Is a risk retention group made up of governmental housing authorities exempt from the Article 33 franchise taxes on insurance corporations as a state instrumentality?
Plain-English summary
Housing Authority Risk Retention Group, Inc. is a risk retention group formed to provide insurance for governmental housing authorities. It asked whether it is exempt from the Article 33 franchise taxes on insurance corporations as a state instrumentality.
Yes -- it is a governmental instrumentality. Tax Law section 1512(a)(1) provides that the franchise taxes on insurance corporations do not apply to "the government of the United States, or of any state or municipality thereof, or any instrumentality of any such government." The group qualifies because:
- Its income accrues to its governmental member entities -- satisfying the accruing requirement of IRC section 115 (income accruing to a state or political subdivision); and
- On dissolution, the remaining assets revert to the participating governmental entities in proportion to their participation.
Because the group is an instrumentality of state/municipal government within the meaning of section 1512(a)(1), it is exempt from New York's franchise taxes on insurance corporations.
What this means for you
A governmental instrumentality is exempt from Article 33
Section 1512(a)(1) exempts governments and their instrumentalities from the insurance franchise taxes -- including a risk pool that is genuinely an arm of government.
The test looks at where the income and assets go
The group qualified because its income accrues to its governmental members and its assets revert to them on dissolution -- the hallmarks of a governmental instrumentality under IRC section 115.
Form as a risk retention group does not control
What mattered was the governmental character of the members and the flow of income and assets, not the label "risk retention group."
Common questions
Q: Is our governmental risk retention group subject to the Article 33 insurance taxes?
A: No, if it is an instrumentality of government -- section 1512(a)(1) exempts governments and their instrumentalities.
Q: What makes it an instrumentality?
A: Its income accrues to its governmental member entities (IRC section 115) and its assets revert to them on dissolution.
Q: Does being structured as a risk retention group matter?
A: No. The exemption turns on the governmental character of the members and the flow of income and assets, not the form.
Citations and references
Statutes, regulations, and authorities:
- Tax Law section 1512(a)(1) (franchise taxes on insurance corporations do not apply to a government or its instrumentality)
- IRC section 115 (income accruing to a state or political subdivision)
Source
- Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1992.htm
- Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a92_18c.pdf
Original ruling text
New York State Department of Taxation and Finance
Taxpayer Services Division
Technical Services Bureau
TSB-A-92 (18) C
Corporation Tax
December 16, 1992
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION
PETITION NO. C920924A
On September 24, 1992, a Petition for Advisory Opinion was received from Housing
Authority Risk Retention Group, Inc., 677 South Main Street, Cheshire, Connecticut 06410.
The issue raised by Petitioner, Housing Authority Risk Retention Group, Inc., is whether it
is exempt from franchise taxes on insurance corporations under Article 33 of the Tax Law as a state
instrumentality.
Petitioner is a nonprofit, nonstock corporation. Petitioner was formed for the purpose of
providing its members the opportunity to pool certain liability risks. Membership in Petitioner is
limited to individual public housing authorities, public housing and development or redevelopment
authorities, and similar authorities or boards operated for the primary purpose of providing public
housing for low-income persons, created and existing as political subdivisions of any state or the
District of Columbia, or possession of the United States or an agency thereof. The liabilities covered
will be connected with properties actually owned by the member authorities or a liability arising out
of a member's duty to inspect certain privately owned lower income development properties. In all
events, no liability of any one other than a member authority will be covered.
Petitioner will be governed by a board of directors, consisting of not less than three and not
more than 21 persons, elected by the member representatives at the annual meeting. Each member
housing authority shall appoint one individual to serve as its representative to Petitioner. The
individual must be an employee or an elected or appointed official of a member housing authority.
The board of directors will determine the annual premiums, based on each member
authority's rating category, which takes into account its loss history, deductible level, coverage
ceiling, and related factors. The board has the authority to assess retroactive premiums if deemed
necessary to cover the losses of the group.
