internal_revenue_service appeals_office release number release date date date org address certified mail dear department of the treasury employer_identification_number person to contact employee d number tel foy 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 c 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 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 please show your employer_identification_number on all returns you file and in all correspondence with internal_revenue_service 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 in a 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 sincerely yours appeals team manager enclosure publication department of the treasury internal_revenue_service date date taxpayer_identification_number form 990-ez tax period s ended 20xx 20xx 20xx person to contact id number contact numbers telephone fax tax exempt and government entities org address dear - during our examination of the returns indicated above we determined that your organization was not described in internal_revenue_code sec_501 for the tax periods listed above and therefore it does not qualify for exemption from federal_income_tax this letter is not a determination of your exempt status under sec_501 for any periods other than the tax periods listed above the attached report of examination form 886-a summarizes the facts the applicable law and the service's position regarding the examination of the tax periods listed above you have not agreed with our determination or signed a form 6018-a consent to proposed action accepting our determination of non-exempt status for the periods stated above you have not agreed to file the required income_tax returns you may appeal your case the enclosed publication the examination process and publication exempt_organizations appeal procedures for unagreed issues explain how to appeal an internal_revenue_service irs decision publication also includes information on your rights as a taxpayer and the irs collection process if you request a conference with appeals you mustsubmit 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 if you do not agree with 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 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 number shown in the heading of this letter telephone number and the most convenient time to call if we need to contact you if you write please provide a thank you for your cooperation sincerely acting director eo examinations enclosures publication publication form 6018-a report of examination envelope schedule number or exhibit form 886-a rev date explanations of items tax identification_number name of taxpayer org year period ended 20xx 20kx 20kx 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 taxpayer was formed and incorporated in country territory on november 20xx under the provisions of section of the companies act the taxpayer was formed to provide certain property and casualty insurance type services the taxpayer is formed as a foreign captive insurance taxpayer the taxpayer is authorized to issue common shares with a dollar_figure par_value the taxpayer actually issued shares in consideration of dollar_figure capital_contribution the taxpayer is wholly owned by parent co a state limited_liability_company located at address city state zip code parent co as the sole shareholder purchased shares of the taxpayer’s stock for dollar_figure on november 20xx parent co is owned by partner-1 partner-2 and partner-3 partner-1 and partner-2 are father and son both partners are u s citizens who reside in city state the tege examining agent obtained a copy of taxpayer's form_1024 application administrative file from rulings and agreements in washington d c on february 20xx the administrative file included a copy of the form_1024 application articles of incorporation the sec_953 election regulatory filings and responses of insurance regulators insurance underwriting diagrams organizational partner-1 chart supplemental information for the form_1024 financial information for 20xx and subsequent years forms of credit reinsurance agreements entered into by the taxpayer and a copy of the 20xx insurance policies issued by the taxpayer other documents were received from cpa cpa in response to information document requests issued by the examining agent to the cpa during the current audit according to the articles of incorporation the taxpayer is to be governed by a board_of directors composed of one to seven directors the board is actually composed of two form 886-a catalog number 20810w page of publish no irs gov department of the treasury-internal revenue service schedule number or exhibit form 886-a explanations of items rev date tax identification_number name of taxpayer org year period ended 20xx 20xx 20xx directors partner-1 and partner-2 partner-1 serves as chief_executive_officer ceo president treasurer and assistant secretary of org partner-2 serves as vice president secretary and assistant treasurer of the taxpayer partner-1 is also the majority partner-1 of co-1 the co-2 co-3 co-4 and co-5 partner-2 and indv-1 also own minority interest in some of these business interests called affiliated business interests according to the taxpayer’s business plan the affiliated business interests desired to insure certain of their property and casualty exposures and are unwilling or in some cases unable to do so through the conventional insurance marketplace the affiliated business interests looked at alternative methods of arranging such insurance coverage and have found that providing such coverage through 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 partner-1 president signed an sec_953 election statement on february 20xx it appears that the election statement was filed with the irs city state office on the same day on june 20xxx the taxpayer 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 revealed that 20xx was the initial short tax_year of the taxpayer taxpayer did not file any federal_income_tax or information returns prior to filing the form_1024 application partner-1 president signed the application on june 20xx a form_2848 power_of_attorney accompanied the application authorizing attorney-1 attorney attorney-2 attorney and attorney-3 attorney to represent the taxpayer during the application process the attorneys worked for law firm a law firm in city state the application revealed that the taxpayer hired co-6 to serve as its resident insurance manager in country territory the taxpayer agreed to pay compensation of less than dollar_figure annually on september 20xx the form_1024 application was referred to rulings and agreements in washington d c for consideration and ruling assigned to a tax law specialist for review the organization’s representative faxed a letter on september 20xx to rulings and agreements and to director exempt_organizations rulings agreements requesting that the form_1024 application be withdrawn from consideration and ruling by rulings agreements the letter was signed by partner-1 president on september 20xx apparently before the application was form 886-a catalog number 20810w publish no irs gov page of department of the treasury-internal revenue service schedule number or exhibit form 886-a explanations of items rev date name of taxpayer tax identification_number org year period ended 20xx 20xx 20xx on december 20xx rulings agreements mailed a zip code acknowledging receipt of the applicant's september 20xx letter and informing the applicant that no further action would be taken on the application and the matter was considered closed the applicant was also advised that the user_fee was not refundable and if required the letter issued by rulings agreements was signed by ' director exempt_organizations rulings agreements it sought another determination_letter in the future a new user_fee payment would be letter to org at address city state _ for 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 the sec_953 election from the irs city state office later that day the irs city state office informed the examining agent that the service does not have record that the sec_953 election was approved the taxpayer's initial tax_year consisted of the period november 20xx the date of incorporation through december 20xx the taxpayer filed form 990-ez for its initial short tax_year taxpayer also filed form_990 returns for the 20xx and 20xx tax years the financial services commission country issued a class ‘b general insurance license to the taxpayer effective december 20xx the taxpayer conducted limited business during the period of december 20xx through december 20xx during the years under audit the taxpayer operated primarily to provide property and casualty insurance coverage to co-1 and affiliated businesses which are primarily owned and controlled by partner-1 and partner- officers and beneficial partner-1s of org in 20xx the taxpayer wrote twelve direct-written contracts to co-1 and affiliated businesses as follows excess directors and officers employment practices liability special risk - expense reimbursement legal expense reimbursement special risk - cargo transit special risk - loss of service special risk - loss of major business to business relationship excess pollution liability special risk - product recall special risk - punitive wrap special risk - regulatory changes and special risk - tax_liability under the terms of each policy org was listed as the lead insurer and assumed of the risk co-8 as stop loss insurer assumed the remaining of the risk each policy listed co-1 the co-2 co-3 and co-4 located at address city state zip code as the named insureds page of publish no irs gov department of the treasury-internal revenue service form 886-a catalog number 20810w schedule number or exhibit form 886-a he senusret name of taxpayer explanations of items tax identification_number org year period ended 20xx 20xx 20xx supplemental information submitted by taxpayer with the form_1024 application revealed that each of the named insureds is primarily owned as follows cont co-2 co-3 partner-1 partner-2 indv-1 co-4 is wholly owned by the partner-2 irrevocable management_trust each of the direct written contracts issued by the taxpayer during the 20xx tax_year is described below directors officers liability co-2 has an uninsured directors and officers liability exposure which could be a serious issue if for example allegations of misrepresentation were made against the co-2 for a marketing effort the company has over employees in today’s litigious environment it is likely for a company the size of co-2 with a predominantly blue collar workforce to have several uninsured employment practices liability incidents and it is probable that one or more of those incidents will result in eeoc investigations and or loss catalog number 20810w form 886-a page of publish no irs gov ' other owners are co-4 the co-7 trust-1 and the co-2 employment practices liability covers claims made by any of co-2’s employees alleging employment related risk exposures the company is potentially at risk for employment practices liability for discrimination harassment wrongful termination or other similar inappropriate act jurisdictions actions related to civil rights allegations can come from third parties such as customers and independent contractors in some department of the treasury-internal revenue service schedule number or exhibit form 886-a rev date explanations of items tax identification_number year period ended 20xx 20xx 20xx name of taxpayer org expense reimbursement any claims that arise including claims associated with products liability or product recall would cause the company to have costs related to managing a public relations campaign to restore its customers’ faith uninsured legal expenses and litigation expense associated with disputes between the insured and its insurers related to claims also represent a risk to the company potentially catastrophic claims are often denied by conventional insurers on financial grounds a separate policy through the captive for litigation expense would be advisable legal expense reimbursement covers all litigation expenses_incurred by the insured resulting for insured’s actual 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 special risk cargotransit provides coverage for transit losses for all common carrier shipments over dollar_figure million will be shipped in 20xx without separate cargo coverage the trucking companies have low limitations on the loss or damage of property which is generally inadequate a separate cargo policy through the captive insurer is recommended to prevent financial loss from transportation risks loss of services with co-2 structured as a limited_partnership there are several partners whose services are critical to the operations of the business including partner-1 partner-2 indv-1 and partner-4 the company is also has a loss of services exposure associated with its three most productive salespersons emp-1 emp-2 and emp-3 should the company lose the services of any one of these key people it would not only suffer a business interruption loss while finding a suitable replacement but it may also incur significant legal expenses enforcing non-compete and confidentiality agreements loss of major business to business relationships co-2 is indemnified from any business interruption loss of up to twelve months suffered as a result of the loss of reduction of services of a major business-to-business relationship s as specified as any business relationship that contributes or more to revenue 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 form 886-a catalog number 20810w page of publish no irs gov department of the treasury-internal revenue service schedule number or exhibit explanations of items tax identification_number form b86-a rev date name of taxpayer org year period ended 20xx 20xx 20xx clear air clear 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 special risk - product recall reimburses co-2 for recall costs associated with any of its inventory_items determined to be out of specification or defective co-2 will need to research the extent of the defect within the product line and recall those products that are affected given the long supply chain and with several base materials originating outside the united_states the risk of recall in the supply chain is significant if a product is special risk - punitive wrap liability although the company carries general liability and auto liability coverage those policies typically have numerous exclusions the insurers use to decline coverage any investigation even if no negligence is found could prove very costly a policy to reimburse the company for this type of insured defense expense may prove attractive to the company special risk - requlatory changes co-2 is at risk of external factors such as regulatory changes in locksmith licensing and local codes the company could incur a significant loss of income if significant changes in locksmith licensing changes interrupt its marketing strategy or if changes in local codes force the company to secure alternative inventory