internal_revenue_service appeals_office department of the treasury employer_identification_number release number release date date date org address certified mail dear ' person to contact employee id number tel fax tax period s ended december 20xx december 20xx december 20xx december 20xx uil this is a final_determination that you do not qualify for exemption from federal_income_tax under internal_revenue_code the code sec_501 as an organization described in sec_501 of the code for the tax periods above our adverse determination as to your exempt status was made for the following reason s you are not an insurance_company within the meaning of subchapter_l of the internal_revenue_code because your primary and predominant activity is not insurance the purported insurance and or reinsurance transactions lack economic_substance organizations that are not exempt under sec_501 generally are required to file federal_income_tax returns form_1120 form_1120 or form 1120-f for foreign_corporations and pay tax where applicable for further instructions forms and information please visit www irs gov we will make this letter and the proposed adverse determination_letter available for public inspection under code sec_6110 after deleting certain identifying information we have provided to you ina separate mailing notice notice of intention to disclose please review the notice and the documents attached that show our proposed deletions if you disagree with our proposed deletions follow the instructions in notice if you decide to contest this determination you may file an action for declaratory_judgment under the provisions of sec_7428 of the code in one of the following three venues united_states tax_court the united_states court of federal claims or the united_states district_court for the district of columbia a this determination_letter was mailed to you please contact the clerk of the appropriate court for rules and the appropriate forms for filing petitions for declaratory_judgment by referring to the enclosed publication you may write to the courts at the following addresses petition or complaint in one of these three courts must be filed within days from the date united_states tax_court second street n w washington d c u s court of federal claims madison place n w washington d c u s district_court for the district of columbia constitution ave n w washington d c processing of income_tax returns and assessments of any taxes due will not be delayed if you file a petition for declaratory_judgment under sec_7428 of the internal_revenue_code you may also be eligible for help from the taxpayer_advocate_service tas tas is an independent organization within the irs that can help protect your taxpayer rights tas can offer you help if your tax problem is causing a hardship or you've tried but haven't been able to resolve your problem with the irs if you qualify for tas assistance which is always free tas will do everything possible to help you visit www taxpayeradvocate irs gov or call if you have any questions about this letter please contact the person whose name and telephone number are shown in the heading of this letter sincerely yours appeals team manager enclosure publication cc tax exempt and government entities org address department of the treasury internal_revenue_service date date taxpayer_identification_number form 990-ez tax period s ended 20xx 20xx 20xx 20xx person to contact id number contact numbers telephone fax dear during our examination of the returns indicated above we determined that your organization was not described in internal_revenue_code sec_501 for the tax periods listed above and therefore it does not qualify for exemption from federal_income_tax this letter is not a determination of your exempt status under sec_501 for any periods other than the tax periods listed above the attached report of examination form 886-a summarizes the facts the applicable law and the service’s position regarding the examination of the tax periods listed above you have not agreed with our determination or signed a form 6018-a consent to proposed action accepting our determination of non-exempt status for the periods stated above you have not agreed to file the required income_tax returns you may appeal your case the enclosed publication the examination process and publication exempt_organizations appeal procedures for unagreed issues explain how to appeal an internal_revenue_service irs decision publication also includes information on your rights as a taxpayer and the irs collection process z if you request a conference with appeals you must submit a written protest within days of the date of this letter an appeals officer will review your case the appeals_office is independent of the director eo examinations most disputes considered by appeals are resolved informally and promptly you may also request that we refer this matter to irs headquarters for technical_advice as explained in publication the conclusions of the technical_advice_memorandum no further administrative appeal is available to you within the irs on the issue that was the subject of the technical_advice if you do not agree with if we do not hear from you within days of the date of this letter we will issue a statutory_notice_of_deficiency based on the adjustments shown in the enclosed report of examination you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at in the future if you believe your organization qualifies for tax-exempt status and would like to establish its status you may request a determination from the irs by filing form_1024 application_for recognition of exemption under sec_501 and paying the required user_fee if you have any questions please call the contact person at the telephone number shown in the heading of this letter telephone number and the most convenient time to call if we need to contact you if you write please provide a taxpayer_advocate_service thank you for your cooperation sincerely director eo examinations enclosures publication publication form 6018-a report of examination envelope schedule number or exhibit 886-a form ‘ess date explanations of items name of taxpayer tax identification_number year period ended 20xx 20xx 20kx 20xkx issues constitute contracts of insurance involves the requisite element of risk whether the contracts executed by whether the arrangement entered into by distribution whether more than half of the business of consideration is the issuing of insurance or annuity_contracts or the reinsuring of risks underwritten by insurance_companies if under sec_501 of the internal_revenue_code is the sec_953 election valid if the taxpayer is not an insurance_company and the election was never approved by the service is not an insurance_company does it qualify for treatment as a tax-exempt_entity during each of the taxable years under facts ‘taxpayer’ was formed and incorporated in on december 20xx under the provisions of section of the companies act the taxpayer was formed to provide certain property and casualty insurance type services the taxpayer is formed as a foreign captive insurance taxpayer the taxpayer is authorized to issue common shares with a dollar_figure par_value the taxpayer actually issued shares in consideration of dollar_figure capital_contribution the taxpayer is wholly owned by december 20xx husband and wife as the sole shareholder purchased shares of the taxpayer’s stock for dollar_figure on is owned by aka and both individuals are u s citizens who reside in a state limited_liability_company located at the tege examining agent obtained a copy of taxpayer's form_1024 application administrative file from rulings and agreements in washington d c on october 20xx the administrative file included a copy of the form_1024 application articles of incorporation the sec_953 election regulatory filings and responses of insurance regulators insurance underwriting diagrams organizational owner chart supplemental information for the form_1024 financial information for 20xx and subsequent years forms of credit reinsurance agreements entered into by the taxpayer and a copy of the 20xx insurance policies issued by the taxpayer other documents were received from document requests issued by the examining agent to the cpa during the current audit according to the articles of incorporation the taxpayer is to be governed by a board_of directors composed of one to seven directors the board is actually composed of two directors serves as chief_executive_officer ceo president cpa in response to information and department of the treasury-internal revenue service form 886-a catalog number 20810w publish no irs gov page of schedule number or exhibit form 886-a explanations of items rev date name of taxpayer tax identification_number year period ended 20xx 20xx 20xx 20xx treasurer and assistant secretary of and assistant treasurer of the taxpayer serves as vice president secretary is also a significant owner of and owns and or is associated with various other business interests called affiliated business interests according to the taxpayer's business plan the affiliated business interests desired to insure certain of their property and casualty exposures and are unwilling or in some cases unable to do so through the conventional insurance marketplace the affiliated business interests looked at alternative methods of arranging such insurance coverage and have found that providing such coverage through will be a captive offers the best_method for satisfying its needs operated primarily to accomplish this objective the taxpayer was created as a controlled_foreign_corporation the taxpayer is not a member of a controlled_group_of_corporations as a controlled_foreign_corporation president signed an sec_953 election statement on february 20xx it appears that the election statement was filed with the irs office on the same day on october 20xx the taxpayer filed form_1024 application_for recognition of exemption under sec_501 seeking exemption as a small under sec_501 of the internal_revenue_code the application revealed that 20xx was the initial full tax_year of the taxpayer prior to filing the form_1024 application the taxpayer had filed form_990 for the tax_year ended december 20xx with the ogden service_center the application on september 20xx a form_2848 power_of_attorney accompanied the attorney to represent the taxpayer application authorizing during the application process the attorneys worked for a law firm president signed attorney and in the application revealed that the taxpayer employed co-3 to serve as its resident insurance the taxpayer agreed to pay compensation of less than dollar_figure annually manager in on november 20xx the form_1024 application was referred to rulings and agreements in washington d c for consideration and ruling the application was assigned to a tax law specialist for review in december 20xx on january 20xx the tax law specialist mailed a letter to the taxpayer's domestic address in acopy of the letter was mailed to the taxpayer’s attorney taxpayer's operations after requesting two day extensions the taxpayer's attorney response to the request for additional information on march 20xx the taxpayer's response to the letter was due by february 20xx the letter requested additional information about the submitted the form 886-a catalog number 20810w page of publish no irs gov department of the treasury-internal revenue service year period ended 20xx 20xx 20xx 20xx schedule number or exhibit 886-a form sean januar iad explanations of items name of taxpayer tax identification_number the form_1024 application administrative file does not reflect any more action taken on the organization’s application by the tax law specialist between the period of mid march 20xx submitted a letter through mid-september 20xx the taxpayer's president dated september 20xx requesting that the form_1024 application be withdrawn from further consideration and ruling the tax law specialist closed the form_1024 application file without making a final_determination whether the taxpayer did or did not qualify for sec_501 tax-exempt status thus the taxpayer did not receive a favorable or final adverse_ruling letter from tege rulings and agreements in addition to not completing the exemption application process there is no evidence that its sec_953 election statement was approved by the internal_revenue_service on march 20xx the te_ge examining agent requested the effective date of the sec_953 election from the irs plantation florida office on april 20xx the irs office informed the examining agent that the service does not have record that the sec_953 election was approved the taxpayer's initial tax_year consisted of the period december 20xx the date of incorporation through december 20xx the taxpayer did not file a return for its initial short tax_year the initial return filed by taxpayer was a form_990 return for 20xx taxpayer also filed form_990 returns for the 20xx 20xx and 20xx tax years issued a class ‘b general insurance license to the financial services commission the taxpayer effective december 20xx the taxpayer did not conduct any business during the period of december 20xx through december 20xx during the years under audit the taxpayer operated primarily to provide property and casualty insurance coverage to which is partially owned by an officer and beneficial_owner of excess directors officers liability excess in 20xx the taxpayer wrote thirteen direct-written contracts to special risk -collection rate employment practices liability special risk - expenses reimbursement special risk - loss of major b2b relationships special risk - loss of services special risk - payee audit liability special risk - representations and warranties special risk - special risk - regulatory breach of medical standards excess pollution liability changes special risk - punitive wrap liability and special risk - tax_liability under the terms of each policy listed as one of three joint insurers each joint insurer assumed of the risk as stop loss insurer assumed the remaining of the risk was listed as the lead insurer the taxpayer was as follows and each policy listed as the named insureds and the located at publish no irs gov department of the treasury-internal revenue service form 886-a catalog number 20810w page of schedule number or exhibit form 886-a explanations of items rev date name of taxpayer tax identification_number year period ended 20xkx 20xx 20xx 20xx supplemental information submitted by taxpayer with the form_1024 application revealed that each of the named insureds is owned as follows and are not related to or each of the direct written contracts issued by the taxpayer during the 20xx tax_year is described below special risk-collection rate insurance_policy policy number _ with the office practice currently billing several million dollars annually a drop in its collection rate of only five percentage points where attributable to factors largely outside of control such as levels of reimbursements by health insurers pricing of services by third party payers including medicare etc would result in a six-figure decrease in revenue ' sec_2 excess directors officers liability insurance_policy policy number actions against the directors and officers may follow from leased facilities hospitals managed care providers or other third parties if procedures are alleged to be inappropriate patients referring physicians billing excess employment practices liability insurance_policy policy number is at risk for employment practices liability for discrimination harassment wrongful termination or similar wrongful act further in some jurisdictions these civil rights allegations can come from third parties such as patients special risk - expense reimbursement insurance_policy policy number may confront unanticipated allegation suspension of professional licenses or other adverse events significant amounts of monies could be required for public relations crisis management to avert and offset negative publicity which could ultimately lead to a loss of business special risk - loss of major business to business relationship publish no irs gov department of the treasury-internal revenue service form 886-a catalog number 20810w page of bag oe 20xx 20xx 20kx schedule number or exhibit form 886-a explanations of items rev date name of taxpayer tax identification_number policy number is a participant in virtually all of the major managed care insurance plans in the geographical area carefirst bluecross blueshield of state medicare and the workers compensation commission of state represent business relationships where a significant exposure may exist special risk - loss of services insurance_policy policy number as a professional practice the practice is highly dependent on the services of and loss of services from one or more of the insureds who are large or significant billers the business is at risk of significant income loss upon the incapacitation or special risk-payee audit liability insurance_policy policy number is at risks for potential unexpected costs or liability resulting from an audit by the state workers compensation commission of its billed medical services provided for patient treatment of a worker’s compensation related injury excess pollution liability insurance_policy policy number has a significant waste exposure which is excluded from its commercial general liability insurance coverage it deals with sharps used needles etc bodily fluids and chemical wastes on a daily basis handling procedures are in place however historical claims occurring industry-wide illustrate that improper handling is possible and represents a significant exposure further the proper disposal of its waste once it leaves a pollution incident could occur resulting in significant damage injuries cleanup costs and fines contracts out its waste disposal and cannot guarantee facilities if these wastes are mishandled