Read PLR 201351006 [PDF 68 KB]
The private letter ruling presents two factual situations.
In the first situation the automobile dealerships sell used vehicles, finance the sales by extending credit to customers, and then in turn sell the loans to two finance companies. Under the financing agreements, the dealerships’ customers agree to maintain property insurance on the vehicles from an insurance company; alternatively, the financing companies can obtain a collateral protection policy and charge the customers for this coverage.
The insurance company enters into a quota-share reinsurance contract from a broker, to reinsure the risks under the collateral protection policies obtained by the financing companies. In turn, the broker obtains a quota-share reinsurance contract from the taxpayer.
The taxpayer claimed that both the insurance company and the broker qualified as insurance companies for federal income tax purposes, and asserted more than half of its business was the reinsurance of the collateral protection contracts.
The IRS concluded that the collateral protection policies are insurance contracts for federal income tax purposes. As the IRS explained, the economic risk that is shifted first from the customers to the insurance company, and then to the broker, and ultimately to the taxpayer is an insurance risk, and the coverage provided is in accord with the commonly accepted sense of insurance.
In the second factual situation, a dealership sells a motor vehicle service contract (VSC) that generally provides customers protection for certain expenses related to repairs not already covered by the manufacturer’s warranty or for collision or other factors.
The service contract is sold separately from the vehicle. The dealership purchases from the taxpayer “indemnity insurance agreements” that are intended to constitute reinsurance arrangements and to reimburse the dealership for repair expenses incurred in connection with the obligations under the service contracts. The taxpayer represented that more than half of its business was the insuring of the indemnity insurance agreements for the VSCs.
The IRS concluded that the VSCs are insurance contracts for federal income tax purposes. As noted, the VSCs and the indemnity insurance agreements together shift risk of loss from the dealerships’ customers to the taxpayer. Further, the risk of loss shifted ultimately to the taxpayer is commonly accepted as insurance.
*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.