special risk - tax_liability the company is at risk if it were to suffer an adverse decision from an unexpected tax audit with regard to its organizational structure cash_basis accounting captive planning billing methodology or any other federal tax related issue the policy period for each contract was from january 20xx to january 20xx the contracts also listed the aggregate limit of insurance and the premium paid_by the total combined premium paid_by the named insured as follows type of policy excess directors officers excess employment practices special risk-exp reimb legal expense reimb policy number secty secty secty secty aggregate dollar_figure limit total premium dollar_figure org’s premium dollar_figure form 886-a catalog number 20810w - page of department of the treasury-internal revenue service publish no irs gov schedule number or exhibit 886-a form ieev jurnry name of taxpayer explanations of items tax identification_number org year period ended 20xx 20xx 20xx special risk-cargo transit special risk-loss of srvc special risk - loss of majorb2b excess pollution special risk - product recall special risk - punitive wrap regulator change special risk - tax_liability secty secty secty secty secty secty secty secty total _0 each policy identified the named insureds as co-1 co-2 co-3 and co-4 located at address city texas zip code the above amount represents the total direct written premium received for the direct written contracts and the joint stop loss agreement with co-8 under the terms of the joint underwriting agreement and direct written contracts org as lead insurer received dollar_figure named insureds paid of the total combined premiums_paid by the named insureds in addition the directly to co-8 as the stop loss insurer or dollar_figure or org co-8 total combined direct written premium dollar_figure dollar_figure x x dollar_figure dollar_figure joint underwriting stop loss endorsement with respect of each of the above referenced property and casualty contracts the taxpayer and co-8 co-8 entered into an agreement titled joint underwriting stop loss endorsement the taxpayer and co-8 appear to be separate independent companies however it is not known whether the companies are owned and controlled by related parties under the terms of the endorsement both parties agreed to underwrite the insurance coverages described in the direct written policies with the affiliated businesses taxpayer was responsible for payment of part of the claims incurred by the named insureds under the direct written contracts up to certain specified thresholds if the specified thresholds were met then co-8 as the stop loss insurer became liable for payment of claims up to certain if the specified limits for co-8’s payment of claims were exceeded then the specified limits taxpayer again became liable of dollar_figure for the direct written contracts insureds or dollar_figure was paid to the taxpayer and or dollar_figure was paid directly to co-8 the endorsement effective date is december 20xx org is identified as the lead insurer and co-8 as the stop loss insurer the terms of the endorsement reads as follows for 20xx the named insureds paid a total combined premium of the total combined premium paid_by the named department of the treasury-internal revenue service form 886-a catalog number 20810w publish no irs gov page of 886-a schedule number or exhibit form fant explanations of items tax identification_number name of taxpayer org year period ended 20xx 20xx 20kx in exchange for the direct payment of a portion of the total policy premiums specified in the policy declarations and as further discussed below the insurers agree to jointly underwrite the policies specified above according to the attachment points participation levels and additional conditions specified herein the stop loss insurer co-8 shall have no liability for payment of any claims until two tests are met i the total of all claims reported by the insured s against the above policies must exceed of the combined direct written premiums for all of the policies specified above and then ii one of the attachment points specified below must be reached for the policies specified above the agreement specifies five levels of attachment points that make the stop loss insurer liable for claims once a first attachment point is reached the stop loss insurer co-8 will be responsible for paying claims in accordance with its participation level detailed in paragraph reached the subsequent attachment points shall be ignored and the stop loss insurer’s participation will be dictated by the terms of the first attachment point reached if another attachment point is subsequently the stop loss endorsement serves to supplement the terms of the direct written contracts the stop loss endorsement outlines the risk of the primary and secondary reinsurers of the policies directly written to the affiliated businesses under the terms of the joint underwriting endorsement org lead insurer received of the total combined premium of dollar_figure paid_by the named insureds the named insureds also paid the remaining of the combined premium directly to co-8 the stop loss insurer quota share reinsurance policy org executed a quota share reinsurance policy qs20xx with co-8 the agreement indicates that co-8 is located at address city country territory org is identified as a reinsurer and co-8 is the reinsured 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- form 886-a catalog number 20810w page of publish no irs gov department of the treasury-internal revenue service schedule number or exhibit form 886-a explanations of items rev date tax identification_number name of taxpayer org year period ended 20xx 20xx 20xx 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 disability co-8 insured a portion of the direct insurance underwritten by the pool participants using a so- called stop loss endorsement co-8 participated in over insurance policies with more than insureds co-8 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 org as reinsurer is to receive a quota share premium from co-8 in exchange for the assumption of of the risk_pool comprised of the stop loss coverages to all stop loss endorsement issued during the policy period by co-8 policyholders the policy period runs from january 20xx through january 20xx of the policy reflects a total of reinsurers participating in the quota share schedule reinsurance program co-8 in response to question of idr cpa cpa indicated that org is identified as reinsurer no as reinsurer org was contracted to receive a quota share reinsurance policy premium of dollar_figure or of the dollar_figure total premiums_paid premiums of dollar_figure to the reinsurers according to the general ledger the taxpayer received reinsurance premiums of dollar_figure from co-8 in 20xx the taxpayer relied on the services of co-9 and co-10 to establish the premium rating methodology for the direct written contracts and the quota share reinsurance agreement credit insurance coinsurance contract finally org executed credit insurance coinsurance contract with co-8 an country territory corp effective december 20xx in which org agrees to reinsure a prorate share of all net retained policies in force on the effective date assumed by co-8 from credit co-11 an country corporation the risks reinsured are the 20xx insurance exposures on all and policies of vehicle service contracts direct written by co-12 in force on january subsequently issued and assumed by credit co-11 from co-14 under its treaty dated january 20xx the reinsurance premiums to be paid_by co-8 pro_rata share of the earned premiums during the accounting_period under each reinsured policy earned premiums are the gross premiums charged the insureds plus the unearned premiums at the beginning of the accounting_period less the unearned premiums at the end of the accounting_period to org shall be org’s form 886-a catalog number 20810w page of publish no irs gov department of the treasury-internal revenue service schedule number or exhibit form 886-a explanations of items rev date tax identification_number year period ended 20xx 20kx 20xx name of taxpayer org based on the terms of the agreement it appears that the quota share reinsurance and credit insurance coinsurance contract do provide from the assumption of insurance risk from unrelated third parties according to the general ledger taxpayer received a reinsurance_premium of dollar_figure in 20xx under the terms of the contracts reviewed for 20xx the taxpayer assumed risk exposures as follows summary for 20xx direct written premiums quota share reinsurance assumed other reinsurance assumed total dollar_figure dollar_figure the organization reported total revenue of dollar_figure on the form 990-ez for 20xx program service revenue was the only source of revenue earned by taxpayer in 20xx total revenue was derived from the following sources program service revenue direct written premiums quota share reinsurance other reinsurance total premiums investment_income gain of loss on sale of assets other income total revenue dollar_figure dollar_figure dollar_figure -0- -0- -0- during 20xx the organization opened a checking account with bank of state the account was opened on november 20xx with an initial deposit of dollar_figure which represented the initial capital_contribution made by its parent parent co for the purchase of shares of dollar_figure par_value common_stock stock certificate no dated november 20xx also on december 20xx taxpayer received a wire transfer from the co-1 for the deposit of the 20xx direct written premium in the amount of dollar_figure the deposit represented of the total combined premium received by org from the named insureds the balance of the total dollar_figure or was paid_by the co-1 directly to the stop loss insurer co-8 under the terms of the joint underwriting agreement no other funds were deposited to the org’s checking account in 20xx form 886-a catalog number 20810w page of publish no irs gov department of the treasury-internal revenue service schedule number or exhibit 886-a form ‘hae land explanations of items tax identification_number name of taxpayer org year period ended 20xx 20kx 20xx of the total premiums received by the taxpayer in 20xx of the premiums were generated from the twelve direct written policies with the named insured co-1 of the premiums are from the quota share 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 and consisted primarily of cash in the bank of state checking account dollar_figure and reinsurance receivables dollar_figure 20xx tax_year the taxpayer filed form_990 return of organization exempt from income_tax for the tax_year ended december 20xx claiming to be tax-exempt under sec_501 during the year the taxpayer continued to operate as a captive company that insured certain property and casualty risks of affiliated business interests the taxpayer participated in the same three programs that it engaged in during the 20xx tax_year direct written contracts with affiliated business interests quota share risk_pool reinsurance credit coinsurance reinsurance the organization wrote the same direct contracts in 20xx that were written in 20xx all of the contracts reflected the same named insureds as co-1 co-2 co-3 and co-4 located at address city contracts list org as lead insurer and co-8 as the stop loss insurer the contracts are silent about the percentage of risk assumed by org as lead insurer and co-8 as the stop loss insurer during 20xx the taxpayer sold and insured the following direct written policies zip code org is one of two insurers listed in each contract the 20xx direct written policies excess directors and officers excess employment practices liability special risk - expense reimbursement legal expense reimbursement special risk - cargo transit special risk - loss of service special risk - loss of major b2b rel excess pollution liability special risk - product recall special risk - punitive wrap special risk - regulatory change sec_12 special risk - tax_liability secty secty secty secty secty secty secty secty secty secty secty secty as of the endorsement effective date co-4 was added as a named insured form 886-a catalog number 20810w page of publish no irs gov department of the treasury-internal revenue service schedule number or exhibit form 886-a name of taxpayer rev date explanations of items tax identification_number org year period ended 20xx 20xx 20xx according to the contracts the policy period runs from january 20xx to january 20xx each policy was an aggregate limit of dollar_figure the combined aggregate limit is dollar_figure according to the terms of the contracts reviewed the named insureds paid a total combined premium of dollar_figure for 20xx org received of the direct written premium paid_by the named insureds the remaining of the direct written premium was paid to co-8 the terms of the direct written contracts for 20xx are described as follows directors officers liability co-2 has an uninsured directors and officers liability exposure which could be a serious issue if for example allegations of misrepresentation were made against the co-2 for a marketing effort the company has over employees in today’s litigious environment it is likely for a company the size of co-2 with a predominantly blue collar workforce to have several uninsured employment practices liability incidents and it is probable that one or more of those incidents will result in eeoc investigations and or loss employment practices liability the company is potentially at risk for employment practices liability for discrimination harassment wrongful termination or other similar inappropriate act in some jurisdictions actions related to civil rights allegations can come from third parties such as customers and independent contractors expense reimbursement any claims that arise including claims associated with products liability or product recall would cause the company to have costs related to managing a public relations campaign to restore its customers’ faith uninsured legal expenses and litigation expense associated with disputes between the insured and its insurers related to claims also represent a risk to the company potentially catastrophic claims are often denied by conventional insurers on financial grounds a separate policy through the captive for litigation expense would be advisable publish no irs gov department of the treasury-internal revenue service form 886-a catalog number 20810w page of schedule number or exhibit form 886-a explanations of items rev date tax identification_number name of taxpayer org year period ended 20xx 20kx 20xx legal expense reimbursement covers all litigation expenses_incurred by the insured resulting for insured’s actual 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 special risk cargotransit merchandise worth millions will be shipped in 20xx without separate cargo coverage the trucking companies have low limitations on the loss or damage of property which is generally inadequate a separate cargo policy through the captive insurer is recommended to prevent financial loss from