IRS “no rulings” - Foreign companies’ requests for treatment as insurance companies 

December 16: The IRS has publicly released notifications of “no rule” decisions (dated June 13, 2013) on nine letter ruling requests for insurance company status under section 831 and rulings on the deductibility of premiums paid by insured affiliates.

The IRS stated in legal memoranda that it had insufficient information to rule on:

  • Achievement of risk shifting and risk distribution through reinsurance pools
  • Whether the contracts involved insurance risk
  • Whether the premiums charged were arm’s length

ILMs 201350008 (involving premiums from two affiliates); 201350009 (seven affiliates); 201350010 (two affiliates); 201350026 (one affiliate); 201350027 (three affiliates); 201350028 (one affiliate); 201350029 (two affiliates); 201350030 (one affiliate); 201350031 (two affiliates).

Read one of these ILMs [PDF 52 KB] as a sample showing the IRS position on these matters.


The taxpayers are foreign companies that are licensed as insurance companies in their home countries. The companies made elections under section 953(d) to be subject to income tax as U.S. insurance companies, and they file Forms 1120-PC.

  • The ILM states that the companies directly issue “purported” insurance contracts, with a one-year coverage period, to varying numbers of affiliates (ranging from one to seven affiliates; see above).
  • The companies joined a reinsurance pool consisting of several other unrelated “purported” insurance companies.
  • Under the reinsurance agreements, the companies ceded to the pool a substantial portion of their direct written premiums and risks, and each company assumed from the pool a “roughly equal amount of premiums and risks.”
  • The ILM states the agreements contained language providing for experience refunds and experience loss carryforwards, which were to be paid back with interest.

Each company sought two rulings:

    1. The company would be treated as an insurance company under section 831 for federal income tax purposes.
    2. The premiums paid to the company by the insured affiliates would be deductible by the affiliates as insurance premiums under section 162 for federal income tax purposes.

IRS’s conclusions

The IRS concluded that because of a lack of sufficient relevant information, it was unable to issue the requested rulings.

The IRS pointed out that the Code and the regulations do not define the terms “insurance” or “insurance contract” in the context of property and casualty insurance, and reiterated the standard in Helvering v. LeGierse that in order for an arrangement to constitute insurance for federal tax purposes, both risk shifting and risk distribution must be present. Also, the IRS emphasized that:

  • The risk transferred under the contract must be a risk of economic loss.
  • The risk must contemplate the “fortuitous” occurrence of a stated contingency, and must not be merely an “investment or business risk.”
  • The arrangement must constitute insurance “in the commonly accepted sense.”

The IRS voiced three areas of concern regarding the arrangements under consideration:

    1. Whether the pooling arrangements at issue actually provided risk shifting and risk distribution and, in particular, whether the reinsurance agreements between the 953(d) companies and the reinsurance pools contained provisions whose net effect might be to negate risk shifting and risk distribution?
    2. Whether some or all of the insurance contracts constitute insurance for federal tax purposes as opposed to, for example, contracts covering investment or business risks?
    3. Whether the premiums paid by the insured affiliates to the 953(d) companies reflected an arm’s length transaction between the parties?

    4. The IRS concluded that the companies had not provided sufficient information for it to resolve these concerns and, thus, concluded that the requested rulings could not be issued.

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