special risk-punitive wrap liability insurance_policy policy number the company is at risk if a jurisdiction rules that its conventional liability coverage cannot provide coverage for punitive or exemplary damages the damage awards are often significant multiples of the actual damages sought by a plaintiff special risk-regulatory changes insurance_policy policy number is at risk of external factors such as regulatory changes in the pain management field specifically or in its industry as a whole or even regulatory changes within the facilities at which and regulations regarding pain management or ascs there is also the possibility that could incur significant costs to come into compliance with rules operates department of the treasury-internal revenue service form 886-a catalog number 20810w - page of publish no irs gov 886-a schedule number or exhibit form ‘env loruary explanations of items name of taxpayer tax identification_number compliance may not be cost effective thereby eliminating a revenue stream from the office practice and also resulting in a potential loss of patients year period ended 20xx 20xx 20xx 20xx special risk-representation and warranties insurance_policy policy number under the terms of the may 20xx reacquisition of assets of to other agreements associated with the sale subsequently deemed uncollectible to received certain amounts from other third parties under the closing documents or is at risks for any amounts that are assigned to right sec_12 special risk-breach of medical standards insurance_policy policy number is entrusted with and manages a large volume of sensitive personal information on patients the volume of incidents and related lawsuits from the mishandling security breach of sensitive personal information is on the rise - especially given the increasing reliance on electronic data processing and the growing threat of identity theft from underground and organized information thieves these risks represent a potential and substantial exposure to in each contract in addition the policy and then lists the type of is reflected as the lead insurer policy number is also at risk if special risk - tax_liability insurance_policy it were to suffer an adverse decision from an unexpected tax audit with as lead insurer assumed of the stated limits is reflected as one of three joint insurers each of which assumed of regard to its organizational structure cash_basis accounting captive planning billing methodology or any other federal tax related issue each of the above contracts appeared to be written and sold by another captive company called number reflected on each contract has the designation contraction and the contract number of insurance the stated limited of insurance together the lead and joint insurers assumed of the stated limits of insurance the remaining of the stated limited of insurance was assumed did not write sale or issue any direct by written contracts to any related or unrelated parties for which it was the lead insurer each direct written contract listed the named insured as located at address zip code the policy period for each contract was from january 20xx to january 20xx the contracts also listed the aggregate limit of insurance and the premium paid_by the total combined premium paid_by the named insured as follows as the stop loss insurer during 20xx department of the treasury-internal revenue service catalog number 20810w form 886-a and the publish no irs gov page of year period ended 20xkx 20xx 20xx 20kx schedule number or exhibit form 886-a rev date explanations of items name of taxpayer tax identification_number dollar_figure contract special risk-collection rate excess d o liability excess employment practices special risk-expense reimb special risk-loss of major b2b special risk-loss of services special risk-payee audit excess pollution liability special risk-punitive wrap special risk-regulatory changes special risk-rep and warranties special risk-breach of medical special risk-tax liability totals dollar_figure aggregate limit combined premium o c c o c c o c o o o o o d c o l c dollar_figure a s o o e c o c c o c o c c e l a joint underwriting stop loss endorsement entered into an agreement titled joint underwriting stop loss with respect of each of the above referenced property and casualty contracts the taxpayer and endorsement the taxpayer and however it is not known whether the companies are owned and controlled by related parties under the terms of the agreement the taxpayer is listed as one of three joint insurers and is responsible for payment of part of the claims incurred by the named insureds under the direct written contracts up to certain specified thresholds if the specified thresholds are met then appear to be separate independent companies as the stop loss insurer becomes liable for payment of claims up to certain specified if the specified limits for payment of claims are exceeded then the taxpayer for 20xx the named insureds paid a total combined premium of dollar_figure limits again becomes liable for the direct written contracts insureds or dollar_figure was paid to the taxpayer follows of the total combined premium paid_by the named page paragraph of the agreement reads as the premium rate for this joint underwriting stop loss endorsement is of the combined gross direct written premiums for the specified policies due directly from the insured s this endorsement premium of dollar_figure out of the total premiums of dollar_figure is payable directly from the insured s to the stop loss insurer department of the treasury-internal revenue service form 886-a catalog number 20810w - page of publish no irs gov schedule number or exhibit form 886-a explanations of items rev date tax identification_number name of taxpayer for the direct written contracts and the joint underwriting stop loss endorsement agreement the named insureds was required to pay of total premiums of dollar_figure premium dollar_figure or was paid to was paid directly to the taxpayer as joint insurer as stop loss insurer and the balance of dollar_figure or of the total year period ended 20xx 20xx 20xx 20xx quota share reinsurance agreement the taxpayer also entered into two types of reinsurance arrangements the first arrangement is referred to as a reinsurance risk pooling program reinsurance policy - with the agreement indicates that executed a quota share is located at policy runs from january 20xx to january 20xx is identified as the reinsurer and is the reinsured the under this arrangement the taxpayer participated in a reinsurance risk_pool with several other unrelated insurance_companies pool participants the risk_pool was operated by each pool participant had one or more affiliated operating entities for which it underwrites insurance coverage generally casualty type coverage such as credit life insured a portion of the direct insurance underwritten by the pool and credit disability participants using a so-called stop loss endorsement insurance policies with more than insurers insurance and then reinsured the entire book on a quota share basis with each of the pool in 20xx participants the contract reflected a total of reinsurers participating in the is not identified by number in schedule of the contract however there are three reinsurers listed on page of schedule of the contract that assumed of the quota share risk_pool could either be reinsurer reinsurer or reinsurer determine which of the three reinsurers represents the examining agent identified blended together its direct written for purposes of the case write up participated in over it is not pertinent to as reinsurer in exchange for as reinsurer the taxpayer received a quota share premium from the assumption of of the risk_pool comprised of the stop loss coverages issued during the policy period by paid total reinsurance premiums of dollar_figure to participating reinsurers of this amount_paid a quota share reinsurance_premium of dollar_figure which was equal to risk_pool assumed by taxpayer of the dollar_figure total premiums received reinsurance premiums of dollar_figure from to all stop loss endorsement policyholders in 20xx according to the general ledger the taxpayer in 20xx the taxpayer relied on the services of methodology for the direct written contracts and the quota share reinsurance agreement to establish the premium rating and department of the treasury-internal revenue service form 886-a catalog number 20810w page of publish no irs gov schedule number or exhibit explanations of items tax identification_number form 886-a rev date name of taxpayer year period ended 20xx 20xx 20xx 20xx credit coinsurance reinsurance agreement under the terms of the second arrangement which is referred to as the credit coinsurance reinsurance program the taxpayer assumed reinsurance contracts from reinsured a quota share of the risks from vehicle service contracts reinsured by the vehicle service contracts were initially written by then by received a pro_rata share of the earned premiums received by a reinsurance_premium of dollar_figure from in 20xx assumed by from the taxpayer the taxpayer was paid and finally assumed by the taxpayer in 20xx from under the terms of the contracts reviewed for 20xx the taxpayer assumed risk exposures as follows direct written premiums quota share reinsurance assumed other reinsurance assumed total dollar_figure dollar_figure for the tax_year ended december 20xx the taxpayer reported gross_receipts of dollar_figure and total revenue of dollar_figure revenue was derived primarily from premiums received from the direct written reinsurance risk pooling program and the credit coinsurance reinsurance program the difference between gross_receipts and total revenue is only the net_loss from the sale of assets was reported on the form_990 return the taxpayer received gross_receipts as follows 20xx program revenue service direct written premiums quota share reinsurance premiums credit coinsurance reinsurance premiums dollar_figure total premiums investment_income proceeds from sale of assets’ other income gross_receipts dollar_figure -0- -0- in 20xx the taxpayer deposited the direct written premiums received from the named insured into its investment account ' after offsetting cost_basis of dollar_figure the incurred a net_loss of dollar_figure only the net_loss was reported as income on the return department of the treasury-internal revenue service form 886-a catalog number 20810w publish no irs gov page of year period ended 20xx 20xx 20xx 20xx schedule number or exhibit form 886-a explanations of items rev date name of taxpayer tax identification_number of the total premiums received by the taxpayer in 20xx of the premiums were generated from the direct written policies with the named insureds of the premiums are from the quota share reinsurance risk pooling program and of the premiums from the credit coinsurance reinsurance program and the as of december 20xx the taxpayer’s assets totaled dollar_figure and consisted primarily of securities and cash in the account 20xx tax_year the taxpayer filed form_990 return of organization exempt from income_tax for the tax_year ended december 20xx claiming to be tax-exempt under sec_501 during the year the taxpayer continued to operate as a captive company that insured certain property and casualty risks of affiliated business interests the taxpayer participated in the same three programs that it engaged in during the 20xx tax_year direct written contracts with affiliated business interests quota share risk_pool reinsurance credit coinsurance reinsurance the taxpayer wrote fourteen direct contracts to insure certain property and casualty of affiliated business interests the taxpayer wrote of the direct contracts as was written in 20xx with a couple of exceptions the taxpayer dropped the special risk-loss of services and the special risk-representation and warranties contracts in 20xx in addition the taxpayer added the special risk-legal expense reimbursement the special risk- commercial medical malpractice gap liability and the excess cyber risk contracts in 20xx as lead insurer the fourteen contracts the contracts appear to have been written by were written for the policy period of january 20xx to january 20xx none of the fourteen direct contracts identified the names of the insurers the contracts either never included this information or the contracts were sanitized of this information before the documents were submitted to the examining agent for review however the joint underwriting endorsement did reveal that the taxpayer was one of four insurers that assumed risk under the direct written contracts the taxpayer assumed of the stated limits of insurance in exchange for of the combined premium paid the named insureds based on the information provided by the 20xx contracts the other insurers involved in the direct written contracts were ' limits of insurance in exchange for of the combined premium paid the named insureds the remaining of the combined premium was paid to are joint insurers the four captive companies assumed of the stated appeared to be the lead insurer and as the stop loss insurer and and however general endorsement changes were made removing the in 20xx the direct written contracts listed the same three named insureds and the as one of the three named insureds and transferring its risk to another captive company effective october 20xx through january 20xx the insurance coverages for the was transferred from for the 20xx and 20xx tax years the taxpayer’s to another unknown captive company cpa provided two sets of direct in the response to idr department of the treasury-internal revenue service form 886-a catalog number 20810w publish no irs gov page of schedule number or exhibit form 886-a explanations of items rev date name of taxpayer tax identification_number written contracts in effective during 20xx the cpa provided the fourteen contracts written by in which the taxpayer is a joint insurer the cpa also provided a copy of the fourteens written by an unknown lead insurer the designation of the lead in his september 20xx coverletter that accompanied the response to insurer is idr for 20xx and 20xx the cpa stated that confidential information of third parties was removed taxpayer participated as a joint insurer in the following direct contracts written by the 20xx for the policy period of january 20xx through january and with year period ended 20xkx 20xx 20xx 20kx contract name policy number aggregate limit dollar_figure dollar_figure premium special risk - collection rate excess directors officers liability excess employment practices liability special risk -- expense reimbursement expense reimbursement - legal expenses excess pollution liability special risk - punitive wrap special risk - regulatory changes special risk - tax_liability expense reimbursement - breach of medical payer audit liability special risk - loss of major b2b special risk - commercial medical malprac excess cyber risk dollar_figure totals coverages were transferred to another captive taxpayer did not the direct written premiums charged by the lead insurer were reduced from the 20xx amounts because write sale or issue direct written contracts to the general_public or unrelated third parties under the terms of the joint underwriting endorsement with one of five insurers the taxpayer appears to be a joint insurer that agreed to assume of the stated limits of insurance in exchange for of the combined written premium by the other four insurers assumed the remaining of the stated limits of insurance in together the five insurers exchange for of the combined premium paid_by as with the exception that the excess cyber risk contract was replaced by a special is listed as the only named insured under the fourteen effective october 20xx the coverages for captive company with risk- loss of service_contract direct contracts written by insured the same property and casualty coverages with were transferred to another unknown department of the treasury-internal revenue service the taxpayer is listed as catalog number 20810w form 886-a publish no irs gov page of schedule number or exhibit form 886-a explanations of items rev date name of taxpayer tax identification_number assumed of the stated limited of insurance in exchange for of the combined premium as a stop loss paid_by insurer under the joint underwriting endorsement page of the joint underwriting endorsement includes the following language the remaining of the combine premium was paid to year period ended 20xx 20xx 20xx 20kx as the stop loss insurer is not subject_to quota share participation and is instead subject_to the joint underwriting stop loss endorsement to the policy in 20xx the taxpayer participated as a joint insurer under the following direct contracts written by for the policy period of october 20xx through january 20xx contract name policy number aggregate limit premium special risk - collection rate excess directors and officers excess employment practices special risk - expense reimbursement legal expense reimbursement excess pollution liability special risk - punitive wrap special risk - regulatory changes n w r k a o n b m o breach of medical standard sec_11 payer audit liability special risk - commercial medical mal special risk - loss of major b2b special risk - loss of service special risk - tax_liability totals dollar_figure o c o c o c o o c o o c o d o o o o d o o m l o dollar_figure o c o c o c o c o c o o c o o o o o o o m l o according to the business plan direct written contracts for the following exposures participated as a joint insurer under the and special risk-collection rate insurance_policy with the office practice currently billing several million dollars annually a drop in its collection rate of only five percentage points where attributable to factors largely outside of control such as levels of reimbursements by health