internal_revenue_service appeals_office release number release date date december uil code org address certified mail dear department of the treasury employer_identification_number person to contact employee id number tel fax tax period s ended 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 code sec_501 for the tax periods listed above the final adverse determination of your exempt status was made for the following reason s taxpayer is not an insurance_company exempt from tax pursuant to code sec_501 as of 20xx 20xx and 20xx please show your employer_identification_number on all returns you file and in all correspondence with internal_revenue_service you are required to file federal_income_tax returns on forms for the tax periods stated in the heading of this letter and for all tax years thereafter file your return with the appropriate internal_revenue_service center per the instructions of the return 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 have any questions about this letter please contact the person whose name and telephone number are shown in the heading of this letter enclosure publication appeals team manager sincerely yours cy tax_exempt_and_government_entities_division org address department of the treasury internal_revenue_service date january taxpayer_identification_number form 990-ez tax period s ended 20xx 20xx 20xx person to contact id number dear contact numbers telephone fax 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 irs collection process 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 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 taxpayer_advocate_service 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 if you write please provide a number shown in the heading of this letter telephone number and the most convenient time to call if we need to contact you thank you for your cooperation sincerely director eo examinations enclosures publication publication form 6018-a report of examination envelope 886-a form rev darwary name of taxpayer explanations of items tax identification_number schedule number or exhibit org year period ended 20xx 20xx 20xx issues whether the contracts executed by org constitute contracts of insurance whether the arrangement entered into by org involves the requisite element of risk_distribution whether more than half of the business of org during each of the taxable years under consideration is the issuing of insurance or annuity_contracts or the reinsuring of risks underwritten by insurance_companies if org is not an insurance_company does it qualify for treatment as a tax-exempt_entity 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 facts org hereinafter taxpayer’ was formed and incorporated in country territory 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_company the taxpayer is authorized to issue common shares with a dollar_figure par_value and actually issued shares in consideration of dollar_figure capital_contribution from its sole shareholder the taxpayer is wholly owned by co-1 a state limited_liability_company co-1 is not engaged in any business activity and does not file federal_income_tax returns co-1 is co- equally owned and controlled by owner and co-owner both individuals are united_states citizen and residents of the state of state the tege examine agent obtained a copy of org’s form_1024 application administrative file from the exempt_organizations records unit in city on february 20xx the administrative file included a copy of the form_1024 application articles of incorporation the sec_953 election statement a copy of the insurance licenses for 20xx and 20xx regulatory filings and responses of insurance regulators insurance underwriting diagrams organizational owner chart supplemental information for the form_1024 financial forecasts for years 20xx through 20xx forms of credit reinsurance agreements entered into by the company and a copy of the 20xx insurance policies issued by the company other documents were received from cpa cpa in response to information document requests issued by the examining agent during the audit process 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 department of the treasury-internal revenue service form 886-a catalog number 20810w page of 42____ publish no irs gov 886-a schedule number or exhibit form eh wan ais explanations of items tax identification_number name of taxpayer org year period ended 20xx 20xx 20xx directors owner and co-owner president treasurer and assistant secretary of org co-owner serves as vice president secretary and assistant treasurer of the company owner also serves as chief_executive_officer ceo owner and co-owner are also equally co-owners of co-2 located in city state the company is engaged in commercial machinery repair maintenance service owner and co- owner also own co-3 and co-4 the exact nature of the business conducted by these entities is unknown these business interests are collectively referred to as affiliated business interests according org’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 a captive_insurance_company offers the best_method for satisfying its needs org will be 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 owner president signed an sec_953 election statement on february 20xx it appears that the election statement was filed with the irs state office on the same day on september 20xx the company filed form_1024 application_for recognition of exemption under sec_501 seeking exemption as a small insurance_company under sec_501 of the internal_revenue_code the application was received by tege in city on september 20xx the application revealed that 20xx was the initial tax_year of the company as of the filing of the form_1024 application the taxpayer had filed form_990 for the tax_year ended december 20xx with the ogden service_center owner president signed the application on september 20xx a form_2848 power_of_attorney accompanied the application authorizing attorney-1 attorney and attorney-2 attorney to represent the company during the application process the attorneys worked for a law firm in the application revealed that the taxpayer employed co-5 to serve as its resident insurance manager in country territory the taxpayer agreed to pay compensation of less than dollar_figure annually the form_1024 application was referred to rulings and agreements in washington d c on october 20xx for consideration and ruling the application was assigned to a tax law specialist on or around november 20xx no action was taken on the application until july 20xx on july 20xx the tax law specialist mailed a letter to the company’s domestic address at address suite city state zip code to request additional information about the form 886-a catalog number 20810w page of 42___ publish no irs gov department of the treasury-internal revenue service schedule number or exhibit form 886-a rev date explanations of items tax identification_number name of taxpayer org year period ended -42 20xx 20xx 20xx operations attorney submitted a until september 20xx the taxpayer's response to the letter was due by august 20xx attorney-2 letter dated august 20xx requesting an extension of time to respond instead of responding to the additional information request of the tax law specialist the company’s president owner submitted a letter on september 20xx to request that the form_1024 application be withdrawn from further consideration and ruling on september 20xx the tax law specialist closed the application file and issued a letter informing the company that their request to withdraw the application was accepted and no further action would be taken on the application 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 february 20xx the te_ge examining agent requested the effective date of state office on february 20xx the irs the sec_953 election from the irs state office informed the examining agent that the service did not have record that - the sec_953 election was approved the taxpayer filed a form 990-ez return for its initial tax_year that consisted of the period december 20xx through december 20xx the company also filed form_990 returns for the 20xx and 20xx calendar years the taxpayer operated primarily to provide property and casualty insurance coverage to co- co-3 and co-4 hereinafter called affiliated businesses which are owned and controlled by owner and co-owner officers and beneficial owners of org the financial services commission country issued a class ‘b general insurance license to the taxpayer effective december 20xx in 20xx the taxpayer wrote thirteen direct-written insurance contracts to co-2 titled special risk - loss of services insurance_policy special risk - product recall insurance_policy special product - weather related business interruption insurance_policy special risk - regulatory changes insurance_policy special risk - tax_liability insurance_policy special risk - punitive wrap liability insurance_policy excess pollution insurance_policy special risk - loss of major customer insurance_policy excess intellectual_property package policy special risk - expense reimbursement insurance_policy excess employment practices liability insurance_policy excess directors officers liability insurance_policy and excess cyber risk each of the above-named policies is described in detail below _ special risk - loss of services insurance_policy provides for the indemnification of the affiliated businesses for an involuntary loss of services of a key_employee owner for form 886-a catalog number 20810w page of 42____ publish no irs gov department of the treasury-internal revenue service 886-a schedule number or exhibit form sec alararary explanations of items name of taxpayer tax