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 id number i poe tax period s ended december 20xx december 20xx december 20xx december 20xx vil this is a final_determination that you do not qualify for exemption from federal_income_tax under internai revenue code the code sec_501 as an organization described in code sec_501 for the tax periods above your determination_letter dated october 20xx is revoked our adverse determination as to your exempt status was made for the following reason s you are not an insurance_company within the meaning of subchapter_l of the internal_revenue_code because your primary and predominant activity is not insurance the purported insurance and or reinsurance transactions lack economic_substance organizations that are not exempt under sec_501 generally are required to file federal_income_tax returns form_1120 form_1041 or form 1120-f for foreign_corporations and pay tax where applicable for further instructions forms and information please visit www irs gov if you decide to contest this determination you may file an action for declaratory_judgment under the provisions of sec_7428 of the code in one of the following three venues united_states tax_court the united_states court of federal claims or the united_states district_court for the district of columbia a petition or complaint in one of these three courts must be filed within days from the date this determination_letter was mailed to you please contact the clerk of the appropriate court for rules and the appropriate forms for filing petitions for declaratory_judgment by referring to the enclosed publication you may write to the courts at the following addresses united_states tax_court second street n w washington d c u s court of federal claims madison place n w washington d c u s district_court for the district of columbia constitution ave n w washington d c processing of income_tax returns and assessments of any taxes due will not be delayed if you file a petition for declaratory_judgment under sec_7428 of the internal_revenue_code you may aiso be eligible for help from the taxpayer_advocate_service tas tas is an independent organization within the irs that can help protect your taxpayer rights tas can offer you help if your tax problem is causing a hardship or you've tried but haven't been able to resolve your problem with the irs if you qualify for tas assistance which is always free tas will do everything possible to help you visit www taxpayeradvocate irs gov or call if you have any questions about this letter please contact the person whose name and telephone number are shown in the heading of this letter sincerely yours appeals team manager enclosure publication cc department of the treasury internal_revenue_service irs tax_exempt_and_government_entities_division org address date date taxpayer_identification_number form tax_year s ended 20xx 20xx 20xx 20xx person to contact d number contact numbers telephone fax manager's name id number manager's contact number response due_date dear certified mail - return receipt requested why you are receiving this letter enclosed is a copy of our report of examination explaining why revocation of your organization's tax-exempt status is necessary what you need to do if you agree if you agree with our findings please sign the enclosed form 6018-a consent to proposed action and return it to the contact at the address listed above we'll send you a final letter revoking your exempt status if we don't hear from you if we don’t hear from you within calendar days from the date of this letter we'll process your case based on the recommendations shown in the report of examination and this letter will become final effects of revocation in the event of revocation you’ll be réquired to file federal_income_tax returns for the tax_year s shown above file these returns with the contact at the address listed above within calendar days from the date of this letter unless a request for an extension of time is granted file returns for later tax years with the appropriate service_center indicated in the instructions for those returns what you need to do if you disagree with our findings if you disagree with our position you may request a meeting or telephone conference with the supervisor of the contact identified in the heading of this letter you also may file a protest with the irs appeals_office by submitting a written request to the contact person at the address listed above within calendar days from the date of this letter the appeals_office is independent of the exempt_organizations division and resolves most disputes informally letter 3610-r catalog number 59432g for your protest to be valid it must contain certain specific information including a statement of the facts the applicable law and arguments in support of your position for specific information needed for a valid protest please refer to page one of the enclosed publication how to appeal an irs decision on tax-exempt status and page six of the enclosed publication the examination process publication also includes information on your rights as a taxpayer and the irs collection process please note that fast track mediation referred to in publication generally doesn’t apply after we issue this letter if you and appeals don’t agree on some or all of the issues after your appeals_conference or if you don’t request an appeals_conference you may file suit in united_states tax_court the united_states court of federal claims or united_states district_court after satisfying procedural and jurisdictional requirements you may also request that we refer this matter for technical_advice as explained in publication please contact the person identified in the heading of this letter if you’re considering requesting technical_advice if we send a determination_letter to you based on a technical_advice_memorandum issued by the exempt_organizations rulings and agreements office then no further irs administrative appeal will be available to you contacting the taxpayer_advocate office is a taxpayer right you have the right to contact the office_of_the_taxpayer_advocate service tas tas is your voice at the irs this service helps taxpayers whose problems with the irs are causing financial difficulties who have tried but haven’t been able to resolve their problems with the irs and those who believe an irs system or procedure is not working as it should if you believe you are eligible for tas assistance you can call the toll-free number or tty tdd for more information go to www irs gov advocate if you prefer you may contact your local taxpayer_advocate at internal_revenue_service office_of_the_taxpayer_advocate for additional information if you have any questions please call the contact at the telephone number shown in the heading of this letter if you write please provide a telephone number and the most convenient time to call if we need to contact you thank you for your cooperation sincerely director eo examinations enclosures report of examination form 6018-a publication publication letter 3610-r catalog number 59432g schedule number or exhibit form 886-a rev date name of taxpayer explanations of items tax identification_number org year period ended 20xx 20xx 20xx 20xx issue 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 should its tax-exempt status under sec_501 of the internal_revenue_code be revoked effective january 20xx is the sec_953 election valid if the taxpayer is not an insurance_company is org entitled to relief under sec_7805 facts org taxpayer was formed and incorporated in island territory on december 20xx under the provisions of the international business companies act cap 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 a single parent captive taxpayer is wholly owned by trust an irrevocable_trust formed in city county state on september 20xx by indv-1 grantor indv-1 is the brother of indv-2 trust is located at address city state zip code this is also the principal address of indv-2 and indv-3 indv-2 and wife indv-3 served as the initial trustees of trust_beneficiary of the trust over the years the board_of trustees was expanded to included indv- and indv-5 son and daughter of dr indv-2 and indv-3 however indv-3 and indv-5 resigned as trustees in october 20xx and indv-2 is still the sole beneficiary currently the trust is governed by indv-2 and his son indv-4 indv-2 is the sole the tege examining agent obtained a copy of taxpayer's form_1024 application administrative file from rulings and agreements in washington d c on october 20xx the administrative file included a copy of the form_1024 application articles of incorporation the sec_953 election regulatory filings application_for insurance_business license and responses of insurance regulators insurance underwriting diagrams organizational owner chart supplemental information for the form_1024 a copy of trust agreement financial information for 20xx and subsequent years forms of credit reinsurance agreements entered form 886-a department of the treasury-internal revenue service catalog number 20810w publish no irs gov page of schedule number or exhibit form rev date explanations of items 886-a name of taxpayer tax identification_number year period ended 20kx 20xx 20xx 20xx org 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 course of the current audit according to the articles of incorporation the taxpayer is to be governed by a board_of directors composed of one to seven directors the board is actually composed of two directors indv-2 and indv-3 president treasurer and assistant secretary and assistant treasurer of the taxpayer indv-2 served as director chief_executive_officer ceo indv-3 served as vice president secretary taxpayer filed an application_for an insurance_business license with territory financial services department on november 20xx the application included a copy of the taxpayer's business plan according to the business plan indv-2 and indv-3 are also owners of co-1 a city based marketer of specialty dermatologic creams that are sold to major drug store chains such as eckerd rite aid walgreens etc and through the home shopping television channels the family also own interests in other city based businesses the family’s ownership in co-1 and other business interests was referred to as affiliated business interests 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 was formed to operate primarily to accomplish this objective the taxpayer was initially formed and created as a controlled_foreign_corporation the taxpayer is not a member of a controlled_group_of_corporations as a controlled_foreign_corporation indv-2 family president filed an sec_953 election with the irs on february 20xx the election was approved by the irs with an effective date of december 20xx on march 20xx the irs rulings and agreements in cincinnati received form_1024 application_for recognition of exemption under sec_501 filed by taxpayer seeking exemption as a small insurance_company under sec_501 of the internal_revenue_code the application revealed that taxpayer was incorporated on december 20xx thus the taxpayer's initial tax_year was comprised of the short_year december 20xx through december 20xx the first full year of operations was 20xx taxpayer filed its initial form_990 return for the tax_year ended december 20xx signed the form_1024 application on february 20xx a form_2848 power_of_attorney indv-2 family president 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 886-a rev date name of taxpayer org year period ended 20kx 20xx 20xx 20xx accompanied the application authorizing attorney attorney to represent the taxpayer during the application process the attorney worked for a law firm in city state in part ll of the form_1024 application taxpayer described its past present and planned operations as follows underwriting select lines of property and casualty insurance coverages for business entities that are related but independently operated insurance risks underwritten may include by the way of example directors and officers liability employment practices liability expense reimbursement intellectual asset property_tax liability and other lines of property and casualty exposure the percentage of organizational time devoted to this type of activity is estimated to be -0 issuing reinsurance coverage for select lines of property and casualty insurance risks ie serving as underwriting on certain kinds of property and casualty insurance coverages directly issued by other insurance_companies or participating in an insurance pooling arrangement with third parties the percentage of organizational time devoted to this type of activity is estimated to be -0 as a supporting activity to the above two primary activities the organization will invest the monetary assets of the organization including those which are required to be held as insurance reserves to support underwriting expenses and losses all the activities of the organization have as their purpose the carrying on of an insurance_business other than life_insurance the nature of the investments will be traditional insurance activities see item below which include from time to time asset- backed loans corporate lending of affiliates’ receivables or other assets in a commercially reasonably manner and as authorized by the insurance regulators the above described activities were all initiated in december 20xx the above described activities will be conducted in the territory through a designed regulated and licensed insurance manager which present time is co-2 co-2 is one of the larger captive managers in the territory and is a subsidiary of an international financial services firm co-2 senior executives have decades of relevant insurance experience