Is a group self-insurance workers' compensation trust taxed as an insurance company under Article 33, or under another article of the Tax Law?

Plain-English summary

A group self-insurance workers' compensation trust (TRUST) lets employers in a related industry pool together to self-insure their workers' compensation obligations under section 50.3-a of the Workers' Compensation Law. The TRUST is qualified by the Workers' Compensation Board, not the Superintendent of Insurance; each participating employer stays jointly and severally liable, and the TRUST invests the contributions until benefits must be paid. For federal tax it files Form 1120-PC and is taxed as an insurance company under IRC section 831 (Rev. Rul. 83-172). Stulmaker asked: is the TRUST subject to Article 33 (insurance tax), and if not, which article applies?

The Department held:

• Not Article 33. Whether a company is "doing an insurance business" turns historically on whether it must be licensed by the Superintendent of Insurance. The TRUST is not required to be licensed and is regulated by the Workers' Compensation Board, so it is not an insurance corporation under Tax Law section 1500 and owes no Article 33 tax (following KPMG Peat Marwick, TSB-A-93(4)C, which reached the same result for an unlicensed HMO).
• Not the Article 22 personal income tax. Section 601(g) provides that a trust taxable as a corporation for federal purposes is not subject to Article 22. Because the TRUST is taxed federally as an insurance company (a corporation), it is outside Article 22.
• Yes, Article 9-A. The TRUST's activities exceed "the mere investment of funds and the collection of income therefrom" (20 NYCRR 1-2.5(b)(2)), so it is conducting a business. Because its members' interests are evidenced by written instruments (the trust and indemnity agreements), it is a corporation under Tax Law section 208.1 and is subject to the Article 9-A franchise tax under section 209.1.

What this means for you

Licensing by the Insurance Department is the key to Article 33

If an entity is not required to be licensed by the Superintendent of Insurance and is not regulated under the Insurance Law, the Department treats it as not "doing an insurance business," so Article 33 does not apply -- even if it is taxed as an insurance company federally.

A business trust with written ownership interests is a corporation for Article 9-A

A trust that does more than passively invest funds and whose interests are evidenced by a written instrument is a "corporation" under section 208.1 and is taxed under Article 9-A.

The result is one tax, not none and not two

The classification analysis routes the trust away from Article 33 and away from the Article 22 personal income tax, and into Article 9-A.

Common questions

Q: Is a group self-insurance workers' compensation trust an insurance company for New York tax?
A: Not under Article 33. Because it is not licensed by the Superintendent of Insurance, it is not "doing an insurance business" for Article 33 purposes.

Q: Does filing as an insurance company federally put it under Article 33?
A: No. Federal Form 1120-PC treatment does not control; New York looks to whether Insurance Department licensing is required.

Q: So which tax applies?
A: The Article 9-A franchise tax. The trust conducts a business and its interests are evidenced by a written instrument, making it a corporation under section 208.1.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 1500(a) (insurance corporation; "doing an insurance business"); sections 1501 and 1510 (Article 33 taxes)
- Tax Law section 601(g) (trust taxable as a corporation federally is not subject to Article 22)
- Tax Law section 208.1 (corporation includes a business conducted by trustees with interests evidenced by a written instrument); 20 NYCRR 1-2.5(b)(2)
- Tax Law section 209.1 (Article 9-A franchise tax); section 209.4 (corporation liable under Article 33 is not subject to 9-A)
- KPMG Peat Marwick, TSB-A-93(4)C (unlicensed HMO not an insurer); Guardian Life Ins. v. Chapman, 302 NY 226; IRC section 831 / Rev. Rul. 83-172

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1996.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a96_22c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-96 (22) C
Corporation Tax
September 12, 1996

