, the X Contract did not constitute
insurance for federal income tax purposes. k% of Taxpayer’s revenue was from the X
Contract. Under the legal standard in effect at the time the 1999 PLR was issued,
Taxpayer’s “primary and predominant” business activity was not the issuing of
insurance or annuity contracts or the reinsuring of risks underwritten by insurance
companies. As a result, Taxpayer was not an insurance company for federal income
tax purposes when the 1999 PLR was issued. Accordingly, the 1999 PLR is revoked,
subject to the § 7805(b) relief described below.

Notwithstanding the revocation of the 1999 PLR, the Service continues to agree with its
determination in the 1999 PLR that the Y Contract, a Per Vehicle Contract, was
insurance for federal income tax purposes.

Section 7805(b) Relief

Section 7805(b)(8) provides that 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.

Under § 12.07 of Rev. Proc. 99-1, if a letter ruling is issued covering a continuing action
or series of actions and the letter ruling is later found to be in error or no longer in
accord with the position of the Service, the Service ordinarily will limit the retroactive
effect of the revocation or modification to a date that is not earlier than the date on
which the letter ruling is revoked or modified.

Under § 12.11 of Rev. Proc. 99-1, a taxpayer may request that the retroactive effect of
any revocation or modification of a letter ruling be limited. Parent has made this request
on behalf of Taxpayer, and the Service has decided to grant relief under § 7805(b) to
limit the effect of the revocation of the 1999 PLR.

The 1999 PLR is revoked as of Date 2. However, Taxpayer may treat Per Incident
Contracts (including the X Contract, as amended prior to Date 2) as insurance contracts
for purposes of determining whether Taxpayer is an insurance company for federal
income tax purposes for Taxpayer’s last taxable year ending prior to Date 3. Further,
for Taxpayer’s taxable year that includes Date 2 and all subsequent taxable years,
Taxpayer may treat any Per Incident Contract (including the X Contract, as amended)
that was issued before Date 2 as an insurance contract for federal income tax purposes,
unless and until such contract is modified or amended (or further modified or amended
in the case of a contract that had been previously modified or amended before Date 2).

PLR-104817-21 6

                                         CONCLUSION

The 1999 PLR is revoked, subject to the § 7805(b) relief described above.

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

A copy of this letter must be attached to any income tax return to which it is relevant.
Alternatively, taxpayers filing their returns electronically may satisfy this requirement by
attaching a statement to their return that provides the date and control number of the
letter.

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

                                          Sincerely,


                                          ___________________________
                                          Daniel P. Phillips
                                          Senior Counsel, Branch 4
                                          Office of Associate Chief Counsel
                                          (Financial Institutions & Products)

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