In addition to the annual premiums, members are required to make an initial surplus
contribution in order to provide reserves for potential claims. The amount of the initial surplus
contribution has been set at fifty percent of each authority's initial annual premium. Additional
contributions may be required of all member authorities to cover unexpected losses or other
expenses.
To the extent that Petitioner has excess income at the end of a fiscal year which is not
necessary to meet current losses and expenses of Petitioner, such income will either be added to the
reserves in order to provide additional investment income and reduce the amount of surplus
contributions or premium payments which would otherwise be required of member authorities, or
distributed to member authorities in the form of dividends.
TP-9 (9/88)
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December 16, 1992
Each member of Petitioner shall agree to continue membership for not less than three years,
unless it is forced out by the occurrence of certain events. If a member is forced out, it will be
entitled to receive a refund of all of its account. If a member withdraws during the three year period
for any other reason, the board reserves the right to withhold the member's account in full. At the
conclusion of such period, a member may withdraw for any reason and Petitioner will refund to that
member that percentage of those cumulative reserve fund contributions made to Petitioner by the
withdrawing member according to a prescribed schedule. Upon dissolution of Petitioner and after
payment of all liabilities, the remaining assets shall be distributed among the members based on the
annual premiums.
Section 1 of the New York State Public Authorities Law provides that a public authority, is
an agency and instrumentality of the State. Section 15 of the New York State Public Housing and
Urban Renewal Law provides that a municipal housing authority is an agency and instrumentality
of the State.
Section 115 of the Internal Revenue Code (hereinafter "IRC") provides that gross income
does not include income derived from the exercise of an essential governmental function and
accruing to a state or political subdivision of a state or income accruing to the government of any
possession of the United States, or any political subdivision thereof.
In Rev Rul 90-74, 1990-2 CB 34, it is held that the income of an organization formed,
operated, and funded by political subdivisions to pool their casualty risks is excluded from gross
income under section 115(1) of the IRC. Similarly, the income of an organization formed, operated,
and funded by one or more political subdivisions (or by a state and one or more political
subdivisions) to pool their risks in lieu of purchasing insurance to cover their public liability,
workers' compensation, or employees' health obligations is also excluded under section 115(1) of
the IRC if private interests do not, except for incidental benefits to employees of the participating
state and political subdivisions, participate in or benefit from the organization.
Petitioner received a letter ruling from the Internal Revenue Service dated January 5, 1988 stating
that the income of Petitioner is excludable from gross income under section 115 of the IRC. The
ruling's basis is that the provision of financial protection against losses by Petitioner is an enterprise
that is desirable from the standpoint of the governmental entities because use of Petitioner fulfills
the need of the governmental entities to provide this type of protection at a cost lower than could be
obtained commercially. Participation of the governmental entities in Petitioner is an activity within
the function of a sovereign to conduct because the governmental entities must take steps to protect
their financial security with liability protection. Thus, Petitioner is performing an essential
governmental function that is within the scope of section 115 of the IRC.
Also, the letter ruling states that with respect to the income accruing requirement in section
115 of the IRC, the income of Petitioner will be used for the provision of liability protection or the
payment of claims or will be returned to the participating public authorities. Upon dissolution of
Petitioner and after the satisfaction of all the obligations of Petitioner, the participating governmental
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Corporation Tax
December 16, 1992
entities are entitled to a return of the remaining agency assets in proportion to their participation in
the agency. Accordingly, the arrangement satisfies the accruing requirement of section 115 of the
IRC.
Section 1512(a)(1) of the Tax Law provides that the Franchise Taxes on Insurance
Corporations does not apply to "the government of the United States, or of any state or municipality
thereof, or any instrumentality of any such government".
Herein, Petitioner is an "instrumentality" within the meaning of section 1512(a)(1) of the Tax
Law and is therefore exempt from New York State franchise taxes on insurance corporations
pursuant to section 1512(a)(1) of the Tax Law.
DATED: December 16, 1992
s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division
NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.