insurers pricing of services by third party payers including medicare etc would result in a six-figure decrease in revenue excess directors officers liability insurance_policy actions against the directors and officers may follow from leased facilities hospitals managed care providers or other third parties if procedures are alleged to be inappropriate patients referring physicians billing publish no irs gov department of the treasury-internal revenue service form 886-a catalog number 20810w page of year period ended 20xx 20kx 20xx 20xx schedule number or exhibit form 886-a explanations of items rev date tax identification_number name of taxpayer excess employment practices liability insurance_policy is at risk for employment practices liability for discrimination harassment wrongful further in some jurisdictions these civil rights allegations termination or similar wrongful act can come from third parties such as patients special risk - expense reimbursement insurance_policy may confront unanticipated allegation suspension of professional licenses or other adverse events significant amounts of monies could be required for public relations crisis management to avert and offset negative publicity which could ultimately lead to a loss of business special risk - legal expense reimbursement the contract covers all litigation expenses_incurred by the company resulting from actual of alleged civil liability excess pollution liability insurance_policy has a significant waste exposure which is excluded from its commercial general liability insurance coverage it deals with sharps used needles etc bodily fluids and chemical wastes on a daily basis handling procedures are in place however historical claims occurring industry-wide illustrate that improper handling is possible and represents a significant exposure further the proper disposal of its waste once it leaves a pollution incident could occur resulting in significant damage injuries cleanup costs and fines contracts out its waste disposal and cannot guarantee facilities if these wastes are mishandled special risk-punitive wrap liability insurance_policy the company is at risk if a jurisdiction rules that its conventional liability coverage cannot provide coverage for punitive or exemplary damages the damage awards are often significant multiples of the actual damages sought by a plaintiff special risk-regulatory changes insurance_policy is at risk of external factors such as regulatory changes in the pain management field operates specifically or in its industry as a whole or even regulatory changes within the facilities at which and regulations regarding pain management or ascs there is also the possibility that compliance may not be cost effective thereby eliminating a revenue stream from the office practice and also resulting in a potential loss of patients could incur significant costs to come into compliance with rules special risk - tax_liability insurance_policy department of the treasury-internal revenue service form 886-a catalog number 20810w publish no irs gov page of schedule number or exhibit form 886-a explanations of items rev date tax identification_number name of taxpayer year period ended 20xx 20xx 20xx 20xx is also at risk if it were to suffer an adverse decision from an unexpected tax audit with regard to its organizational structure cash_basis accounting captive planning billing methodology or any other federal tax related issue special risk-breach of medical standards insurance_policy is entrusted with and manages a large volume of sensitive personal information on patients the volume of incidents and related lawsuits from the mishandling security breach of sensitive personal information is on the rise - especially given the increasing reliance on electronic data processing and the growing threat of identity theft from underground and organized information thieves these risks represent a potential and substantial exposure to special risk-payee audit liability insurance_policy is at risks for potential unexpected costs or liability resulting from an audit by the state workers compensation commission of its billed medical services provided for patient treatment of a worker's compensation related injury special risk - loss of major business to business relationship is a participant in virtually all of the major managed care insurance plans in the geographical area carefirst bluecross blueshield of state medicare and the workers compensation commission of state represents business relationships where a significant exposure may exist special risk - loss of services insurance_policy as a professional practice the practice is highly dependent on the services of and loss of services from one or more of the insureds who are large or significant billers the business is at risk of significant income loss upon the incapacitation or 14a special risk - commercial medical malpractice the contract provides commercial malpractice coverage for the insured during the 20xx calendar_year the contract reimburses the named insured for any loss sustained for which a claim against the underlying insurance_policy specified above is denied solely and exclusively due to the exclusion endorsement or limitation specified above 14b excess cyber risk the contract protects the named insured from losses resulting from cyber attacks such as computer viruses unauthorized access through cyber presence and degradation or loss to its system due to cyber presence department of the treasury-internal revenue service form 886-a catalog number 20810w publish no irs gov page of schedule number or exhibit form 886-a explanations of items rev date name of taxpayer tax identification_number year period ended 20xx 20xx 20xx 20xx joint underwriting endorsement in addition to the direct property and casualty insurance contracts the taxpayer also executed separate joint underwriting stop loss endorsements with contracts whereby both parties agreed to underwrite the insurance coverages described in the policies with the affiliated business interests for the and joint underwriting endorsement the taxpayer is identified as one of four under the insurers the other three lead insurers were sanitized from the contract however the examining agent believes the parties are of the stated limits of insurance in exchange for of the combined premium paid the named insureds and the taxpayer assumed joint underwriting endorsement the taxpayer is identified as one of five under the insurers the names of the other four insurers were sanitized from the agreement by the taxpayer's cpa however the agreement reveals that taxpayer assumed of the stated limits of insurance in exchange for of the combined premium paid_by named insured the terms of the endorsements included the following language as the sole the limits of insurance shall be borne proportionately by all quota share of the limits participants listed herein to a combined maximum of of liability stated in the declarations as the stop loss insurer is not subject_to quota share participation and is instead subject_to the joint underwriting stop loss endorsement to the policy and under the of the stated limits of insurance in exchange for of the combined premium by the named insureds the remaining of the combined premium was paid_by the named insureds directly to joint underwriting endorsements the insurers assumed therefore in 20xx the combined premium paid_by the named insureds under the fourteen and contracts was allocated to the taxpayer as follows direct written contracts total combined premium dollar_figure dollar_figure direct written contracts department of the treasury-internal revenue service form 886-a catalog number 20810w publish no irs gov page of schedule number or exhibit form 886-a ea aneyiee explanations of items name of taxpayer tax identification_number year period ended 20xx 20xx 20xx 20xx total combined premium dollar_figure total direct written premiums rec’d by taxpayer in 20xx dollar_figure quota share reinsurance policy taxpayer continued to participate in the reinsurance risk pooling program by executing a quota share reinsurance policy hqs20xx with the agreement indicates that is located at reinsured taxpayer is identified as the reinsurer and is the according to the terms exchange for the assumption of of the risk_pool comprised of the stop loss coverages issued during the policy period by to all stop loss endorsement policyholders the policy period runs from january 20xx through january 20xx as reinsurer is to receive a quota share premium from in the contract reflects a total of reinsurers participating in the paid total reinsurance premiums of dollar_figure to the reinsurers based on the amount of reinsurance premiums reflected in schedule of the quota share agreement be reinsurer was determined to a a an corporation on january 20xx received a quota share reinsurance policy premium of dollar_figure which was from corporation that was merged into as reinsurer equal to of the total premium of dollar_figure the risks reinsured are the 20xx insurance exposures on all policies of vehicle service contracts direct written by assumed by credit insurance coinsurance contract taxpayer continued to participate in the credit coinsurance contract with corp in which the taxpayer agreed to reinsure a prorate share of all net retained policies in force on the effective date assumed by under a treaty dated june 20xx with the reinsurance premiums to be paid_by share of the earned premiums during the accounting_period under each reinsured policy earned premiums are the gross premiums charged the insureds plus the unearned premiums at the beginning of the accounting_period less the unearned premiums at the end of the accounting_period taxpayer received dollar_figure in reinsurance premiums under this contract in 20xx in force on january 20xx and subsequently issued and to the taxpayer shall be taxpayer's pro_rata under its treaty dated january 20xx department of the treasury-internal revenue service catalog number 20810w form 886-a publish no irs gov page of from schedule number or exhibit form 886-a explanations of items rev date tax identification_number name of taxpayer year period ended 20kx 20xx 20xx 20xx under the terms of the contracts reviewed for 20xx the taxpayer assumed risk exposures as follows direct written premiums quota share reinsurance assumed other reinsurance assumed total dollar_figure dollar_figure for the tax_year ended december 20xx the taxpayer reported gross_receipts of dollar_figure and total revenue of dollar_figure gross_receipts were derived primarily from premiums received from the direct written reinsurance risk pooling program and the credit coinsurance reinsurance program the taxpayer received gross_receipts as follows 20xx program revenue service direct written premiums quota share reinsurance premiums credit coinsurance reinsurance premiums dollar_figure total premiums investment_income proceeds from sale of assets other income gross_receipts -0- dollar_figure the 20xx direct written premiums were deposited to the taxpayer's the investment account statements revealed that the taxpayer received the direct written premiums from the following payers dollar_figure __0 dollar_figure total a list of the deposits is shown in exhibit a that is attached to the end of this report of the total premiums received by the taxpayer in 20xx of the premiums were generated for the fourteen direct written policies with the affiliated business interests of the after offsetting cost_basis of dollar_figure the _ incurred a net gain of dollar_figure only the net gain was reported as income on the return form 886-a catalog number 20810w publish no irs gov page of department of the treasury-internal revenue service schedule number or exhibit form 886-a explanations of items rev date tax identification_number name of taxpayer year period ended 20xx 20xx 20xx 20xx premiums are from the quota share reinsurance risk pooling program and of the premiums from the credit coinsurance reinsurance program 20xx tax_year the taxpayer filed form_990 return of organization exempt from income_tax for the tax_year ended december 20xx claiming to be tax-exempt under sec_501 during the year the taxpayer continued to operate as a captive company that insured certain property and casualty risks of affiliated business interests the taxpayer participated in the same three programs that it engaged in during the 20xx and 20xx tax years direct written contracts with affiliated business interests quota share risk_pool reinsurance credit coinsurance reinsurance taxpayer’s primary business continued to be that of providing property and casualty coverages for the named insureds joint insurer for property and casualty coverages written for the named insureds by taxpayer continued to operate as a and and continued to provide property and casualty coverages to continued to provide coverages to and and during 20xx the taxpayer continued to operate as a joint insurer under the same property and casualty contracts written by 20xx taxpayer was one of four insurers providing coverage to the named insureds although continued to serve as the contracts were sanitized by taxpayer’s cpa it appears that the lead insurer the lead insurer while assumed of the stated limits of insurance in exchange for of the combined premium paid_by the named insureds while each of the joint insurers assumed of the stated limits of insurance in exchange for of the combined premium as in the 20xx tax_year as in _ were joint insurers and the and of the stated limits of insurance in exchange for together the insurers assumed of the combined premium paid_by the named insureds the remaining of the combined premium was paid_by the named insureds to underwriting endorsement as stop loss insurer under the joint in 20xx continued to list the named insureds as the contracts written by and the 20xx contracts even though it was suppose to provide coverage only to however the contracts written by the policy period for each contract is january 20xx through january 20xx effective october as a named insureds from its property and casualty even though did not remove coverages were transferred to as the sole named insured did reflect and publish no irs gov department of the treasury-internal revenue service form 886-a catalog number 20810w page of schedule number or exhibit form 886-a explanations of items rev date name of taxpayer tax identification_number during 20xx the taxpayer did not insure direct contracts with unrelated and unaffiliated parties or the general_public nor did the taxpayer write any direct contracts during the years under audit with related or unrelated parties where it served as lead insurer taxpayer served as a joint insurer under the following contracts written by year period ended 20xx 20xx 20xx 20xx contract name policy number special risk - collection rate excess directors officers liability excess employment practices liability special risk - expense reimbursement expense reimbursement - legal expenses excess pollution liability special risk - punitive wrap special risk - regulatory changes e r o g e b v o d o i special risk - tax_liability expense reimbursement - breach of medical payer audit liability special risk - loss of major b2b special risk - commercial medical mal excess cyber risk totals dollar_figure aggregate limit c c o c c o c c o c o c o c o c o c o o d o o dollar_figure o o dollar_figure dollar_figure in 20xx premium o o o ' o ' o ' o o ' o o ' o - o contracts the taxpayer was one of five insurers that provided with respect to the property and casualty coverage to contracts the taxpayer is listed as one of five insurers the names of the lead insurer and as the other joint insurers were sanitized by the cpa sole named insured as the sole named insured under the terms of the the contracts continue to list taxpayer agreed to assume of the stated limits of insurance in exchange for of the combined premium paid_by the named insured together the five insurers agreed to insure of the stated limits of insurance in exchange for of the combined premium paid as the sole named insured the remaining of the combined premium was paid_by by to as the stop loss insurer under the joint underwriting endorsement taxpayer served as a joint insurer under the following contracts written by in 20xx contract name policy number special risk - collection rate excess directors officers liability excess employment practices liability special risk - expenses reimbursement expense reimbursement - legal expenses excess pollution liability aggregate dollar_figure limit premium dollar_figure form 886-a catalog number 20810w page of publish no irs gov department of the treasury-internal revenue service schedule number or exhibit form 886-a explanations of items rev date name of taxpayer tax identification_number year period ended 20xx 20xx 20xx 20xx dollar_figure_0 dollar_figure dollar_figure special risk - punitive wrap special risk - regulatory changes special risk - tax_liability expense reimbursement - breach of med payer audit liability special risk - loss of major b2b special risk - commercial medical mal special risk - loss of service totals according to the business plan direct written contracts for the following exposures participated as a joint insurer under the and special risk-collection rate insurance_policy with the office practice currently billing several million dollars annually a drop in its collection rate of only five percentage points where attributable to factors largely outside of control such as levels of reimbursements by health insurers pricing of services by third party payers including medicare etc would result in a six-figure decrease in revenue excess directors officers liability insurance_policy actions against the directors and officers may follow from leased facilities hospitals managed care providers or other third parties