identification_number org sickness disability death loss of license termination of employment resignation retirement or any other occurrence that deprives the affiliated businesses from the receipt in a material and substantial way of his services year period ended 20xx 20xx 20xx special risk - product recall insurance_policy provides for the indemnification of the affiliated businesses for expenses involved in the recall of all products manufactured and or sold by the affiliated businesses during 20xx special risk - weather related business interruption insurance_policy provides for the indemnification of the affiliated businesses for any business interruption loss of up to months suffered as a result of any weather event such as significant flooding catastrophic snow hail freezing rain tornados and tsunamis that has an adverse impact on the normal on-going business operations special risk - regulatory changes insurance_policy covers actual compliance expenses and business interruptions suffered as a result of any regulatory change having an adverse impact on the normal on-going business operations of the affiliated businesses the policy does not cover adverse regulatory changes resulting from substantial noncompliance with regulations or guidelines or those changes initiated in direct response to negligent acts omissions or errors by the affiliated businesses special risk - tax_liability insurance_policy provides the affiliated businesses with indemnification up to of the amount of additional tax_liability each may incur on its 20xx federal_income_tax return no coverage is provided for additions to tax civil penalties or criminal penalties for delinquent returns or criminal or fraudulent acts special risk - punitive wrap liability insurance_policy provides that org will pay claims filed by the affiliated businesses resulting from the failure of an insurer to cover punitive or exemplary damages judgments or awards related to the other policies solely due to the enforcement of any law or judicial_ruling that precludes the insuring of such damages and that but for such law or judicial_ruling would otherwise be covered excess pollution liability insurance_policy provides for the indemnification of the affiliated businesses against clean up cost and diminution of property value due to any pre-existing and new on-site pollution and environmental contamination special risk - loss of major customer insurance_policy provides for the indemnification of the affiliated businesses for any business interruption loss of up to months suffered as a result of losing the services of any major customer a major customer is defined as any customer who represents of more of annual sales for the six months preceding the loss department of the treasury-internal revenue service form 886-a catalog number 20810w page of 42____ publish no irs gov schedule number or exhibit 886-a form rev janusry explanations of items name of taxpayer tax identification_number org year period ended 20xx 20xx 20xx excess intellectual_property package policy provides indemnification subject_to certain limitations to the affiliated businesses for all damages legally obligated to pay for litigation expenses mitigation expenses investigation_expenses costs to replace restore or re-create intellectual_property additional damages and rewards resulting from wrongful acts committed during the policy period wrongful acts include infringement of copyright plagiarism invasion or interference of right of privacy or publicity libel slander piracy or unfair competition breach of contract patent infringement and malicious prosecution with regard to intellectual_property special risk - expense reimbursement insurance_policy covers public relations expenses to mitigate adverse publicity to the affiliated businesses under certain circumstances including actual or imminent incidents where the insureds potential liability amount is in excess of dollar_figure product recalls layoffs and labor disputes government or regulatory litigation bankruptcy or other major financial crisis loss of intellectual_property rights unsolicited takeover bids terrorism or any other adverse incident expected to reduce the insureds annual gross revenue by at least the policy also covers all expenses for the affiliated businesses defenses to actual or alleged civil liability excess employment practices liability insurance_policy provides for the indemnification of the affiliated businesses against all costs and expenses_incurred as a result of claims filed by employees for wrongful termination dismissal discharge sexual harassment unlawful employment discrimination and employment related invasion of privacy and defamation excess directors officer liability insurance_policy provides indemnification subject_to certain limitations to the affiliated businesses for their indemnification of its officers and directors for wrongful acts including any error misstatement misleading statement act omission neglect or breach of duty committed attempted or allegedly committed or attempted by an officer or director of the affiliated businesses the policy also covers similar acts in relation to mergers and acquisitions moreover the policy includes liability for pollution the policy also provides direct and executive liability coverage for similar acts to the affiliated businesses officers and directors excess cyber risk insurance_policy provides indemnification to the affiliated businesses against claims resulting from content liability and interruption of business due to cyber crimes _ such as corruption of computer systems dues to viruses and other malicious codes with respect of each of the above referenced property and casualty contracts the taxpayer and co-6 co-6 entered into an agreement titled joint underwriting stop loss endorsement the taxpayer and co-6 are separate independent companies and are not owned and controlled by related parties nor is co-6 related to shareholders directors or officers of the taxpayer under the terms of the agreement the taxpayer is responsible for payment of claims up to certain specified thresholds if the specified thresholds are met then if the specified limits co-6 becomes liable for payment of claims up to certain specified limits form 886-a catalog number 20810w page of 42____ publish no irs gov department of the treasury-internal revenue service schedule number or exhibit explanations of items tax identification_number form 886-a rev date name of taxpayer org year period ended 20xx 20xx 20xx it also for co-6’s payment of claims are exceeded then the taxpayer again becomes liable appears that for each of the direct-written contracts the taxpayer received of the total premiums and co-6 received of the total premiums page paragraph of the agreement reads as follows 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 therefore under the terms of the joint underwriting stop loss endorsement agreement the affiliated businesses were required to pay of total premiums of dollar_figure for the thirteen direct written policies and for the stop loss endorsement of the total premium the affiliated businesses in addition the affiliated businesses paid dollar_figure directly to the taxpayer as lead insurer paid dollar_figure as a reinsurance_premium directly to co-6 as the stop loss insurer based on the review of the contracts the premiums_paid by the named insureds under the terms of the 20xx contracts was as follows contract sec_1 special risk-loss of service sec_2 special risk-product recall special risk-weather related bus interruption regulatory change sec_5 special risk tax_liability special risk punitive wrap liability excess pollution liability special risk-loss of major customer excess intellectual_property special risk-expense reimbursement excess employment practices liability excess directors officers liability excess cyber risk totals total premium dollar_figure _ dollar_figure portion of premium to taxpayer dollar_figure dollar_figure the taxpayer also entered into two types of reinsurance arrangements the first arrangement is referred to as a reinsurance risk pooling program 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 co-6 each pool participant had one or more affiliated operating entities for which it underwrote insurance coverage generally casualty type coverage such as credit life and credit disability co-6 insured a portion of the publish no irs gov department of the treasury-internal revenue service form 886-a catalog number 20810w page of 42___ 886-a form soe larume abe explanations of items schedule number or exhibit name of taxpayer tax identification_number org year period ended 20xx 20xx 20xx direct insurance underwritten by the pool participants using a so-called stop loss endorsement co-6 participated in over insurance policies with more than insureds co-6 blended together its direct written insurance and then reinsured the entire book on a quota share basis with each of the pool participants according to the terms of the 20xx quota share reinsurance policy executed with co-6 the taxpayer was one of companies listed as reinsurer as reinsurer the taxpayer was to retained of its quota share retained premiums from co-6 in exchange for the assumption of of the risk_pool comprised of the stop loss coverages issued during the policy period by co-6 insurance_company to all stop loss endorsement policyholders co-6 paid total reinsurance premiums of dollar_figure to reinsurers of this total premium the taxpayer received a quota share reinsurance_premium equal to or dollar_figure of which dollar_figure is the portion of the premium retained by taxpayer as a quota share retained premium until the final accounting and