II

106TH CONGRESS

2D SESSION S. 2103

To amend the Internal Revenue Code of 1986 to provide equitable treatment

for associations which prepare for or mitigate the effects of natural disasters.

IN THE SENATE OF THE UNITED STATES

FEBRUARY 24, 2000

Mr. GRAMM (for himself and Mrs. HUTCHISON) introduced the following bill;

which was read twice and referred to the Committee on Finance

A BILL

To amend the Internal Revenue Code of 1986 to provide

equitable treatment for associations which prepare for

or mitigate the effects of natural disasters.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. EXEMPTION FROM INCOME TAX FOR STATE4 CREATED ORGANIZATIONS PROVIDING PROP5 ERTY AND CASUALTY INSURANCE FOR PROP6 ERTY FOR WHICH SUCH COVERAGE IS OTH7 ERWISE UNAVAILABLE.

8 (a) IN GENERAL.—Subsection (c) of section 501 of

9 the Internal Revenue Code of 1986 (relating to exemption
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1 from tax on corporations, certain trusts, etc.) is amended

2 by adding at the end the following new paragraph:

3 ‘‘(28)(A) Any association created before Janu4 ary 1, 1999, by State law and organized and oper5 ated exclusively to provide property and casualty in6 surance coverage for property located within the

7 State for which the State has determined that cov8 erage in the authorized insurance market is limited

9 or unavailable at reasonable rates, if—

10 ‘‘(i) no part of the net earnings of which

11 inures to the benefit of any private shareholder

12 or individual,

13 ‘‘(ii) except as provided in clause (v), no

14 part of the assets of which may be used for, or

15 diverted to, any purpose other than—

16 ‘‘(I) to satisfy, in whole or in part, the

17 liability of the association for, or with re18 spect to, claims made on policies written

19 by the association,

20 ‘‘(II) to invest in investments author21 ized by applicable law,

22 ‘‘(III) to pay reasonable and nec23 essary administration expenses in connec24 tion with the establishment and operation
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1 of the association and the processing of

2 claims against the association, or

3 ‘‘(IV) to make remittances pursuant

4 to State law to be used by the State to

5 provide for the payment of claims on poli6 cies written by the association, purchase

7 reinsurance covering losses under such

8 policies, or to support governmental pro9 grams to prepare for or mitigate the ef10 fects of natural catastrophic events,

11 ‘‘(iii) the State law governing the associa12 tion permits the association to levy assessments

13 on insurance companies authorized to sell prop14 erty and casualty insurance in the State, or on

15 property and casualty insurance policyholders

16 with insurable interests in property located in

17 the State to fund deficits of the association, in18 cluding the creation of reserves,

19 ‘‘(iv) the plan of operation of the associa20 tion is subject to approval by the chief executive

21 officer or other official of the State, by the

22 State legislature, or both, and

23 ‘‘(v) the assets of the association revert

24 upon dissolution to the State, the State’s des25 ignee, or an entity designated by the State law
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1 governing the association, or State law does not

2 permit the dissolution of the association.

3 ‘‘(B)(i) An entity described in clause (ii) shall

4 be disregarded as a separate entity and treated as

5 part of the association described in subparagraph

6 (A) from which it receives remittances described in

7 clause (ii) if an election is made within 30 days after

8 the date that such association is determined to be

9 exempt from tax.

10 ‘‘(ii) An entity is described in this clause if it

11 is an entity or fund created before January 1, 1999,

12 pursuant to State law and organized and operated

13 exclusively to receive, hold, and invest remittances

14 from an association described in subparagraph (A)

15 and exempt from tax under subsection (a), to make

16 disbursements to pay claims on insurance contracts

17 issued by such association, and to make disburse18 ments to support governmental programs to prepare

19 for or mitigate the effects of natural catastrophic

20 events.’’.

21 (b) UNRELATED BUSINESS TAXABLE INCOME.—

22 Subsection (a) of section 512 of the Internal Revenue

23 Code of 1986 (relating to unrelated business taxable in24 come) is amended by adding at the end the following new

25 paragraph:
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1 ‘‘(6) SPECIAL RULE APPLICABLE TO ORGANIZA2 TIONS DESCRIBED IN SECTION 501(C)(28).—In the

3 case of an organization described in section

4 501(c)(28), the term ‘unrelated business taxable in5 come’ means taxable income for a taxable year com6 puted without the application of section 501(c)(28)

7 if at the end of the immediately preceding taxable

8 year the organization’s net equity exceeded 15 per9 cent of the total coverage in force under insurance

10 contracts issued by the organization and outstanding

11 at the end of such preceding year.’’.

12 (c) TRANSITIONAL RULE.—No income or gain shall

13 be recognized by an association as a result of a change

14 in status to that of an association described by section

15 501(c)(28) of the Internal Revenue Code of 1986, as

16 amended by subsection (a).

17 (d) EFFECTIVE DATE.—The amendment made by

18 subsection (a) shall apply to taxable years beginning after

19 December 31, 1999.

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