the largest source of financial support for the organization is income from traditional insurance underwriting activities the only other source of 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 886-a rev date name of taxpayer org year period ended 20xx 20xx 20xx 20xx financial support for the organization is income from investing the organization's insurance reserves eg investments in stocks bonds corporate lending receivable factoring and other investments and related risk management activities on april 20xx the form_1024 application was referred to rulings and agreements in washington d c for consideration and ruling the application was assigned to a tax law specialist for review on april 20xx on april 20xx the tax law specialist mailed a letter to the taxpayer's representative attorney attorney located in city state the letter requested additional information about the taxpayer’s operations the taxpayer’s response to the letter was originally due by may 20xx however taxpayer's representative requested three day extensions the last extending the due_date to september 20xx during the interim period the form_1024 application was transferred to a new tax law specialist on september 20xx the new tls mailed a letter to taxpayer's registered agent in the territory providing notification about the application transfer and to confirm the september 20xx due_date to the service's request for additional information about the taxpayer's operations the tls received the additional information requested from the taxpayer's representative attorney attorney on september 20xx on october 20xx after reviewing all information exchanged between the parties the tax law specialist recommended approved of the application_for tax-exempt status under sec_501 of the internal_revenue_code the tls summarized the basis for approving the application as follows org was incorporated in the territory on december 20xx org underwrites property and casualty insurance coverage for business entities that are related but independently operated insurance risks underwritten are listed in org’s form_1024 page specifically org writes insurance for co-1 indv-2 family m d p a and the family limited_partnership none of which are owned by org a diagram of organizational structure and a diagram of insurance underwriting activities is shown in exhibit d in the application case file org states that its net written premiums are not expected to exceed dollar_figure for any year org has made an election to be treated as a domestic insurance corporation under sec_953 of the code sec_501 of the code provides that insurance_companies or associations other than life including interinsurer and reciprocal underwritten are exempt from taxation under sec_501 a if net written form 886-a catalog number 20810w page of department of the treasury-internal revenue service publish no irs gov schedule number or exhibit form 886-a rev date name of taxpayer explanations of items tax identification_number year period ended 20xx 20xx 20xx 20kx org premium or if greater direct written premiums for the taxable_year must not exceed dollar_figure taxpayer was granted tax-exempt status under sec_501 on october 20xx the ruling was effective retroactively back to the date of incorporation december 20xx the letter was signed by robert c harper jr manager exempt_organization technical group the ruling letter included the following language you were incorporated under the laws of the territory you have made an election under sec_953 of the code to be treated as a domestic insurance_company for all purposes of the internal_revenue_code you are an insurance_company other than life based on the information supplied and assuming your operations will be as stated in your application_for recognition of exemption we have determined you are exempt from united_states income_tax under sec_501 of the code as an organization described in sec_501 commencing on december 20xx and for tax years when your net written premiums or if greater your direct written premiums do not exceed the dollar_figure limit prescribed by sec_501 the governor of the territory of the territory issued the first insurance license to taxpayer on december 20xx in accordance with the provisions of section of the insurance of as a territory corporation taxpayer filed form_990 returns as an sec_501 small insurance_company tege exempt_organizations division san francisco post of duty initiated an examination of the taxpayer's 20xx form_990 return in september 20xx during the period of december 20xx and december 20xx taxpayer operated in 20xx the taxpayer wrote direct written contracts to the affiliated business interests as follows special risk - collection rate special risk - expense reimbursement special risk - commercial property gap special risk - punitive wrap liability special risk - product recall special risk - commercial general liability gap special risk - loss of major business to business relationship special risk - medical malpractice gap special risk - regulator changes special risk - regulatory change sec_2 special risk - tax_liability special risk - tax_liability directors officers liability insurance excess employment practices liability insurance excess intellectual_property package policy excess intellectual_property package policy and excess pollution liability the terms of each policy stated that the named insurers are org as lead insurer and co-6 as a joint insurer org is responsible for insuring of the risks incurred under the policies and co-6 is responsible for of the risk under the policies the contracts reviewed during the audit were sanitized by the cpa excess form 886-a catalog number 20810w page of publish no irs gov department of the treasury-internal revenue service schedule number or exhibit form 886-a rev date name of taxpayer explanations of items tax identification_number year period ended 20xx 20xx 20xx 20xx org removing the names of the other joint insurers that assumed the remaining of the direct risks each of the direct written contracts issued by the taxpayer during the 20xx tax_year is described below special risk - collection rate insurance_policy rate-081 provides the insured against uncollectible premiums during the policy period based on the prior year’s experience rate special risk - expenses reimbursement insurance_policy hexpreim-081 covers public relations expenses to mitigate adverse publicity to co-1 and indv-2 family m d p a under certain circumstances including actual or imminent incidents where the insureds potential liability amount is in excess of dollar_figure product recalls layoffs and labor disputes government or regulatory litigation bankruptcy or other major financial crisis loss of intellectual_property rights unsolicited takeover bids terrorism or any other adverse incident expected to reduce the insureds annual gross revenue by at least the policy also covers all expenses for co-1 and indv-2 family m d p a s defenses to actual or alleged civil liability special risk - commercial property gap insurance_policy prop-gp-081 provides reimbursement for claims which are denied by co-12 under commercial package policy number for the calendar_year 20xx which includes exclusion endorsement buy back or differences in conditions coverage caused by earthquakes flood or froze from an underlying commercial property policy special risk - punitive wrap liability insurance_policy pwrp-081 provides that org will pay claims filed by the affiliated businesses resulting from the failure of an insurer to cover punitive or exemplary damages judgments or awards related to the other policies special risk - product recall insurance_policy recall-081 provides for the indemnification of the affiliated businesses for expenses involved in the recall of all products manufactured and or sold by the affiliated businesses during 20xx special risk- commercial general liability policy gp-081 provides reimbursement for claims which are denied by co-12 under general liability policy number effective january 20xx through january 20xx which includes exclusion endorsement buy back or differences in conditions coverage from an underlying commercial property commercial general liability or other commercial insurance_policy form 886-a catalog number 20810w page of publish no irs gov department of the treasury-internal revenue service schedule number or exhibit form rev date explanations of items 886-a name of taxpayer tax identification_number year period ended 20xx 20xx 20xx 20xx org special risk - loss of major business to business relationship insurance_policy b2b-081 provides for the indemnification of co-1 and indv-2 family m d p a for any business interruption loss of up to months suffered as a result of losing the services business interruption includes the impact of lost revenue and the extra expenses involved in finding a replacement business to business relationship special risk - medical malpractice gap policy mal-081 provides reimbursement for claims which are denied by the medical malpractice insurance_policy state medical liability trust policy covering calendar_year 20xx which includes exclusion endorsement buy back’ or differences in conditions coverage from an underlying commercial property commercial general liability or other commercial insurance_policy special risk - regulatory changes insurance_policy reg-081 covers actual compliance expenses and business interruptions suffered as a result of any regulatory change having an adverse impact on the normal on-going business operations of the affiliated businesses the policy does not cover adverse regulatory changes resulting from substantial noncompliance with regulations or guidelines or those changes initiated in direct response to negligent acts omissions or errors by the affiliated businesses special risk - regulatory changes insurance_policy reg-082 covers actual compliance expenses and business interruptions suffered as a result of any regulatory change having an adverse impact on the normal on-going business operations of the affiliated businesses the policy does not cover adverse regulatory changes resulting from substantial noncompliance with regulations or guidelines or those changes initiated in direct response to negligent acts omissions or errors by the affiliated businesses special risk - tax_liability insurance_policy tax-081 provides the affiliated businesses with indemnification up to of the amount of additional tax_liability each may incur on its 20xx federal_income_tax return no coverage is provided for additions to tax civil penalties or criminal penalties for delinquent returns or criminal or fraudulent acts special risk - tax_liability insurance_policy tax-082 provides the affiliated businesses with indemnification up to of the amount of additional tax_liability each may incur on its 20xx federal_income_tax return no coverage is provided for additions to tax civil penalties or criminal penalties for delinquent returns or criminal or fraudulent acts excess directors officers liability insurance_policy d 0o-081 provides indemnification subject_to certain limitations to the affiliated businesses for their indemnification of its officers and directors for wrongful acts including any error misstatement misleading statement act omission neglect or breach of duty committed attempted or allegedly committed or attempted by an officer or director of the affiliated businesses the 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 rev date name of taxpayer explanations of items tax identification_number year period ended 20xx 20kx 20xx 20xx org policy also covers similar acts in relation to mergers and acquisitions moreover the policy includes liability for pollution the policy also provides direct and executive liability coverage for similar acts to the affiliated business officers and directors excess employment practices liability insurance_policy epl-081 provides for the indemnification of the affiliated businesses against all costs and expenses_incurred as a result of claims filed by employees for wrongful termination dismissal discharge sexual harassment unlawful employment discrimination and employment related invasion of privacy and defamation excess intellectual_property package policy ipp-081 provides indemnification subject_to certain limitations to pae and pap for all damages legally obligated to pay for litigation expenses mitigation expenses investigation_expenses costs to replace restore or re-create intellectual_property additional damages and rewards resulting from wrongful acts committed during the policy period wrongful acts include infringement of copyright plagiarism invasion or interference of right of privacy or publicity libel slander piracy or unfair competition breach of contract patent infringement and malicious prosecution with regard to intellectual_property excess intellectual_property package policy ipp-082 provides indemnification subject_to certain limitations to pae and pap for all damages legally obligated to pay for litigation expenses mitigation expenses investigation_expenses costs to replace restore or re-create intellectual_property additional damages and rewards resulting from wrongful acts committed during the policy period wrongful acts include infringement of copyright plagiarism invasion or interference of right of privacy or publicity libel slander piracy or unfair competition breach of contract patent infringement and malicious prosecution with regard to intellectual_property excess pollution liability insurance_policy poll-081 provides for the indemnification of the affiliated businesses against clean up cost and diminution of property value due to any pre-existing and new on-site pollution and