settlement of the risk_pool was completed the final accounting and settlement generally occur sec_180 days following the expiration date shown in the policy declaration the quota share retained premium was calculated pincite of the quota share reinsurance policy premium of dollar_figure the risk_pool insured by co-6 and reinsured by the pool participants included the thirteen direct written policies written and sold by the taxpayer to the affiliated business interests according to the general ledger the taxpayer reported receiving a reinsurance_premium of dollar_figure from co-6 in 20xx under the terms of the second reinsurance arrangement which is referred to as the credit coinsurance reinsurance program the taxpayer assumed reinsurance contracts from co-6 the taxpayer reinsured a quota share of the risks from vehicle service contracts reinsured by co-6 the vehicle service contracts were initially written by co-7 company in 20xx assumed by co-8 then by co-9 from co-8 and finally assumed by co-6 from co-9 the taxpayer received a pro_rata share of the earned premiums received by co-6 the taxpayer was paid a reinsurance_premium of dollar_figure from co-6 in 20xx for the tax_year ended december 20xx the taxpayer reported gross_receipts and total revenue of dollar_figure total revenue was 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 investment_income gain of sale of assets other income total revenue -0- -0- -0- -0- dollar_figure form 886-a catalog number 20810w page of 42____ publish no irs gov department of the treasury-internal revenue service schedule number or exhibit form 886-a rev date explanations of items tax identification_number name of taxpayer year period ended 20xx 20xx 20xx aie bank statement for december 20xx with bank reflected the checking account three deposits totaling dollar_figure the statement reflected a deposit of dollar_figure on december 20xx which represented the payment of insurance premiums received from the affiliated businesses from the thirteen direct written insurance policies another deposit of dollar_figure was made on december 20xx which represented the initial contribution of capital made by co-1 the sole shareholder of the taxpayer the only other deposit made during 20xx was interest_income credited to the account on december 20xx in the amount of dollar_figure as of december 20xx the taxpayer’s assets totaled dollar_figure which consisted primarily of cash in its checking account of dollar_figure and reinsurance premiums receivable of dollar_figure 20xx and 20xx tax years during the tax periods ending december 20xx and december 20xx the taxpayer wrote contracts insuring risks of the affiliated businesses which are owned and controlled by owner and co-owner officers and beneficial owners of org the taxpayer insured risks for the same contracts in 20xx and 20xx the contracts in effect for both years are as follows excess directors officers liability provides indemnification subject_to certain limitations to the affiliated businesses for their indemnification of its officers and directors for wrongful acts including any error misstatement misleading statement allegedly committed or attempted by an officer or director of the affiliated businesses the policy also covers similar acts in relation to mergers and acquisitions moreover the policy act omission neglect or breach of duty committed attempted or includes liability for pollution the policy also provides direct and executive liability coverage for similar acts to the affiliated businesses officers and directors special risk - loss of major customer provides for the indemnification of the affiliated businesses for any business interruption loss of up to months suffered as a result of losing the services of any major customer a major customer is defined as any customer who represents of more of annual sales for the six months preceding the loss special risk - expense reimbursement covers public relations expenses to mitigate adverse publicity to the affiliated businesses under certain circumstances including actual or imminent incidents where the insureds potential liability amount is in excess of dollar_figure product recalls layoffs and labor disputes government or regulatory litigation bankruptcy or other major financial crisis loss of intellectual_property rights unsolicited takeover bids terrorism or any other adverse incident expected to reduce the insureds annual gross revenue by at least the policy also covers all expenses for the affiliated businesses defenses to actual or alleged civil liability department of the treasury-internal revenue service form 886-a catalog number 20810w page of 42____ publish no irs gov year period ended 20xx 20xx 20xx 886-a schedule number or exhibit form seecie dasonp explanations of items name of taxpayer tax identification_number org expense reimbursement - legal expense covers defense expenses where the company has no underlying insurer or the company has exhausted all defense expenses covered under their primary insurance_policy lost of work time resulting from responding to discovery requests and travel_expenses to meetings dispositions and trials costs of hiring independent counsel in addition to that provided by the primary liability insurer in order to ensure that the interests of the company are met and to provide additional assistance in the litigation and expert witness fees and travel_expenses special risk - loss of services provides for the indemnification of the affiliated businesses for an involuntary loss of services of a key_employee owner for sickness disability death loss of license termination of employment resignation retirement or any other occurrence that deprives the affiliated businesses from the receipt in a material and substantial way of his services excess pollution liability provides for the indemnification of the affiliated businesses against clean up cost and diminution of property value due to any pre-existing and new on-site pollution and environmental contamination special risk - tax_liability provides the affiliated businesses with indemnification up to _ of the amount of additional tax_liability each may incur on its 20xx federal_income_tax return no coverage is provided for additions to tax civil penalties or criminal penalties for delinquent returns or criminal or fraudulent acts excess intellectual_property package provides indemnification subject_to certain limitations to the affiliated businesses for all damages legally obligated to pay for litigation expenses mitigation expenses investigation_expenses costs to replace restore or re-create intellectual_property additional damages and rewards resulting from wrongful acts committed during the policy period wrongful acts include infringement of copyright plagiarism invasion or interference of right of privacy or publicity libel slander piracy or unfair competition breach of contract patent infringement and malicious prosecution with regard to intellectual_property special risk - regulatory change covers actual compliance expenses and business interruptions suffered as a result of any regulatory change having an adverse impact on the normal on-going business operations of the affiliated businesses the policy does not cover adverse regulatory changes resulting from substantial noncompliance with regulations or guidelines or those changes initiated in direct response to negligent acts omissions or errors by the affiliated businesses special risk - punitive wrap provides that org will pay claims filed by the affiliated businesses resulting from the failure of an insurer to cover punitive or exemplary damages judgments or awards related to the other policies solely due to the enforcement of any law publish no irs gov department of the treasury-internal revenue service form 886-a catalog number 20810w page of 42____ schedule number or exhibit 886-a form rev date name of taxpayer explanations of items tax identification_number org or judicial_ruling that precludes the insuring of such damages and that but for such law or judicial_ruling would otherwise be covered year period ended 1120xx 1120xx 20kx special risk - product recall provides for the indemnification of the affiliated businesses for expenses involved in the recall of all products manufactured and or sold by the affiliated businesses during 20xx and 20xx with respect of each of the above referenced property and casualty contracts the taxpayer and co-6 co-6 entered into an agreement titled joint underwriting stop loss endorsement in 20xx and 20xx the taxpayer and co-6 are separate independent companies and are not owned and controlled by related parties nor is co-6 related to shareholders directors or officers of the taxpayer under the terms of the agreement the taxpayer is responsible for payment of claims up to certain specified thresholds if the specified thresholds are met then co-6 becomes liable for payment of claims up to certain if the specified limits for co-6’s payment of claims are exceeded then the specified limits taxpayer again becomes liable in 20xx the taxpayer assumed of the risk and received of the direct written premiums co-6 received of the total premiums in 20xx the taxpayer assumed of the risk and received of the direct written premiums co-6 received of the direct written premiums in 20xx the 20xx and 20xx joint underwriting agreements include the following terms the premium rate for this joint underwriting stop loss endorsement is for 20xx of the combined gross direct written premiums for the specified policies due directly from the insured s for 20xx and 20xx endorsement premiums of dollar_figure and dollar_figure out of the total premiums of dollar_figure and dollar_figure respectively