To amend the Internal Revenue Code of 1986 to exempt from income tax State-created organizations providing property and casualty insurance for property for which such coverage is otherwise unavailable.

Summary: Exempts an organization from income tax if it is created by a State to provide property and casualty insurance coverage for property for which such coverage is otherwise unavailable.

SECTION 1. EXEMPTION FROM INCOME TAX FOR STATE-CREATED ORGANIZATIONS 
              PROVIDING PROPERTY AND CASUALTY INSURANCE FOR PROPERTY 
              FOR WHICH SUCH COVERAGE IS OTHERWISE UNAVAILABLE.

    (a) In General.--Subsection (c) of section 501 of the Internal 
Revenue Code of 1986 (relating to exemption from tax on corporations, 
certain trusts, etc.) is amended by adding at the end the following new 
paragraph:
            ``(28)(A) Any association created before January 1, 1999, 
        by State law and organized and operated exclusively to provide 
        property and casualty insurance coverage for property located 
        within the State for which the State determines, through 
        appropriate State action, that coverage in the authorized 
        insurance market is not reasonably available to a substantial 
        number of insurable real properties (and any successor 
        association) if--
                    ``(i) no part of the net earnings of which inures 
                to the benefit of any private shareholder or 
                individual,
                    ``(ii) except as provided in clause (v), no part of 
                the assets of which may be used for, or diverted to, 
                any purpose other than--
                            ``(I) to satisfy, in whole or in part, the 
                        liability of the association for, or with 
                        respect to, claims made on policies written by 
                        the association,
                            ``(II) to invest in investments authorized 
                        by applicable law,
                            ``(III) to pay reasonable and necessary 
                        administration expenses in connection with the 
                        establishment and operation of the association 
                        and the processing of claims against the 
                        association, or
                            ``(IV) to make remittances pursuant to 
                        State law to be used by the State to provide 
                        for the payment of claims on policies written 
                        by the association, purchase reinsurance 
                        covering losses under such policies, or to 
                        support governmental programs to prepare for or 
                        mitigate the effects of natural catastrophic 
                        events,
                    ``(iii) the State law governing the association 
                permits the association to levy assessments on 
                insurance companies authorized to sell property and 
                casualty insurance in the State, or on property and 
                casualty insurance policyholders with insurable 
                interests in property located in the State to fund 
                deficits of the association, including the creation of 
                reserves,
                    ``(iv) the plan of operation of the association is 
                subject to approval by the chief executive officer or 
                other official of the State, by the State legislature, 
                or both, and
                    ``(v) the assets of the association revert upon 
                dissolution to the State, the State's designee, or an 
                entity designated by the State law governing the 
                association, or State law does not permit the 
                dissolution of the association.
            ``(B)(i) An entity described in clause (ii) (and any 
        successor entity) shall be disregarded as a separate entity and 
        treated as part of the association described in subparagraph 
        (A) from which it receives remittances described in clause (ii) 
        if an election is made within 30 days after the date that such 
        association is determined to be exempt from tax.
            ``(ii) An entity is described in this clause if it is an 
        entity or fund created before January 1, 1999, pursuant to 
        State law and organized and operated exclusively to receive, 
        hold, and invest remittances from an association described in 
        subparagraph (A) and exempt from tax under subsection (a), to 
        make disbursements to pay claims on insurance contracts issued 
        by such association, and to make disbursements to support 
        governmental programs to prepare for or mitigate the effects of 
        natural catastrophic events.''.
    (b) Unrelated Business Taxable Income.--Subsection (a) of section 
512 of such Code (relating to unrelated business taxable income) is 
amended by adding at the end the following new paragraph:
            ``(6) Special rule applicable to organizations described in 
        section 501(c)(28)--In the case of an organization described in 
        section 501(c)(28), the term `unrelated business taxable 
        income' means taxable income for a taxable year computed 
        without the application of section 501(c)(28) if at the end of 
        the immediately preceding taxable year the organization's net 
        equity exceeded 15 percent of the total coverage in force under 
        insurance contracts issued by the organization and outstanding 
        at the end of such preceding year.''.
    (c) Transitional Rule.--No income or gain shall be recognized by an 
association as a result of a change in status to that of an association 
described by section 501(c)(28) of the Internal Revenue Code of 1986, 
as amended by subsection (a).
    (d) Effective Date.--The amendment made by subsection (a) shall 
apply to taxable years beginning after December 31, 2001.