environmental contamination each direct written contract listed the named insured as co-1 co-1 indv-2 family m d p a the family limited_partnership co-3 co-4 and co-5 the address of the named insureds is listed in the contracts as address city state zip code the policy period for each contract was from january 20xx to january 20xx the contracts also listed the aggregate limit of insurance and the premium paid_by the total combined premium paid_by the named insured as follows form 886-a catalog number 20810w page of publish no irs gov department of the treasury-internal revenue service schedule number or exhibit form 886-a rev date explanations of items name of taxpayer tax identification_number org year period ended 20xx 20xx 20xx 20xx contracts p n p n w r special risk - collection rate special risk - expense reimbursement special risk - commercial property gap special risk - punitive wrap liability special risk - product recall special risk - commercial general liability gap special risk - loss of major b2b relationship special risk - medical malpractice gap special risk - regulatory changes special risk - regulatory change sec_11 special risk - tax_liability special risk - tax_liability excess directors officers excess employment practice sec_15 excess intellectual_property package policy excess intellectual_property package policy excess pollution liability o total direct written premiums per form_990 difference aggregate total combined limit premium org premiums dollar_figure dollar_figure e c c c c c c c c c c c c c o l o o a e n a c a o a o a a o o a o o o o o c o o c o o o l c o o o o o a c o c c o o c c c e o e c o o e c o o l o dollar_figure 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 the terms of each policy state that the named insurers are org as lead insurer and co-6 as joint insurer org is responsible for insuring of the risks incurred under the policies and co-6 is responsible for of the risk under the policies the names of the remaining joint insurers were removed from the contracts by the taxpayer's cpa the aggregate limits for the policies range from dollar_figure to dollar_figure with most of the policies having an aggregate limit of dollar_figure combined aggregate limit is dollar_figure according to the terms of the contracts reviewed org was to receive of the combined total premiums of dollar_figure or dollar_figure from the direct written policies in 20xx the organization reported program service revenue totaling dollar_figure for 20xx the 20xx form 990-ez return does not itemize the sources of revenue included in the program revenue amount joint underwriting stop loss endorsement in addition to the direct property and casualty insurance policies org also executed a joint underwriting stop loss endorsement with co-6 insurance corp whereby both parties agreed to underwrite the insurance coverages described in the policies with the affiliated business interests org is identified as the lead insurer the terms of the endorsement reads as follows form 886-a catalog number 20810w department of the treasury-internal revenue service publish no irs gov page of schedule number or exhibit form rev date explanations of items 886-a tax identification_number name of taxpayer org year period ended 20xx 20xx 20xx 20xx 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-6 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-6 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 on page paragraph states that the premium rate for this joint underwriting stop loss endorsement is of the combined gross direct written premiums for the specified policies due directly from the insureds this endorsement premium of dollar_figure out of the total premiums of dollar_figure is payable directly from the insureds to the stop loss insurer based on the terms it appears that stop loss endorsement policy serves to supplement the terms of the direct written policies under the terms of direct written contracts and the joint underwriting stop loss endorsement agreement the named insureds were required to pay of total premiums of dollar_figure of the total premium dollar_figure or was paid directly to co-6 as stop loss insurer and the balance of dollar_figure or was paid directly to the taxpayer as joint insurer in 20xx taxpayer also entered into two reinsurance arrangements form 886-a catalog number 20810w page of publish no irs gov department of the treasury-internal revenue service form schedule number or exhibit rev date explanations of items 886-a tax identification_number name of taxpayer org year period ended 20xx 20xkx 20xkx 20kx quota share reinsurance agreement the first arrangement is referred to as a reinsurance risk pooling program org ins corp executed a quota share reinsurance policy qs20xx with co-6 the agreement indicates that co-6 insurance corp is located at address island territory org is identified as the reinsurer and co-6 insurance corp is the reinsured the policy runs from january 20xx to january 20xx 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- 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-6 insured a portion of the direct insurance underwritten by the pool participants using a so- called stop loss endorsement co-6 participated in over insurance policies with more than insurers co-6 blended together its direct written insurance and then reinsured the entire book on a quota share basis with each of the pool participants schedule attached to the policy revealed that org is one of many reinsurers that participated in the program and who contracted to reinsure their respective quota shares of cq-6’s risk_pool according to schedule a total of reinsurers are identified co-6 paid total premiums of dollar_figure to the reinsurers participating in the program org is reinsurer as reinsurer the taxpayer received a quota share premium from co-6 in exchange for the assumption of of the risk_pool comprised of the stop loss coverages issued during the policy period by co-6 insurance_company to all stop loss endorsement policyholders in 20xx co-6 insurance corporation paid total reinsurance premiums of dollar_figure to participating reinsurers of this amount co-6 insurance corporation paid a quota share reinsurance_premium of dollar_figure which was equal to risk_pool assumed by taxpayer of the dollar_figure total premiums according to the general ledger the taxpayer received reinsurance premiums of dollar_figure from co-6 insurance corp in 20xx the taxpayer relied on the services of co-7 and co-8 to establish the premium rating methodology for the direct written contracts and the quota share reinsurance agreement credit coinsurance reinsurance agreement under the terms of the second arrangement which is referred to as the credit coinsurance reinsurance program the taxpayer assumed reinsurance contracts from co-6 the taxpayer reinsured a quota share of the risks from vehicle service contracts reinsured by co-6 insurance corporation the vehicle service contracts were initially written by co-9 in 20xx assumed by co-10 then by co-11 from co-10 and finally assumed by co-6 from co-11 the taxpayer received a pro_rata share of the earned premiums received by co-6 the taxpayer was paid a reinsurance_premium of dollar_figure from co-6 in 20xx form 886-a catalog number 20810w page of publish no irs gov department of the treasury-internal revenue service schedule number or exhibit form rev date explanations of items 886-a name of taxpayer tax identification_number org year period ended 20xx 20xx 20xx 20xx under the terms of the contracts reviewed for 20xx the taxpayer assumed risk exposures as follows direct written premiums quota share reinsurance assumed other reinsurance assumed total for the tax_year ended december 20xx the taxpayer reported gross_receipts of dollar_figure and total revenue of dollar_figure revenue was derived primarily from premiums received from the direct written reinsurance risk pooling program and the credit coinsurance reinsurance program the difference between gross_receipts and total revenue is only the net_loss from the sale of assets was reported on the form_990 return gross_receipts were not accurately reported on the return the taxpayer's gross_receipts for 20xx were as follows 20xx program revenue service direct written premiums quota share reinsurance premiums credit coinsurance reinsurance premiums total premiums investment_income proceeds from sale of assets’ other income gross_receipts the direct written premium income was received from indv-2 family m d p a and co-1 which are owned by indv-2 one of the beneficial owners of org insurance_company and from the family limited_partnership the bank statements for the wells fargo checking account shows a deposit of dollar_figure posted to the account on december 20xx the books_and_records did not reveal the source of the deposit in his april 20xx response to idr cpa cpa identified the sources of the direct written premium deposit as follows co-1 indv-2 family m d p a family family limited_partnership dollar_figure o e o o l o dollar_figure of the total premiums received by the taxpayer in 20xx of the premiums were generated from the seventeen direct written policies with the named insureds although only three of the ' after offsetting cost_basis of dollar_figure the org incurred a net_loss of dollar_figure the net_loss was reported on the return form 886-a department of the treasury-internal revenue service catalog number 20810w publish no irs gov page of schedule number or exhibit 886-a form rev date name of taxpayer explanations of items tax identification_number year period ended 20xx 20xx 20kx 20xx org named insureds actually paid the direct written premium 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 which consisted primarily of cash in temporary savings dollar_figure and notes and loans receivable balances due from affiliated business interests 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 however the taxpayer participated in two of the three programs that it engaged in during the 20xx tax_year direct written contracts with affiliated business interests and the credit coinsurance reinsurance programs taxpayer did not participate in the quota share risk_pool reinsurance program in 20xx in addition the direct insurance_business was smaller than in 20xx the taxpayer wrote only eight of the direct contracts as written in 20xx to insure certain property and casualty of affiliated business interests the taxpayer wrote the following contracts in 20xx special risk - collection rate special risk - commercial general liability gap excess intellectual_property package special risk - commercial medical malpractice gap special risk - commercial property gap special risk - regulatory changes special risk - tax_liability and special risk - punitive wrap org is listed as the sole lead insurer co-6 is listed the sole stop loss insurer the contracts did not list of percentage of risk assumed by the lead and stop loss insurers the contracts listed co-1 co-1 indv-2 family m d p a family limited_partnership co- co-5 and co-4 as the named insureds the eight contracts were written for the policy period of january 20xx to january 20xx the contracts did not list of percentage of risk assumed by the lead and stop loss insurers however taxpayer as lead insurer received of the premium paid_by the named insurers the named insureds did not pay any portion of the direct written premiums to co-6 nor did the taxpayer disburse any portion of the direct written premiums received from the named insureds to co-6 thus it appears that the taxpayer of the risk under the terms of the direct written contracts taxpayer is the sole lead insurer in the following direct contracts it wrote to insure certain property and casualty risks of co-1 co-1 indv-2 family m d p a family limited form 886-a catalog number 20810w page of publish no irs gov department of the treasury-internal revenue service schedule number or exhibit form 886-a rev date explanations of items name of taxpayer tax identification_number year period ended 20xx 20kx 20xx 20xx org partnership co-3 co-5 and co-4 for the policy period of january 20xx through january 20xx contracts special risk - collection rate special risk - commercial property gap special risk - punitive wrap liability special risk - commercial general liability gap special risk - medical malpractice gap special risk - regulatory changes special risk - tax_liability excess intellectual_property package policy total direct written premiums per form_990 difference aggregate total combined limit premium org premiums dollar_figure dollar_figure e c o o o o o o o o o o c c o o o o o o i l o o a dollar_figure dollar_figure o c c c a o c o o i i o o c -0- dollar_figure in 20xx taxpayer did not execute a joint underwriting stop loss endorsement with co-6 insurance corporation each of the direct written contracts issued by the taxpayer during the tax_year is described below special risk - collection rate insurance_policy rate-091 provides the insured against uncollectible premiums during the policy period based on the prior year’s experience rate special risk - commercial property gap insurance_policy gp-091 provides reimbursement for claims which are denied by co-12 under commercial package policy number for the calendar_year 20xx which includes exclusion endorsement buy back or differences in conditions coverage caused by earthquakes flood or froze from an underlying commercial property policy special risk - punitive wrap liability insurance_policy pwrp-091 provides that org will pay claims filed by the affiliated businesses resulting from the failure of an insurer to cover punitive or exemplary damages judgments or awards related