if procedures are alleged to be inappropriate patients referring physicians billing excess employment practices liability insurance_policy is at risk for employment practices liability for discrimination harassment wrongful termination or similar wrongful act further in some jurisdictions these civil rights allegations can come from third parties such as patients special risk - expense reimbursement insurance_policy may confront unanticipated allegation suspension of professional licenses or other adverse events significant amounts of monies could be required for public relations crisis management to avert and offset negative publicity which could ultimately lead to a loss of business special risk - legal expense reimbursement the contract covers all litigation expenses_incurred by the company resulting from actual of alleged civil liability excess pollution liability insurance_policy has a significant waste exposure which is excluded from its commercial general liability insurance coverage it deals with sharps used needles etc bodily fluids and chemical wastes on a daily basis handling procedures are in place however historical claims form 886-a catalog number 20810w page of publish no irs gov department of the treasury-internal revenue service year period ended 20xkx 20xx 20xx 20xx schedule number or exhibit form 886-a explanations of items rev date name of taxpayer tax identification_number occurring industry-wide illustrate that improper handling is possible and represents a significant exposure further the proper disposal of its waste once it leaves a pollution incident could occur resulting in significant damage injuries cleanup costs and fines contracts out its waste disposal and can not guarantee if these wastes are mishandled facilities special risk-punitive wrap liability insurance_policy the company is at risk if a jurisdiction rules that its conventional liability coverage cannot provide coverage for punitive or exemplary damages the damage awards are often significant multiples of the actual damages sought by a plaintiff special risk-regulatory changes insurance_policy is at risk of external factors such as regulatory changes in the pain management field specifically or in its industry as a whole or even regulatory changes within the facilities at which and regulations regarding pain management or ascs there is also the possibility that compliance may not be cost effective thereby eliminating a revenue stream from the office practice and also resulting in a potential loss of patients could incur significant costs to come into compliance with rules operates special risk - tax_liability insurance_policy is also at risk if it were to suffer an adverse decision from an unexpected tax audit with regard to its organizational structure cash_basis accounting captive planning billing methodology or any other federal tax related issue special risk-breach of medical standards insurance_policy is entrusted with and manages a large volume of sensitive personal information on patients the volume of incidents and related lawsuits from the mishandling security breach of sensitive personal information is on the rise - especially given the increasing reliance on electronic data processing and the growing threat of identity theft from underground and organized information thieves these risks represent a potential and substantial exposure to special risk-payee audit liability insurance_policy is at risks for potential unexpected costs or liability resulting from an audit by the state workers compensation commission of its billed medical services provided for patient treatment of a worker’s compensation related injury special risk - loss of major business to business relationship is a participant in virtually all of the major managed care insurance plans in the geographical area bluecross blueshield of state medicare and the workers department of the treasury-internal revenue service form 886-a catalog number 20810w publish no irs gov page of schedule number or exhibit form 886-a rev date explanations of items name of taxpayer tax identification_number year period ended 20xx 20xx 20xx 20xx compensation commission of state represents business relationships where a significant exposure may exist special risk - loss of services insurance_policy as a professional practice the practice is highly dependent on the services of and loss of services from one or more of the insureds who are large or significant billers _ the business is at risk of significant income loss upon the incapacitation or 14a special risk - commercial medical malpractice the contract provides commercial malpractice coverage for the insured during the 20xx the contract reimburses the named insured for any loss sustained for which a calendar_year claim against the underlying insurance_policy specified above is denied solely and exclusively due to the exclusion endorsement or limitation specified above 14b excess cyber risk the contract protects the named insured from losses resulting from cyber attacks such as computer viruses unauthorized access through cyber presence and degradation or loss to its system due to cyber presence joint underwriting endorsement in addition to the direct property and casualty insurance contracts the taxpayer also executed separate joint underwriting stop loss endorsements with contracts whereby both parties agreed to underwrite the insurance coverages described in the policies with the affiliated business interests for the and joint underwriting endorsement the taxpayer is identified as one of four under the insurers the other three insurers were sanitized from the contract however the examining the taxpayer assumed of agent believes the parties are the stated limits of insurance in exchange for of the combined premium paid the named insureds and joint underwriting endorsement the taxpayer is identified as one of five under the insurers the names of the other four insurers were also sanitized from the agreement by the taxpayer’s cpa however the agreement reveals that taxpayer assumed of the stated limits of insurance in exchange for of the combined premium paid_by named insured as the sole the terms of the endorsements included the following language department of the treasury-internal revenue service form 886-a catalog number 20810w page of publish no irs gov schedule number or exhibit form 886-a ieee dienuaty we explanations of items name of taxpayer tax identification_number year period ended 20xx 20xx 20xx 20xx the limits of insurance shall be borne proportionately by all quota share participants listed herein to a combined maximum of of the limits of liability stated in the declarations as the stop loss insurer is not subject_to quota share participation and is instead subject_to the joint underwriting stop loss endorsement to the policy and under the of the stated limits of insurance in exchange for of the combined premium by the named insureds the remaining of the combined premium was paid_by the named insureds directly to joint underwriting endorsements the insurers assumed therefore in 20xx the combined premium paid_by the named insureds under the fourteen and contracts was allocated to the taxpayer as follows direct written contracts total combined premium dollar_figure o dollar_figure direct written contracts total combined premium dollar_figure o total direct written premiums rec’d by taxpayer in 20xx dollar_figure quota share reinsurance policy taxpayer continued to participate in the reinsurance risk pooling program by executing a quota share reinsurance policy located at reinsured taxpayer is identified as the reinsurer and the agreement indicates that _ with is is the according to the terms in exchange for the assumption of of the risk_pool comprised of the stop loss coverages issued during the policy period by policy period runs from january 20xx through january 20xx as reinsurer is to receive a quota share premium from to all stop loss endorsement policyholders the the policy reflects a total of reinsurers participating in the in 20xx reinsurer in schedule attached to the policy taxpayer is identified as paid premiums of dollar_figure to department of the treasury-internal revenue service form 886-a catalog number 20810w publish no irs gov page of year period ended 20xx 20xx 20xx 20xx 886-a form gav jantar explanations of items schedule number or exhibit tax identification_number name of taxpayer is not identified by number in schedule of the contract however the reinsurers there are three reinsurers listed on page of schedule of the contract that assumed of could either be reinsurer reinsurer or reinsurer the quota share risk_pool it is not pertinent to determine which of the three reinsurers represents purposes of the case write up the examining agent identified for as reinsurer as reinsurer taxpayer received a quota share reinsurance policy premium of dollar_figure which was equal to of the total premium of dollar_figure paid_by to the reinsurers credit insurance coinsurance contract taxpayer continued to participate in the credit coinsurance contract with corp in which the taxpayer agreed to reinsure a prorate share of all net retained policies corporation under a in force on the effective date assumed by treaty dated june 20xx with on january 20xx corporation that was merged into a territory from an a the risks reinsured are the 20xx insurance exposures on all policies of vehicle service contracts direct written by assumed by under its treaty dated january 20xx in force on january 20xx and subsequently issued and from the reinsurance premiums to be paid_by share of the earned premiums during the accounting_period under each reinsured policy earned premiums are the gross premiums charged the insureds plus the unearned premiums at the beginning of the accounting_period less the unearned premiums at the end of the accounting_period taxpayer received dollar_figure in reinsurance premiums under this contract in 20xx to the taxpayer shall be taxpayer's pro_rata under the terms of the contracts reviewed for 20xx the taxpayer assumed risk exposures as follows direct written premiums quota share reinsurance assumed other reinsurance assumed total dollar_figure dollar_figure o o for the tax_year ended december 20xx the taxpayer reported gross_receipts of dollar_figure and total revenue of dollar_figure gross_receipts were derived primarily from premiums received from the direct written reinsurance risk pooling program and the credit coinsurance reinsurance program the taxpayer received gross_receipts as follows department of the treasury-internal revenue service form 886-a catalog number 20810w publish no irs gov page of schedule number or exhibit form 886-a rev date explanations of items tax identification_number name of taxpayer program revenue service direct written premiums quota share reinsurance premiums credit coinsurance reinsurance premiums dollar_figure total premiums investment_income proceeds from sale of assets other income gross_receipts year period ended 20xx 20kx 20xx 20xx 20xx the 20xx direct written premiums were deposited to the taxpayer's _ the investment account statements revealed that the taxpayer received the direct written premiums from the following payers total dollar_figure dollar_figure a list of the deposits is shown in exhibit b that is attached to the end of this report of the total premiums received by the taxpayer in 20xx of the premiums were generated for the fourteen direct written policies with the affiliated business interests of the premiums are from the quota share reinsurance risk pooling program and of the premiums from the credit coinsurance reinsurance program law sec_501 of the internal_revenue_code provides insurance_companies other than life including inter-insurers and reciprocal underwriters can qualify for tax-exempt status if the gross_receipts for the taxable_year do not exceed dollar_figure and more than of such gross_receipts consist of premiums or inthe case of a mutual_insurance_company the gross_receipts of which for the taxable year do not exceed dollar_figure and more than of such gross_receipts consist of premiums sec_816 of the code provides that the term_insurance company means any company more than half of the business of which during the taxable_year is the issuing of insurance or annuity_contracts or the reinsuring of risks underwritten by insurance_companies afier offsetting cost_basis of dollar_figure the incurred a net gain of dollar_figure only the net gain was reported on the return department of the treasury-internal revenue service form 886-a catalog number 20810w publish no irs gov page of schedule number or exhibit fanr eesn explanations of items rev date name of taxpayer tax identification_number year period ended 20xx 20xkx 20kx 20xx sec_831 defines the term_insurance company for purposes of sec_831 as having the same meaning as the terms is given under sec_816 sec_816 provides that the term_insurance company means any company more than half of the business of which during the taxable_year is the issuing of insurance or annuity_contracts or reinsuring of risks underwritten by insurance_companies pursuant to 312_us_531 the united_states supreme court in defining the term_insurance contract held that in order for a contract to amount to an insurance_contract it must shift and distribute a risk of loss and that risk must be an insurance risk 979_f2d_162 cir aff’g 96_tc_18 risk-shifting means one party shifts his risk of loss to another and risk-distributing means that the party assuming the risk distributes his potential liability in part among others an arrangement without the elements of risk-shifting and risk-distributing lacks the fundamentals inherent in a true contract of insurance 572_f2d_1190 cir the common definition for insurance is an agreement to protect the insured against a direct or indirect economic loss arising from a defined contingency whereby the insurer undertakes no present duty_of performance but stands ready to assume the financial burden of any covered loss 183_f2d_288 2d cir the risk must contemplate the fortuitous occurrence of a stated contingency 797_f2d_920 cir historically and commonly insurance involves risk -shifting and risk distributing risk-shifting means one party shifts his risk of loss to another and risk-distributing means that the party assuming the risk distributes his potential liability in part among others an arrangement without the elements of risk-shifting and risk-distributing lacks the fundamentals inherent in a true contract of insurance 988_f2d_1135 fed cir for insurance purposes risk-shifting means one party shifts his risk of loss to another and risk- distributing means that the party assuming the risk distributes his potential liability in part among others 811_f2d_1297 gt cir a true insurance agreement must remove the risk of loss from the insured party form 886-a catalog number 20810w page of publish no irs gov department of the treasury-internal revenue service schedule number or exhibit form 886-a explanations of items rev date name of taxpayer tax identification_number year period ended 20xx 20xx 20xx 20xx 881_f2d_247 cir risk_distribution involves shifting to a group of individuals the identified risk of the insured the focus is broader and looks more to the insurer as to whether the risk insured against can be distributed over a larger group rather than the relationship between the insurer and any single insured revrul_89_96 1989_2_cb_114 an insurance agreement or contract must involve the requisite risk shifting necessary for insurance revrul_2002_89 2002_2_cb_984 it is not insurance where a parent company formed a subsidiary and of the subsidiary’s earned premium was paid_by the parent company the rev_rul further held that such arrangement between a parent and a subsidiary would constitute insurance if less than of the premium earned by the subsidiary is from the parent company revrul_60_275 1960_2_cb_43 risk shifting not present where subscribers all subject_to the same flood risk agreed to coverage under a reciprocal flood insuranc exchange revrul_2002_90 c b a wholly owned subsidiary that insured subsidiaries of its parent constitute insurance for federal_income_tax purposes revrul_2005_40 2005_40_irb_4 an arrangement that purported to be an insurance_contract but lacked the requisite risk_distribution was characterized as a deposit arrangement a loan a contribution_to_capital an indemnity arrangement that was not an insurance_contract revrul_2007_47 2007_30_irb_127 an arrangement that provides for the reimbursement of inevitable future costs does not involve the requisite insurance risk foreign_corporation tax provisions sec_951 amounts included in gross_income of united_states_shareholders a amounts included - in general -if a foreign_corporation is a controlled_foreign_corporation for an uninterrupted period of days or more during any taxable_year every person who is a united_states_shareholder as defined in subsection b of such corporation and who owns within the meaning of sec_958 stock in such corporation on the last day in such year on which such corporation is a controlled_foreign_corporation shall include in his gross_income for his taxable_year in which or with which such taxable_year of the corporation ends - form 886-a catalog number 20810w publish no irs gov page of department of the treasury-internal revenue service schedule number or exhibit form 886-a explanations of items rev date name of taxpayer tax identification_number year period ended 20xx 20xx 20xkx 20kx a the sum of - i his pro_rata share determined under paragraph of the corporation's subpart_f_income for such year ii his pro_rata share determined under sec_955 as in effect before the enactment of the tax reduction act of of the corporation's previously excluded subpart_f_income withdrawn from investment in less developed countries for such year