NE 24-96-1 Corporate Income Tax 1996-11-27

When must a Nebraska insurance company include reinsurance premiums in its one-factor apportionment formula?

Short answer: Reinsurance premiums are normally left out -- unless they exceed one-third of premiums received. Under Revenue Ruling 24-96-1 (corporate income tax), an insurance company or unitary group apportions income to Nebraska with a one-factor formula: the numerator is direct premiums received on Nebraska property or risks and the denominator is direct premiums received everywhere. Premiums for reinsurance are normally not included. But if more than one-third of the premiums received by the company or unitary group are premiums received for reinsurance accepted, the reinsurance premiums are included in both the numerator and denominator (after eliminating all transactions between members of the same group). Reinsurance premiums are sourced to Nebraska if the underlying risks are, or can reasonably be assumed to be, in Nebraska; where the risk location can't be established or assumed, they are sourced to the ceding company's state of commercial domicile -- except that if more than half of the ceding company's written premiums are direct, quota-share reinsurance is sourced by the ceding company's NAIC Annual Statement Schedule T allocation of its direct premiums written.

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This page answers the general question as of 1996. Ezel answers yours, under current Nebraska tax law, with citations.

Disclaimer: This is an official Revenue Ruling of the Nebraska Department of Revenue, a guidance document stating the Department's interpretation of how Nebraska tax law applies. Each Nebraska guidance document carries the notice that it 'is advisory in nature but is binding on the Nebraska Department of Revenue until amended.' Unlike a private letter ruling, a Revenue Ruling is a general statement of Department policy rather than advice to a single taxpayer, but it can be amended, superseded, or made obsolete by a later ruling or a change in statute or regulation, many rulings in this series have been rescinded or superseded, so confirm it is still in effect before relying on it. Nebraska's local option sales and use taxes are administered by the Department, not self-collected by home-rule cities. This summary is informational only and is not legal or tax advice. Consult a licensed Nebraska tax professional about your situation.

About this page: The plain-English summary, reader guidance, and Q&A below were written by Ezel based on the official state tax ruling. The original ruling (linked on this page as a PDF) is the authoritative source for any reliance.

View original ruling (PDF)

Plain-English summary

Insurance companies apportion their income to Nebraska differently from ordinary corporations — with a one-factor premiums formula — and this ruling explains when reinsurance premiums get pulled into that formula.

The base formula. An insurance company (or a unitary group of insurance companies) apportions income to Nebraska using a fraction: the numerator is direct premiums received on property or risks in Nebraska, and the denominator is direct premiums received on property or risks everywhere. Normally, premiums for reinsurance are not included.

The one-third trigger. If more than one-third of the premiums received by the company or unitary group are premiums received for reinsurance accepted, then reinsurance premiums are included in the formula. All transactions between corporate members of the same group are eliminated before making this determination. When the trigger is met:

the denominator becomes direct premiums everywhere plus reinsurance premiums accepted for risks everywhere; and
the numerator becomes direct premiums for Nebraska risks plus reinsurance premiums accepted for risks sourced to Nebraska.

Sourcing reinsurance premiums. Reinsurance premiums accepted are sourced to Nebraska if the underlying risks are in Nebraska or can reasonably be assumed to be. If the risk location can neither be established nor reasonably assumed, the premiums are sourced to the state of commercial domicile of the ceding company — with one exception: if more than half of the ceding company's written premiums are direct, then quota-share reinsurance premiums are sourced in proportion to the ceding company's NAIC Annual Statement Schedule T allocation of its direct premiums written. (Schedule T is the state-by-state allocation in the annual statement prescribed by the National Association of Insurance Commissioners; quota-share reinsurance covers a set percentage of the reinsured's business.)

What this means for you

An insurance company (or unitary insurance group) filing in Nebraska

First test the mix of your premiums received. If reinsurance accepted is one-third or less, keep using the plain direct-premiums formula and leave reinsurance out. If it's more than one-third, add reinsurance premiums to both the numerator and denominator, after eliminating intercompany transactions — then source each block of reinsurance premiums by where the underlying risk is, falling back to the ceding company's commercial domicile (or, for quota-share from a mostly-direct ceding company, its Schedule T allocation).