to the other policies special risk- commercial general liability gp-091 provides reimbursement for claims which are denied by co-12 under general liability policy number effective january 20xx through january 20xx which includes exclusion endorsement buy back or differences in conditions coverage from an underlying commercial property commercial general liability or other commercial insurance_policy special risk - medical malpractice gap coverage gp-091 provides reimbursement for claims which are denied by the medical malpractice insurance_policy state medical liability trust policy covering calendar_year 20xx which includes 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 20xx 20xx exclusion endorsement buy back or differences in conditions coverage from an underlying commercial property commercial general liability or other commercial insurance_policy special risk - regulatory changes insurance_policy reg-091 covers actual compliance expenses and business interruptions suffered as a result of any regulatory change having an adverse impact on the normal on-going business operations of the affiliated businesses the policy does not cover adverse regulatory changes resulting from substantial noncompliance with regulations or guidelines or those changes initiated in direct response to negligent acts omissions or errors by the affiliated businesses special risk - tax_liability insurance_policy tax-091 provides the affiliated businesses with indemnification up to of the amount of additional tax_liability each may incur on its federal_income_tax return no coverage is provided for additions to tax civil penalties or criminal penalties for delinquent returns or criminal or fraudulent acts excess intellectual_property package policy ipp-091 provides indemnification subject_to certain limitations to pae and pap for all damages legally obligated to pay for litigation expenses mitigation expenses investigation_expenses costs to replace restore or re-create intellectual_property additional damages and rewards resulting from wrongful acts committed during the policy period wrongful acts include infringement of copyright plagiarism invasion or interference of right of privacy or publicity libel slander piracy or unfair competition breach of contract patent infringement and malicious prosecution with regard to intellectual_property joint underwriting endorsement org did not execute a joint retained percent of the 20xx direct written premiums received from the named insureds underwriting stop loss endorsement in 20xx taxpayer org did not execute a quota share reinsurance contract in 20xx quota share reinsurance premiums during 20xx quota share reinsurance policy taxpayer did not receive credit insurance coinsurance contract org executed credit insurance coinsurance contract with co-6 a territory corp in which org agrees to reinsure a prorate share of all net retained policies in force on the effective date assumed by co-6 from co-11 an anguilla corporation under a treaty dated june 20xx with co-11 a island corporation that was merged into co-11 on january 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 rev date explanations of items 886-a name of taxpayer tax identification_number year period ended 20xx 20xx 20xx 20xx org the risks reinsured are the 20xx insurance exposures on all policies of vehicle service contracts direct written by co-9 in force on january 20xx and subsequently issued and assumed by co-11 from co-10 _ ltd under its treaty dated january 20xx the reinsurance premiums to be paid_by co-6 insurance_company to org shall be org’s 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 taxpayer received dollar_figure in reinsurance premiums under this contract in 20xx under the terms of the contracts reviewed for 20xx the taxpayer assumed risk exposures as follows direct written premiums quota share reinsurance assumed other reinsurance assumed total dollar_figure dollar_figure dollar_figure -0- for the tax_year ended december 20xx the taxpayer reported gross_receipts of dollar_figure and total revenue of dollar_figure gross_receipts were derived primarily from premiums received from the direct written and the credit coinsurance reinsurance program the taxpayer received gross_receipts as follows 20xx program revenue service direct written premiums quota share reinsurance premiums credit coinsurance reinsurance premiums total premiums investment_income proceeds from sale of assets other income gross_receipts dollar_figure dollar_figure dollar_figure dollar_figure taxpayer retained percent of the 20xx direct written premiums received from the named insureds the direct written premiums were deposited to a wells fargo bank account in response to question idr for 20xx the cpa provided a schedule reflecting deposits of direct written premiums to this account after offsetting cost_basis of dollar_figure the org incurred a net_loss of dollar_figure the net_loss was reported on the return 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 886-a form rev date name of taxpayer org year period ended 20xx 20xx 20xx 20xx date of deposit 20xx 20xx 20xx total amount of deposit dollar_figure __0 dollar_figure the deposits were verified with the bank statements from the wells fargo bank account taxpayer did not provide records showing the amount of direct written premium paid_by each of the named insureds listed in the contracts thus the examining agent was unable to determine whether the direct written premiums were paid to the taxpayer by one or all of the named insureds of the total premiums received by the taxpayer in 20xx of the premiums were generated from the eight direct written policies with the affiliated business interests of the premiums are from the quota share reinsurance risk pooling program and of the premiums from the credit coinsurance reinsurance program as of december 20xx the taxpayer’s assets totaled dollar_figure which consisted primarily of cash in temporary savings dollar_figure and notes and loans receivable balances due from affiliated business interests 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 two programs that it engaged in during the 20xx tax_year direct written contracts with affiliated business interests and credit coinsurance reinsurance as in 20xx the taxpayer did not engage in the quota share reinsurance program during 20xx taxpayer’s primary business continued to be that of providing property and casualty coverages for the named insureds co-1 co-1 indv-2 family m d p a family limited_partnership co-3 co-5 and co-4 during 20xx the taxpayer continued to operate as the sole lead insurer under the same property and casualty contracts written to the named insureds as in the 20xx tax_year 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 tax identification_number rev date name of taxpayer org year period ended 20xx 20kx 20xx 20xx the taxpayer wrote the following contracts in 20xx special risk - collection rate special risk - commercial general liability gap excess intellectual_property package special risk - commercial medical malpractice gap special risk - commercial property gap special risk - regulatory changes special risk - tax_liability and special risk - punitive wrap org is listed as the sole lead insurer co-6 is listed the sole stop loss insurer the contracts did not list of percentage of risk assumed by the lead and stop loss insurers taxpayer is the sole lead insurer in the following direct contracts it wrote to insure certain property and casualty risks of co-1 co-1 indv-2 family m d p a family limited_partnership co-3 co-5 and co-4 for the policy period of january 20xx through january 20xx contract sec_1 special risk - collection rate special risk - commercial property gap special risk - punitive wrap liability special risk - commercial general liability gap special risk - medical malpractice gap special risk - regulatory changes special risk - tax_liability excess intellectual_property package policy total direct written premiums per form_990 difference dollar_figure aggregate total combined limit premium org premiums dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure -0- in 20xx taxpayer did not execute a joint underwriting stop loss endorsement with co-6 insurance corporation taxpayer retained percent of the 20xx direct written premiums received from the named insureds each of the direct written contracts issued by the taxpayer during the tax_year is described below special risk - collection rate insurance_policy rate-101 provides the insured against uncollectible premiums during the policy period based on the prior year’s experience rate special risk - commercial property gap insurance_policy gp-101 provides reimbursement for claims which are denied by co-12 under commercial package policy number for the calendar_year 20xx which includes exclusion endorsement buy back or differences in conditions coverage caused by earthquakes flood or froze from an underlying commercial property policy form 886-a catalog number 20810w department of the treasury-internal revenue service publish no irs gov page of schedule number or exhibit form rev date explanations of items 886-a name of taxpayer tax identification_number year period ended 20xx 20xx 20xx 20xx org special risk - punitive wrap liability insurance_policy pwrp-101 provides that org will pay claims filed by the affiliated businesses resulting from the failure of an insurer to cover punitive or exemplary damages judgments or awards related to the other policies special risk- commercial general liability gap gp-101 provides reimbursement for claims which are denied by co-12 under general liability policy number effective january 20xx through january 20xx which includes exclusion endorsement buy back or differences in conditions coverage from an underlying commercial property commercial general liability or other commercial insurance_policy special risk - medical malpractice gap coverage gp-101 provides reimbursement for claims which are denied by the medical malpractice insurance_policy state medical liability trust policy covering calendar_year 20xx which includes exclusion endorsement buy back or differences in conditions coverage from an underlying commercial property commercial general liability or other commercial insurance_policy special risk - regulatory changes insurance_policy reg-101 covers actual compliance expenses and business interruptions suffered as a result of any regulatory change having an adverse impact on the normal on-going business operations of the affiliated businesses the policy does not cover adverse regulatory changes resulting from substantial noncompliance with regulations or guidelines or those changes initiated in direct response to negligent acts omissions or errors by the affiliated businesses special risk - tax_liability insurance_policy tax-101 provides the affiliated businesses with indemnification up to of the amount of additional tax_liability each may incur on its 20xx federal_income_tax return no coverage is provided for additions to tax civil penalties or criminal penalties for delinquent returns or criminal or fraudulent acts excess intellectual_property package policy ipp-101 provides indemnification subject_to certain limitations to pae and pap for all damages legally obligated to pay for litigation expenses mitigation expenses investigation_expenses costs to replace restore or re-create intellectual_property additional damages and rewards resulting from wrongful acts committed during the policy period wrongful acts include infringement of copyright plagiarism invasion or interference of right of privacy or publicity libel slander piracy or unfair competition breach of contract patent infringement and malicious prosecution with regard to intellectual_property org did not execute a joint retained percent of the 20xx direct written premiums received from the named insureds underwriting stop loss endorsement in 20xx taxpayer joint underwriting endorsement 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 rev date explanations of items name of taxpayer tax identification_number year period ended 20xx 20xx 20xx 20xx org org did not execute a quota share reinsurance contract in 20xx quota share reinsurance premiums during 20xx taxpayer did not receive quota share reinsurance policy credit insurance coinsurance contract org executed credit insurance coinsurance contract with co-6 a territory corp in which org agrees to reinsure a prorate share of all net retained policies in force on the effective date assumed by co-6 insurance_company from co-11 a territory corporation under a treaty dated june 20xx with co-11 an island 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-9 in force on january 20xx and subsequently issued and assumed by co-11 from co-10 ltd under its treaty dated january 20xx the reinsurance premiums to be paid_by co-6 insurance_company to org shall be org’s 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 taxpayer received dollar_figure in reinsurance premiums under this contract in 20xx under the terms of the contracts reviewed for 20xx the taxpayer assumed risk exposures as follows direct written premiums quota share reinsurance assumed other reinsurance assumed total dollar_figure dollar_figure dollar_figure -0- q for the tax_year ended december 20xx the taxpayer reported gross_receipts of dollar_figure and total revenue of dollar_figure gross_receipts were derived primarily from premiums received from the direct written and the credit coinsurance reinsurance program the taxpayer received gross_receipts as follows program revenue service direct written premiums 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 rev date name of taxpayer explanations