and iii his pro_rata share determined under sec_955 of the corporation's previously excluded subpart_f_income withdrawn from foreign_base_company shipping operations for such year and sec_953 insurance_income a insurance_income - in general -for purposes of sec_952 the term_insurance income means any income which - a is attributable to the issuing or reinsuring of an insurance_or_annuity_contract b would subject_to the modifications provided by subsection b be taxed under subchapter_l of this chapter if such income were the income of a domestic exception -such term shall not include any exempt_insurance_income as defined in subsection e d election by foreign to be treated as domestic_corporation a a foreign_corporation is a controlled_foreign_corporation as defined in sec_957 by substituting percent or more for more than percent and by using the definition of united_states_shareholder under c a b such foreign_corporation would qualify under part or il of subchapter_l for the it were a domestic_corporation and sec_953 insurance_income in general - if taxable_year if catalog number 20810w form 886-a page of publish no irs gov department of the treasury-internal revenue service schedule number or exhibit form 886-a explanations of items rev date name of taxpayer tax identification_number year period ended 20xx 20xx 20xx 20xx c such foreign_corporation meets such requirements as the secretary shall prescribe to ensure that the taxes imposed by this chapter on such foreign_corporation are paid and d such foreign_corporation makes an election to have this paragraph apply and waives all benefits to such corporation granted by the united_states under any treaty for purposes of this title such corporation shall be treated as a domestic_corporation government’s position form_1024 application the taxpayer filed a form_1024 application on october 20xx seeking retroactive exemption under sec_501 back to december 20xx the date of incorporation the application was ultimately withdrawn by agent believes that the application was withdrawn by the company on the advice on its counsel examining agent believes that its counsel advised the taxpayer to withdraw the form_1024 application because counsel anticipated eo rulings and agreements would deny sec_501 tax-exempt status to agreements on applications filed by other clients of president on september 20xx the examining based on the position taken by rulings and and attorney-2 who are affiliated with the in represented many captive insurance_companies that filed form_1024 applications the seeking tax-exempt status under sec_501 all of the applications included basically identical fact patterns and organizational and operational structure however after eo rulings and agreements received an adverse opinion from the irs office_of_chief_counsel financial institutions products division concluding that the applicants were not insurance_companies within the meaning of subchapter_l of the code because the contracts executed by the companies lack adequate risk_distribution rulings and agreements began issuing the remaining companies suddenly withdrew their adverse denial letters to these companies form_1024 applications probably anticipating that their applications would also be denied tax- exempt status by eo rulings and agreements the examining agent believes that the withdrawals of the remaining applications including the application filed by taxpayer is more than mere coincidence in addition the examining agent believes the taxpayer withdrew its form_1024 application upon advice from its counsel in order to avoid receiving an adverse denial letter from rulings and agreements department of the treasury-internal revenue service form 886-a catalog number 20810w publish no irs gov page of schedule number or exhibit form 886-a explanations of items rev date name of taxpayer tax identification_number year period ended 20xx 20xx 20xx 20xx qualification as insurance_company neither the internal_revenue_code nor the income_tax regulations define the terms insurance or insurance_contract the standard for evaluating whether an arrangement constitutes insurance for federal tax purposes has evolved over the years and is at best a nonexclusive facts and circumstances analysis 972_f2d_858 7th cir the most frequently cited opinion on the definition of insurance is 312_us_531 in which the court describes insurance as an arrangement involving risk-shifting and risk-distributing of an actual insurance risk at the time the transaction was executed cases analyzing captive insurance arrangements have described the concept of insurance for federal_income_tax purposes as containing three elements involvement of an insurance risk shifting and distributing of that risk and insurance in its commonly accepted sense see eg 979_f2d_162 9th cir affg 96_tc_18 the test however is not a rigid three-prong test there is also no single definition of insurance for non-tax purposes t he subject has no useful or fixed definition there is neither a universally accepted definition or concept of sic exclusive concept or definition that can be persuasively applied in ‘insurance’ nor a insurance lawyering appleman on insurance 2d sec_1 while it seems appropriate that any concept and meaning of insurance be sufficiently broad and flexible to meet the varying and innovative transactions which humankind perpetually produces care must be used to describe insurance because overbroad definitions are not useful and may cause many commercial relationships erroneously to constitute insurance id moreover a state’s determination of whether a product is insurance for state law purposes does not control whether the product is insurance for federal tax law see 96_tc_18 there is no need for parity between a state law definition and federal definition as the objective for state purposes is company solvency solvency is not a concern for determining whether an arrangement qualifies as insurance for federal_income_tax purposes not all contracts that transfer risk are insurance policies even where the primary purpose of the contract is to transfer risk a desired investment return protects against investment risk not insurance risk legierse u s pincite the risk must not be merely an investment risk 387_us_202 the transfer of an investment risk cannot by itself create insurance see also revrul_89_96 1989_2_cb_114 for example a contract that protects against the failure to achieve form 886-a catalog number 20810w page of publish no irs gov department of the treasury-internal revenue service schedule number or exhibit form 886-a explanations of items rev date tax identification_number name of taxpayer year period ended 20kx 20kx 20xx 20kx risks transferred were in the nature of investment risk not insurance risk revrul_68_27 1968_1_cb_315 although an element of risk existed it was predominantly a normal business risk of an organization engaged in furnishing medical services on a fixed price basis rather than an insurance risk and revrul_2007_47 2007_2_cb_127 the arrangement lacked the requisite insurance risk to constitute insurance because the arrangement lacked fortuity and the risk at issue was akin to the timing and investment risks of rev_rul the line between investment risk and insurance risk however is pliable t he finance and insurance industries have much in common the different tools these industries provide their customers for managing financial insurable risks rely on the same two further the valuation techniques in both fundamental concepts risk pooling and risk_transfer financial and insurance markets are formally the same the fair values of a security and an insurance_policy are the discounted expected values of the cash flows they provide their owners scholars and practitioners recognize these commonalities not surprisingly the markets have converged recently for example some insurance_companies offer mutual funds and life_insurance tied to stock portfolios and some banks sell annuities financial economics with applications to investments insurance and pension sec_1 harry h panier ed insurance risk requires a fortuitous event or hazard and not a mere timing or investment risk a fortuitous event’ such as a fire or accident is at the heart of any contract of insurance see 183_f2d_288 2d cir the risk must contemplate the fortuitous occurrence of a stated contingency not an expected event lack of insurance risk the service analyzed the risk of the contracts to determine whether the contracts qualify as contracts of insurance annuity_contracts or reinsurance contracts in deciding whether the contracts qualify as insurance contracts for federal tax purposes we have considered all of the facts and circumstances associated with the parties in the context of the captive arrangement when deciding that a specific contract is not insurance because it does not have an insurance risk but deals with a business or investment risk we have considered such things as the ordinary activities of a business_enterprise the typical activities and obligations of running of a business whether an action that might be covered by a policy is in the control of the insured within a business context whether the economic risk involved is a market risk that is part of the business environment whether the insured is required by a law or regulation to pay for the covered claim and whether the action is question is willful or inevitable catalog number 20810w form 886-a a happening that because it occurs only by chance or accident the parties could not reasonably have foreseen black's law dictionary ed see also first restatement of contracts sec_291 cmt a american law institute restatement second contracts cmt a see generally jeffery w stempel stempel on insurance contracts sec_1 06a supp i n the past years a modern view of fortuity as a matter of law has emerged in united_states courts one that largely embraces the notions of fortuity held by the american law institute when it adopted the restatement of contracts first in and again in the second restatement published in page of publish no irs gov department of the treasury-internal revenue service schedule number or exhibit form 886-a explanations of items rev date name of taxpayer tax identification_number year period ended 20xx 20kx 20xx 20xx 20xx policie sec_1 special risk - collection rate insurance_policy policy indemnifies for a portion of the differential between the net collection percentage ncp during the covered period and the ncp during a baseline period the ncp is calculated by dividing the actual collections amount during a specified period into the gross billings amount for that same period not insurance the policy is not insurance in the commonly accepted sense there is no insurance risk but only investment or business risk excess directors officers liability insurance_policy covers wrongful acts of directors and officers insurance excess employment practices liability insurance_policy cover sec_11 categories of wrongful acts including wrongful termination refusal to hire or promote sexual harassment unlawful_discrimination based on age gender etc invasion of privacy failure to create employment policies or procedures retaliatory treatment violation of civil rights violation of family_and_medical_leave act breach of employment contract failure there is to provide safe work environment violations listed herein against a non-employee excluded from coverage claims related to employee's entitlements under various listed non- specific laws rules or regulations also excluded are claims under various listed laws such as the occupational safety and health act these exclusions shall not apply to claim for any actual or alleged retaliatory discriminatory or other employment practices-related treatment not insurance_policy is not insurance in its commonly accepted sense there is no insurance risk but only investment or business risk special risk - expense reimbursement insurance_policy coverage form a deals with crisis management public relations expenses public relations expenses to mitigate the insured's adverse publicity generated from an actual or imminent liability incident that could exceed dollar_figure product recall employee layoff or labor this covers all department of the treasury-internal revenue service form 886-a catalog number 20810w publish no irs gov page of form 886-a explanations of items rev date schedule number or exhibit tax identification_number name of taxpayer year period ended 20xkx 20xx 20xx 20kx loss of intellectual_property rights unsolicited dispute government litigation financial crisis takeover bid security incident or any incident expected to reduce annual gross revenue by at least o coverage form b deals with uninsured defense or alleged civil liability where there is no insurer to provide such coverage or where such coverage has been exhausted under an existing insurance_contract this covers all defense expense for actual not insurance as to coverage a coverage form a is not insurance in the commonly accepted sense there is no insurance risk but only investment or business risk we could not conclude that coverage form b is insurance in the commonly accepted sense it is vague as to what liability contract underlies the need for defense expenses special risk-loss of major business to business covers any business interruption loss of up to months suffered as a result of losing the services of a major business-to-business relationship any business relationship that contributes or more to revenue business interruption losses include the impact of lost revenue and the extra expenses involved in finding a replacement business-to-business relationship relationship where the insured initiates the termination of the agreement the loss of a major business-to-business relationship that insured did not attempt or intent to replace or the loss of a major business-to-business relationship due to insured’s substantial non-compliance with the terms and conditions of its contractual agreement with the customer the policy will not cover the voluntary loss of a major business-to-business not insurance the policy is not insurance in the commonly accepted sense there is no insurance risk but only business risk special risk - loss of services insurance_policy covers the involuntary loss of services for key employees the covered cause of loss must be involuntary and includes sickness disability death loss of license resignation or retirement after days coverage does not include any loss of services if the insured terminated the employment of the employee also excluded is any claim if the insured does not attempt to replace the employee timely claim costs can include costs incurred by existing employees costs of temporary employees training costs and lost net revenue not insurance the policy is not insurance in the commonly accepted sense although a policy only covering death or disability of a key_employee is insurance the policy here covers many non-insurance risks that is investment or business risks form 886-a catalog number 20810w page of publish no irs gov department of the treasury-internal revenue service schedule number or exhibit form 886-a rev date explanations of items name of taxpayer tax identification_number year period ended 20xkx 20xx 20kx 20xx special risk - payee audit liability covers amounts of unexpected audit liability insured incurs as a result from audit by the state workers compensation commission swcc of insured’s billed medical services provided for patient treatment of a workers compensation-related injury also covers defense expenses insured incurs in preparing for or participating in any swcc audit not insurance insureds are located in state state workers compensation commission is even a possibility therefore there would be no if insureds do provide medical_care in state then the policy is still probably not risk to insure insurance in the commonly accepted sense because there is no insurance risk but only investment or business risk it is very questionable whether an audit from the excess pollution liability insurance_policy insuring agreement and cover clean-up costs and diminution in value costs resulting from pre-existing or new on-site pollution conditions coverage is conditioned on an affirmative obligation to report on site pollution conditions to a governmental agency so as to be in compliance with environmental laws various laws covering solid_waste disposal super funds clean air clean water and toxic substances are listed in a non-exclusive list provided the insured has or may have a legal_obligation to incur clean up costs for pollution conditions or pollution release clean up costs cover the expenses of investigation or removal of or rendering non-hazardous pollution conditions to the extent required by environmental laws diminution in value means the difference in the fair_market_value of the property when the remedial action plan is approved and the fair_market_value of the property had there been no on site pollution conditions insuring agreement sec_3 to provide for third party claims for on site or off site clean up and diminution in value costs for pre-existing or new on site or off site pollution conditions as well as bodily and property damage as well as non-owned locations insuring agreement covers pollution release from transported cargo carried by covered autos no covered auto is identified in the declarations insuring agreement covers third party claims from transporting of a product or waste publish no irs gov department of the treasury-internal revenue service form 886-a catalog number 20810w page of schedule number or exhibit form 886-a explanations of items rev date name of taxpayer tax identification_number year period ended 20xx 20xx 20xx 20xx insuring agreement covers actual loss resulting from the interruption of the business operations caused solely and directly by on site pollution conditions