transportation risks loss of services with co-2 structured as a limited_partnership there are several partners whose services are critical to the operations of the business including partner-1 partner-2 indv-1 and partner-4 the company is also has a loss of services exposure associated with its three most productive salespersons emp-1 emp-2 and emp-3 should the company lose the services of any one of these key people it would not only suffer a business interruption loss while finding a suitable replacement but it may also incur significant legal expenses enforcing non-compete and confidentiality agreements premium dollar_figure loss of major business to business relationships co-2 is indemnified from any business interruption loss of up to twelve months suffered as a result of the loss of reduction of services of a major business-to-business relationship s as specified as any business relationship that contributes or more to revenue 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 clear air clear 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 special risk - product recall if a product is determined to be out of specification or defective co-2 will need to research the extent of the defect within the product line and recall those products that are affected given the long supply chain and with several base materials originating outside the united_states the risk of recall in the supply chain is significant catalog number 20810w - page of publish no irs gov department of the treasury-internal revenue service form 886-a 886-a schedule number or exhibit form hae explanations of items tax identification_number name of taxpayer org year period ended 20kx 20kx 20kx special risk - punitive wrap liability although the company carries general liability and auto liability coverage those policies typically have numerous exclusions the insurers use to decline coverage any investigation even if no negligence is found could prove very costly a policy to reimburse the company for this type of insured defense expense may prove attractive to the company special risk - requlatory changes co-2 is at risk of external factors such as regulatory changes in locksmith licensing and local codes the company could incur a significant loss of income if significant changes in locksmith licensing changes interrupt its marketing strategy or if changes in local codes force the company to secure alternative inventory special risk - tax_liability the company is at risk if it were to suffer an adverse decision from an unexpected tax audit with regard to its organizational structure cash_basis accounting captive planning billing methodology or any other federal tax related issue the contracts also listed the aggregate limit of insurance and the premium paid_by the total combined premium paid_by the named insured as follows 20xx contracts type of policy excess directors officers excess employment practics special risk-exp reimb legal expense reimb special risk-cargo transit special risk-loss of srvc special risk - loss of majorb2b excess pollution special risk - product recall special risk - punitive wrap regulator change special risk - tax_liability total policy number secty secty secty secty secty secty secty secty secty secty secty secty aggregate limit total premium org’s premium dollar_figure dollar_figure dollar_figure each policy identified the named insureds as co-1 co-2 co-3 co-4 located at address city zip code form 886-a catalog number 20810w page of publish no irs gov department of the treasury-internal revenue service schedule number or exhibit form 886-a explanations of items rev date tax identification_number name of taxpayer org year period ended 20xx 20xx 20xx the above amount represents the total direct written premium received for the direct written contracts and the joint stop loss agreement with co-8 under the terms of the joint underwriting agreement and direct written contracts org as lead insurer received or dollar_figure of the total premiums_paid by the named insureds co-8 the stop loss insurer received or org co-8 dollar_figure dollar_figure xx x ‘ dollar_figure total combined direct written premium dollar_figure joint underwriting stop loss endorsement in addition to the direct written contracts executed in 20xx org also executed a joint underwriting stop loss endorsement with co-8 to underwrite the insurance coverages described in the direct written policies with the affiliated businesses the endorsement effective date is january 20xx org is identified as the lead insurer’ and co-8 as the stop loss insurer the terms of the endorsement reads as follows whereby both parties agreed in exchange for the direct payment of a portion of the total policy premiums specified in the policy declarations and as further discussed below the insurers agree to jointly underwrite the policies specified above according to the attachment points participation levels and additional conditions specified herein the stop loss insurer co-8 shall have no liability for payment of any claims until the total of all claims reported by the insured s against the above policies exceed of the subject premiums for all of the policies specified above by way of example if the insured s subject premiums are dollar_figure the lead insurer shall be solely responsible for payment of all claims up to dollar_figure in the aggregate once the aggregate for all claims exceed dollar_figure the stop loss insurer will be responsible for paying claims in accordance with its participation level detailed in paragraph if the attachment threshold is met the stop loss insurer will pay a final settlement which is quota share of the aggregate for all claims form 886-a catalog number 20810w page of publish no irs gov department of the treasury-internal revenue service schedule number or exhibit 886-a form ‘wav daniiny ae explanations of items tax identification_number name of taxpayer org year period ended 20xx 20xx 20xx reported by the insured s in excess of the attachment threshold subject_to a maximum of of the subject premiums provided however that nothing in this endorsement shall be interpreted to allow a maximum claim recovery by the insured s in excess of of the limits of liability stated in the policy declarations if the attachment threshold above is not met the lead insurer shall be solely responsible for payment of claims against the specified policies and the stop loss insurer shall not be responsible for payment of any claims the lead insurer shall be solely responsible for payment of claims against the specified policies once the stop loss insurer has exhausted its limits in accordance with paragraph a the stop loss premium rate for this joint underwriting stop loss endorsement is of the subject 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 by way of example if the insured s subject premiums are dollar_figure then the insured s shall pay a premium of dollar_figure directly to the stop loss insurer with the insured s paying a premium of dollar_figure directly to the lead insurer the stop loss insurer and lead insurer represent and warrant that the only insureds being issued direct written coverage by the stop loss insurer are clients of law firm and co-13 the stop loss endorsement serves to supplement the terms of the direct written contracts the stop loss endorsement outlines the risk of the primary and secondary reinsurers of the policies directly written to the affiliated businesses under the terms of the joint underwriting endorsement org lead insurer received of the total combined premium of dollar_figure paid_by the named insureds the named insureds also paid the remaining of the combined premium directly to co-8 the stop loss insurer quota share reinsurance policy page of publish no irs gov department of the treasury-internal revenue service form 886-a catalog number 20810w schedule number or exhibit form 886-a explanations of items rev date tax identification_number name of taxpayer org year period ended 20xx 20xx 20kx org executed a quota share reinsurance policy qs20xx with co-8 the agreement indicates that co-8 is located at address city country territory org is identified as a reinsurer and co-8 is the reinsured according to the terms org as reinsurer is to receive a quota share premium from co-8 in exchange for the assumption of of the risk_pool comprised of the stop loss coverages to all stop loss endorsement issued during the policy period by co-8 policyholders the policy period runs from january 20xx through january 20xx schedule of the policy reflects a total of reinsurance program co-8 reinsurers that participated in the program in 20xx in response to question of idr cpa cpa identified org is identified as reinsurer contracted to receive a quota share reinsurance policy premium of dollar_figure or of the dollar_figure total premium reinsurers participating in the quota share paid total premiums of dollar_figure to the as reinsurer org was according to the general ledger the taxpayer received reinsurance premiums of dollar_figure from co-8 in 20xx the taxpayer relied on the services of co-9 and co-10 to establish the premium rating methodology for the direct written contracts and the quota share reinsurance agreement credit insurance coinsurance contract finally org executed credit insurance coinsurance contract with co-8 an country territory corp effective january 20xx in which org agrees to reinsure a prorate share of all net retained policies in force on the effective date assumed by co-8 under a treaty dated june 20xx with co-11 a territory corporation that was merged into co-11 on january 20xx the risks reinsured are the 20xx insurance exposures on all policies of vehicle service contracts direct written by co-12 in force on january 20xx and subsequently issued and assumed by credit co-11 from co-14 under its treaty dated january 20xx from co-11 an country corporation the reinsurance premiums to be paid_by co-8 pro_rata share of the earned premiums during the accounting_period under each reinsured policy earned premiums are the gross premiums charged the insureds plus the unearned premiums at the beginning of the accounting_period less the unearned premiums at the end of the accounting_period to org shall be org’s department of the treasury-internal revenue service form 886-a catalog number 20810w page of publish no irs gov schedule number or exhibit form 886-a explanations of items rev date tax identification_number year period ended 20xx 20xx 20xx name of taxpayer org based on the terms of the agreement it appears that the quota share reinsurance and credit insurance coinsurance contract do provide from the assumption of insurance risk from unrelated third parties premium of dollar_figure in 20xx according to the general ledger taxpayer received a reinsurance under the terms of the contracts reviewed for 20xx the taxpayer assumed risk as follows summary for 20xx direct written premiums quota share reinsurance other reinsurance total premiums dollar_figure dollar_figure the organization reported total revenue of dollar_figure on the form_990 for 20xx program service revenue represented the primary source of revenue earned by the taxpayer total revenue was derived from the following sources during 20xx program service revenue direct written premiums quota share reinsurance other reinsurance total premiums investment_income gain of loss on sale of assets other income_interest on secured loan total revenue dollar_figure _ dollar_figure dollar_figure during 20xx the organization continued to maintain the checking account with bank of state the organization made six deposits to the account totally dollar_figure a list of the deposits was prepared for the case file the deposits included the quota share reinsurance_premium and retention amount received from co-8 totaling dollar_figure the deposits also the total combined premium due on the direct written contracts the taxpayer sold the same direct written contracts as in 20xx however in 20xx co-1 the named insured paid the total combined premium of dollar_figure to org even though the captive was only entitled to of the total premium or dollar_figure thus overpayment was subsequently disbursed by taxpayer to co-8 share as stop loss insurer on october 20xx check number overpaid the direct written premium by dollar_figure the in the amount of dollar_figure for its o __ form 886-a catalog number 20810w _- page of publish no irs gov department of the treasury-internal revenue service 886-a schedule number or exhibit form ren lanuanet ea explanations of items tax identification_number name of taxpayer org year period ended 20xx 20xx 20xx in addition on october 20xx co-1 the named insured paid a second premium for stop loss coverage in the amount of dollar_figure to the taxpayer this payment was also received from the named insured in error this overpayment was returned to co-1 on october 20xx on november 20xx the organization deposited dollar_figure as a partial payment of the 20xx quota share reinsurance premiums received from co-8 the last deposit of dollar_figure was made on december 20xx represented a principal and interest payment on a secured loan made to co-1 an initial loan was made to co-1 by taxpayer in the amount of dollar_figure on november 20xx according the general ledger account the deposit of dollar_figure included interest of dollar_figure and principal reduction of dollar_figure no other funds were deposited to the taxpayer’s checking account in 20xx date 7120xx 20xx 20xx 20xx 20xx 20xx amount source 20xx quota share reins prem from co-8 20xx retention from co-8 20xx direct written premiums rec'd from co-1 co-1-error for stop loss 20xx quota share reins prem from co-8 loan prin dollar_figure loan int dollar_figure total deposits for 20xx of the total premiums received by the taxpayer in 20xx of the premiums were generated from the twelve direct written policies with the named insureds co-1 the co-2 co-3 and co-4 of the premiums are from the quota share 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 and consisted primarily of cash in the bank of state checking account dollar_figure and a notes receivable balance dollar_figure form 886-a catalog number 20810w publish no irs gov page of department of the treasury-internal revenue service schedule number or exhibit form 886-a sey aa explanations of items name of taxpayer tax identification_number org year period ended 20xx 20xx 20xx 20xx tax_year the taxpayer filed form_990 retum of organization exempt from income_tax for the tax_year ended december 20xx claiming to be tax-exempt under sec_501 during the year the taxpayer continued to operate as a captive company that insured certain property and casualty risks of affiliated business interests the taxpayer participated in the same three programs that it engaged in during the 20xx and 20xx tax years direct written contracts with affiliated business interests quota share risk_pool reinsurance credit coinsurance reinsurance the organization wrote the same direct contracts in 20xx that were written during the 20xx and 20xx tax years all of the contracts reflected the same named