of items tax identification_number org year period ended 20xx 20xx 20xx 20xx quota share reinsurance premiums credit coinsurance reinsurance premiums total premiums investment_income proceeds from sale of assets other income gross_receipts dollar_figure dollar_figure dollar_figure q taxpayer retained percent of the 20xx direct written premiums received from the named insureds the direct written premiums were deposited to a wells fargo bank account in response to question idr for 20xx the cpa provided a schedule reflecting deposits of direct written premiums to this account date of deposit 20xx 20xx 20xx 20xx total amount of deposit _ dollar_figure the deposits were verified with the bank statements from the wells fargo bank account taxpayer did not provide records showing the amount of direct written premium paid_by each of the named insureds listed in the contracts thus the examining agent was unable to determine whether the direct written premiums were paid to the taxpayer by one or all of the named insureds of the total premiums received by the taxpayer in 20xx of the premiums were generated from the eight direct written policies with the affiliated business interests of the premiums are from the quota share reinsurance risk pooling program and of the premiums from the credit coinsurance reinsurance program as of december 20xx the taxpayer’s assets totaled dollar_figure which consisted primarily of cash in temporary savings dollar_figure and notes and loans receivable balances due from affiliated business interests dollar_figure 20xx after offsetting cost_basis of dollar_figure the org incurred a net_loss of dollar_figure the net_loss was reported on the return 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 886-a rev date name of taxpayer org year period ended 20xx 20xx 20xx 20xx taxpayer filed form_990 for the tax_year ended december 20xx the books_and_records including policies and contracts were not examined by the examining agent as part of this audit taxpayer reported gross_receipts of dollar_figure and total revenue of dollar_figure for the year revenue was derived primarily from direct written premiums and quota share and credit coinsurance reinsurance premiums the taxpayer received gross_receipts as follows program revenue service direct written premiums quota share reinsurance premiums credit coinsurance reinsurance premiums total premiums investment_income proceeds from sale of assets other income gross_receipts 20xx dollar_figure dollar_figure dollar_figure 0o _0 0o under the terms of the contracts reviewed for 20xx the taxpayer assumed risk exposures as follows direct written premiums quota share reinsurance other reinsurance assumed total dollar_figure dollar_figure as of december 20xx the taxpayer's assets totaled dollar_figure which consisted primarily of cash in temporary savings dollar_figure and notes and loans receivable balances due from affiliated business interests 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 after offsetting cost_basis of dollar_figure the org incurred a net_loss of dollar_figure the net_loss was reported on the return 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 886-a form rev date name of taxpayer org year period ended 20kx 20xx 20xx 20xx in the 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 during the taxable_year is the issuing of insurance or annuity_contracts or reinsuring of risks underwritten by insurance_companies pursuant to 312_us_531 the united_states supreme court in defining the term_insurance contract held that in order for a contract to amount to an insurance_contract it must shift and distribute a risk of loss and that risk must be an insurance risk 979_f2d_162 cir aff'g 96_tc_18 risk-shifting means one party shifts his risk of loss to another and risk-distributing means that the party assuming the risk distributes his potential liability in part among others an arrangement without the elements of risk-shifting and risk-distributing lacks the fundamentals inherent in a true contract of insurance 572_f2d_1190 cir the common definition for insurance is an agreement to protect the insured against a direct or indirect economic loss arising from a defined contingency whereby the insurer undertakes no present duty_of performance but stands ready to assume the financial burden of any covered loss 183_f2d_288 2d cir the risk must contemplate the fortuitous occurrence of a stated contingency 797_f2d_920 cir historically and commonly insurance involves risk -shifting and risk distributing risk-shifting means one party shifts his risk of loss to another and risk-distributing means that the party assuming the risk distributes his potential liability in part among others an arrangement without the elements of risk-shifting and risk-distributing lacks the fundamentals inherent in a true contract of insurance 988_f2d_1135 fed cir for insurance purposes risk-shifting means one party shifts his risk of loss to another and risk- distributing means that the party assuming the risk distributes his potential liability in part among others form 886-a catalog number 20810w page of publish no irs gov department of the treasury-internal revenue service schedule number or exhibit form rev date explanations of items 886-a name of taxpayer tax identification_number org year period ended 20xx 20xx 20xx 20xx 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 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 and a subsidiary would constitute insurance if less than of the premium earned by the subsidiary is from the parent company revrul_60_275 1960_2_cb_43 risk shifting not present where subscribers all subject_to the same flood risk agreed to coverage under a reciprocal flood 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 r b an arrangement that purported to be an insurance_contract but lacked the requisite risk_distribution was characterized as a deposit arrangement a loan a contribution_to_capital an indemnity arrangement that was not an insurance_contract revrul_2007_47 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 form 886-a catalog number 20810w page of publish no irs gov department of the treasury-internal revenue service schedule number or exhibit form 886-a rev date explanations of items name of taxpayer tax identification_number year period ended 20xx 20xx 20xx 20xx org such corporation is a controlled_foreign_corporation shall include in his gross_income for his taxable_year in which or with which such taxable_year of the corporation ends - a the sum of - i his pro_rata share determined under paragraph of the corporation's subpart_f_income for such year ii his pro_rata share determined under sec_955 as in effect before the enactment of the tax reduction act of of the corporation's previously excluded subpart_f_income withdrawn from investment in less developed countries for such year and ili 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 sec_953 insurance_income d election by foreign_insurance_company to be treated as domestic_corporation in general - if form 886-a catalog number 20810w department of the treasury-internal revenue service publish no irs gov page of schedule number or exhibit form 886-a rev date explanations of items name of taxpayer tax identification_number year period ended 20xx 20xx 20xx 20xx org a a foreign_corporation is a controlled_foreign_corporation as defined in sec_957 by substituting percent or more for more than percent and by using the definition of united_states_shareholder under c a b such foreign_corporation would qualify under part or il of subchapter_l for the taxable_year if it were a domestic_corporation c such foreign_corporation meets such requirements as the secretary shall prescribe to ensure that the taxes imposed by this chapter on such foreign_corporation are paid and d such foreign_corporation makes an election to have this paragraph apply and waives all benefits to such corporation granted by the united_states under any treaty for purposes of this title such corporation shall be treated as a domestic_corporation government’s position qualification as insurance_company neither the internal_revenue_code nor the income_tax regulations define the terms insurance or insurance_contract the standard for evaluating whether an arrangement constitutes insurance for federal tax purposes has evolved over the years and is at best a nonexclusive facts and circumstances analysis 972_f2d_858 7th cir the most frequently cited opinion on the definition of insurance is 312_us_531 in which the court describes insurance as an arrangement involving risk-shifting and risk-distributing of an actual insurance risk at the time the transaction was executed cases analyzing captive insurance arrangements have described the concept of insurance for federal_income_tax purposes as containing three elements involvement of an insurance risk shifting and distributing of that risk and insurance in its commonly accepted sense see eg 979_f2d_162 9th cir 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 lawyering 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 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 886-a rev date name of taxpayer org year period ended 20xx 20xx 20xx 20xx 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 the line between investment risk and insurance risk however is pliable t he finance and insurance industries have much in common the different tools these industries provide their customers for managing financial insurable risks rely on the same two fundamental concepts risk pooling and risk_transfer further the valuation techniques in both financial and insurance markets are formally the same the fair values of a security and an insurance_policy are the discounted expected values of the cash flows they provide their owners scholars and practitioners recognize these commonalities not surprisingly the markets have converged recently for example some insurance_companies offer mutual funds and life_insurance tied to stock portfolios and some banks sell annuities financial economics with applications to investments insurance and pension sec_1 harry h panier ed insurance risk requires a fortuitous event or hazard and not a mere timing or investment risk a fortuitous event such as a fire or accident is at the heart of any contract of insurance see oa 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 form 886-a catalog number 20810w page of publish no irs gov department of the treasury-internal revenue service schedule number or exhibit form 886-a rev date explanations of items name of taxpayer tax identification_number year period ended 20xx 20xx 20xx 20xx org 183_f2d_288 2d cir the risk must contemplate the fortuitous occurrence of a stated contingency not an expected event lack of insurance risk the service analyzed the risk of the contracts to determine whether the contracts qualify as contracts of insurance annuity_contracts or reinsurance contracts in deciding whether the contracts qualify as insurance contracts for federal tax purposes we have considered all of the facts and circumstances associated with the parties in the context of the captive arrangement when deciding that a specific contract is not insurance because it does not have an insurance risk but deals with a business or investment risk we have considered such things as the ordinary activities of a business_enterprise the typical activities and obligations of running of a business whether an action that might be covered by a policy is in the control of the insured within a business context whether the economic risk involved is a market risk that is part of the business environment whether the insured is required by a law or regulation to pay for the covered claim and whether the action is question is willful or inevitable special risk - collection rate insurance_policy rate-081 20xx policies policy indemnifies for a portion of the differential between the net collection percentage ncp during the covered period and the ncp during a baseline period the ncp is calculated by dividing the actual collections amount during a specified period into the gross billings amount for that same period not insurance the policy is not insurance in the commonly accepted sense there is no insurance risk but only investment or business risk special risk - expense reimbursement insurance_policy eim-081 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 dispute government litigation financial crisis loss of intellectual_property rights unsolicited this covers all 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 rev date explanations of items 886-a name of taxpayer tax identification_number year period ended 20xx 20xx 20xx 20kx org takeover bid security incident or any incident expected to reduce annual gross revenue by at least coverage form b deals with uninsured defense or alleged civil liability where there is no insurer to provide such coverage or where such coverage has been exhausted under an existing insurance_contract this covers all defense expense for actual not insurance as to coverage a coverage form a is not insurance in the commonly accepted sense there is no insurance risk but only investment or business risk not insurance as to coverage form b 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 - commercial property gap liability insurance_policy gp-081 this policy provides exclusion endorsement buy back or differences in conditions coverage for a coverage trigger from commercial real_estate package policy co-13 policy pending that provide coverage during year 20xx not insurance terms of the contract are too vague special risk - punitive wrap liability insurance_policy pwrp-081 