actual loss means the net_income the insured would have earned had there been no interruption coverage also includes loss of rental value which generally means the anticipated rental income from tenant occupancy of insured property not insurance the policy is not insurance in the commonly accepted sense there is no insurance risk but only investment or business risk special risk - punitive wrap liability insurance_policy covers claims for punitive or exemplary damages upon the failure of the insurer under policies listed that are issued to the insured to cover punitive or exemplary damages judgments or awards solely due to the enforcement of any law or judicial_ruling that precludes the insuring of punitive or similar damages and that but for such law or ruling would otherwise be covered and for which an insured is legally obligated to pay not insurance the policy is not insurance in the commonly accepted sense there is no insurance risk but only investment or business risk special risk - regulatory changes insurance_policy covers actual compliance expenses and any business interruption loss of up to months as a result of any regulatory change that has an adverse impact on insured's normal on-going business operations regulatory changes include governmental administrative agency or legislative changes changes to environmental zoning transportation or safety laws or regulations changes to import export laws regulatory changes due to foreign political risk including the collapse of a foreign economy and any regulatory change due to the insured's reorganization such as changing from a corporation to a limited_partnership the policy excludes any claim for an adverse regulatory change due to the insured's substantial non- compliance with regulations or other guidelines not insurance the contract is vague as to what it covers the documents provided do not provide enough information for us to be able to conclude that this contract is insurance in the commonly accepted sense not insurance the policy is not insurance in the commonly accepted sense there is no insurance risk but only investment or business risk special risk - representation and warranties insurance_policy department of the treasury-internal revenue service catalog number 20810w form 886-a publish no irs gov page of schedule number or exhibit form 886-a explanations of items rev date name of taxpayer tax identification_number year period ended 20xx 20xx 20xx 20xx special risk - breach of medical standards insurance_policy covers all fines penalties defense expense and costs to bring operations in compliance resulting from an investigation or hearing of type brought by a public regulatory agency or private medical standards board types of investigations covered include but are not limited to allegations of hipaa violations and medical standards reviews criminal acts not covered liability coverage is excluded we could not conclude that this contract is insurance in the commonly accepted sense the contract is vague as to what it covers special risk - tax_liability insurance_policy covers any additional tax_liability up to dollar_figure subject_to a deductible equal to of the actual filed irs tax_liability provided return prepared and signed by cpa policy also covers defense expenses_incurred in determining the final tax_liability several irs penalties are excluded from coverage not insurance the policy is not insurance in the commonly accepted sense there is no insurance risk but only investment or business risk 20xx policies same as 20xx except special risk - representations and warranties policy was replaced with expense reimbursement - legal expenses insurance_policy covers all litigation expenses_incurred by the insured resulting for insured's actual or alleged civil liability not insurance we could not conclude that this contract is insurance in the commonly accepted sense the contract is vague as to what liability contract underlies the need for defense expenses special risk - commercial medical malpractice gap insurance_policy covers claims that have been denied by the listed insurance_company which issued the underlying medical malpractice insurance_policy due to a breach of warranty failure to notify form 886-a catalog number 20810w publish no irs gov page of department of the treasury-internal revenue service schedule number or exhibit form 886-a explanations of items rev date name of taxpayer tax identification_number year period ended 20xx 20xx 20xx 20xkx the insurer of medical operations or procedures sales or distribution of excluded products or the exhaustion of the primary limits not insurance we could not conclude that this contract is insurance in the commonly accepted sense the contract is vague as to what it covers excess cyber risk package insurance_policy insuring agreement - cyber risk liability covers all damages that insured becomes legally obligated to pay and defense expenses as a result of any claim made against insured for a wrongful act wrongful acts may include but are not limited to the following defamation infringement of intellectual_property and failure to prevent unauthorized access to use of tampering with or introduction of malicious code into data or systems insuring agreement - ' party property loss business interruption covers loss of or damages to insured’s covered property caused by but not limited to the following a computer virus a cyber attack theft of computer system resources and computer crimes insuring agreement also covers business interruption expenses monies surrendered or costs incurred as a result of cyber-extortion and reward money for information leading to the arrest and conviction of individuals committing or attempting to commit illegal acts related to coverage under the policy insuring agreement - post-loss systems crisis management covers the cost of public relations services required to protect insured’s image and reputation following a covered loss insuring agreement also covers service fees of consultants hired to identify and or implement ways to prevent or decrease the possibility of a further or future loss similar to the covered loss not insurance the policy is not insurance in the commonly accepted sense there is no insurance risk but only investment or business risk same as the polices written in 20xx 20xx policies our review of the direct written contracts executed during the tax years under consideration is summarized as follows contract special risk-collection rate deemed insurance not deemed insurance no form 886-a catalog number 20810w page of publish no irs gov department of the treasury-internal revenue service schedule number or exhibit 886-a form irev january explanations of items name of taxpayer tax identification_number year period ended 20xx 20xkx 20xx 20xx yes excess directors officers excess employment practices special risk-expense reimbursement loss of major business to business special risk-loss of services payer audit liability excess pollution special risk-punitive wrap special risk-regulatory changes special risk-representations and warranties breach of medical standards special risk-tax liability special risk-legal expense reimbursement special risk-commercial medical malpractice gap excess cyber risk no no no no no no no no no no no no no no we were able to conclude only one of the direct written contracts as insurance contracts because they included an insurance risk fourteen of the fifteen direct written contracts were deemed not to include an insurance risk and was either a business or investment risk or we were unable to clearly identify an insurance risk other insurance policies participated in over insurance policies with more than insureds blended together is direct written insurance and then reinsured the entire book on a quota share basis with each of the pool participants as reinsurer no in the 20xx reinsurance program taxpayer received a quota share premium of dollar_figure from of of the risk_pool comprised of the stop loss coverages issued to all the stop loss endorsement policyholders see also the joint underwriting stop loss endorsement in 20xx taxpayer was identified as reinsurer no received a quota share premium of dollar_figure from in 20xx taxpayer was reinsurer no again taxpayer received a quota share premium of dollar_figure from exchange for the assuming of the risk_pool in exchange for the assumption of of the risk_pool in exchange for the assumption in we do not have any understanding of the risks insured by taxpayer we do not know whether the policies reinsured are similar to the several policies that we have concluded above are not insurance contracts written by therefore it is highly likely that the entire pool which is insured by and reinsured on a quota share basis with each of the pool participants is primarily comprised however the direct written contracts insured by do include the form 886-a catalog number 20810w page of publish no irs gov department of the treasury-internal revenue service 886-a schedule number or exhibit form ineu lancary explanations of items name of taxpayer tax identification_number year period ended 20xx 20xx 20xx 20xx of direct written contracts that the service would deem not be insurance in the commonly accepted sense thus all or a portion of the premiums received by taxpayer during the taxable years under consideration would not be for reinsuring insurance risks credit coinsurance reinsurance program the policy reinsures risks on vehicle service contracts again we do not know what risks are being insured and reinsured insurance in its commonly accepted sense staff as a foreign_corporation taxpayer contracted with its residential insurance manager taxpayer did not hire or employ staff to conduct an insurance_business during the tax years under consideration taxpayer did not incur salaries and wages expenses or any other payroll costs territory to serve as in pricing of contracts the service also has concern about whether the premiums charged for the contracts were reasonable a premium for an insurance_contract is based on actuarial calculations and factors even if an insurance_contract is deem to be insurance for federal tax purposes the premium paid pursuant to that contract must be determined based on actuarial factors and in the january 20xx response to idr for the 20xx and 20xx tax years the principles cpa provided a copy of letters from which was purpose to address the method used for pricing the direct written and reinsurance contracts for the taxable years under consideration in addition the cpa provided a copy of a captive feasibility study for the the purpose of the study was as follows dated january 20xx the study was prepared by and to evaluate the center’s desire to explore the option of forming a small captive insurer specifically a small captive under sec_501 for the purpose of writing coverages that are generally unavailable or impractical in obtaining in the conventional insurance marketplace on page addressed the pricing of the various policies written by taxpayer the proposed insured is currently paying dollar_figure annually for its conventional commercial property department of the treasury-internal revenue service form 886-a catalog number 20810w publish no irs gov page of schedule number or exhibit form 886-a explanations of items rev date name of taxpayer tax identification_number year period ended 20xx 20xx 20xkx 20kx casualty insurance program since its inception in 19xx the proposed insured has paid close to a million dollars for these coverages the underwriting profit made by the various insurers has caused the proposed insured to be concerned about pricing inequity the service concluded that the letters and feasibility study do not address the method of pricing the specific direct written and reinsurance contracts that 20xx 20xx and 20xx thus the service concluded that the premiums received by taxpayer were not reasonable because they were not based on actuarial calculations and factors was a party to during use of assets taxpayer engaged in investment activities that are typical of insurance_companies based on the review of the form_990 returns taxpayer made two loans to the affiliated businesses to whom it executed the direct written contracts loans were made during the 20xx and 20xx tax years the amount of the outstanding loan receivable balances represented the total percentage of assets as follows loan balance total assets percentage 20xx dollar_figure -0- 20xx dollar_figure dollar_figure 20xx 20xx dollar_figure dollar_figure dollar_figure -0- o the affiliated businesses repaid the outstanding notes receivable balance to taxpayer during 20xx risk shifting risk shifting occurs if a person facing the possibility of an economic loss transfers some or all of the financial consequences of the potential loss to the insurer such that a loss by the insured does not affect the insured because the loss is offset by a payment from the insurer see revrul_60_275 risk shifting not present where subscribers all subject_to the same flood risk agreed to coverage under a reciprocal flood insurance exchange risk_distribution risk_distribution incorporates the statistical phenomenon known as the law of large numbers the concept of risk_distribution emphasizes the pooling aspect of insurance that it is the nature of an insurance_contract to be part of a larger collection of coverages combined to distribute risks between insureds 96_tc_18 aff'd 979_f2d_162 cir in treganowan f 2d pincite the court quoting note the new york stock exchange gratuity fund insurance that isn’t insurance form 886-a catalog number 20810w page of publish no irs gov department of the treasury-internal revenue service schedule number or exhibit form 886-a explanations of items rev date name of taxpayer tax identification_number year period ended 20xx 20xx 20xx 20xx yale l j explained that by diffusing the risks through a mass of separate risk shifting contracts the insurer casts his lot with the law of averages the process of risk_distribution therefore is the very essence of insurance also see beech aircraft corp v united_states f 2d cir risk_distribution means that the party assuming the risk distributes his potential liability in part among others 988_f2d_1135 fed cir risk_distribution involves spreading the risk of loss among policyholders’ distributing risk allows the insurer to reduce the possibility that a single costly claim will exceed the amount taken in as premiums and set_aside for the payment of such a claim by assuming numerous relatively small independent risks that occur over time the insurer smoothes out losses to match more closely its receipts of premiums 811_f2d_1297 cir risk_distribution necessarily entails a pooling of premiums so that a potential insured is not in significant part paying for its own risks see 881_f2d_247 cir in situation of revrul_2002_89 s a wholly owned subsidiary of p a domestic parent_corporation entered into an annual arrangement with p whereby s provided coverage for p’s professional liability risks the liability coverage s provided to p accounted for of the total risks borne by s under the facts of situation the service concluded that insurance did not exist for federal_income_tax purposes on the other hand in situation of revrul_2002_89 the premiums that s received from the arrangement with p constituted less than of total premiums received by s for the year under the facts of situation the service reasoned that the premiums and risks of p were pooled with those of unrelated insureds and thus the requisite risk shifting and risk_distribution were present accordingly under situation the arrangement between p and s constituted insurance for federal_income_tax purposes in revrul_2002_90 s a wholly owned insurance subsidiary of p directly insured the professional liability risks of operating subsidiaries of its parent s was adequately capitalized and there were no related guarantees of any kind in favor of s most importantly s and the insured operating subsidiaries conducted themselves in a manner consistent with the standards applicable to an insurance arrangement between unrelated parties together the operating subsidiaries had a significant volume of independent homogeneous risks under the facts presented the ruling concludes the arrangement between s and each of the operating subsidiaries of the parent of s constitute insurance for federal_income_tax purposes situation of revrul_2005_40 describes a scenario where a domestic_corporation operated a large fleet of automotive vehicles in its courier transport business covering a large portion of the united_states this represented a significant volume of independent homogeneous risks for valid non-tax business purposes the transport company entered into an insurance arrangement with an unrelated domestic_corporation whereby in exchange for an agreed amount of premiums the domestic carrier insured the transport company against the risk of form 886-a catalog number 20810w page of publish no irs gov department of the treasury-internal revenue service schedule number or exhibit form 886-a explanations of items rev date name of taxpayer tax identification_number loss arising out of the operation of its fleet in the conduct of its courier business the unrelated carrier received arm’s length premiums was adequately capitalized received no guarantees from the courier transport company and was not involved in any loans of funds back to the transport company the transport company was the carrier’s only insured while the requisite risk-shifting was seemingly present the risks assumed by the carrier were not distributed among other insured’s or policyholders therefore the arrangement between the carrier and the transport company did not constitute insurance for federal_income_tax purposes year period ended 20kx 20xkx 20xx 20xx the facts in situation of revrul_2005_40 mirror the facts of situation