is payable directly from the insured s to the stop loss insurer therefore under the terms of the joint underwriting stop loss endorsement agreement the affiliated businesses were required to pay of total premiums of dollar_figure for the eleven direct written policies written in 20xx and total premiums of dollar_figure for the same eleven policies renewed for 20xx of the total premiums the affiliated businesses paid dollar_figure in 20xx and dollar_figure in 20xx directly to the taxpayer as lead insurer the affiliated businesses also paid dollar_figure and dollar_figure in 20xx and 20xx as reinsurance premiums directly to co-6 as the stop loss insurer based on the review of the contracts the premiums_paid by the named insureds under the terms of the 20xx contracts was as follows contract sec_1 excess directors officers liability special risk-loss of major customer special risk-expense reimbursement total premium dollar_figure dollar_figure portion of premium to taxpayer ww catalog number 20810w page of 42___ publish no irs gov department of the treasury-internal revenue form 886-a service schedule number or exhibit explanations of items tax identification_number 886-a form cing canker name of taxpayer org year period ended 20xx 20xx 20xx expense reimbursement-legal expense sec_5 special risk-loss of services excess pollution liability special risk-tax liability excess intellectual_property special risk-regulatory changes special risk-punitive wrap special risk-product recall totals dollar_figure __0 _0 based on the review of the contracts the premiums_paid by the named insureds under the terms of the 20xx contracts was as follows total premium dollar_figure portion of premium to taxpayer f contract sec_1 excess directors officers liability special risk-loss of major customer special risk-expense reimbursement expense reimbursement-legal expense sec_5 special risk-loss of services excess pollution liability special risk-tax liability excess intellectual_property special risk-regulatory changes special risk-punitive wrap special risk-product recall totals dollar_figure dollar_figure a0 dollar_figure the taxpayer also entered into two types of reinsurance arrangements in 20xx and 20xx the first arrangement is referred to as a reinsurance risk pooling program also called co- 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 co-6 each pool participant had one or more affiliated operating entities for which it underwrites insurance coverage generally casualty type coverage such as credit life and credit co-6 insured a portion of the direct insurance underwritten by the pool participants disability using a so-called stop loss endorsement co-6 participated in over insurance policies with co-6 blended together its direct written insurance and then reinsures more than insureds the entire book on a quota share basis with each of the pool participants in 20xx the taxpayer was one of reinsurers participating in the risk_pool the taxpayer as reinsurer retained of a quota share premium from co-6 in exchange for the assumption of of the risk_pool comprised of the stop loss coverages issued during the policy period by co-6 catalog number 20810w page 0f42___ publish no irs gov department of the treasury-internal revenue form 886-a service schedule number or exhibit form 886-a explanations of items rev date tax identification_number year period ended 20xx 20xx 20xx name of taxpayer org insurance_company to all stop loss endorsement policyholders co-6 paid total reinsurance premiums of dollar_figure to reinsurers of this total premium the taxpayer received a quota share reinsurance_premium equal to or dollar_figure of which dollar_figure is the portion of the premium retained by taxpayer as a quota share retained premium until the final accounting and settlement of the risk_pool was completed the quota share retained premium was calculated pincite of the quota share reinsurance policy premium of dollar_figure the risk_pool insured by co-6 and reinsured by the pool participants included the eleven direct written policies written and sold by the taxpayer to the affiliated business interests according to the general ledger the taxpayer reported receiving a reinsurance_premium of dollar_figure from co-6 in 20xx in 20xx the risk_pool consisted of reinsurers as reinsurer the taxpayer retained of a quota share premium from co-6 in exchange for the assumption of of the risk_pool comprised of the stop loss coverages issued during the policy period by co-6 insurance_company to all stop loss endorsement policyholders co-6 paid total reinsurance premiums of dollar_figure to reinsurers of this total premium the taxpayer received a quota share reinsurance_premium equal to or dollar_figure of which dollar_figure is the portion of the premium retained by taxpayer as a quota share retained premium until the final accounting and settlement of the risk_pool was completed the quota share retained premium was calculated pincite of the quota share reinsurance policy premium of dollar_figure the risk_pool insured by co-6 and reinsured by the pool participants included the eleven direct written policies written and sold by the taxpayer to the affiliated business interests according to the general ledger the taxpayer received reinsurance premiums of dollar_figure from co-6 in 20xx the second reinsurance arrangement is called credit coinsurance reinsurance program under the terms of the 20xx and 20xx contracts the taxpayer assumed reinsurance contracts from co-6 the taxpayer reinsured a and quota share of the risks respectively from vehicle service contracts reinsured by co-6 written by frome share of the earned premiums received by co-6 the taxpayer received a reinsurance_premium of dollar_figure in 20xx and dollar_figure in 20xx from co-6 ‘and finally assumeu vy co-6 from co-9 the taxpayer received a pro_rata the vehicle service contracts were initially in 20xx assumed by co-8 then by co-9 - for the tax years ended december 20xx the taxpayer reported gross_receipts and total - revenue of dollar_figure total revenue was derived primarily from premiums received from the direct written reinsurance risk pooling program and the credit coinsurance reinsurance program the taxpayer received total revenue as follows program revenue-service direct written premiums quota share reinsurance premiums credit coinsurance reinsurance premiums 20xx dollar_figure catalog number 20810w page of 42___ publish no irs gov department of the treasury-internal revenue form 886-a service schedule number or exhibit 886-a form edna name of taxpayer explanations of items tax identification_number org year period ended 20xx 20xx 20xx investment_income gain of sale of assets other income premium finance charge total revenue -0- dollar_figure -0- of the total premiums received by the taxpayer in20xx generated from the eleven direct written policies with the affiliated business interests co-2 co-3 and co-45- of the premiums are from the reinsurance risk pooling program and of the premiums from the credit coinsurance reinsurance program -- of the premiums were as of december 20xx the taxpayer's assets totaled dollar_figure which consisted primarily of cash in its checking account of dollar_figure and investment in publicly_traded_securities of dollar_figure for the tax years ended december 20xx the taxpayer reported gross_receipts of dollar_figure and total revenue of dollar_figure total revenue was derived primarily from premiums received from the direct written reinsurance risk pooling program and the credit coinsurance reinsurance program the taxpayer received total revenue as follows program revenue service direct written premiums quota share reinsurance premiums credit coinsurance reinsurance premiums investment_income gain of sale of assets other income premium finance charge total revenue 20xx ‘ dollar_figure of the total premiums received by the taxpayer in 20xx of the premiums were generated from the eleven direct written policies with the affiliated business interests co-2 co-3 and co-4 of the premiums are from the reinsurance risk pooling program and of the premiums from the credit coinsurance reinsurance program as of december 20xx the taxpayer’s assets totaled dollar_figure which consisted primarily of cash in its checking and investment accounts of dollar_figure and investment in publicly_traded_securities of dollar_figure ' actuarial studies were completed by co-11 co-12 co-13 and co-14 for pricing of coverages provided by org catalog number 20810w page of 42____ publish no irs gov department of the treasury-internal revenue form 886-a service 886-a schedule number or exhibit form ces lam asees explanations of items name of taxpayer tax identification_number org year period ended 20xx 20xx 20xx with respect to the direct contracts insured in 20xx 20xx and 20xx the taxpayer did not sale write or issue separate policies to co-2 co-3 and co-4 three parties as the insured the contracts also listed a single combined premium payment due to cover all three parties the three named insured did not pay separate premiums to the taxpayer in 20xx 20xx or 20xx premium payments were to be allocated between them nor did the parties have an agreement to show how the _ each contract listed all based on the analysis of premiums received during the years under audit two-thirds of the risks insured by the taxpayer was the risk from affiliated business interests law sec_501 of the internal_revenue_code provides insurance_companies as defined in sec_816 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_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 the 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 affg 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 