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-product recall insurance_policy recall-081 not insurance the policy is not insurance in the commonly accepted sense there is no insurance risk but only investment or business risk form 886-a department of the treasury-internal revenue service catalog number 20810w publish no irs gov page of schedule number or exhibit form rev date explanations of items 886-a name of taxpayer tax identification_number org year period ended 20xx 20xx 20xx 20xx special risk - commercial general liability gap gp-081 this policy provides coverage for certain claims which are denied by employers fire insurance_company under general liability policy number effective august 20xx through august 20xx as follows knowing violation of rights of others exclusion for personal and advertising injury limitations of coverage to designated events and abuse or molestation exclusion not insurance the terms of the contract are too vague special risk-loss of major business to business b2b-081 covers any business interruption loss of up to months suffered as a result of losing the services of a major business-to-business relationship any business relationship that contributes or more to revenue business interruption losses include the impact of lost revenue and the extra expenses involved in finding a replacement business-to-business relationship relationship where the insured initiates the termination of the agreement the loss of a major business-to-business relationship that insured did not attempt or intent to replace or the loss of a major business-to- the policy will not cover the voluntary loss of a major business-to-business 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 special risk - commercial medical malpractice gap insurance_policy gp-081 covers claims that have been denied by the listed insurance_company which issued the underlying medical malpractice insurance_policy due to a breach of warranty failure to notify the insurer of medical operations or procedures sales or distribution of excluded products or the exhaustion of the primary limits not insurance it is vague as to what it covers special risk - regulatory changes insurance_policy reg-081 form 886-a catalog number 20810w page of publish no irs gov department of the treasury-internal revenue service schedule number or exhibit form 886-a rev date explanations of items name of taxpayer tax identification_number year period ended 20xx 20xx 20xx 20xx org 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 we could not conclude that this contract is insurance in the commonly accepted sense the contract is vague as to what it covers special risk - regulatory changes insurance_policy reg-082 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 we could not conclude that this contract is insurance in the commonly accepted sense the contract is vague as to what it covers special risk - tax_liability insurance_policy tax-081 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 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 rev date 886-a name of taxpayer year period ended 20xx 20xx 20xx 20kx org 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 although a policy only covering defense expenses is insurance this policy also covers non-insurance risks that are investment or business risks special risk - tax_liability insurance_policy tax-082 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 although a policy only covering defense expenses is insurance this policy also covers non-insurance risks that are investment or business risks excess directors officers liability insurance_policy d o-081 covers wrongful acts of directors and officers insurance excess employment practices liability insurance_policy epl-081 cover sec_11 categories of wrongful acts including wrongful termination refusal to hire or promote sexual harassment unlawful_discrimination based on age gender etc invasion of privacy failure to create employment policies or procedures retaliatory treatment violation of civil rights violation of family_and_medical_leave act breach of employment contract failure to provide safe work environment violations listed herein against a non-employee there is excluded from coverage claims related to employee's entitlements under various listed non- specific laws rules or regulations also excluded are claims under various listed laws such as the occupational safety and health act these exclusions shall not apply to claim for any actual or alleged retaliatory discriminatory or other employment practices-related treatment not insurance_policy is not insurance in its commonly accepted sense there is no insurance risk but only investment or business risk excess intellectual_property package policy ipp-081 form 886-a catalog number 20810w page of publish no irs gov department of the treasury-internal revenue service schedule number or exhibit form rev date explanations of items 886-a name of taxpayer tax identification_number year period ended 20kx 20xx 20xx 20xx org insuring agreement liability to third parties covers wrongful acts listed above committed by third parties against insured's intellectual_property it pays for litigation expenses mitigation expense to mitigate the extent of the claim costs to replace restore or re-create the covered intellectual_property and finally additional damages to the insured's business operations such as business interruption loss of clients or market share or public relation damage control efforts the policy excludes loss due to insured's cyber presence not insurance insuring agreement there is no insurance risk but only investment or business risks property the insured possesses is not insurance in the commonly accepted sense it is not clear what intellectual excess intellectual_property package policy ipp-082 insuring agreement loss to your intellectual_property covers damages defense expenses and compliance redesign expense for listed wrongful acts infringement of copyright trademark etc plagiarism or unauthorized use of ideas characters plots etc invasion of privacy or publicity libel slander or product disparagement piracy or unfair competition misappropriation of advertising ideas etc breach of contract resulting from the alleged submission of material used by insured patent infringement malicious prosecution with regard to intellectual_property compliance redesign expense covers expense to recall and or redesign the insured's intellectual_property to comply with a judgment or settlement the policy excludes any intentional act by a director officer_or_employee not insurance insuring agreement is not insurance in the commonly accepted sense there is no insurance risk but only investment or business risks property the insured possesses it is not clear what intellectual excess pollution liability insurance_policy poll-081 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 form 886-a catalog number 20810w page of publish no irs gov department of the treasury-internal revenue service schedule number or exhibit form 886-a rev date explanations of items name of taxpayer tax identification_number org year period ended 20xx 20kx 20xx 20xx remedial action plan is approved and the fair_market_value of the property had there been no on site pollution conditions insuring agreement sec_3 to provide for third party claims for on site or off site clean up and diminution in value costs for pre-existing or new on site or off site pollution conditions as well as bodily and property damage as well as non-owned locations insuring agreement covers pollution release from transported cargo carried by covered autos no covered auto is identified in the declarations insuring agreement covers third party claims from transporting of a product or waste insuring agreement covers actual loss resulting from the interruption of the business operations caused solely and directly by on site pollution conditions actual loss means the net_income the insured would have earned had there been no interruption coverage also includes loss of rental value which generally means the anticipated rental income from tenant occupancy of insured property not insurance the policy is not insurance in the commonly accepted sense there is no insurance risk but only investment or business risk org was a joint insurer under direct contracts written by an unnamed lead insurer the contracts written in 20xx were also written in 20xx the 20xx contracts were as follows 20xx policie sec_1 special risk - collection rate insurance_policy rate-091 not insurance the policy is not insurance in the commonly accepted sense there is no insurance risk but only investment or business risk policy indemnifies for a portion of the differential between the net collection percentage ncp during the covered period and the ncp during a baseline period the ncp is calculated by dividing the actual collections amount during a specified period into the gross billings amount for that same period department of the treasury-internal revenue service special risk - commercial general liability gap catalog number 20810w form 886-a gp-091 publish no irs gov page of - schedule number or exhibit form rev date explanations of items 886-a name of taxpayer tax identification_number year period ended 20xx 20kx 20xx 20xx org policy provides reimbursement for claims which are denied by co-12 under general liability policy number effective january 20xx through january 20xx which includes exclusion endorsement buy back or differences in conditions coverage from an underlying commercial property commercial general liability or other commercial insurance_policy not insurance the terms of the contract are too vague excess intellectual_property package policy ipp-091 insuring agreement covers damages defense expenses and compliance redesign expense for listed wrongful acts infringement of copyright trademark etc plagiarism or unauthorized use of ideas characters plots etc invasion of privacy or publicity or product disparagement piracy or unfair competition misappropriation of advertising ideas etc breach of contract resulting from the alleged submission of material used by insured patent infringement malicious prosecution with regard to intellectual_property compliance redesign expense covers expense to recall and or redesign the insured's intellectual_property to comply with a judgment or settlement the policy excludes any intentional act by a director officer_or_employee libel slander insuring agreement covers wrongful acts listed above committed by third parties against insured's intellectual_property it pays for litigation expenses mitigation expense to mitigate the extent of the claim costs to replace restore or re-create the covered intellectual_property and finally additional damages to the insured's business operations such as business interruption loss of clients or market share or public relation damage control efforts the policy excludes loss due to insured's cyber presence not insurance insuring agreement there is no insurance risk but only investment or business risks property the insured possesses is not insurance in the commonly accepted sense it is not clear what intellectual insuring agreement is not insurance in the commonly accepted sense there is no insurance risk but only investment or business risks special risk - commercial medical malpractice gap insurance_policy gp-091 covers claims that have been denied by the listed insurance_company which issued the underlying medical malpractice insurance_policy due to a breach of warranty failure to notify the insurer of medical operations or procedures sales or distribution of excluded products or the exhaustion of the primary limits 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 886-a rev date name of taxpayer org year period ended 20xx 20xx 20xx 20kx not insurance we could not conclude that this contract is insurance in the commonly accepted sense the contract is vague as to what it covers special risk - commercial property gap gp-091 this policy provides exclusion endorsement buy back or differences in conditions coverage for a coverage trigger from commercial real_estate package policy co-13 policy pending that provide coverage during calendar_year 20xx not insurance terms of the contract are too vague special risk -- regulatory changes insurance_policy reg-091 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 we could not conclude that this contract is insurance in the commonly accepted sense the contract is vague as to what it covers special risk - tax_liability insurance_policy tax-091 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 form 886-a catalog number 20810w page of publish no irs gov department of the treasury-internal revenue service schedule number or exhibit form 886-a rev date explanations of items name of taxpayer tax identification_number org year period ended 20xx 20xx 20xx 20xx special risk - punitive wrap liability insurance_policy pwrp-091 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 wrote the same polices written in 20xx none of the direct written policies written during 20xx were deemed to be contracts of insurance 20xx policies our review of the direct written contracts executed during the tax years under consideration is summarized as follows contract special risk-collection rate special risk-expense reimbursement special risk -- commercial property gap special risk-punitive wrap special risk - product recall special risk - commercial general liability gap loss of major business to business special risk-commercial medical malpractice gap special risk-regulatory changes special risk-regulatory changes special risk-tax liability special risk-tax liability excess directors officers excess employment practice