insureds as co-1 co-2 co-3 and co-4 located at address city state zip code org is one of two insurers listed in each contract the contracts list org as lead insurer and co-8 as the stop loss insurer the contracts are silent about the percentage of risk assumed by org as lead insurer and co-8 as the stop loss insurer during 20xx the taxpayer sold and insured the following direct written policies 20xx direct written policies excess directors and officers excess employment practices liability special risk - expense reimbursement legal expense reimbursement special risk - cargo transit special risk - loss of service special risk - loss of major b2b rel excess pollution liability special risk - product recall special risk - punitive wrap special risk - regulatory change sec_12 special risk - tax_liability secty secty secty secty secty secty secty secty secty secty secty secty according to the contracts the policy period runs from january 20xx to january 20xx a more detailed description of the policies is reflected on the attached excel spreadsheet each policy was an aggregate limit of dollar_figure the combined aggregate limit is dollar_figure according to the terms of the contracts reviewed the named insureds paid a total combined premium of dollar_figure for 20xx as of the endorsement effective date co-4 corp was added as a named insured form 886-a catalog number 20810w page of publish no irs gov department of the treasury-internal revenue service schedule number or exhibit explanations of items tax identification_number yee b12 oo form 886-a rev date name of taxpayer org 20xx 20xx taxpayer received dollar_figure or of the direct written premium paid_by the named insureds the remaining of dollar_figure of the direct written premium was paid to co-8 the terms of the direct written contracts for 20xx are described as follows directors officers liability co-2 has an uninsured directors and officers liability exposure which could be a serious issue if for example allegations of misrepresentation were made against the co-2 for a marketing effort the company has over company the size of co-2 with a predominantly blue collar workforce to have several uninsured employment practices liability incidents and it is probable that one or more of those incidents will result in eeoc investigations and or loss total premium dollar_figure employees in today’s litigious environment it is likely for a employment practices liability the company is potentially at risk for employment practices liability for discrimination harassment wrongful termination or other similar inappropriate act in some jurisdictions actions related to civil rights allegations can come from third parties such as customers and independent contractors total premium dollar_figure expense reimbursement any claims that arise including claims associated with products liability or product recall would cause the company to have costs related to managing a public relations campaign to restore its customers’ faith uninsured legal expenses and litigation expense associated with disputes between the insured and its insurers related to claims also represent a risk to the company potentially catastrophic claims are often denied by conventional insurers on financial grounds a separate policy through the captive for litigation expense would be advisable total premium dollar_figure special risk cargotransit over dollar_figure million will be shipped in 20xx without separate cargo coverage the trucking companies have low limitations on the loss or damage of property which is generally inadequate a separate cargo policy through the captive insurer is recommended to prevent financial loss from transportation risks total premium dollar_figure legal expense reimbursement covers all litigation expenses_incurred by the insured resulting for insured’s actual 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 department of the treasury-internal revenue service total premium dollar_figure catalog number 20810w form 886-a publish no irs gov page of schedule number or exhibit form 886-a explanations of items rev date ee aie phy tax identification_number name of taxpayer org 20xx 20xx loss of services limited_partnership there are several partners whose services are with co-2 structured as a critical to the operations of the business including partner-1 partner-2 indv-1 and partner-4 the company is also has a loss of services exposure associated with its three most productive salespersons emp-1 emp-2 and emp-3 should the company lose the services of any one of these key people it would not only suffer a business interruption loss while finding a suitable replacement but it may also incur significant legal expenses enforcing non-compete and confidentiality agreements total premium dollar_figure loss of major business to business relationships co-2 is indemnified from any business interruption loss of up to twelve months suffered as a result of the loss of reduction of services of a major business-to-business relationship s as specified as any business relationship that contributes or more to revenue total premium dollar_figure 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 clear air clear 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 premium dollar_figure special risk - product recall if a product is determined to be out of specification or defective co-2 will need to research the extent of the defect within the product line and recall those products that are affected given the long supply chain and with several base materials originating outside the united_states the risk of recall in the supply chain is significant total premium dollar_figure special risk - punitive wrap liability although the company carries general liability and auto liability coverage those policies typically have numerous exclusions the insurers use to decline coverage any investigation even if no negligence is found could prove very costly a policy to reimburse the company for this type of insured defense expense may prove attractive to the company total premium dollar_figure form 886-a catalog number 20810w page of publish no irs gov department of the treasury-internal revenue service schedule number or exhibit form 886-a explanations of items rev date tax identification_number name of taxpayer org year period ended 20xx 20xx 20xx special risk - regulatory changes co-2 is at risk of external factors such as regulatory changes in locksmith licensing and local codes the company could incur a significant loss of income if significant changes in locksmith licensing changes interrupt its marketing strategy or if changes in local codes force the company to secure alternative inventory total premium dollar_figure special risk - tax_liability the company is at risk if with regard to its organizational structure cash_basis accounting captive planning billing methodology or any other federal tax related issue total premium dollar_figure it were to suffer an adverse decision from an unexpected tax audit the contracts also listed the aggregate limit of insurance and the premium paid_by the total combined premium paid_by the named insured as follows 20xx contracts type of policy policy number excess directors officers excess employment practics special risk-exp reimb legal expense reimb special risk-cargo transit special risk-loss of srvc special risk - loss of majorb2b excess pollution special risk - product recall special risk - punitive wrap regulator change special risk - tax_liability total secty secty secty secty secty secty secty secty secty secty secty secty aggregate limit - total premium org’s premium dollar_figure dollar_figure dollar_figure each policy identified the named insureds as co-1 co-2 co-3 co-4 located at address city the above amount represents the total direct written premium received for the direct written contracts and the joint stop loss agreement with co-8 under the terms of the joint underwriting agreement and direct written contracts org as lead insurer received or dollar_figure of the total premiums_paid by the named insureds co-8 the stop loss insurer received or publish no irs gov department of the treasury-internal revenue service form 886-a catalog number 20810w page of schedule number or exhibit form 886-a rev date explanations of items tax identification_number name of taxpayer org year period ended 20xx 20xx 20kx org co-8 dollar_figure dollar_figure x x dollar_figure dollar_figure total combined direct written premium dollar_figure underwriting stop loss endorsement in addition to the direct written contracts executed in 20xx the taxpayer also executed a whereby both parties joint underwriting stop loss endorsement with co-8 agreed to underwrite the insurance coverages described in the direct written policies with the affiliated businesses the endorsement effective date is january 20xx taxpayer is identified as the lead insurer’ and co-8 as the stop loss insurer the terms of the endorsement reads as follows in exchange for the direct payment of a portion of the total policy premiums specified in the policy declarations and as further discussed below the insurers agree to jointly underwrite the policies specified above according to the attachment points participation levels and additional conditions specified herein the stop loss insurer co-8 shall have no liability for payment of any claims until the total of all claims reported by the insured s against the above policies exceed of the subject premiums for all of the policies specified above by way of example if the insured s subject premiums are dollar_figure the lead insurer shall be solely responsible for payment of all claims up to dollar_figure in the aggregate once the aggregate for all claims exceed dollar_figure the stop loss insurer will be responsible for paying claims in accordance with its participation level detailed in paragraph if the attachment threshold is met the stop loss insurer will pay a quota share of the aggregate for all claims final settlement which is reported by the insured s in excess of the attachment threshold subject_to a maximum of of the subject premiums if the attachment threshold above is not met the lead insurer shall be solely responsible for payment of claims against the specified policies and the stop loss insurer shall not be responsible for payment of any claims form 886-a catalog number 20810w page of publish no irs gov department of the treasury-internal revenue service schedule number or exhibit form 886-a rev date explanations of items tax identification_number name of taxpayer org year period ended 20xx 20xx 20kx the lead insurer shall be solely responsible for payment of claims against the specified policies once the stop loss insurer has exhausted its limits in accordance with paragraph a the stop loss premium rate for this joint underwriting stop loss endorsement is of the subject 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 by way of example if the insured s subject premiums are dollar_figure then the insured s shall pay a premium of dollar_figure directly to the stop loss insurer with the insured s paying a premium of dollar_figure directly to the lead insurer the stop loss insurer and lead insurer represent and warrant that the only insureds being issued direct written coverage by the stop loss insurer are clients of law firm and co-13 the stop loss endorsement serves to supplement the terms of the direct written contracts ‘the stop loss endorsement outlines the risk of the primary and secondary reinsurers of the policies directly written to the affiliated businesses under the terms of the joint underwriting endorsement the taxpayer as lead insurer received of the total combined premium of dollar_figure paid_by the named insureds the named insureds also paid the remaining of the combined premium directly to co-8 the stop loss insurer quota share reinsurance policy org executed a quota share reinsurance policy qs20xx with co-8 the agreement is located at address city country territory org is indicates that co-8 identified as a reinsurer and co-8 is the reinsured according to the terms taxpayer as reinsurer is to receive a reinsurance_premium from co-8 in exchange for the assumption of a specified quota share of the risk_pool attached to the quota share reinsurance contract showed that co-8 reinsured its risk_pool with separate_property and casualty companies org is one of the companies that co-8 paid premiums totaling dollar_figure to the reinsurers reinsured co-8’s risk_pool in 20xx schedule form 886-a catalog number 20810w page of publish no irs gov department of the treasury-internal revenue service schedule number or exhibit 886-a form sie iannanet200 explanations of items tax identification_number name of taxpayer org year period ended 20xx 20xx 20kx in schedule org is identified as reinsurer as reinsurer org contracted to assume of the risk of co-8’s risk_pool in exchange for a quota share reinsurance_premium of dollar_figure or of dollar_figure according to the general ledger the taxpayer received reinsurance premiums of dollar_figure from co-8 in 20xx the taxpayer relied on the services of co-9 and co-10 to establish the premium rating methodology for the direct written contracts and the quota share reinsurance agreement credit insurance coinsurance contract finally org executed credit insurance coinsurance contract with co-8 an country territory corp effective january 20xx in which org agrees to reinsure a prorate share of all net retained policies in force on the effective date assumed by co-8 from co-11 an country corporation under a treaty dated june 20xx with credit co-11 a 20xx the risks reinsured are the 20xx insurance exposures on all policies of vehicle service contracts direct written by co-12 in force on date and subsequently issued and assumed by credit co-11 from co-14 under its treaty dated january 20xx corporation that was merged into co-11 on january the reinsurance premiums to be paid_by co-8 pro_rata share of the earned premiums during the accounting_period under each reinsured policy earned premiums are the gross premiums charged the insureds plus the unearned premiums at the beginning of the accounting_period less the unearned premiums at the end of the accounting_period to org shall be org’s based on the terms of the agreement it appears that the quota share reinsurance and credit insurance coinsurance contract do provide from the assumption of insurance risk from unrelated third parties premium of dollar_figure in 20xx according to the general ledger taxpayer received a reinsurance under the terms of the contracts reviewed for 20xx the taxpayer assumed risk as follows summary for 20xx direct written premiums quota share reinsurance other reinsurance total premiums dollar_figure dollar_figure q form 886-a catalog number 20810w page of publish no irs gov department of the treasury-internal revenue service form b86-a explanations of items rev date schedule number or exhibit tax identification_number name of taxpayer org year period ended 20xx 20xkx 20xx the organization reported total revenue of dollar_figure on the form_990 for 20xx program