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C960501A

On May 1, 1996, a Petition for Advisory Opinion was received from Stulmaker, Kohn &
Richardson, LLP, 524 Broadway, Albany, New York 12207.
The issues raised by Petitioner, Stulmaker, Kohn & Richardson, LLP, are: (1) Whether a
group self-insurance workers' compensation trust is subject to tax under Article 33 of the Tax Law.
(2) If yes, how is the tax on premiums applied to the entity? (3) If no, under which Article of the Tax
Law is it taxable?
Petitioner submits the following facts as the basis for this Advisory Opinion.
A group self-insurance workers' compensation trust ("TRUST") is issued a "Notice of
Qualification as Group Self-Insurer Under the Workers' Compensation Law" by the New York State
Workers' Compensation Board, pursuant to the Board's authority under section 50.3-a of the
Workers' Compensation Law. An employer participating in group self-insurance shall not be
relieved from any liability for compensation under section 50 of the Workers' Compensation Law.
Each employer participating in the trust is jointly and severally liable for any lawful obligations of
the TRUST; no indemnification exists. An employer becomes a member of the TRUST by signing
the trust agreement and an indemnity agreement.
Petitioner states that TRUST is not licensed by the Superintendent of Insurance. Nor is it
required to file, with the Superintendent of Insurance, the annual statement that insurers authorized
to do an insurance business in New York State are required to file pursuant to section 307 of the
Insurance Law.
Petitioner states that the amounts received by TRUST from the participating employers are
held until the workers' compensation benefits are required to be paid to the employees. The funds
held by TRUST are invested until needed. Since TRUST does not have any employees, it has a
third-party manage the funds for which TRUST pays a management fee and an administrative fee.
Petitioner states that TRUST files Form ll20PC for Federal income tax purposes pursuant to
Rev Rul 83-172, 1983-2 CB 107. This Internal Revenue Ruling provides that a group that has been
created for the purpose of providing self-insured workers' compensation under state law is taxable
as an insurance company under the provisions of section 831 of the Internal Revenue Code, even
though it is not recognized as an insurance company under state law.
Section 50 of the Workers' Compensation Law provides that an employer must provide for
the payment of benefits to its employees as required by the Workers' Compensation Law under one
of three methods. An employer may (1) purchase a Workers' Compensation Insurance policy from
an insurance company authorized to provide such coverage by the New York Superintendent of

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Insurance, (2) purchase a policy from the State Insurance Fund, or (3) self-insure with the permission
of the Chairman of the Workers' Compensation Board upon proof of financial security and ability
to pay benefits when an injury occurs.
Employers in a particular industry who conduct related activities may choose to organize
together for group self-insurance under section 50.3-a of the Workers' Compensation Law.
However, an employer participating in group self-insurance is not relieved from the liability for
compensation prescribed by the Workers' Compensation Law except by the payment thereof by the
group self-insurer or by itself. That is, if the group fund fails to pay benefits, the individual employer
will still be liable to make the payments. Section 53 of the Workers' Compensation Law provides
that an employer is released from all liability for the payment of workers' compensation if it has
purchased a policy from the State Insurance Fund. Otherwise, an employer is not relieved from
liability for the payment of workers' compensation except by payment made by itself or its insurance
carrier.
Section 50.5 of the Workers' Compensation Law states that the Chairman of the Workers'
Compensation Board shall administer all matters relating to self-insurance under the Workers'
Compensation Law and that the amount of deposit or bond to be filed with the Chairman shall be
jointly determined by the Chairman and the Superintendent of Insurance. The Chairman may from
time to time request the Superintendent of Insurance for such other assistance as may be necessary
to insure the financial ability of the self-insurance groups to pay compensation for the employers in
the industries covered by the plans.
Pursuant to Article 33 of the Tax Law, two of the franchise taxes imposed on insurance
corporations are contained in sections 1501 and 1510 with a cap contained in section 1505.
The tax imposed pursuant to section 1501(a) of the Tax Law provides:
[e]very domestic insurance corporation and every foreign or alien insurance
corporation, for the privilege of exercising its corporate franchise, or of doing
business, or of employing capital, or of owning or leasing property in this state in a
corporate or organized capacity, or of maintaining an office in this state ... shall
annually pay a franchise tax ....
Section 1510(a) of the Tax Law provides for an additional premiums tax on insurance
corporations as follows:
[e]xcept as hereinafter provided, every domestic insurance corporation, every foreign
insurance corporation and every alien insurance corporation, other than such
corporations transacting the business of life insurance, (1) authorized to transact
business in this state under a certificate of authority from the superintendent of
insurance . . . shall, for the privilege of exercising corporate franchises or for carrying
on business in a corporate or organized capacity within this state, and in