sec_15 excess intellectual_property package excess intellectual_property package deemed insurance not deemed insurance no no no no no no no no no no no no no no no yes 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 rev date name of taxpayer explanations of items tax identification_number year period ended 20kx 20xx 20xx 20kx org excess pollution no we were able to conclude only one of the direct written contracts as insurance contracts because they included an insurance risk sixteen of the seventeen direct written contracts were deemed not to include an insurance risk and was either a business or investment risk or we were unable to clearly identify an insurance risk quota share reinsurance program other insurance policies co-6 participated in over insurance policies with more than insureds co-6 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-6 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 org was not a party to the quota share reinsurance agreement during the 20xx and 20xx org did not receive a quota share reinsurance_premium during 20xx and 20xx org received a quota share reinsurance_premium of dollar_figure in 20xx however the direct written contracts insured by co-6 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-6 and reinsured on a quota share basis with each of the pool participants is primarily comprised of direct written contracts that the service would deem not be insurance in the commonly accepted sense thus all or a portion of the premiums received by taxpayer during the taxable years under consideration would not be for reinsuring insurance risks credit coinsurance reinsurance program the policy reinsures risks on vehicle service contracts again we do not know what risks are being insured and reinsured form 886-a catalog number 20810w page of publish no irs gov department of the treasury-internal revenue service schedule number or exhibit form rev date explanations of items 886-a name of taxpayer tax identification_number year period ended 20kx 20kx 20xx 20xx org insurance in its commonly accepted sense staff as a foreign_corporation taxpayer contracted with co-2 trust limited and co-2 insurance management company in island 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 actual co-10 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 actual co-10 factors and principles in the august 20xx response to idr for the 20xx and 20xx tax years the cpa provided a copy of letters from co-14 co-7 and co-8 which was purpose to address the method used for pricing the direct written and reinsurance contracts for the taxable years under consideration however the service concluded that the letters did not address the method of pricing the specific direct written and reinsurance contracts that org was a party to during 20xx 20xx and 20xx thus the service concluded that the premiums received by taxpayer were not reasonable because they were not based on actual co-10 calculations and factors use of assets taxpayer engaged in investment activities that are not typical of insurance_companies based on the review of the form_990 returns taxpayer had four note receivable loan balances due from the affiliated businesses to whom it executed the direct written contracts loans exceeding dollar_figure million dollars were made to co-1 and loans exceeding dollar_figure were made to a_trust called trust-2 in which the beneficiaries are jeval affiliates the amount of the outstanding loan receivable balances represented the total percentage of assets as follows loan balance total assets percentage 20xx dollar_figure dollar_figure 20xx dollar_figure dollar_figure 20xx 20xx dollar_figure dollar_figure o o dollar_figure dollar_figure the loans due to taxpayer from the affiliated businesses were still outstanding as of 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 rev date explanations of items name of taxpayer tax identification_number org year period ended 20xx 20xx 20xx 20xx risk shifting risk shifting occurs if a person facing the possibility of an economic loss transfers some or all of the financial consequences of the potential loss to the insurer such that a loss by the insured does not affect the insured because the loss is offset by a payment from the insurer see revrul_60_275 risk shifting not present where subscribers all subject_to the same flood risk agreed to coverage under a reciprocal flood insurance exchange risk_distribution risk_distribution incorporates the statistical phenomenon known as the law of large numbers the concept of risk_distribution emphasizes the pooling aspect of insurance that it is the nature of an insurance_contract to be part of a larger collection of coverages combined to distribute risks between insureds 96_tc_18 aff'd 979_f2d_162 cir in treganowan f 2d pincite the court quoting note the new york stock exchange gratuity fund insurance that isn't insurance yale l j explained that by diffusing the risks through a mass of separate risk shifting contracts the insurer casts his lot with the law of averages the process of risk_distribution therefore is the very essence of insurance also see beech aircraft corp v united_states f 2d cir risk_distribution means that the party assuming the risk distributes his potential liability in part among others 988_f2d_1135 fed cir risk_distribution involves spreading the risk of loss among policyholders distributing risk allows the insurer to reduce the possibility that a single costly claim will exceed the amount taken in as premiums and set_aside for the payment of such a claim by assuming numerous relatively small independent risks that occur over time the insurer smoothes out losses to match more closely its receipts of premiums 811_f2d_1297 cir risk_distribution necessarily entails a pooling of premiums so that a potential insured is not in significant part paying for its own risks see 881_f2d_247 et 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 form 886-a catalog number 20810w department of the treasury-internal revenue service publish no irs gov page of schedule number or exhibit form 886-a rev date explanations of items name of taxpayer tax identification_number year period ended 20xx 20xx 20xx 20xx org requisite risk shifting and risk_distribution were present accordingly under situation the arrangement between p and s constituted insurance for federal_income_tax purposes in revrul_2002_90 s a wholly owned insurance subsidiary of p directly insured the professional liability risks of operating subsidiaries of its parent s was adequately capitalized and there were no related guarantees of any kind in favor of s most importantly s and the insured operating subsidiaries conducted themselves in a manner consistent with the standards applicable to an insurance arrangement between unrelated parties together the operating subsidiaries had a significant volume of independent homogeneous risks under the facts presented the ruling concludes the arrangement between s and each of the operating subsidiaries of the parent of s constitute insurance for federal_income_tax purposes situation of revrul_2005_40 describes a scenario where a domestic_corporation operated a large fleet of automotive vehicles in its courier transport business covering a large portion of the united_states this represented a significant volume of independent homogeneous risks for valid non-tax business purposes the transport company entered into an insurance arrangement with an unrelated domestic_corporation whereby in exchange for an agreed amount of premiums the domestic carrier insured the transport company against the risk of 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 form 886-a catalog number 20810w department of the treasury-internal revenue service publish no irs gov page of 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 20xx 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 similarly in situation of revrul_2005_40 the service concluded that insurance existed where llcs electing classification as associations each contributed between five and of the insurer’s total risks moreover in situation of revrul_2002_89 supra the service concluded that insurance existed where a wholly owned subsidiary insured its parent but the arrangement represented less than of the insurer's total risk for the year in the instance case the facts therein are analogous to the analysis under situation1 of revrul_2002_89 supra the liability coverage provided to the parent_corporation by its wholly owned subsidiary accounted for of the total risks borne by the subsidiary similarly in situation of revrul_2005_40 supra a second insurer contributing of the insured’s risks was added to the single-insured scenario of situation1 the service concluded in both of the above scenarios that insurance did not exist because there lacked a sufficient number of insureds the small number of insureds produced an insufficient pool of premiums to distribute any insurance risk with respect to the contracts reviewed during the tax years under audit the service concluded that the contracts between the taxpayer and co-1 and affiliated businesses 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 affiliated businesses the affiliated businesses are indirectly owned by indv-2 through his ownership and control of trust which is the sole shareowner of org of total risk insured by the taxpayer approximately percent of the risk assumed during the years under audit is that of the affiliated business revrul_2005_40 cited several court decisions that have recognized that risk_distribution necessarily entails a pooling of premiums so that a potential insured is not in significant part paying for its own risks concentration of insurance 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 form 886-a catalog number 20810w page of publish no irs gov department of the treasury-internal revenue service schedule number or exhibit form 886-a rev date explanations of items name of taxpayer tax identification_number year period ended 20xx 20xx 20xx 20xx org in addition of the total premiums received during the 20xx 20xx and 20xx tax years percent of the premiums were derived from the direct written contracts that insure the risk of the affiliated business approximately of all premiums and of the direct written premiums were paid_by only three of the seven affiliated entities furthermore documents reviewed during the audit revealed that three of the affiliated entities paid direct written premiums to the taxpayer in 20xx only org did not write issue or sell direct written contracts to non-affiliated business interests nor did the taxpayer sell direct written contracts to the general_public during the tax years under audit the taxpayer was primarily and predominantly supported by direct written premiums that were received from only three of the named insureds co-1 indv- family m d p a and the family limited_partnership although the contracts lists seven named insureds the remaining four named insureds did not pay separate direct written premiums to the taxpayer during the years under consideration the taxpayer did not receive direct written premiums from an adequate pool of insureds thus the direct written contracts between the taxpayer and the affiliated business interests lack the requisite risk_distribution that is necessary for the contracts to be deemed contracts of insurance as described in subchapter_l of the internal_revenue_code because the risk is too heavily concentrated in the affiliated business interests the service concluded that the primary and predominant activity of the taxpayer is to assume risk from contracts that are solely concentrated in seven affiliated businesses co-1 ltd co- indv-2 family m d p a family limited_partnership co-3 co-5 and co-4 again although the direct written contracts list seven named insureds the direct written premiums are only paid to taxpayer by co-1 indv-2 family m d p a and the family limited_partnership 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 in addition since the affiliated business interests paid the majority of premiums received by the taxpayer during the years under audit the service concluded that losses_incurred by the affiliated business interests were paid only from the premiums_paid to the taxpayer by three of the seven named insureds 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 other the service's other concern is that over of the total risks assumed by the taxpayer is with affiliated businesses that are indirectly controlled by indv-2 beneficial_owner of the taxpayer because org did not qualify as an insurance_company for federal_income_tax purposes it failed to meet the requirements of sec_501 of the code thus the taxpayer did not qualify for recognition of exemption under sec_501 of the code as an organization form 886-a catalog number 20810w department of the treasury-internal revenue service publish no irs gov page of schedule number or exhibit form 886-a rev date name of taxpayer explanations of items tax identification_number year period ended 20xx 20xx 20xx 20xx org described in sec_501 of the internal_revenue_code taxpayer's tax-exempt status under sec_501 is proposed effective january 20xx thus revocation of the 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 therefore the amounts received by org for those based the service's analysis of the contracts for 20xx sixteen of the seventeen direct written contracts were deemed not to be insurance or we could definitively determine whether the contract included an insurance risk sixteen direct written contracts are not considered insurance premiums the amount received by taxpayer for only one of the seventeen direct written contracts was deemed to be a premium