page of 42____ publish no irs gov department of the treasury-internal revenue catalog number 20810w form 886-a service 886-a schedule number or exhibit form pone name of taxpayer explanations of items tax identification_number org year period ended 20xx 20xx 20xx 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 org 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 cir a true insurance agreement must remove the risk of loss from the insured party revrul_89_96 1989_2_cb_114 an insurance agreement or contract must involve the requisite risk shifting necessary for insurance 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_2002_89 2002_2_cb_984 it is not insurance where a parent company formed a subsidiary insurance_company and of the subsidiary’s earned premium was paid_by the parent company the rev_rul further held that such arrangement between a parent anda 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 insurance exchange publish no irs gov department of the treasury-internal revenue form 886-a service catalog number 20810w page of 42___ schedule number or exhibit form 886-a rev date explanations of items name of taxpayer tax identification_number org year period ended 20xx 20xx 20xx 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 r b 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 r b 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 - ingeneral -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 - 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 - publish no irs gov department of the treasury-internal revenue catalog number 20810w page of 42___ form 886-a service schedule number or exhibit form 886-a rev date name of taxpayer explanations of items tax identification_number org year period ended 20xx 20xx 20xx ingeneral -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 and 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 insurance_company exception -such term shall not include any exempt_insurance_income as defined in subsection e sec_953 insurance_income d election by foreign_insurance_company to be treated as domestic_corporation in general - if 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 taxable_year if it were a domestic_corporation 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 september 20xx seeking retroactive exemption under sec_501 back to december 20xx the date of incorporation the application was ultimately withdrawn by owner president on september 20xx the examining agent believes that the application was withdrawn by the taxpayer on the advice on its counsel attorney-3 attorney-1 and attorney-2 who are affiliated with the law firm in form 886-a service catalog number 20810w page of 42____ publish no irs gov department of the treasury-internal revenue year period ended 20xx 20xx 20xx 886-a form heat si nonig gh explanations of items schedule number or exhibit name of taxpayer tax identification_number org city state the 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 org based on the position taken by rulings and agreements on applications filed by other clients of the law firm the law firm represented many captive insurance_companies that filed form_1024 applications 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 adverse denial letters to these companies withdrew their form_1024 applications probably anticipating that their applications would also be denied tax-exempt status by eo rulings and agreements the remaining companies suddenly the examining agent believes that the withdrawals of the remaining applications including the application filed by the 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 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 ‘insurance’ nor a sic exclusive concept or definition that can be persuasively applied in insurance lawyering appleman on insurance sec_1 while it seems appropriate that any concept and meaning of insurance be sufficiently broad and flexible to catalog number 20810w page of 42___ publish no irs gov department of the treasury-internal revenue form 886-a service 886-a schedule number or exhibit form tek say ttinay explanations of items name of taxpayer tax identification_number org 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 year period ended 20xx 20kx 20xx not all contracts that transfer risk are insurance policies even where the primary purpose of the contract is to transfer risk for example a contract that protects against the failure to achieve 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 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 fundamental concepts risk pooling and risk_transfer further the valuation techniques in both 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 form 886-a service catalog number 20810w page of 42___ a happening that because it occurs only by chance or accident the parties could not reasonably have foreseen black's first restatement of contracts sec_291 cmt a american law law dictionary ed see also 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 publish no irs gov department of the treasury-internal revenue schedule number or exhibit form 886-a rev date explanations of items name of taxpayer tax identification_number org year period ended 1120xx 20xx 20xx 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 special risk - loss of services insurance_policy 20xx policies covers the involuntary loss of service 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 claims 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 special risk - product recall covers the mandatory or voluntary recall of all products manufactured or sold by the affiliated business interests in 20xx due to a known or specific defect defi iciency of dangerous condition not insurance department of the treasury-internal revenue catalog number 20810w page of 42____ publish no irs gov form 886-a service 886-a schedule number or exhibit form ac enagaee name of taxpayer explanations of items tax identification_number org year period ended 20xx 20xx 20kx the policy is not insurance in the commonly accepted sense there is no insurance risk but only investment or business risk special risk - weather related business interruption the policy covers loss of income from interruptions in business due to certain weather related events insurance special risk-regulatory changes insurance_policy covers actual compliance expenses and any business interruption loss 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 policy is not insurance in the commonly accepted sense there is no insurance risk but only investment or business risk 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 special risk-punitive wrap liability insurance_policy catalog number 20810w page of 42____ publish no irs gov department of the treasury-internal revenue form 886-a service schedule number or exhibit explanations of items tax identification_number a form rev date - name of taxpayer org year period ended 20xx 20xx 20xx 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 t 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 the schedule of covered policies lists the other direct written policies described in this part of this report not insurance the policy is not insurance in the commonly accepted sense there is no insurance risk but only investment or business risk excess pollution liability 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 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 form 886-a service_department of the treasury-internal revenue catalog number 20810w publish no irs gov page of 42____ 886-a form beta jahtiany explanations of items schedule number or exhibit name of taxpayer tax identification_number org year period ended 20xx 20xx 20xx special risk -- loss of major customer covers any business interruption suffered as a result of losing the service of a major customer s business interruption includes the impact of lost revenue and the extra expenses involved in finding a replacement customer s the policy will not cover the voluntary loss of a major customer where the insured initiates the termination of the agreement the loss of a major customer that insured did not attempt or intent to replace or the loss of a major customer due to insured’s substantial non-compliance with the terms and conditions of its contractual agreement with the customer not insurance the policy is not insurance in the commonly accepted sense there is no insurance risk but only business risk excess intellectual_property package policy insuring agreement covers damages defense expenses and compliance redesign expense for listed wrongful acts infringement of copyrights trademark etc plagiarism or unauthorized use of ideas characters plots etc invasion of privacy or publicity libel slander or product disparagement piracy or unfair competition misappropriation of advertising ideas etc breach of contract resulting from the alleged submission of material used by insured patent infringement malicious prosecution with regard to intellectual_property compliance redesign expense covers expense to recall and or redesign the insured’s intellectual_property to comply with a judgment or settlement the policy excludes any intentional act by a director officer_or_employee insuring agreement covers wrongful acts listed above committed by third parties against insured’s intellectual_property it pays for litigation expenses mitigation expense to mitigate the extent of the claim costs to replace restore or re-create the covered intellectual_property and finally additional damages to the insured’s business operations such as business interruption loss of clients or market share or public relations damage control