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addition to any other taxes imposed for such privilege, pay a tax on all gross direct
premiums, less return premiums thereon, written on risks located or resident in this
state . . . .
Section 1500(a) of Article 33 of the Tax Law provides that the term "insurance corporation"
includes a corporation, association, joint stock company or association, person, society, aggregation
or partnership, by whatever name known, doing an insurance business.
Under Article 33 of the Tax Law, "doing an insurance business" is not defined. Historically,
the Department of Taxation and Finance has looked to whether a company must be licensed by the
Superintendent of Insurance to determine if it is doing an insurance business. Under section 187 of
Article 9 (the predecessor to Article 33), the Court of Appeals held that the premiums tax was "in
pari materia" with the provisions of the Insurance Law (Guardian Life Ins v Chapman, 302 NY 226
(1951)). In KPMG Peat Marwick, Adv Op Comm T & F, January 12, 1993, TSB-A-93(4)C, the
Department held that an HMO that was exempt from licensing by the Superintendent of Insurance
was not considered to be doing an insurance business under Article 33 and was subject to tax under
Article 9-A.
Petitioner states that TRUST is not required to be licensed by the New York State
Superintendent of Insurance to do an insurance business and it is not regulated under the Insurance
Law. The Chairman of the Workers' Compensation Board administers all matters relating to
TRUST. Therefore, TRUST is not doing an insurance business as contemplated by section 1500 of
the Tax Law. Accordingly, TRUST is not an insurance corporation for purposes of Article 33 of the
Tax Law and is not subject to the taxes imposed under Article 33 of the Tax Law.
With respect to the New York State personal income tax under Article 22 of the Tax Law,
the tax is imposed on resident and nonresident trusts. However, section 601(g) of the Tax Law
provides that a trust which is taxable as a corporation for Federal income tax purposes is not subject
to tax under Article 22 of the Tax Law. Section 7701(a)(3) of the Internal Revenue Code provides
that the term "corporation" includes an insurance company. In this case, TRUST is considered to
be an insurance company under the Internal Revenue Code and taxable as a corporation.
Accordingly, TRUST is not subject to the personal income tax imposed under Article 22 of the Tax
Law.
However, section 209.1 of Article 9-A of the Tax Law imposes an annual franchise tax on
a domestic or foreign corporation for the privilege of exercising its corporate franchise, doing
business, employing capital, owning or leasing property in a corporate or organized capacity, or
maintaining an office, in New York State during the taxable year. Section 209.4 of the Tax Law
provides that a corporation liable for tax under Article 33 of the Tax Law is not subject to tax under
Article 9-A of the Tax Law.
Section 208.1 of Article 9-A of the Tax Law provides that the term "corporation" includes
any business conducted by a trustee or trustees wherein interest or ownership is evidenced by
certificate or other written instrument.

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Section 1-2.5(b)(2) of the Business Corporation Franchise Tax Regulations provides that:
[a] business conducted by a trustee or trustees in which interest or ownership is
evidenced by certificate or other written instrument includes, but is not limited to, an
association commonly referred to as a business trust or Massachusetts trust. In
determining whether a trustee or trustees are conducting a business, the form of the
agreement is of significance but is not controlling. The actual activities of the trustee
or trustees, not their purposes and powers, will be regarded as decisive factors in
determining whether a trust is subject to tax under article 9-A of the Tax Law. The
mere investment of funds and the collection of income therefrom, with incidental
replacement of securities and reinvestment of funds, does not constitute the conduct
of a business in the case of a business conducted by a trustee or trustees.
In this case, the activities of TRUST exceed the "mere investment of funds and the collection
of income therefrom, with incidental replacement of securities and reinvestment of funds" as
contemplated in section 1-2.5(b)(2) of the Business Corporation Franchise Tax Regulations.
Therefore, the activities of TRUST constitute the conduct of a business. Since the Trust is doing
business, and interest in the Trust is evidenced by a written instrument (the trust agreement and the
indemnity agreement), Trust is a corporation under section 208.1 of the Tax Law and section 1­
2.5(b)(2) of the Business Corporation Franchise Tax Regulations. Accordingly, TRUST is deemed
to be a corporation for purposes of Article 9-A of the Tax Law. Since TRUST is doing business in
New York State pursuant to section 209.1 of the Tax Law, TRUST is subject to the tax imposed
under Article 9-A of the Tax Law.

DATED: September 12, 1996

NOTE:

/s/
John W. Bartlett
Deputy Director
Technical Services Bureau

The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.