A tax preparer for a reinsurer

The Schedule T mechanics matter only in a specific corner: quota-share reinsurance where the risk location is unknown and the ceding company writes mostly direct premiums. Identify whether you're in that corner before defaulting to commercial-domicile sourcing.

Common questions

Q: Are reinsurance premiums always part of the Nebraska apportionment formula?
A: No. They're normally excluded and are included only if more than one-third of premiums received are reinsurance accepted.

Q: How are reinsurance premiums sourced to Nebraska?
A: By where the underlying risks are (or are reasonably assumed to be). If that can't be determined, they're sourced to the ceding company's state of commercial domicile — except quota-share premiums from a mostly-direct ceding company, which follow that company's Schedule T allocation.

Q: What about transactions within a unitary group?
A: All transactions between corporate members of the same group are eliminated before determining whether the one-third threshold is met and before computing the formula.

Citations and references

One-factor insurance apportionment formula — numerator: direct premiums on Nebraska property/risks; denominator: direct premiums everywhere.
The one-third reinsurance rule — reinsurance premiums accepted are included only when they exceed one-third of premiums received, with intercompany transactions eliminated first.
NAIC Annual Statement, Schedule T — the direct-premiums-written allocation used to source quota-share reinsurance when the ceding company writes mostly direct premiums and the risk location is unknown.

Source

Original ruling text

Revenue Ruling 24-96-1
November 27, 1996
Corporate Income Tax -- Apportionment Formula: Reinsurance Premiums. IF MORE THAN ONETHIRD OF THE PREMIUMS RECEIVED BY AN INSURANCE COMPANY OR A UNITARY
GROUP OF INSURANCE COMPANIES ARE PREMIUMS RECEIVED FOR REINSURANCE, THE
REINSURANCE PREMIUMS WILL BE INCLUDED IN THE APPORTIONMENT FORMULA.
Advice has been requested as to the inclusion of premiums received for reinsurance in calculating the
apportionment formula of an insurance company or a unitary group of companies.
The income of an insurance company or unitary group of insurance companies is apportioned to Nebraska
pursuant to a one-factor formula consisting of a fraction, the numerator of which is direct premiums received
on property or risks in Nebraska and the denominator of which is direct premiums received on property or
risks everywhere. Premiums for reinsurance are normally not included.
When more than one-third of the premiums received by a company or a unitary group of insurance companies
consist of premiums received for reinsurance accepted, then the premiums received for reinsurance will be
included in the apportionment formula. All transactions between corporate members of the same group will
be eliminated prior to making the determinations outlined in this ruling.
The denominator is the sum of direct premiums received on property and risks everywhere, plus premiums
received for reinsurance accepted with respect to property and risks everywhere. The numerator is the sum
of direct premiums received for insurance upon property and risks in the State of Nebraska, plus premiums
received for reinsurance accepted in respect to property and risks sourced in the State of Nebraska.
Premiums received for reinsurance accepted will be sourced to Nebraska if it can be established or reasonably
be assumed that the underlying risks are in Nebraska. In the case of reinsurance accepted for which the
location of the underlying risk can neither be established nor reasonably assumed, premiums received will
be sourced to the state of commercial domicile of the ceding company with the following exception. If more
than half of the ceding company’s premiums written are direct premiums, reinsurance premiums received
with respect to quota-share shall be sourced in proportion to the ceding company’s Annual Statement -Schedule T allocation of its direct premiums written. Schedule T is part of the annual statement prescribed
by the National Association of Insurance Commissioners, which is required to be filed annually with the
various state insurance departments. Quota-share reinsurance is reinsurance of a certain percentage of all or
certain parts of the business of the reinsured.
APPROVED:

M. Berri Balka
State Tax Commissioner
November 27, 1996

Nebraska Department of Revenue, P.O. Box 94818, Lincoln, Nebraska 68509-4818

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