efforts the policy excludes loss due to insured’s cyber presence not insurance insuring agreement and are not insurance in the commonly accepted sense there is no it is not clear what intellectual_property insurance risk but only investment or business risks the insured possesses special risk - expense reimbursement insurance_policy coverage form a deals with crisis management public relations expenses this covers all public relations expenses to mitigate the insured’s adverse publicity generated from an actual catalog number 20810w page of 42____ publish no irs gov department of the treasury-internal revenue form 886-a service 886-a schedule number or exhibit form rev janvaty name of taxpayer explanations of items tax identification_number org year period ended 1120xx 1120xx 20xx or imminent liability incident that could exceed dollar_figure product recall employee layoff or labor dispute government litigation financial crisis loss of intellectual_property rights unsolicited takeover bid security incident or any incident expected to reduce annual gross revenue by at least 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 coverage b may be insurance in the commonly accepted sense it is vague as to what liability contract underlies the need for defense expenses more information needed as to coverage b excess employment practices liability 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 to provide safe work environment violations listed herein against a non-employee there is 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 excess directors officers liability insurance_policy covers wrongful acts or directors and officers insurance excess cyber risk 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 publish no irs gov department of the treasury-internal revenue catalog number 20810w form 886-a service page of 42____ 886-a schedule number or exhibit form ane leruaeptes explanations of items name of taxpayer tax identification_number org infringement of intellectual_property and failure to prevent unauthorized access to use of tampering with or introduction of malicious code into data or systems year period ended 20kx 20kx 20kx 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 insuring agreement and is insurance insuring agreement is too vague and broad and not insurance in the commonly accepted sense there is no insurance risk but only business risk not insurance the policy is not insurance in the commonly accepted sense there is no insurance risk but only investment or business risk 20xx policie sec_1 loss of services insurance_policy same as 20xx not insurance special risk - product recall same as 20xx not insurance special risk-regulatory changes insurance_policy same as 20xx not insurance catalog number 20810w - page of 42___ publish no irs gov department of the treasury-internal revenue form 886-a service schedule number or exhibit form 886-a explanations of items rev date name of taxpayer tax identification_number org year period ended 20xx 20xx 20xx special risk- tax_liability same as 20xx not insurance special risk - punitive wrap same as 20xx not insurance excess pollution liability insurance_policy same as 20xx not insurance special risk - loss of major customer same as 20xx not insurance excess intellectual_property same as 20xx not insurance expense reimbursement insurance_policy this policy differs from the 20xx insurance_policy with the same title covers losses due to an actual or imminent liability incident product recall employee layoff or labor dispute 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 same as 20xx _ insurance expense reimbursement-legal expenses insurance_policy publish no irs gov department of the treasury-internal revenue catalog number 20810w form 886-a service page of 42___ year period ended 20xx 20xx 20xx schedule number or exhibit form 886-a rev date explanations of items name of taxpayer tax identification_number one new policy for 20xx policy covers litigation expenses from actual or alleged civil liability not insurance this is not insurance in the commonly accepted sense investment or business risk there is no insurance risk but only 20xx policies same direct written contracts were issued to the affiliated business interests in 20xx as in 20xx therefore only the excess directors officers liability contract was deemed to be a valid insurance_contract for 20xx co-10 other insurance policies co-6 participated in over insurance policies with more than insureds co-6 blended together its direct written insurance and then reinsured the entire book on a quota share basis with each of the pool participants taxpayer was one of reinsurers listed in the agreement for 20xx as reinsurer no j of co-6’s gross premiums of dollar_figure in exchange for the assumption comprised of the stop loss coverage issued to all of the stop loss endorsement policyholders in the 20xx reinsurance program taxpayer received _ of the risk_pool in 20xx co-6 participated in over insurance policies with more than insureds co-6 blended together its direct written insurance and then reinsured the entire book on a quota share basis with each of the pool participants taxpayer was one of reinsurers listed in the agreement for 20xx as reinsurer no taxpayer received of co-6’s gross premiums of dollar_figure in exchange for the assumption of of the risk_pool comprised of the stop loss coverage issued to all of the stop loss endorsement policyholders finally in 20xx co-6 participated in over insurance policies with more than insureds co-6 blended together its direct written insurance and then reinsured the entire book on a quota share basis with each of the pool participants taxpayer was one of reinsurers listed in the agreement for 20xx as reinsurer no taxpayer received of co-6's gross premiums of dollar_figure in exchange for the assumption of of the risk_pool comprised of the stop loss coverage issued to all of the stop loss endorsement policyholders catalog number 20810w - page of 42___ publish no irs gov department of the treasury-internal revenue form 886-a service 886-a schedule number or exhibit form rev january explanations of items name of taxpayer tax identification_number org 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 org therefore it is highly likely that the entire pool which is insured by co-6 and reinsured on a quota share basis with each of the pool participants is primarily comprised 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 however the direct written contracts insured by co-6 do include the year period ended 20xx 20xx 20xx credit coinsurance reinsurance program the policy reinsures risks on vehicle service contracts again we do not know what risks are being insured and reinsured 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 principles in the february 20xx response to idr for 20xx the cpa provided a copy of letters from co-13 co-11 and co-12 which was purpose to address the method used for pricing the direct written and reinsurance contracts for the taxable years under consideration however the service concluded that the letters did not address the method of pricing the specific direct written and reinsurance contracts that org was a party to during 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 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 publish no irs gov department of the treasury-internal revenue catalog number 20810w -- page of 42___ form 886-a service schedule number or exhibit form 886-a rev date name of taxpayer explanations of items tax identification_number org year period ended 20xx 20xx 20xx 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 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 fo 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 a 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 catalog number 20810w page of 42____ publish no irs gov department of the treasury-internal revenue form 886-a service 886-a form caavanennee name of taxpayer explanations of items tax identification_number schedule number or exhibit org year period ended 20xx 20xx 20xx 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 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 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 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 similarly in department of the treasury-internal revenue publish no irs gov page of 42___ catalog number 20810w form 886-a service year period ended 20xx 20kx 20xx 886-a schedule number or exhibit form ae ea toes name of taxpayer explanations of items tax identification_number org in the instance case the facts therein are analogous to the analysis under situation’ of revrul_2002_89 supra the liability coverage provided to the parent_corporation by its wholly 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 with respect to the contracts reviewed during the tax_year under audit the service concluded that the agreements between the taxpayer and the affiliated businesses co-2 co-3 and co-4 the insured did not constitute contracts of insurance because they lack the essential element of risk_distribution most of the risk insured by the taxpayer is under the direct written contracts with related entities all of total risk insured by the company approximately to of the risk is from the related entities the taxpayer did not write or issue separate in addition of the total premiums received during the years contracts to the affiliated insured under audit of the direct written premium and to of total premiums was paid_by a single entity co-2 even though the direct written contracts covers all three related insured there is no evidence that each of the related insured paid separate premiums to org for