service revenue represented the primary source of revenue earned by the taxpayer total revenue was derived from the following sources during 20xx program service revenue direct written premiums quota share reinsurance other reinsurance total premiums investment_income gain of loss on sale of assets other income premium finance_charges interest on secured loan total revenue dollar_figure dollar_figure dollar_figure o o c l o o r s o o o o l o during 20xx the organization continued to maintain the checking account with bank of state the organization made eight deposits to the account totaling dollar_figure a was prepared for the case file the bank statements reflected four deposits of dollar_figure these deposits represented a combination of the direct written premiums of dollar_figure and premium finance_charges of dollar_figure for the contracts executed in 20xx received from the co-1 although the contracts listed multiple named insureds only one of the entities actually paid the direct written premium to org the following deposits were made to the taxpayer's checking account during 20xx the direct written premiums were list of the deposits date amount source of deposit direct premium purpose finance charge loan interest 20xx 20xx 20xx 20xx 20xx 20xx 20xx co-1 co-1 co-1 form 886-a catalog number 20810w page of publish no irs gov department of the treasury-internal revenue service schedule number or exhibit form 886-a rev date explanations of items tax identification_number year period ended 20xx 20xx 20xx name of taxpayer org 20xx total deposits the quota share reinsurance_premium and credit reinsurance premiums were recorded in the books on the accrual basis the reinsurance premiums were recognized as income in 20xx in response to idr item although the actual premiums were not received until 20xx the cpa indicated that org received reinsurance premiums from co-8 as follows 20xx 20xx 20xx total quota share dollar_figure credit reinsurance of the total premiums received by the taxpayer in 20xx of the premiums were generated from the twelve direct written policies with the named insureds co-1 the co-2 co-3 and co-4 of the premiums are from the quota share 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 and consisted primarily of cash in the bank of state checking account dollar_figure and a notes receivable balance dollar_figure law sec_501 of the internal_revenue_code provides insurance_companies other than life including inter-insurers and reciprocal underwriters can qualify for tax-exempt status if the gross_receipts for the taxable_year do not exceed dollar_figure and more than of such gross_receipts consist of premiums or inthe case of a mutual_insurance_company the gross_receipts of which for the taxable year do not exceed dollar_figure and more than of such gross_receipts consist of premiums sec_816 of the code provides that the term_insurance company means any company more than half of the business of which during the taxable_year is the issuing of insurance or annuity_contracts or the reinsuring of risks underwritten by insurance_companies 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 form 886-a catalog number 20810w _- page of publish no irs gov department of the treasury-internal revenue service schedule number or exhibit form 886-a rev date explanations of items tax identification_number year period ended 20xx 20xx 20xx name of taxpayer org during the taxable_year is the issuing of insurance or annuity_contracts or reinsuring of risks underwritten by insurance_companies pursuant to 312_us_531 the united_states supreme court in defining the term_insurance contract held that in order for a contract to amount to an insurance_contract it must shift and distribute a risk of loss and that risk must be an insurance risk 979_f2d_162 cir 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 572_f2d_1190 cir the common definition for insurance is an agreement to protect the insured against a direct or indirect economic loss arising from a defined contingency whereby the insurer undertakes no present duty_of performance but stands ready to assume the financial burden of any covered loss 183_f2d_288 2d cir the risk must contemplate the fortuitous occurrence of a stated contingency 797_f2d_920 cir historically and commonly insurance involves risk -shifting and risk distributing risk-shifting means one party shifts his risk of loss to another and risk-distributing means that the party assuming the risk distributes his potential liability in part among others an arrangement without the elements of risk-shifting and risk-distributing lacks the fundamentals inherent in a true contract of insurance 988_f2d_1135 fed cir for insurance purposes risk-shifting means one party shifts his risk of loss to another and risk- distributing means that the party assuming the risk distributes his potential liability in part among others -811_f2d_1297 cir a true insurance agreement must remove the risk of loss from the insured party 881_f2d_247 et 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 form 886-a catalog number 20810w page of publish no irs gov department of the treasury-internal revenue service form 886-a explanations of items rev date schedule number or exhibit tax identification_number name of taxpayer org year period ended 20xx 20xx 20xx revrul_89_96 1989_2_cb_114 an insurance agreement or contract must involve the requisite risk shifting necessary for insurance revrul_2002_89 2002_2_cb_984 it is not insurance where a parent company formed a subsidiary 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 revrul_2002_90 c b a wholly owned subsidiary that insured subsidiaries of its parent constitute insurance for federal_income_tax purposes revrul_2005_40 2005_40_irb_4 an arrangement that purported to be an insurance_contract but lacked the requisite risk_distribution was characterized as a deposit arrangement a loan a contribution_to_capital an indemnity arrangement that was not an insurance_contract revrul_2007_47 2007_30_irb_127 an arrangement that provides for the reimbursement of inevitable future costs does not involve the requisite insurance risk foreign_corporation tax provisions sec_951 amounts included in gross_income of united_states_shareholders a amounts included - in general -if a foreign_corporation is a controlled_foreign_corporation for an uninterrupted period of days or more during any taxable_year every person who is a united_states_shareholder as defined in subsection b of such corporation and who owns within the meaning of sec_958 stock in such corporation on the last day in such year on which such corporation is a controlled_foreign_corporation shall include in his gross_income for his taxable_year in which or with which such taxable_year of the corporation ends - a the sum of - i his pro_rata share determined under paragraph of the corporation's subpart_f_income for such year form 886-a catalog number 20810w - page of publish no irs gov department of the treasury-internal revenue service schedule number or exhibit 886-a form bas jlenaayi0 explanations of items tax identification_number name of taxpayer org year period ended 20xx 20xx 20kx ii his pro_rata share determined under sec_955 as in effect before the enactment of the tax reduction act of of the corporation's previously excluded subpart_f_income withdrawn from investment in less developed countries for such year and iii his pro_rata share determined under sec_955 of the corporation's previously excluded subpart_f_income withdrawn from foreign_base_company shipping operations for such year and sec_953 insurance_income a insurance_income - in general -for purposes of sec_952 the term_insurance income means any income which - a is attributable to the issuing or reinsuring of an insurance_or_annuity_contract 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 d election by foreign_insurance_company to be treated as domestic_corporation a a foreign_corporation is a controlled_foreign_corporation as defined in sec_957 by substituting percent or more for more than percent and by using the definition of united_states_shareholder under c a b such foreign_corporation would qualify under part or il of subchapter_l for the it were a domestic_corporation in general - if sec_953 insurance_income form 886-a taxable_year if catalog number 20810w - page of publish no irs gov department of the treasury-internal revenue service 886-a schedule number or exhibit form teas lene asi explanations of items tax identification_number name of taxpayer org year period ended 20xx 20xx 20kx 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 june 20xx seeking retroactive exemption under sec_501 back to november 20xx the date of incorporation the application was ultimately withdrawn by partner-1 president on september 20xx the examining agent believes that the application was withdrawn by the taxpayer on the advice on its counsel law attorney-3 attorney-1 and firm in 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 who are affiliated with law firm 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 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 form 886-a catalog number 20810w page of publish no irs gov department of the treasury-internal revenue service schedule number or exhibit form 886-a rev date explanations of items tax identification_number name of taxpayer org year period ended 20kx 20xx 20xx 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 aff'g 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 lastateering appleman on insurance sec_1 while it seems appropriate that any concept and meaning of insurance be sufficiently broad and flexible to meet the varying and innovative transactions which humankind perpetually produces care must be used to describe insurance because overbroad definitions are not useful and may cause many commercial relationships erroneously to constitute insurance id moreover a state’s determination of whether a product is insurance for state law purposes does not control whether the product is insurance for federal tax law see 96_tc_18 there is no need for parity between a state law definition and federal definition as the objective for state purposes is company solvency solvency is not a concern for determining whether an arrangement qualifies as insurance for federal_income_tax purposes not all contracts that transfer risk are insurance policies even where the primary purpose of the contract is to transfer risk 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 form 886-a department of the treasury-internal revenue service catalog number 20810w page of publish no irs gov 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 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 org and an insurance_policy are the discounted expected values of the cash flows they provide their partner-1s scholars and practitioners recognize these commonalities not surprisingly the markets have converged recently for example some insurance_companies offer mutual funds and life_insurance tied to stock portfolios and some banks sell annuities financial economics with applications to investments insurance and pension sec_1 harry h panier ed insurance risk requires a fortuitous event or hazard and not a mere timing or investment risk a fortuitous event such as a fire or accident is at the heart of any contract of insurance see 183_f2d_288 2d cir the risk must contemplate the fortuitous occurrence of a stated contingency not an expected event lack of insurance risk the service analyzed the risk of the contracts to determine whether the contracts qualify as contracts of insurance annuity_contracts or reinsurance contracts in deciding whether the contracts qualify as insurance contracts for federal tax purposes we have considered all of the facts and circumstances associated with the parties in the context of the captive arrangement when deciding that a specific contract is not insurance because it does not have an insurance risk but deals with a business or investment risk we have considered such things as the ordinary activities of a business_enterprise the typical activities and obligations of running of a business whether an action that might be covered by a policy is in the control of the insured within a business context whether the economic risk involved is a market risk that is part of the a happening that because it occurs only by chance or accident the parties could not reasonably have foreseen black's law dictionary ed see also first restatement of contracts sec_291 cmt a american law institute restatement second contracts cmt a see generally jeffery w stempel stempel on insurance contracts sec_1 06a supp i n the past years a modern view of fortuity as a matter of law has emerged in united_states courts one that largely embraces the notions of fortuity held by the american law institute when it adopted the restatement of contracts first in and again in the second restatement published in form 886-a catalog number 20810w page of publish no irs gov department of the treasury-internal revenue service schedule number or exhibit form 886-a explanations of items rev date tax identification_number name of taxpayer org year period ended 20xx 20xx 20xx 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 20xx policie sec_4 excess directors officers liability insurance_policy covers wrongful acts of directors and officers insurance excess employment practices liability insurance_policy cover sec_11 categories of wrongful acts including wrongful termination refusal to hire or promote sexual harassment unlawful_discrimination based on age gender etc invasion of privacy failure to create employment policies or procedures retaliatory treatment violation of civil rights violation of family_and_medical_leave act breach of employment contract failure there is to provide safe work environment violations listed herein against a non-employee excluded from coverage claims related to employee's entitlements under various listed non- specific laws rules or regulations also excluded are claims under various listed laws such as the occupational safety and health act these exclusions shall not apply to claim for any actual or alleged retaliatory discriminatory or other employment practices-related treatment not insurance_policy is not insurance in its commonly accepted sense there is no insurance risk but only investment or business risk special risk - expense reimbursement insurance_policy coverage form a deals with crisis management public relations expenses public relations expenses to mitigate the insured's adverse publicity generated from an actual or imminent liability incident that could exceed dollar_figure product recall employee layoff or labor loss of intellectual_property rights unsolicited dispute government litigation financial crisis takeover bid org incident or any incident expected to reduce annual gross revenue by at least this covers all 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 form 886-a catalog number 20810w page of publish no irs gov department of the treasury-internal revenue service schedule number or exhibit