except that in addition to its arrangement with the transport company the carrier entered into a second arrangement with another unrelated domestic company in the second arrangement the carrier agreed that in exchange for premiums it would insure the second company against its risk of loss associated with the operation of its own transport fleet the amount that the carrier received from the second agreement constituted of the total_amounts it received during the tax_year on a gross and net_basis thus of the carrier's business remained with one insured the revenue_ruling concluded that the first arrangement still lacked the requisite risk_distribution to constitute insurance even though the scenario involved multiple insureds in situation of revrul_2005_40 llc’s elected classification as associations each contributing between and of the insurer’s total risks the service concluded that this transaction constituted insurance for federal_income_tax purposes the principal concern with regard to your activities is whether there is sufficient risk_distribution as discussed above the idea of risk_distribution involves some mathematical concepts for example risk_distribution is said to incorporate the statistical phenomenon known as the law of large numbers whereby distributing risks allows the insurer to reduce the possibility that a single costly claim will exceed the amount taken in as premiums the concept hinges on the assumption of numerous relatively small and independent risks that occur randomly over time 811_f2d_1297 pincite as discussed the service in revrul_2002_90 concluded that insurance existed where insureds each contributed between five and to the insured’s total risks similarly in situation of revrul_2005_40 the service concluded that insurance existed where llcs electing classification as associations each contributed between five and of the insurer’s total risks moreover in situation of revrul_2002_89 supra the service concluded that insurance existed where a wholly owned subsidiary insured its parent but the arrangement represented less than of the insurer’s total risk for the year in the instance case the facts therein are analogous to the analysis under situation1 of revrul_2002_89 supra the liability coverage provided to the parent_corporation by its wholly publish no irs gov department of the treasury-internal revenue service form 886-a catalog number 20810w page of schedule number or exhibit form 886-a rev date explanations of items name of taxpayer tax identification_number year period ended 20xx 20xx 20xx 20xx owned subsidiary accounted for of the total risks borne by the subsidiary similarly in situation of revrul_2005_40 supra a second insurer contributing of the insured’s risks was added to the single-insured scenario of situation1 the service concluded in both of the above scenarios that insurance did not exist because there lacked a sufficient number of insureds the small number of insureds produced an insufficient pool of premiums to distribute any insurance risk the current position of the service with respect to captive insurance arrangements is expressed in revrul_2005_40 in situation of the ruling the service concluded that insurance did not exist because the captive arrangement with a single-insured lacked risk_distribution however in situation the service concluded that the captive arrangement with llc’s did result in insurance the main point of revrul_2005_40 situation sec_2 and is the service established a range between a single-insured and twelve-insured entities that might or might not meet the requisite risk_distribution needed to qualify as insurance the closer the number of insured parties in the captive arrangement approache sec_12 insured the more likelihood adequate risk_distribution exist and the arrangement will qualify as insurance however the closer the number of insured parties in the captive arrangement approaches one insured the more likelihood the arrangement lacks adequate risk_distribution and will not qualify as insurance and the named with respect to the contracts reviewed during the tax years under audit the service concluded that the contracts between the taxpayer and the insureds do not constitute contracts of insurance because the risk transferred is a business or investment risk and not an insurance risk and the contracts lack the essential element of risk_distribution most of the risk insured by the taxpayer is under the direct written contracts with an affiliated business the affiliated businesses are partially -owned by a beneficial_owner of is one of three owners each of whom owned a one-third the taxpayer interest in the affiliated businesses of total risk insured by the taxpayer approximately percent of the risk assumed during the years under audit is that of the affiliated business revrul_2005_40 cited several court decisions that have recognized that risk_distribution necessarily entails a pooling of premiums so that a potential insured is not in significant part paying for its own risks insureds does not constitute risk_distribution because of the very high likelihood of the insureds paying for any of its claims with its own premiums such an arrangement is not insurance but a form of self-insurance in this case the large concentration of insurance risks in three in addition of the total premiums received during the year percent of the premiums were derived from the direct written contracts that insure the risk of the affiliated business approximately of all premiums and of the direct written premiums were paid_by only three affiliated entities business interests nor did the taxpayer sell direct written contracts to the general_public did not write issue or sell direct written contracts to non-affiliated form 886-a catalog number 20810w page of publish no irs gov department of the treasury-internal revenue service schedule number or exhibit form 886-a explanations of items rev date tax identification_number name of taxpayer year period ended 20xx 20xx 20xx 20xx during the tax years under audit the taxpayer was primarily and predominantly supported by and direct written premiums that were received from three insured parties the taxpayer did not receive direct written premiums from an adequate pool of insureds thus the contracts between the taxpayer and the affiliated business interests lacks the requisite risk_distribution that is necessary for the contracts to be contracts of insurance as described in subchapter_l of the internal_revenue_code _ affiliated business interests the service concluded that the primary and predominant activity of the taxpayer is to assume risk from contracts that are solely concentrated in only three affiliated policyholders because the risk is too heavily concentrated in the and affiliated business interests it is clear that any losses paid_by the taxpayer would be those of the affiliated business interests and not from an unrelated third party affiliated business interests paid the majority of premiums received by the taxpayer during the years under audit the service concluded that losses_incurred by the affiliated business interests were paid only from the premiums_paid to the taxpayer by the same affiliated business interests business interests represents a form of self-insurance and no court has held that self- insurance is insurance for federal tax purposes in other words the arrangement between the taxpayer and the affiliated in addition since the a beneficial gross_receipts_test sec_501 of the internal_revenue_code provides exemptions for insurance_companies other than life_insurance_companies including inter-insurers and reciprocal underwriters if the gross_receipts for the taxable_year do not exceed dollar_figure and more than of such gross_receipts consist of premiums the service’s other concern as to whether all of the contracts qualify as insurable risks assuming that all of the agreements do constitute insurable risks or that a significant majority of the contracts qualify as insurable risks over of the total risks assumed by the taxpayer is with affiliated businesses that are partially owned and controlled by owner of the taxpayer based the service’s analysis of the contracts fourteen of the fifteen direct written contracts were deemed not to be insurance or we could definitively determine whether the contract included an insurance risk therefore the amounts received by written contracts are not considered insurance premiums the amount received by taxpayer for one of the fourteen direct written contracts was deemed to be premiums because only for this contracts included an insurance risk during the taxable years under consideration received amounts that the service deemed to be direct written and reinsurance premiums as follows department of the treasury-internal revenue service for those fourteen direct catalog number 20810w form 886-a publish no irs gov page of schedule number or exhibit form 886-a explanations of items rev date name of taxpayer tax identification_number year period ended 20xx 20xx 20xx 20xx 20xx contract excess directors officers liability dollar_figure ox amount deemed premiums from direct written contracts quota share premiums credit coinsurance reinsurance total premiums for 20xx gross_receipts for 20xx percentage of premiums to gross_receipts contract excess directors officers liability dollar_figure dollar_figure 0x ox 20xx amount deemed premiums from direct written contracts quota share premiums credit coinsurance reinsurance total premiums for 20xx gross_receipts for 20xx percentage of premiums to gross_receipts contract excess directors officers liability dollar_figure dollar_figure x x 20xx amount deemed premiums from direct written contracts quota share premiums credit coinsurance reinsurance total premiums for 20xx gross_receipts for 20xx percentage of premiums to gross_receipts premium dollar_figure x dollar_figure o o o premium dollar_figure e o l o o b l o o s dollar_figure dollar_figure premium _ f f f a t k c o s department of the treasury-internal revenue service form 886-a catalog number 20810w page of publish no irs gov schedule number or exhibit form 886-a rev date name of taxpayer explanations of items tax identification_number year period ended 20xkx 20xx 20xx 20kx premiums received by taxpayer for each contract in 20xx was not requested during the examination 20xx only the premium received by taxpayer for the excess directors officers contract was deemed to be actual premium income for the tax years under examination because the contract involved an insurance risk thus the excess directors officers contract was deem to be a contract of insurance the amounts received by under the remaining direct written contracts were not premiums for insurance contracts in the commonly accepted sense the terms of the contracts did not include insurance risk but covered investment or business risks because the contracts lacked fortuity and the risk at issue is akin to the timing and investment risks of revrul_89_96 the remaining contracts lacked the requisite insurance risk to constitute insurance an arrangement that provides for the reimbursement of believed-to-be inevitable future costs does not involve the requisite insurance risk for purposes of determining whether the assuming entity may account for the arrangement as an insurance_contract for purposes of subchapter_l of the internal_revenue_code for the contracts that are deemed not to qualify as insurable risks then the amount_paid for each contract by the affiliated business interests to the taxpayer would not qualify as an insurance premium in addition although we question whether the quota share contracts are actually valid reinsurance contracts and whether the amounts received by taxpayer under the contracts are valid reinsurance premiums the amounts received by taxpayer from were included as premium income for purposes of the gross_receipts computation shown above even after given the taxpayer the benefit of the doubt the taxpayer still failed the gross_receipts for the years under audit during the tax years under consideration the premium income received by taxpayer did not exceed of its gross_receipts limitation the amount deemed to be premiums for each taxable_year is not more than of gross_receipts based on our analysis of the contracts we concluded that the taxpayer did not meet the gross_receipts_test described in sec_501 and notice 20xx-42 for any_tax year under audit although gross_receipts are less than the dollar_figure as described in situation of revrul_2002_89 supra and situation of revrul_2005_40 supra there exists an inadequate premium pooling base for insurance to exist the addition of publish no irs gov department of the treasury-internal revenue service form 886-a catalog number 20810w page of year period ended 20xx 20xx 20kx 20kx schedule number or exhibit form 886-a explanations of items rev date name of taxpayer tax identification_number the two other reinsurance arrangements does not change the conclusion that the contracts with the affiliated business interests lack the requisite risk_distribution therefore the taxpayer does not qualify as an insurance_company application of foreign_corporation tax provisions included a copy of the administrative file for the original form_1024 application filed by the sec_953 election filed by the company on february 20xx however the irs has no record that the election was approved as of the date of this examination it appears that the service still has not approved the sec_953 election filed years ago initial form_1024 application on september 20xx withdrew the sec_953 defines insurance_income to mean income which is attributable to the issuing or reinsuring of an insurance_or_annuity_contract and would be taxed under subchapter_l if such income were the income of a domestic insurance_company therefore any premium income received by a cfc could qualify sec_953 allows foreign_insurance_company to elect to be treated as a domestic company for it meets certain requirements one such requirement is that the foreign tax purposes if company must be a company that would qualify under part or il of subchapter_l for the taxable_year if it were a domestic_corporation see sec_953 since the service determined that the taxpayer is not an insurance_company within the meaning of subchapter_l of the code for the year under audit it fails to meet the requirements for the election under sec_953 to be treated as a domestic_corporation in addition because the company does not meet the requirements to make the sec_953 election and thus is not a domestic_corporation the company should be treated as a controlled_foreign_corporation and the provisions of subpart_f of the internal_revenue_code sections should apply however the company did not generate any passive sources of income such as dividends interest royalties rents or annuities during the tax_year under audit the subpart_f provisions apply to foreign_corporations that qualify as controlled_foreign_corporations cfcs sec_957 defines a cfc as a foreign_corporation with regard to which more than of the total combined voting power of all classes of stock entitled to vote or the total value of the stock is owned by u s shareholders a u s shareholder in turn is defined under sec_951 as a u_s_person who owns or more of the total combined voting power of all classes of stock entitled to vote of the foreign_corporation therefore a corporation with regard to which more than of the vote or value is owned by u s persons who individually own or more or the vote will qualify as a cfc under sec_957 department of the treasury-internal revenue service form 886-a catalog number 20810w publish no irs gov page of schedule number or exhibit form 886-a rev date explanations of items tax identification_number name of taxpayer year period ended 20xkx 20xx 20xx 20xx sec_953 defines insurance_income to mean income which is attributable to the issuing or reinsuring of an insurance_or_annuity_contract and would be taxed under subchapter_l if such income were the income of a domestic therefore any premium income received by a cfc could qualify as insurance_income for purposes of sec_953 even though the cfc fails to qualify as an under subchapter_l sec_953 of the code excepts exempt_insurance_income as defined in subsection e from the definition of insurance_income however to qualify as exempt_insurance_income such income must be derived by a qualifying_insurance_company a qualifying_insurance_company is defined as a company that is engaged in an insurance_business and would be subject_to tax under subchapter_l if it were a domestic_corporation sec_953 states that income derived from u s sources does not qualify for exemption if a cfc does not qualify as an insurance_company under subchapter_l definition of a qualifying for purposes of sec_953 thus none of its insurance_income will be exempt_insurance_income it will not meet the a preliminary report form_5701 notice of proposed adjustments was mailed to the taxpayer’s cpa cpa on june 20xx proposing denial of tax-exempt treatment under sec_501 of the internal_revenue_code for the tax years ending december 20xx december 20xx and december 20xx finally the government contends that although the operations and financial records for the tax_year ended december 20xx were not examined by tege the taxpayer would also fail to qualify an insurance_company for that year if taxpayer operated in the same manner as that during the years audited taxpayer’s position a response to the preliminary report was received from in the response the cpa summarized that the taxpayer disagreed with the service's conclusions that the contracts issued by contracts the contracts lack the requisite risk_distribution and the service ignored more than years of well-established tax law as well as the service’s hundreds of rulings lack insurance risks to constitute insurance cpa on august 