its coverage nor did the parties have an agreement showing the amount of premium allocable to each of insured even if related of affiliated insured did pay premiums separately to the taxpayer the fact pattern still would not create a pool large enough to adequately distribute the taxpayer's risk 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 in one insured does not constitute risk_distribution because of the very high likelihood of the insured 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 the service concluded that the contracts resulted in risk that was too heavily concentrated in the three related insured because the risk was heavily concentrated in the affiliated businesses it is highly probable that any losses paid_by the taxpayer are those of the affiliated in addition since the affiliated businesses businesses and not from an unrelated third party paid the majority of premiums received by the taxpayer during the year under audit the service concluded that losses_incurred by the affiliated businesses were paid from the premiums_paid to the taxpayer by the affiliated businesses in other words the arrangement between the taxpayer and the affiliated businesses represented a form of self-insurance and no court has held that self-insurance is insurance for federal tax purposes also 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 page of 42____ publish no irs gov department of the treasury-internal revenue catalog number 20810w form 886-a service year period ended 20xx 20xx 20xx schedule number or exhibit explanations of items tax identification_number form 886-a rev date name of taxpayer org assuming entity may account for the arrangement as an insurance_contract for purposes of subchapter_l of the internal_revenue_code furthermore it appears that the various risks insured are not homogeneous and thus must be separated from one another and analyzed separately as to whether there is risk_distribution as to that risk see revrul_2002_89 supra also see revrul_2005_40 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 company are with affiliated entities that are owned and controlled by owner and co-owner the beneficial owners of the taxpayer 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 based the service’s analysis of the contracts twelve of the fourteen 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 org for those twelve direct written contracts are not considered insurance premiums amounts received by taxpayer for two of the fourteen direct written contracts were deemed to be premiums because only for those contracts included an insurance risk during the taxable years under consideration org received amounts that the service deemed to be direct written and reinsurance premiums as follows contract 20xx special risk - weather related business interruption excess directors officers liability 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 contraet excess directors officers liability 20xx ba premium dollar_figure _ dollar_figure dollar_figure premium dollar_figure catalog number 20810w page of 42___ publish no irs gov department of the treasury-internal revenue form_886 -a service 886-a form iar eae ese explanations of items schedule number or exhibit tax identification_number year period ended 20xx 20xx 20xx name of taxpayer org amount deemed premiums from direct written contracts dollar_figure 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 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 oo dollar_figure dollar_figure premium dollar_figure og dollar_figure dollar_figure the amounts received by org 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 remaining contracts lacked the requisite insurance risk to constitute insurance because the contracts lacked fortuity and the risk at issue is akin to the timing and investment risks of revrul_89_96 the 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 co-2 to the tp would not qualify as an insurance premium in addition although we question whether the co-10 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 co-6 insurance_company were included as premium income for purposes of the gross_receipts computation shown even after given the taxpayer the benefit of the doubt the taxpayer still failed the above gross_receipts for the years under audit during the tax years under consideration the premium income received by taxpayer did not exceed limitation the amount deemed to be premiums for each taxable_year is not more than gross_receipts therefore we are revising our position on the gross_receipts_test as stated in although gross_receipts are less than the dollar_figure of its gross_receipts ef catalog number 20810w page of 42___ publish no irs gov department of the treasury-internal revenue form 886-a service schedule number or exhibit form 886-a name of taxpayer rev date explanations of items tax identification_number org our preliminary report issued to taxpayer on september 20xx based on further analysis of the contracts we concluded that the taxpayer did not meet the’ described in sec_501 and notice_2006_42 for any_tax year under audit gross_receipts_test year period ended 20xx 20xx 20xx 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 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 the administrative file for the original form_1024 application filed by org included a copy of however the irs has the sec_953 election filed by the company on february 20xx no record that the election was approved in the july 20xx response to information_document_request issued by the examining agent on april 20xx cpa stated that it is her understanding that the internal_revenue_service recently changed its internal procedures to postpone review of an sec_953 election until the form_1024 application was reviewed it appears that the service still has not completed processing the sec_953 election filed years ago org withdrew the initial form_1024 application on september 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 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 tax purposes if it meets certain requirements one such requirement is that the foreign 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 taxpayer filed a new form_1024 application with rulings and agreements in september 20xx catalog number 20810w _- page of 42___ publish no irs gov department of the treasury-internal revenue form 886-a service schedule number or exhibit form 886-a rev date name of taxpayer ane explanations of items tax identification_number year period ended 20xx 20xx 20xx 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 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 as insurance_income for purposes of sec_953 even though the cfc fails to qualify as an insurance_company 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 it will not meet the definition of a qualifying_insurance_company for purposes of sec_953 thus none of its insurance_income will be exempt_insurance_income a preliminary report form_5701 notice of proposed adjustments was mailed to the on september 20xx proposing denial of tax-exempt taxpayer's cpa 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 years subsequent to 20xx were not examined by tege the taxpayer would also fail to qualify an insurance_company for any future year if taxpayer operated in the same manner as that during the years audited catalog number 20810w page of 42____ publish no irs gov department of the treasury-internal revenue form 886-a service schedule number or exhibit 886-a form eo enten de explanations of items tax identification_number year period ended 20xx 20xx 20kx name of taxpayer org taxpayer’s position a response to the preliminary report was received from cpa cpa on november 20xx in the response the cpa summarized that the taxpayer disagreed with the service’s conclusion that the contracts issued by org lack adequate risk_distribution and that org's primary and predominant business is insurance org qualifies for sec_501 tax-exempt status and org is not a controlled_foreign_corporation the cpa argued the following points the service's incorrect conclusion is based solely upon its unsupported position that org’s insurance operations lacked the requisite risk_distribution incorrect conclusion that org’s insurance operations lacked the requisite risk_distribution the service ignored more than thirty years of well-established tax law as well as hundreds of prior favorable rulings issued by the service in reaching it sec_2 the taxpayer 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 cir where unrelated risks was determined to be sufficient to meet the risk_distribution requirement the service ignores the tax_court the taxpayer stated that the service conducted no meaningful examination of risk_distribution in its audit of org rather the service 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 the taxpayer cites amerco inc v commissioner no slip op cir date the taxpayer argues that the outside business principle and the decision in harper are recognized in the service's own foreign insurance excise_tax audit technique guide 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 the taxpayer argues risk_distribution can occur even with a single insured the taxpayer cited malone hyde v commissioner department of the treasury-internal revenue catalog number 20810w -- page of 42___ form 886-a service publish no irs gov year period ended 20xkx 20xx 20kx 886-a schedule number or exhibit form dee name of taxpayer explanations of items tax identification_number tes org rather than engage in a meaningful analysis of the number of independent risk exposures insured by org the service merely asserts that risk_distribution is