form dive laren tees explanations of items 886-a tax identification_number name of taxpayer org year period ended 20xx 20xx 20xx not insurance as to coverage a coverage form a is not insurance in the commonly accepted sense there is no insurance risk but only investment or business risk we could not conclude that coverage form b is insurance in the commonly accepted sense it is vague as to what liability contract underlies the need for defense expenses special risk - legal expense reimbursement insurance_policy covers all litigation expenses_incurred by the insured resulting for insured's actual or alleged civil liability not insurance_policy is vague as to what liability contract underlies the need for defense expenses special risk - cargo transit covers loss or damage to property that occurs while the property is being shipped insurance_policy covers risks similar to risks in commonly accepted insurance contracts special risk - loss of services insurance_policy covers the involuntary loss of services for key employees the covered cause of loss must be involuntary and includes sickness disability death loss of license resignation or retirement after days coverage does not include any loss of services if the insured terminated the employment of the employee also excluded is any claim if the insured does not attempt to replace the employee timely claim costs can include costs incurred by existing employees costs of temporary employees training costs and lost net revenue not insurance the policy is not insurance in the commonly accepted sense although a policy only covering death or disability of a key_employee is insurance the policy here covers many non-insurance risks that is investment or business risks special risk-loss of major business to business insurance_policy covers any business interruption loss of up to months suffered as a result of losing the services of a major business-to-business relationship any business relationship that form 886-a catalog number 20810w page of publish no irs gov department of the treasury-internal revenue service 886-a form ihee nia iee name of taxpayer explanations of items tax identification_number schedule number or exhibit org year period ended 20xx 20xx 20kx the policy will not cover the voluntary loss of a major business-to-business contributes or more to revenue business interruption losses include the impact of lost revenue and the extra expenses involved in finding a replacement business-to-business relationship relationship where the insured initiates the termination of the agreement the loss of a major business-to-business relationship that insured did not attempt or intent to replace or the loss of a major business-to-business relationship due to insured’s substantial non-compliance with the terms and conditions of its contractual agreement with the customer not insurance the policy is not insurance in the commonly accepted sense there is no insurance risk but only business risk excess pollution liability insurance_policy insuring agreement and cover clean-up costs and diminution in value costs resulting from pre-existing or new on-site pollution conditions coverage is conditioned on an affirmative obligation to report on site pollution conditions to a governmental agency so as to be in compliance with environmental laws various laws covering solid_waste disposal super funds clean air clean water and toxic substances are listed in a non-exclusive list provided the insured has or may have a legal_obligation to incur clean up costs for pollution conditions or pollution release clean up costs cover the expenses of investigation or removal of or rendering non-hazardous pollution conditions to the extent required by environmental laws diminution in value means the difference in the fair_market_value of the property when the remedial action plan is approved and the fair_market_value of the property had there been no on site pollution conditions insuring agreement sec_3 to provide for third party claims for on site or off site clean up and diminution in value costs for pre-existing or new on site or off site pollution conditions as well as bodily and property damage as well as non-owned locations insuring agreement covers pollution release from transported cargo carried by covered autos no covered auto is identified in the declarations insuring agreement covers third party claims from transporting of a product or waste 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 publish no irs gov department of the treasury-internal revenue service form 886-a _ catalog number 20810w page of schedule number or exhibit form 886-a rev date explanations of items tax identification_number name of taxpayer org year period ended 20xx 20xx 20xx 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 - product recall not insurance the policy is not insurance in the commonly accepted sense there is no insurance risk but only investment or business risk special risk - punitive wrap liability insurance_policy covers claims for punitive or exemplary damages upon the failure of the insurer under policies listed that are issued to the insured to cover punitive or exemplary damages judgments or awards solely due to the enforcement of any law or judicial_ruling that precludes the insuring of punitive or similar damages and that but for such law or ruling would otherwise be covered and for which an insured is legally obligated to pay not insurance the policy is not insurance in the commonly accepted sense there is no insurance risk but only investment or business risk special risk - regulatory changes insurance_policy covers actual compliance expenses and any business interruption loss of up to months as a result of any regulatory change that has an adverse impact on insured's normal on-going business operations regulatory changes include governmental administrative agency or legislative changes changes to environmental zoning transportation or safety laws or regulations changes to import export laws regulatory changes due to foreign political risk including the collapse of a foreign economy and any regulatory change due to the insured's reorganization such as changing from a corporation to a limited_partnership the policy excludes any claim for an adverse regulatory change due to the insured's substantial non- compliance with regulations or other guidelines not insurance the policy is not insurance in the commonly accepted sense there is no insurance risk but only investment or business risk department of the treasury-internal revenue service form 886-a catalog number 20810w page of publish no irs gov schedule number or exhibit form 886-a explanations of items rev date name of taxpayer tax identification_number org year period ended 20xx 20xx 20xx 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 org issued the same direct written contracts as in 20xx 20xx policies org issued the same direct written contracts as in 20xx and 20xx 20xx policies our review of the direct written contracts executed during the tax years under consideration is summarized as follows contract excess directors officers excess employment practices special risk-expense reimbursement special risk-legal expense reimbursement special risk-cargo transit special risk-loss of services special risk-loss of major b2b special risk- excess pollution special risk-product recall special risk-punitive wrap special risk-regulatory changes special risk-tax liability deemed insurance yes deemed not insurance yes no no no no no no no no no no catalog number 20810w page of publish no irs gov department of the treasury-internal revenue service form 886-a 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 we were able to definitively deem only two of the direct written contracts as insurance contracts because they included an insurance risk ten of the twelve direct written contracts issued by the taxpayer were deemed not to include an insurance risk was either a business or investment risk or we were unable to clearly identify an insurance risk quota share reinsurance program other insurance policies co-8 participated in over insurance policies with more than insureds co-8 blended together is direct written insurance and then reinsured the entire book on a quota share basis with each of the pool participants as reinsurer no _ in the 20xx reinsurance program taxpayer received a quota share premium of dollar_figure from co-8 in exchange for the assumption of of the risk_pool comprised of the stop loss coverages issued to all the stop loss endorsement policyholders see also the joint underwriting stop loss endorsement in 20xx taxpayer was identified as reinsurer no from co-8 in exchange for the assumption of of the risk_pool reinsurer no exchange for the assuming of the risk_pool in 20xx taxpayer was again taxpayer received a quota share premium of dollar_figure from co-8 in __ received a quota share premium of dollar_figure however the direct written contracts insured by co-8 do include the 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-8 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 credit coinsurance reinsurance program the policy reinsures risks on vehicle service contracts again we do not know what risks are being insured and reinsured publish no irs gov department of the treasury-internal revenue service form 886-a catalog number 20810w page of 886-a form rev date name of taxpayer explanations of items tax identification_number schedule number or exhibit org year period ended 20xx 20xx 20xx insurance in its commonly accepted sense staff as a foreign_corporation taxpayer contracted with co-6 in country territory to serve as its residential insurance manager taxpayer did not hire or employ staff to conduct an insurance_business during the tax years under consideration taxpayer did not incur salaries and wages expenses or any other payroll costs 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 provided a copy of letters from co-15 co-9 and co-10 which was purpose to address the method used for pricing the direct written and reinsurance contracts for the taxable years under consideration in addition the cpa provided acopy ofa feasibility study for ' the study was prepared by in the august 20xx response to idr for the 20xx tax_year the cpa _inc the purpose of the study was as follows _and affiliates dated october 20xx to evaluate co-2’s desire to explore the option of forming a captive insurer for the purpose of writing coverages tha‘ are generally unavailable or impractical to obtain in the conventional insurance marketplace as such we have started with the captive insurer option and then compared it to other available risk management financing options all in recognition of the wide range of uninsured risks that co-2 now has implicitly decided to retain outright on page taxpayer addressed the pricing of the various policies written by the proposed insured is currently paying dollar_figure annually for its conventional commercial property casualty insurance program since its inception the proposed insured has paid millions of dollars for these coverages the underwriting profit made by the various insurers has caused the proposed insured to be concerned about pricing inequity the economics of the insurance industry are based on the spread of risk this means that conventional insurers will spread their risk over many insureds some insureds will have more losses than premiums_paid and some will have fewer losses than premiums_paid if underwritten department of the treasury-internal revenue form 886-a catalog number 20810w -- page of publish no irs gov schedule number or exhibit explanations of items tax identification_number 886-a form rev january name of taxpayer org year period ended 20xx 20xx 20xx effectively the insurers should make a profit by spreading its risk in this fashion most insureds consider themselves as having been very profitable for their conventional insurers and feel they are effectively subsidizing the poorer risks this leads to a belief that there is pricing inequity in past and present policies and quotes as most take exception to paying top dollar rates for standardized coverage in order to subsidize other insureds who do not share the same level of commitment to loss control the service concluded that the letters and feasibility study do 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 use of assets taxpayer engaged in investment activities that are typical of insurance_companies based on the review of the form_990 returns taxpayer made two loans to the affiliated businesses to whom it executed the direct written contracts loans were made during the 20xx and 20xx tax years the amount of the outstanding loan receivable balances represented the total percentage of assets as follows 20xx 20xx loan balance total assets percentage dollar_figure -0- oo dollar_figure dollar_figure 20xx dollar_figure dollar_figure the loan due from the affiliated businesses was still outstanding as of 20xx risk shifting risk shifting occurs if a person facing the possibility of an economic loss transfers some or all of the financial consequences of the potential loss to the insurer such that a loss by the insured does not affect the insured because the loss is offset by a payment from the insurer see revrul_60_275 risk shifting not present where subscribers all subject_to the same flood risk agreed to coverage under a reciprocal flood insurance exchange risk_distribution 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 risk_distribution form 886-a catalog number 20810w page of publish no irs gov department of the treasury-internal revenue service schedule number or exhibit 886-a form ‘ees vancany aes name of taxpayer explanations of items year period ended 20xx 20xx 20xx tax identification_number org distribute risks between insureds 96_tc_18 affd 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 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 by assuming the amount taken in as premiums and set_aside for the payment of such a claim 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 en 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 form 886-a catalog number 20810w page of publish no irs gov department of the treasury-internal revenue service schedule number or exhibit form 886-a explanations of items rev date tax identification_number name of taxpayer org year period ended 20xx 20xx 20kx the united_states this represented a significant volume of independent homogeneous risks for valid non-tax business purposes the transport company entered into an insurance arrangement with an unrelated domestic_corporation whereby in exchange for an agreed amount of premiums the domestic carrier insured the transport company against the risk of 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 zero 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 zero and of the insurer's total risks moreover in situation of revrul_2002_89 supra the service concluded that similarly in form 886-a catalog number 20810w page of publish no irs gov department of the treasury-internal revenue service schedule number or exhibit