Read PLR 201428006 [PDF 58 KB]
*Private letter rulings are taxpayer-specific rulings furnished by the IRS National Office in response to requests made by taxpayers and can only be relied upon by the taxpayer to whom issued. It is important to note that, pursuant to section 6110(k)(3), such items cannot be used or cited as precedent. Nonetheless, such rulings can provide useful information about how the IRS may view certain issues.
The facts considered by the IRS in the letter ruling are:
- A retailer sells products to customers and offers customers the option to purchase a “product service contract” (PSC).
- The PSC (issued by an obligor) provides coverage for the risk of loss due to certain mechanical failures; and applies only after the manufacturer’s warranty expires.
- The obligor insures its performance under the PSCs with an insurer, regulated by state as an insurance company.
Under the proposed transaction, a taxpayer will be formed in a foreign country and will enter into an arrangement with the insurer so that the taxpayer will assume all of the insurer’s obligations with respect to the PSCs sold by a specific retailer. One of the equity-holders of the taxpayer owns this specific retailer.
The arrangement will be the taxpayer’s only business activity.
For the current year, the retailer will have many individual customers who purchase a PSC. As consideration, the insurer will pay the taxpayer a predetermined portion of the amount that the obligor paid to the insurer, net of a fixed amount per PSC, as a commission (i.e., “ceding commission”).
The taxpayer represented that:
- The PSCs constitute insurance for federal income tax purposes.
- The insurer is an insurance company taxable under section 831.
- The taxpayer’s arrangement with the insurer will be more than half of the business done by the taxpayer during the tax year.
In the letter ruling, the IRS concluded that the taxpayer (reinsurer) qualifies as an insurance company subject to tax under section 831, provided that the contract accounts for more than half of the taxpayer’s business during the tax year.
The IRS found that the taxpayer’s transaction is similar to one described in Rev. Rul. 2009-26—in which the IRS considered a 90% quota share arrangement between an insurance company with 10,000 policy holders and an entity acting as a reinsurer. In that situation, the single reinsurance contract was the reinsurer’s only business. The IRS concluded in the revenue ruling that the reinsurance entity qualified as an insurance company because it was reinsuring risks underwritten by an insurance company and the business was more than half of the reinsurer’s business for the year.
The conclusion in PLR 201428006 generally is in line with prior, published IRS guidance—specifically Rev. Rul. 2009-26. One interesting fact in the private letter ruling is that the owner of the retailer that sells the PSCs is also an owner of the taxpayer / reinsurer that is the subject of the ruling—this fact was noted, but apparently did not affect the IRS’s conclusion in the ruling.