lacking the service has recognized the principle of looking-through the insurance_policy to the actual risks insured in several revenue rulings see revrul_2009_26 revrul_92_93 and revrul_80_95 taxpayer 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 org there has been no intervening change in law to account for the service’s disparate tax treatment between org 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 taxpayer argues that it qualifies for tax-exempt status as an insurance_company described in sec_501 during all of the years under review taxpayer made a valid election under sec_953 to be treated as a domestic_corporation and the service’s conclusion that the taxpayer is a controlled_foreign_corporation is incorrect government’s response to taxpayer’s position after reviewing the response to the preliminary report received from november 20xx the service's initial position is unchanged org’s primary and predominant business in tax years 20xx 20xx and 20xx was not insurance because the contracts issued by the company lacked the requisite risk_distribution _ cpa on taxpayer's position in the initial paragraph of the november 20xx response to the agent's preliminary report the cpa stated that the audit conclusion reached by the service was solely based on an unsupported position that org’s insurance operations lacked the requisite risk_distribution government’s response the conclusion reached by the service was based on an examination of the direct written and reinsurance contracts executed by org and books_and_records for the 20xx 20xx and 20xx tax years based on the review of the contracts the service concluded that the primary activity of org was to assume risks of affiliated businesses owned and controlled by officers of org and beneficial owners of the affiliated businesses approximately of the risk assumed by org was that of the affiliated businesses org did not assume risk of or receive 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 catalog number 20810w page of 42____ publish no irs gov department of the treasury-internal revenue form 886-a service schedule number or exhibit form 886-a posceiko mile explanations of items tax identification_number name of taxpayer org unrelated insured for the law the large numbers to operate the pool consisted of a single policyholder and payer of direct written premiums thus org's primary and predominant activity is not insurance as described in subchapter_l of the internal_revenue_code year period ended 20xx 20xx 20xx taxpayer’s position on page of the taxpayer's position the cpa cites the 96_tc_45 to support the argument that org qualifies as an insurance_company the cpa sites 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 november 20xx response in its preliminary report the service merely states that due to percent of premiums being direct written premiums_paid by certain insureds that owned no interest in org there is a lack of adequate risk_distribution this 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 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 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 - was from unrelated or unaffiliated approximately of the risk assumed by org insured 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 catalog number 20810w _- page of 42___ publish no irs gov department of the treasury-internal revenue form 886-a service form 886-a schedule number or exhibit name of taxpayer tax identification_number org year period ended 20xx 20xx 20xx 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 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 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 in this case the large concentration of 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 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 insurance_company 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 risks in one insured does not constitute risk_distribution because of the very high likelihood of the insured paying for any of its claims with its own premiums such an arrangement is not insurance but a form of self-insurance 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 org rather the service 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 department of the treasury-internal revenue form 886-a service page of 42___ publish no irs gov catalog number 20810w schedule number or exhibit explanations of items tax identification_number year period ended 20kx 20xx 20kx form 886-a rev date name of taxpayer - government’s response in question of idr issued to the cpa on april 20xx an analysis of risk assumed by the taxpayer was presented by the examining agent to the cpa for comment under the terms of the contracts reviewed during the audit org assumed risk exposures as follows affiliated interests affiliate interests unrelated affiliate interests total risk assumed direct exposure pooled reinsurance exposure pooled reinsurance exposure _ in the july 20xx response to idr cpa cpa provided the following comments the percentages listed in your question are incorrect the percentages set forth in idr were apparently derived from simply adding together the company’s participation rates in various direct insurance and reinsurance contracts this method does not take into account relative value of the different contracts and is therefore invalid the proper method for determining the amount of risk being assumed by the company is to compare the premiums received on the various contracts the income statement included under tab of the initial idr response shows the following o dollar_figure dollar_figure total 20xx 20xx direct written premiums other reinsurance assumed pooled reinsurance assumed direct written premiums other reinsurance assumed pooled reinsurance assumed direct written premiums other reinsurance assumed pooled reinsurance assumed catalog number 20810w page of 42___ 20xx total dollar_figure o _ o dollar_figure dollar_figure o __ only the premiums analysis was included in the rar prepared by the examining agent form 886-a service_department of the treasury-internal revenue 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 ase total dollar_figure based on the cpa's own statement the proper way to determine the percentage of risk assumed by the taxpayer is to compare the premium income received under the contracts issued using 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 three years under audit taxpayer’s position on page paragraph the cpa stated that the service’s 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 substantially_similar or less favorable facts to those of org there has been no intervening change in law to account for the service’s disparate tax treatment between org and such similarly situated taxpayers accordingly the service has violated its own procedures and mandate to provide a uniform application of existing tax law see revrul_2012_9 section government’s response the service's current position on captive arrangements is expressed in revrul_2005_40 i r b date similar captive arrangements in the past many of the rulings were issued prior to the publishing of revrul_2005_40 and subsequent clarification of the revenue_ruling received from the office_of_chief_counsel although the service has issued favorable rulings to in addition the service is not precluded from proposing denial of sec_501 tax-exempt status to org simply because the service issued favorable ruling letters to other applicants in the past furthermore the service was not provided adequate opportunity to rule on the taxpayer's form_1024 application filed with rulings agreements in september 20xx because the taxpayer withdrew the application in september 20xx before a final_determination could be made by the service taxpayer’s position on page paragraph the cpa stated that org qualified for tax-exempt status as an insurance_company described in sec_501 during all of the years under review as org made a valid election under sec_953 to be treated as a domestic_corporation the service’s conclusion that org is a controlled_foreign_corporation is incorrect government’s response catalog number 20810w page of 42____ publish no irs gov department of the treasury-internal revenue form 886-a service schedule number or exhibit form 886-a oe deniearet00a explanations of items name of taxpayer tax identification_number org year period ended 20xx 20xx 20xx according to the form_1024 application_for recognition of tax-exempt status administrative file the taxpayer filed its sec_953 election with the plantation state office of the service on february 20xx irs records reveal that the sec_953 election was never 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 sec_953 allows foreign_insurance_company to elect to be treated as a domestic company for tax purposes if it meets certain requirements one such requirement is that the foreign company must be a company that would qualify as an insurance_company under part or ii 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 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 taxpayer did not qualify as an insurance_company for federal_income_tax purposes taxpayer failed to meet the requirements of sec_501 of the code thus taxpayer did not qualify for recognition of exemption under sec_501 of the code as an organization described in sec_501 of the internal_revenue_code for the 20xx 20xx and 20xx tax years since the sec_953 election filed by taxpayer was not been approved by the irs the taxpayer should be treated as a controlled_foreign_corporation and the subpart_f provisions should apply form 886-a service_department of the treasury-internal revenue catalog number 20810w publish no irs gov page of 42____