Insurers Welcome IRS ‘Gross Receipts’ Tax Code Clarification

April 25, 2006

Insurers are applauding a recent IRS/Treasury Department tax code ruling that settles the definition of “gross receipts” for property casualty insurers.

The National Association of Mutual Insurance Companies said the ruling of last week provides “much-needed guidance” on the definition of gross receipts for non-life insurance companies covered under tax code Section 501(c)(15).

NAMIC, whose members are property casualty insurers, requested priority guidance on this issue following the enactment of the Pension Equity Funding Act of 2004. That law replaced the 501(c)(15) premium test of $350,000 with a gross receipts standard.

The change from a premium test to a gross receipts test resulted from widely reported abuses by wealthy corporations and individuals who formed small property/casualty companies to use Section 501 (c)(15) as a tax shelter for investment income.

NAMIC argued that it was important to preserve section 501 (c)(15) for its legitimate intended purpose to help small property/casualty companies serve their communities and policyholders.

Notice 2006-42 advised taxpayers that IRS will include amounts received from the following sources during the taxable year in “gross receipts” for purposes of that section of the code:

Premiums-including deposits and assessments—without reduction for return premiums or premiums paid for reinsurance;

Items described in Section 834(b), gross investment income of a non-life insurance company; and

Other items included in the taxpayer’s gross income under subchapter B of chapter 1, subtitle A of the code.

“We are pleased that the IRS agreed with NAMIC that gross receipts include both tax-free interests and the gain (but not the entire amount realized) from the sale or exchange of capitol assets,” said NAMIC Federal Affairs Senior Vice President David A. Winston. “We’re also pleased that the IRS agreed that gross receipts do not include reinsurance recoverables.”

NAMIC said it contacted the IRS towards the end of 2004 to seek priority guidance to clarify the issue arising from the lack of definition of “gross receipts” in the Pension Equity Funding Act of 2004. The 2004 Act amended section 501(c)(15) to base qualification for the exemption for small non-life insurance companies on a ceiling amount of “gross receipts,” rather than net written premiums as it had been since the Tax Reform Act of 1986 (“pre-2004 law”).

The purpose of this change was to prevent investment companies, which wrote a minimal amount of insurance but had disproportionately high capital and surplus and investment income, from qualifying for tax exemption on all their income because they were under the net premium ceiling.

As amended, the exemption applies only to non-life insurance companies with “gross receipts” for the taxable year that do not exceed $600,000, if premiums make up more than 50 percent of gross receipts. A mutual non-life insurance company also may be exempt if its premiums make up more than 35 percent of its gross receipts and its gross receipts do not exceed $150,000.

“This new definition gives insurers guidance in order to file their 2005 taxes and re-file their 2004 returns, according to Winston.

Source: NAMIC

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