form 886-a explanations of items rev date tax identification_number name of taxpayer org year period ended 20kx 20xx 20kx insurance existed where a wholly owned subsidiary insured its parent but the arrangement represented less than of the insurer's total risk for the year in the instance case the facts therein are analogous to the analysis under 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 situation’ 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 years under audit the service concluded that the contracts between the taxpayer and the co-1 co-2 co-3 co-4 and co-5 the named insureds do not constitute contracts of insurance because the risk transferred is a business or investment risk and not an insurance risk and the contracts lack the essential element of risk_distribution most of the risk insured by the taxpayer is under the direct written contracts with an affiliated business the affiliated businesses are owned and controlled by of the total risk insured by the beneficial partner-1s of the taxpayer partner-1 and partner-2 taxpayer approximately percent of the risk assumed during the years under audit is that of the affiliated business revrul_2005_40 cited several court decisions that have recognized that risk_distribution necessarily entails a pooling of premiums so that a potential insured is not in significant part paying for its own risks risks in three insureds does not constitute risk_distribution because of the very high likelihood of the insureds paying for any of its claims with its own premiums such an arrangement is not insurance but a form of self-insurance in this case the large concentration of insurance in addition of the total premiums received during the year derived from the direct written contracts that insure the risk of the affiliated business approximately of all premiums and of the direct written premiums were paid_by one of taxpayer did not write issue or sell direct written contracts to the five affiliated businesses non-affiliated business interests nor did the taxpayer sell direct written contracts to the general_public percent of the premiums were during the tax years under audit the taxpayer was primarily and predominantly supported by direct written premiums that were received from one of the five insured parties co-1 although the direct written contracts covered five named insureds taxpayer did not receive separate premium payments from the other four entities the taxpayer did not receive direct written premiums from an adequate pool of insureds thus the contracts between the taxpayer and the affiliated business interests lack the requisite risk_distribution that is form 886-a catalog number 20810w page of publish no irs gov department of the treasury-internal revenue service schedule number or exhibit form 886-a rev date explanations of items tax identification_number year period ended 20xx 20xx 20xx name of taxpayer org necessary for the contracts to be contracts of insurance as described in subchapter_l of the internal_revenue_code because the risk is too heavily concentrated in the affiliated business the service concluded that the primary and predominant activity of the taxpayer is to assume risk from contracts that are solely concentrated in the five affiliated businesses co-1 co-2 co-3 co-4 and co-5 interests it is clear that any losses paid_by the taxpayer would be those of the affiliated business interests and not from an unrelated third party affiliated businesses paid all of the direct written premiums received by the taxpayer during the years under audit the service concluded that losses_incurred by the affiliated business interests were paid only from the premiums_paid to the taxpayer by the single entity co-1 other words the arrangement between the taxpayer and the affiliated business interests represents a form of self-insurance and no court has held that self-insurance is insurance for federal tax purposes in addition since only one of the in the service’s other concern as to whether all of the contracts qualify as insurable risks assuming that all of the agreements do constitute insurable risks or that a significant majority of the contracts qualify as insurable risks over of the total risks assumed by the taxpayer is with affiliated businesses that are owned and controlled by partner-1 and partner-2 beneficial partner-1s of the taxpayer only the premiums received by taxpayer for the excess directors officers and the special risk - cargo transit contracts were deemed to be actual premium income for the tax years under examination because the contract involved an insurance risk thus the excess directors officers and cargo transit contracts were deem to be contracts of insurance the amounts received by taxpayer 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 the affiliated business interests to the taxpayer would not qualify as an insurance premium in addition although we question whether the quota share contracts are actually valid reinsurance contracts and whether the amounts received by taxpayer under the contracts are valid reinsurance premiums the amounts received by taxpayer from co-8 form 886-a catalog number 20810w page of publish no irs gov department of the treasury-internal revenue service 886-a schedule number or exhibit form ‘revdatiunry explanations of items tax identification_number name of taxpayer org year period ended 20xx 20xx 20xx 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 of its gross_receipts limitation the amount deemed to be premiums for each taxable_year is not more than of based on our analysis of the contracts we concluded that the taxpayer did not gross_receipts meet the gross_receipts_test described in sec_501 and notice_2006_42 for any_tax year under audit although gross_receipts are less than the dollar_figure as described in situation of revrul_2002_89 supra and situation of revrul_2005_40 supra there exists an inadequate premium pooling base for insurance to exist the addition of 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 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 ten of the twelve 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 taxpayer in 20xx for ten of the twelve direct written contracts are not considered insurance premiums the amount received by taxpayer for two of the twelve direct written contracts was deemed to be a premium because only these two contracts included an insurance risk same twelve direct written contracts again only two of the twelve direct written contracts were deemed to include an insurance risk the rest of the contracts were not insurance contracts because they did not coverage an insurance risk the contracts covered either a business or investment risk during the taxable years under consideration org received amounts that the service deemed to be direct written and reinsurance premiums as follows for 20xx and 20xx taxpayer issued the 20xx contract direct written contracts excess directors officers liability dollar_figure x premium dollar_figure form 886-a catalog number 20810w page of publish no irs gov department of the treasury-internal revenue service schedule number or exhibit form 886-a explanations of items rev date tax identification_number name of taxpayer org year period ended 20xx 20xx 20xx special risk - cargo transit dollar_figure-7o x dy 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 20xx contract direct written contracts excess directors officers liability dollar_figure x special risk - cargo transit dollar_figure xx 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 20xx contract direct written contracts excess directors officers liability dollar_figure x special risk - cargo transit dollar_figure x 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 dollar_figure __90 o o dollar_figure dollar_figure premium dollar_figure o o o l o o o o o dollar_figure dollar_figure dollar_figure premium dollar_figure dollar_figure h f o o o l c c o o o form 886-a department of the treasury-internal revenue service catalog number 20810w publish no irs gov page of schedule number or exhibit form 886-a ies tenia explanations of items tax identification_number name of taxpayer org year period ended 20xx 20xx 20kx premiums received by taxpayer for each contract in 20xx were not requested during the examination 20xx the amounts received by org under the remaining contracts were not for insurance in the commonly accepted sense the terms of the contracts did not include insurance risk but covered investment or business risks 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 remaining contracts lacked the requisite insurance an arrangement that provides for the reimbursement of believed-to-be inevitable future costs does not involve the requisite insurance risk for purposes of determining whether the assuming entity may account for the arrangement as an insurance_contract for purposes of subchapter_l of the internal_revenue_code for the contracts that are deemed not to qualify as insurable risks the amount_paid for each contract by co-1 do not qualify as an insurance premium in addition although we question whether the quota share contracts are actually valid reinsurance contracts and whether the amounts received by taxpayer under the contracts are valid reinsurance premiums the amounts received by taxpayer from co-8 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 of its gross_receipts although gross_receipts are less than the dollar_figure limitation the amount deemed to be premiums for each taxable_year is not more than of gross_receipts we concluded that the taxpayer did not meet the gross_receipts_test described in sec_501 and notice_2006_42 for any_tax year under audit gross_receipts were computed under notice_2006_42 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 businesses lack the requisite risk_distribution therefore the taxpayer does not qualify as an insurance_company catalog number 20810w form 886-a page of org does not meet the new gross_receipts_test imposed by notice_2006_42 for tax years ended december 20xx through december 20xx gross_receipts did not exceed the under notice_2006_42 only gains from the sale of capital assets are included in gross_receipts publish no irs gov department of the treasury-internal revenue service schedule number or exhibit form 886-a explanations of items rev date tax identification_number name of taxpayer org year period ended 20xx 20xx 20xkx dollar_figure limitation however premium income was not greater than of the gross_receipts generated for each year org is not a member of a controlled_group as defined in sec_1563 of the internal_revenue_code therefore only the receipts generated by org were included in the gross_receipts_test used to determine qualification for treatment as a tax-exempt_entity under sec_501 application of foreign_corporation tax provisions the administrative file for the original form_1024 application filed by taxpayer included a copy however the irs has of the sec_953 election filed by the company on february 20xx no record that the election was approved as of the date of this examination it appears that the service still had not approved the sec_953 election filed years ago taxpayer withdrew the initial form_1024 application on september 20xx sec_953 defines insurance_income to mean income which is attributable to the issuing or if such reinsuring of an insurance_or_annuity_contract and would be taxed under subchapter_l income were the income of a domestic insurance_company therefore any premium income received by a cfc could qualify sec_953 allows foreign_insurance_company to elect to be treated as a domestic company for it meets certain requirements one such requirement is that the foreign tax purposes if company must be a company that would qualify under part or il of subchapter_l for the taxable_year if it were a domestic_corporation see sec_953 since the service determined that the taxpayer is not an insurance_company within the meaning of subchapter_l of the code for the year under audit it fails to meet the requirements for the election under sec_953 to be treated as a domestic_corporation in addition because the company does not meet the requirements to make the sec_953 election and thus is not a domestic_corporation the company should be treated as a controlled_foreign_corporation and the provisions of subpart_f of the internal_revenue_code sections should apply however the company did not generate any passive sources of income such as dividends interest royalties rents or annuities during the tax_year under audit the subpart_f provisions apply to foreign_corporations that qualify as controlled_foreign_corporations cfcs sec_957 defines a cfc as a foreign_corporation with regard to which more than of the total combined voting power of all classes of stock entitled to vote or the form 886-a catalog number 20810w page of publish no irs gov department of the treasury-internal revenue service schedule number or exhibit form 886-a explanations of items rev date tax identification_number year period ended 20xx 20xx 20xx name of taxpayer org 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 it were a domestic_corporation if sec_953 states that income derived from u s sources does not qualify for exemption it will not meet the lf a cfc does not qualify as an insurance_company under subchapter_l 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 cpa the taxpayer's cpa and authorized representative on april 20xx proposing denial of tax- exempt treatment under sec_501 of the internal_revenue_code for the tax years ending december 20xx december 20xx and december 20xx taxpayer’s position a response to the preliminary report was received from cpa cpa on june 20xx in the response the cpa summarized that the taxpayer disagreed with the service’s conclusions that org’s insurance operations lacked the requisite insurance risks to constitute insurance the contracts lack the requisite risk_distribution and the service ignored more than years of well-established tax law as well as the service’s hundreds of rulings the cpa argued the following points publish no irs gov department of the treasury-internal revenue service form 886-a catalog number 20810w page of schedule number or exhibit 886-a form tev sianuary name of taxpayer explanations of items tax identification_number org year period ended 20xx 20xx 20kx all of the policies written by org insure against risk of loss due to fortuitous events and there is no presence of business or investment risk coverage in any of the policies all coverages written by org are for pure insurance risks the quota share reinsurance contracts underwritten by org were contracts for insurance as all of the risks reinsured were pure insurance risks the service appears to reach a predetermined result not supported by the facts raising the lack of insurance risk issue the service demonstrates a clear lack of knowledge of customary insurance products as well as the insurance industry in general by the service ignored the important fact that when taking into account all the insurance policies and reinsurance contracts all of the premiums were