20xx the cpa argued the following points publish no irs gov department of the treasury-internal revenue service form 886-a catalog number 20810w page of form 886-a explanations of items rev date schedule number or exhibit tax identification_number name of taxpayer year period ended 20xx 20xx 20xx 20xx all of the policies written by events and there is no presence of business or investment risk coverage in any of the policies all coverages written by insure against risk of loss due to fortuitous are for pure insurance risks the quota share reinsurance contracts underwritten by insurance because all of the risks reinsured were pure insurance risks were contracts of by raising the lack of insurance risk issue the service demonstrates a clear lack of knowledge of customary insurance products as well as the insurance industry in general the service ignored the important fact that more than percent of the premiums were attributable to unrelated insurance arrangements involving many thousands of independent unrelated risks of hundreds or thousands of unrelated insureds the service also ignored achieving distribution by issuing policies to four insureds the cpa indicated that in analyzing captive insurance arrangements for the presence of risk_distribution courts have looked at the level of unrelated risk as a metric for the presence of risk_distribution ruling in the harper group and includible subs v commissioner t c affd979 f 2d determined to be sufficient to meet the risk_distribution requirement cir where unrelated risks was the service ignores the tax_court the cpa stated that the service conducted no meaningful examination of risk rather the service simply claims that the direct distribution in its audit of written contracts lack the requisite risk_distribution the nature of insurance is the number of underlying risk exposures present not an artificial entity count or an artificial count of the number of policies written the taxpayer cites amerco inc v commissioner no slip op cir date the service ignored revrul_2001_31 in which the service conceded that it would no longer assert the economic family theory due to its rejection by the courts the cpa argues the service’s analysis of risk_distribution is incomplete the service ignores the numerous unrelated risks that recognized that risk_distribution can occur even with a single insured the taxpayer cited malone hyde v commissioner insures courts have department of the treasury-internal revenue service form 886-a catalog number 20810w publish no irs gov page of schedule number or exhibit form 886-a explanations of items rev date tax identification_number name of taxpayer year period ended 20xx 20xx 20xx 20xx cpa argues the service’s current position is directly contrary to the position it has taken in hundreds of prior sec_501 tax-exempt determination letters that it has issued these favorable rulings were issued to taxpayer on substantially_similar or less favorable facts to those of change in law to account for the service’s disparate tax treatment between and such similarly situated taxpayers accordingly the service has violated its own procedures and mandate to provide a uniform application of existing tax law rev_proc there has been no intervening the election under sec_953 does not require approval by the service made a valid election under sec_953 to be treated as a united_states_corporation for federal tax purposes government’s response to taxpayer’s position after reviewing the response to the preliminary report received from august 20xx the service’s initial position is unchanged predominant business in tax years 20xx 20xx 20xx and 20xx was not insurance because the contracts issued by the company lacked insurance risks and the requisite risk_distribution primary and cpa on taxpayer’s position in the second paragraph of the august 20xx response to the agent’s preliminary report the cpa stated that the audit conclusion reached by the service is based upon a number of unsupported and factually incorrect positions including that lacked the requisite insurance risk to constitute insurance and lacked the requisite risk_distribution insurance operations government’s response the conclusion reached by the service was based on an examination of the direct written and and books_and_records for the 20xx 20xx and reinsurance contracts executed by 20xx tax years based on the review of the contracts the service concluded that the primary was to assume risks of affiliated businesses partially owned and controlled activity of and beneficial owners of the affiliated businesses approximately of by officers of did not assume risk the risk assumed by of or receive direct written premiums from non-affiliated businesses or unrelated general_public under the terms of the direct written contracts the service concluded that the direct written contracts lack the requisite risk_distribution because arrangement does not include an adequate pool of related or unrelated insured for the law the large numbers to operate the pool consisted of a single policyholder and payer of direct written premiums thus primary and predominant activity is not insurance as described in subchapter_l of the internal_revenue_code was that of the affiliated businesses form 886-a catalog number 20810w page of publish no irs gov department of the treasury-internal revenue service schedule number or exhibit form 886-a fe aren ae explanations of items name of taxpayer tax identification_number year period ended 20xx 20xx 20xx 20xx taxpayer’s position on page sec_2 through the cpa described the terms of direct contracts written by during the tax years in question the cpa claims that the contracts are insurance in the commonly accepted sense the risk covered are insurance risks and the contracts do not lack risk_distribution government’s position the government's position with respect to the status of the direct written contracts remains unchanged the service contends of only the excess directors officers liability insurance_policy covers insurance risks and thus is a valid contract of insurance the remaining direct written contracts are not contracts of insurance in the commonly accepted sense because the contract covers business or investment risks and not an insurance risk taxpayer’s position on page of the taxpayer's position the cpa cites the harper group subsidiaries v commissioner t c to support his argument that insurance_company the cpa sited the court’s holding when a significant percentage percent of an insurance company’s income is received from a relatively large number of unrelated insureds the requirement of risk_distribution is satisfied the source of the remaining percent is irrelevant on the issue whether sufficient risk_distribution is present because of the significant presence of unrelated risks the cpa made the following statement in paragraph on page of the may 20xx response qualifies as an in its preliminary report the service merely states that due to percent of premiums being direct written premiums for coverages written to four insureds which in fact owned no interest in there is a lack of adequate risk_distribution the service’s position ignores the fact that more than percent of premiums were attributable to unrelated insurance arrangements involving many thousands of independent unrelated risks of hundreds or thousands of unrelated insureds the service also ignores achieving distribution by issuing policies to these four insureds government’s response the service disagrees with the cpa’s assertion that the determining factor of whether the requisite risk_distribution is present is identifying the percentage of business with unrelated insureds instead the current service’s position on captive insurance arrangements is expressed in revrul_2005_40 which emphasizes the number of policyholders and percentage of business with the related or affiliated insureds as the determining factor of whether risk_distribution is present the rev_rul emphasizes that an arrangement where an issuer received premiums from a single policyholder lacks the requisite risk_distribution the form 886-a catalog number 20810w page of publish no irs gov department of the treasury-internal revenue service schedule number or exhibit form 886-a explanations of items rev date name of taxpayer tax identification_number year period ended 20xkx 20kx 20xx 20xkx ruling further emphasized that an issuer with contracts with a small number of policyholders can be insurance if the percentage of business exceed sec_50 percent of the total insurance_business conducted even if the cpa claimed that insurance exists under the rationale in the harper case where approximately of the risk assumed by insureds the service believes that this conclusion would be based on a misunderstanding of the harper case in the harper case to of the total premiums received for the years at issue were not related to a single policyholder rather the to were the total percentages received from all related policyholders including brother-sister_corporations a total of entities the court’s analysis in harper group must be read in its entirety and all the facts and circumstances must be considered ie that there are entities making up the nearly two thirds risk concentration in all the years at issue was from unrelated or unaffiliated the service’s interpretation of the harper group is consistent with the conclusions reached by the service in situation of revrul_2002_89 and situation of revrul_2005_40 20xx rather the service taxpayer’s position on page paragraph of the taxpayer's position the cpa stated that the service conducted no meaningful examination of risk_distribution in its audit of simply claims that the direct written contracts lack the requisite risk_distribution the nature of insurance is the number of underlying risk exposures present not an artificial entity count or an artificial count of the number of policies written government’s response the proper method for determining the amount of risk being assumed by the company is to compare the premiums received on the various contracts using the amounts reported on the form_990 returns the taxpayer assumed risks as follows direct written premiums quota share reinsurance assumed other reinsurance assumed direct written premiums quota share reinsurance assumed other reinsurance assumed department of the treasury-internal revenue service catalog number 20810w form 886-a publish no irs gov page of 20xx o total total dollar_figure dollar_figure dollar_figure dollar_figure schedule number or exhibit form 86-a ‘ren 14s explanations of items name of taxpayer tax identification_number year period ended 20xx 20xx 20xx 20xx 20xx direct written premiums quota share reinsurance assumed other reinsurance assumed total 20xx direct written premiums other reinsurance assumed pooled reinsurance assumed total dollar_figure dollar_figure dollar_figure dollar_figure o o q under this method the service concluded that the taxpayer's the primary and predominant activity conducted is assuming risk under the direct written contracts with the affiliated business interests because the activity accounted for more than percent of the business and premiums during the years under audit taxpayer’s position on page paragraph the cpa stated that in reaching its incorrect conclusion in the preliminary report the service appears to ignore revrul_2001_31 in which the service conceded that it would no longer assert the economic family theory due to its rejection by the courts government’s response the current service position is expressed in ruling revenue r b date which provides irs issued guidance emphasizing that the requirement of risk_distribution must be met the ruling demonstrated that this risk_distribution requirement cannot be satisfied if the issuer of the contract enters into such a contract with only one policyholder if the contract fails to constitute insurance then the premiums_paid are not deductible business_expenses under code sec_162 and the issuing company is not an for federal tax purposes revrul_2005_40 cited several court decisions that have recognized that risk_distribution necessarily entails a pooling of premiums so that a potential insured is not in significant part paying for its own risks insureds does not constitute risk_distribution because of the very high likelihood of the insured in this case the large concentration of insurance risks in three form 886-a catalog number 20810w page of publish no irs gov department of the treasury-internal revenue service schedule number or exhibit form 886-a explanations of items rev date name of taxpayer tax identification_number year period ended 20xkx 20xx 20xx 20xx paying for any of its claims with its own premiums such an arrangement is not insurance but a form of self-insurance however when the arrangements between the companies do constitute insurance for federal_income_tax purposes and assuming these arrangements represented more than percent of the insuring company's business the company will be an insurance_company within the meaning of sec_816 and sec_831 and the premium payments may be deductible under code sec_162 assuming the requirements for deduction are otherwise satisfied taxpayer’s position in paragraph on page the cpa stated that service’s current position is directly contrary to the position it has taken in hundreds of prior sec_501 tax-exempt determination letters that it has issued these favorable determination letters were issued to taxpayers on substantially_similar or less favorable facts to those of intervening change in law to account for the service’s disparate tax treatment between and such similarly situated taxpayers there has been no government’s position each taxpayer stands alone the audit of the activities and books_and_records of and the outcome of such audit stands alone the issues raised by the service with respect to the audit of are based on available facts taxpayer’s position in the last page paragraph the cpa stated that an described in sec_501 during all of the years under review as made a valid election under sec_953 to be treated as a domestic_corporation the service's conclusion that is a controlled_foreign_corporation is incorrect qualified for tax-exempt status as government’s response according to the form_1024 application_for recognition of tax-exempt status administrative file the taxpayer filed its sec_953 election with the february 20xx office of the service on irs records reveal that the sec_953 election was not approved by the service because the taxpayer did not submit proof of sec_501 tax-exempt status the taxpayer could not provide proof of sec_501 tax-exempt status because it did not complete the form_1024 application process the taxpayer withdrew its form_1024 application on september 20xx after its counsel anticipated that the service would issue a final adverse_ruling letter denying sec_501 exemption form 886-a catalog number 20810w - page of publish no irs gov department of the treasury-internal revenue service schedule number or exhibit form 886-a explanations of items rev date name of taxpayer tax identification_number year period ended 20xx 20xx 20xx 20xx it meets certain requirements one such requirement is that the foreign sec_953 allows foreign_insurance_company to elect to be treated as a domestic company for tax purposes if company must be a company that would qualify as an insurance_company under part or ii of subchapter_l for the taxable_year if since the service determined that the taxpayer is not an insurance_company within the meaning of subchapter_l of the code for the year under audit it fails to meet the requirements for the election under sec_953 to be treated as a domestic_corporation it were a domestic_corporation see sec_953 in addition because the taxpayer does not meet the requirements to make the sec_953 election and thus is not a domestic_corporation the taxpayer should be treated as a controlled_foreign_corporation and the provisions of subpart_f of the internal_revenue_code sections should apply conclusion because you do not qualify as an insurance_company for federal_income_tax purposes you fail to meet the requirements of sec_501 of the code thus you do not qualify for recognition of exemption under sec_501 of the code as an organization described in sec_501 of the internal_revenue_code since the sec_953 election filed by has not been approved by the irs and the requirements for sec_953 elections were not meet the taxpayer should be treated as a controlled_foreign_corporation and the subpart_f provisions should apply deposit of direct written premiums 20xx date of deposit total deposit premium sec_3 20xx 20xx 20xx 20xx 20xx 20xx - form 886-a catalog number 20810w page of publish no irs gov department of the treasury-internal revenue service schedule number or exhibit form 886-a explanations of items rev date name of taxpayer tax identification_number year period ended 20xx 20xx 20xkx 20xx 20xx 20xx 20xx 20xx 20xx 20xx 20xx totals - - - - - - - dollar_figure dollar_figure dollar_figure less return of premiums 20xx 20xx 20xx adjusted direct written premiums for 20xx deposit of direct written premiums 20xx date of deposit total deposit center for pain mgmt _ billing pain mgmt mgmt pain mgmt asc premiums interest on notes rec 20xx 20xx 20xx 20xx 20xx 20xx - - - - - - - - - - - - - - - - - ez - form 886-a catalog number 20810w - page of publish no irs gov department of the treasury-internal revenue service schedule number or exhibit form 886-a rev date name of taxpayer explanations of items tax identification_number year period ended 20xx 20xx 20xx 20xx 20xx 20xx 20xx 20xx 20xx 20xx 20xx 20xx 20xx 20xx - - - - - - - - - - - - - - - - - - - - - - 20xx 20xx 20xx 20xx 20xx 20xx 20xx 20xx catalog number 20810w form 886-a publish no irs gov 20xx 20xx 20xx page of totals - - - - - - department of the treasury-internal revenue service ie -