attributable to many thousands of independent unrelated risks of hundreds or thousands of unrelated insureds the cpa indicated that in analyzing captive insurance arrangements for the presence of risk_distribution courts have looked at the level of unrelated risk as a metric for the presence of risk_distribution ruling in the harper group and includible subs v commissioner t c affd979 f 2d cir where unrelated risks was determined to be sufficient to meet the risk_distribution requirement the service ignores the tax_court 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 the taxpayer also cited amerco inc v commissioner cir date the service ignored revrul_2001_31 in which the service conceded that it would no longer assert the economic family theory due to its rejection by the courts instead the service now relies inappropriately on the fact that there is an overlap in common beneficial partner-1ship between org and the direct written insureds in reaching its conclusion that the direct written contracts are not valid insurance in doing so the service attempts to resurrect the economic family theory it repudiated over ten years ago the cpa argues the service’s analysis of risk_distribution is incomplete the service ignores the numerous unrelated risks that org insures courts have publish no irs gov department of the treasury-internal revenue service catalog number 20810w form 886-a page of 886-a schedule number or exhibit form rev date explanations of items tax identification_number year period ended 20kx 20xx 20xx name of taxpayer org recognized that risk_distribution can occur even with a single insured the taxpayer cited malone hyde v commissioner the tax court's position on risk_distribution is explained further in the recent opinion rent-a-center inc affiliated subsidianes v commissioner 142_tc_1 ' 20xx the tax_court found that risk_distribution was present even though rent- a-center’s captive legacy insured primarily only three companies with one company representing between and of premiums in the relevant years this finding was based on the significant number of stores employees and vehicles insured by legacy this is the actual risk exposure units covered by the contracts and not the mere number of insureds cpa argues the service’s current position is directly contrary to the position it has taken in hundreds of prior sec_501 tax-exempt determination letters that it has issued 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 20xx-9 section cpa cpa cited an expert report of org’s insurance program for 20xx through 20xx prepared by dr management at the wharton school of the university of pennsylvania the expert witness for the taxpayer in the harper case in his report on org a former professor of insurance and risk ceoncluded that the program offered a sufficient level of risk_distribution to ‘concluded that the risk_distribution in the insurance qualify as insurance program of org far exceeds the standard set forth in the harper case was government’s response to taxpayer’s position after reviewing the response to the preliminary report received from cpa cpa on june 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 direct written contracts issued by the company lacked insurance risks and the requisite risk_distribution thus the company did not operated as an insurance_company as described in subchapter_l of the code because the company was not an insurance_company it also fails to meet the requirements for tax-exempt status under sec_501 of the code for the tax years ended december 20xx december 20xx and december 20xx form 886-a catalog number 20810w page of publish no irs gov department of the treasury-internal revenue service schedule number or exhibit form 886-a explanations of items rev date tax identification_number name of taxpayer org year period ended 20xx 20xx 20xx taxpayer’s position in the second paragraph page of the june 20xx response to the agent’s preliminary report the cpa stated that the audit conclusion reached by the service is based upon a number of unsupported and factually incorrect positions including that org’s insurance operations lacked the requisite insurance risk to constitute insurance and 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 partially owned and controlled by of officers of org and beneficial partner-1s of the affiliated businesses approximately the risk assumed by org was that of the affiliated businesses org did not assume risk of or receive direct written premiums from non-affiliated businesses or the general_public under the terms of the direct written contracts the service concluded that the direct written contracts lack the requisite risk_distribution because arrangement does not include an adequate pool of related or unrelated insured for the law the large numbers to operate the pool consisted of a single policyholder and payer of direct written premiums thus org’s primary and predominant activity is not insurance as described in subchapter_l of the internal_revenue_code taxpayer’s position on page sec_2 through the cpa described the terms of direct contracts written by org during the tax years in question the cpa claims that the contracts are insurance in the commonly accepted sense the risk covered are insurance risks and the contracts do not lack risk_distribution government’s position the government's position with respect to the status of the direct written contracts remains unchanged the service contends that only the excess directors officers liability insurance and the special risk - cargo transit policies covers insurance risks and thus are valid contracts of insurance the remaining ten direct written contracts are not contracts of insurance in the commonly accepted sense because the contract covers business or investment risks and not an insurance risk taxpayer’s position on page of the taxpayer's position the cpa cited the harper group subsidiaries v commissioner t c to support the argument that org qualifies as an insurance significant percentage percent of an company the cpa cited the court’s holding when a insurance company’s income is received from a relatively large number of unrelated insureds form 886-a catalog number 20810w page of publish no irs gov department of the treasury-internal revenue service form 886-a explanations of items rev date schedule number or exhibit tax identification_number year period ended 20xx 20kx 20xx name of taxpayer org 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 the last paragraph on page of the june 20xx response in its preliminary report the service merely states that due to approximately percent of premiums being direct written premiums for coverages written to four insureds which in fact owned no interest in org there is a lack of adequate risk_distribution the service’s position ignores the important fact that when taking into account all the insurance policies and reinsurance contracts all of the premiums were attributable to 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 approximately of the risk assumed by org was from unrelated or unaffiliated insureds the service believes that this conclusion would be based on a misunderstanding of the harper case in the harper case to of the total premiums received for the years at issue were not related to a single policyholder rather the to were the total percentages received from all related policyholders including brother-sister_corporations a total of entities the court’s analysis in harper group must be read in its entirety and all the facts and circumstances must be considered ie that there were 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 department of the treasury-internal revenue service form 886-a catalog number 20810w publish no irs gov page of 886-a form rev date name of taxpayer explanations of items tax identification_number schedule number or exhibit org year period ended 20xx 20xx 20xx 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 government’s response the proper method for determining the amount of risk being assumed by the company is to compare the premiums received on the various contracts using the amounts reported on the form_990 returns the taxpayer assumed risks as follows 20xx direct written premiums quota share reinsurance assumed other reinsurance assumed total 20xx direct written premiums quota share reinsurance other reinsurance total premiums 20xx direct written premiums quota share reinsurance other reinsurance total premiums dollar_figure _0 dollar_figure dollar_figure _0 dollar_figure dollar_figure _0 dollar_figure qo under this method the service concluded that the taxpayer’s the primary and predominant activity conducted is assuming risk under the direct written contracts with the affiliated business interests because the activity accounted for more than percent of the business and premiums during the years under audit form 886-a catalog number 20810w publish no irs gov page of department of the treasury-internal revenue service schedule number or exhibit explanations of items name of taxpayer tax identification_number fom886-a dae iarercted org year period ended 20xx 20xx 20xx taxpayer’s position in paragraph page the cpa cited the recent tax_court decision rent-a-center inc affiliated subsidiaries v commissioners 142_tc_1 20xx as further evidence of the court’s position that risk_distribution is based on the actual risk exposure units covered by the contracts and not by the mere number of insureds government’s response the opinion and dissent in this court case emphasized the following points e e in the irs likewise abandoned its position that there is a per se rule against the deductibility of brother-sister premiums concluding that the characterization of such payments as insurance premiums should be governed not by a per se rule but by the facts and circumstances of the particular case revrul_2002_90 2002_2_cb_985 accord rev_rul c b pincite the service may continue to challenge certain and circumstances of each case transactions insurance captive based facts the on respondent's position in the instant cases is consistent with the ruling position the irs has maintained for the past years--namely that characterization of intragroup payments as insurance premiums should be determined on the basis of the facts and circumstances of the particular case revrul_2005_40 describe facts and circumstances in which payments received by captives under parent-subsidiary and brother-sister arrangements would and would not qualify as an sec_162 deduction for federal_income_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 case the large concentration of insurance risks in a single 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 although the direct written contracts list four named insureds org received premiums from only one of the entities co-1 the direct written premiums were paid_by the single insured and were not paid_by or allocated amongst the other three businesses named in the contracts such an arrangement is not insurance but a form of self-insurance in this 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 form 886-a department of the treasury-internal revenue service catalog number 20810w publish no irs gov page of schedule number or exhibit form 886-a explanations of items rev date tax identification_number name of taxpayer org year period ended 20xx 20xx 20xx service conceded that it would no longer assert the economic family theory due to its rejection by the courts government’s response the current service position is expressed in ruling revenue i 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 a single 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 although the direct written contracts list four named insureds org received premiums from only one of the entities in this case the large concentration of insurance the direct written premiums_paid by the single insured were not paid_by or allocated amongst the other three businesses named in the contracts such an arrangement is not insurance but a form of self-insurance however when the arrangements between the companies do constitute insurance for federal_income_tax purposes and assuming these arrangements represented more than percent of the insuring company's business the company will be an insurance_company within the meaning of sec_816 and sec_831 and the premium payments may be deductible under code sec_162 assuming the requirements for deduction are otherwise satisfied taxpayer’s position on page paragraph the cpa stated that service’s current position is directly contrary to the position it has taken in hundreds of prior sec_501 tax-exempt determination letters that it has issued there has been no intervening change in law to account for the service’s disparate tax treatment between org and such similarly situated taxpayers according the service has violated its own procedures and mandate to provide a uniform application of existing tax law see rev_proc 20xx-9 section government’s position each taxpayer stands alone the audit of the activities and books_and_records of org and the outcome of such audit stands alone the issues raised by the service with respect to the audit of org are based on available facts catalog number 20810w form 886-a publish no irs gov page of department of the treasury-internal revenue service schedule number or exhibit form 886-a rev date explanations of items name of taxpayer tax identification_number org year period ended 20xx 20xx 20xx taxpayer’s position on page of the response the cpa stated that the taxpayer's position is further supported by former professor of insurance and risk management at the expert opinion of dr the wharton school of the university of pennsylvania program for the 20xx through 20xx years and concluded that the program offered a sufficient level of risk_distribution to qualify as insurance he also concluded that the risks transferred in the insurance policies issued by org are ordinary insurable risks and represent insurance in the commonly accepted sense examined org’s insurance government’s response insurance program did not change the opinions expressed by dr the government's position with respect to the activities conducted by org during the tax years covered by this examination_report ‘about the conclusion therefore org’s primary and predominant activity was not issuing of insurance the government concluded that the contracts executed by org do not constitute contracts of insurance and the arrangement entered into by org lacks the requisite element of risk_distribution or annuity_contracts or the reinsuring of risks underwritten by insurance_companies thus org is not an insurance_company as described in subchapter_l of the code and does not qualify for treatment as a tax-exempt_entity under sec_501 of the internal_revenue_code for the tax_year ended december 20xx december 20xx and december 20xx in addition the taxpayer's sec_953 election is not valid because the taxpayer is not an insurance_company and the service never approved the election department of the treasury-internal revenue service form 886-a catalog number 20810w publish no irs gov page of