because only for this single contract included an insurance risk for 20xx and 20xx none of the eight direct written contracts were deemed to include an insurance risk therefore none of the amounts received by org during 20xx and 20xx for the direct written contracts were deemed to be premiums from insurance contracts none of the amounts received for the direct written contracts were included as gross_receipts for purposes of the gross_receipts computation described in notice 20xx-42 org received amounts that the service deemed to be direct written and reinsurance premiums as follows direct written contracts contract 20xx premium excess directors officers liability 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 o dollar_figure dollar_figure o o l o p q o e o direct written contracts contract no dw premiums received amount deemed premiums from direct written contracts 20xx premium dollar_figure dollar_figure dollar_figure 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 explanations of items tax identification_number 886-a form rev date name of taxpayer org year period ended 20xx 20xx 20xx 20xx quota share premiums credit coinsurance reinsurance total premiums for 20xx gross_receipts for 20xx percentage of premiums to gross_receipts contract direct written contracts no dw premiums received amount deemed premiums from direct written contracts 20xx quota share premiums credit coinsurance reinsurance total premiums for 20xx gross_receipts for 20xx percentage of premiums to gross_receipts dollar_figure _0 dollar_figure dollar_figure premium dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure premiums received by taxpayer for each contract in 20xx were not requested during the audit 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-15 co-16 and the co-17 to the tp 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-6 were included as premium income for purposes of the gross_receipts computation shown above even after form 886-a catalog number 20810w page of department of the treasury-internal revenue service publish no irs gov schedule number or exhibit explanations of items tax identification_number 886-a form rev date name of taxpayer org year period ended 20kx 20xx 20xx 20xkx given the taxpayer the benefit of the doubt the taxpayer still failed the gross_receipts for the years under audit during the tax years under consideration the premium income received by taxpayer did not exceed of its gross_receipts gross_receipts were computed under notice 20xx-42 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 therefore we conclude that the taxpayer did not meet the gross_receipts_test described in sec_501 and notice 20xx-42 for any_tax year under audit 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 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 dollar_figure limitation however premium income was not greater than of the gross_receipts generated for each year application of foreign_corporation tax provisions the administrative file for the original form_1024 application filed by org included a copy of the sec_953 election the election was signed by indv-2 family ceo and president of org on february 20xx the election was approved by irs national_office commencing on december 20xx a copy of the approval sec_953 election was attached to the form_990 returns filed for the 20xx through 20xx tax years sec_953 defines insurance_income to mean income which is attributable to the issuing or reinsuring of an insurance_or_annuity_contract and would be taxed under subchapter_l if such income were the income of a domestic insurance_company therefore any premium income received by a cfc could qualify sec_953 allows foreign_insurance_company to elect to be treated as a domestic company for tax purposes if it meets certain requirements one such requirement is that the foreign company must be a company that would qualify under part or ii of subchapter_l for the taxable_year if it were a domestic_corporation see sec_953 under notice_2006_42 only gains from the sale of capital assets are included in gross_receipts 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 886-a form rev date name of taxpayer org year period ended 20xx 20xx 20xx 20kx since the service determined that the taxpayer is not an insurance_company within the meaning of subchapter_l of the code for the years under audit it fails to meet the requirements for the election under sec_953 to be treated as a domestic_corporation in addition because the company does not meet the requirements to make the sec_953 election and thus is not a domestic_corporation the company should be treated as a controlled_foreign_corporation and the provisions of subpart_f of the internal_revenue_code sections should apply however the company did not generate any passive sources of income such as dividends interest royalties rents or annuities during the tax_year under audit the subpart_f provisions apply to foreign_corporations that qualify as controlled_foreign_corporations cfcs sec_957 defines a cfc as a foreign_corporation with regard to which more than of the total combined voting power of all classes of stock entitled to vote or the total value of the stock is owned by u s shareholders a u s shareholder in turn is defined under sec_951 as a u_s_person who owns or more of the total combined voting power of all classes of stock entitled to vote of the foreign_corporation therefore a corporation with regard to which more than of the vote or value is owned by u s persons who individually own or more or the vote will qualify as a cfc under sec_957 sec_953 defines insurance_income to mean income which is attributable to the issuing or reinsuring of an insurance_or_annuity_contract and would be taxed under subchapter_l if such income were the income of a domestic insurance_company therefore any premium income received by a cfc could qualify as insurance_income for purposes of sec_953 even though the cfc fails to qualify as an insurance_company under subchapter_l sec_953 of the code excepts exempt_insurance_income as defined in subsection e from the definition of insurance_income however to qualify as exempt_insurance_income such income must be derived by a qualifying_insurance_company a qualifying_insurance_company is defined as a company that is engaged in an insurance_business and would be subject_to tax under subchapter_l if it were a domestic_corporation sec_953 states that income derived from u s sources does not qualify for exemption if a cfc does not qualify as an insurance_company under subchapter_l it will not meet the definition of a qualifying_insurance_company for purposes of sec_953 thus none of its insurance_income will be exempt_insurance_income an organization may ordinarily rely on a favorable determination_letter received from the internal_revenue_service regulation sec_1 a -1 a revproc_2014_4 dollar_figure cross- effective date of revocation form 886-a catalog number 20810w page of publish no irs gov department of the treasury-internal revenue service schedule number or exhibit form rev date explanations of items 886-a name of taxpayer tax identification_number year period ended 20xx 20xx 20xx 20xx org referencing dollar_figure et seq 2014_1_cb_514 an organization may not rely on a favorable determination_letter however if the organization omitted or misstated a material fact in its application or in supporting documents in addition an organization may not rely ona favorable determination if there is a material_change inconsistent with exemption in the organization's character purposes or methods of operation after the determination_letter is issued regulation sec_601_201 revproc_90_27 1990_1_cb_514 taxpayer filed form_1024 with the service on march 20xx seeking exemption under sec_501 taxpayer received a favorable ruling letter from the service on october 20xx granting sec_501 tax-exempt status exemption was effective retroactively back to the taxpayer's date of incorporation - december 20xx based on the current examination the service proposed revocation of taxpayer's tax-exempt status under sec_501 of the internal_revenue_code effective january 20xx the revocation covers the tax years ended december 20xx through december 20xx revocation was effective as of the first day of the initial tax_year under examination when the service determined that the taxpayer no longer met the requirements as a small insurance_company under sec_501 as of january 20xx the service determined that the taxpayer's primary and predominant activity was no longer insurance and that it also failed to meet the gross_receipts tests described in notice 20xx-42 and sec_501 taxpayer’s position a response to the preliminary report was received from cpa cpa on march 20xx in the response the cpa summarized that the taxpayer disagreed with the service’s conclusions that the contracts issued by org lack insurance risks to constitute insurance contracts the contracts lack the requisite risk_distribution and the service ignored more than years of well-established tax law as well as the service’s hundreds of rulings the cpa argued the following points 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 of insurance because all of the risks reinsured were pure insurance risks form 886-a catalog number 20810w department of the treasury-internal revenue service publish no irs gov page of 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 20xx by raising the lack of insurance risk issue the service demonstrates a clear lack of knowledge of customary insurance products as well as the insurance industry in general the 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 the service ignored the important fact that when taking into account all the insurance policies and reinsurance contracts ail of the premiums were attributable to many thousands of independent unrelated risks of hundreds or thousands of unrelated insureds the service also ignored achieving distribution by issuing policies to four insureds the service ignores the tax_court ruling in the harper group and includible subs v commissioner t c affd 979_f2d_1342 cir where unrelated risks was determined to be sufficient to meet the risk_distribution requirement 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 cites amerco inc v commissioner no slip op cir date based on the harper case which held that unrelated business is sufficient and the recent tax_court decision in rent-a-center it is clear that the insurance and reinsurance contracts issued by org did not lack the requisite risk_distribution rent-a-center inc affiliated subsidiaries v commissioner 142_tc_1 the service ignored revenue_ruling 20xx-31 in which the service conceded that it would no longer assert the economic family theory due to its rejection by the courts the cpa argues the service’s analysis of risk_distribution is incomplete the service ignores the numerous unrelated risks that org insures courts have recognized that risk_distribution can occur even with a single insured the taxpayer cited malone hyde v commissioner 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 rev january name of taxpayer explanations of items tax identification_number year period ended 20xkx 20xx 20xx 20xx org 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 including the tax-exempt determination_letter issued to org there has been no intervening change in law to account for the service’s disparate tax treatment between org and such similarly situated taxpayers accordingly the service has violated its own procedures and mandate to provide a uniform application of existing tax law rev_proc org qualified for tax-exempt status as an insurance_company described in sec_501 during all of the years under review as org made a valid election under sec_953 to be treated as a domestic_corporation the service’s conclusion that org is a controlled_foreign_corporation is incorrect government’s response to taxpayer’s position after reviewing the response to the preliminary report received from cpa cpa on march 20xx the service’s initial position is unchanged org’s primary and predominant business in tax years 20xx 20xx 20xx and 20xx was not insurance because the contracts issued by the company lacked insurance risks and the requisite risk_distribution taxpayer’s position in the second paragraph of the 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 officers of org and beneficial owners of the affiliated businesses approximately of the risk assumed by org was that of the affiliated businesses org did not assume risk of or receive direct written premiums from non-affiliated businesses or unrelated general_public under the terms of the direct written contracts the service concluded that the direct written contracts lack the requisite risk_distribution because the arrangement did not include an adequate pool of related or unrelated insureds 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 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 rev date explanations of items name of taxpayer tax identification_number org year period ended 20xx 20xkx 20xx 20xx taxpayer's position on page sec_2 and 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 of only the excess directors officers liability insurance_policy covers insurance risks and thus is a valid contract of insurance the remaining direct written contracts are not contracts of insurance in the commonly accepted sense because the contract covers business or investment risks and not an insurance risk taxpayer's position on page of the taxpayer’s position the cpa cites the harper group subsidiaries v commissioner t c to support his argument that org qualifies as an insurance_company the cpa cited the court’s holding when a significant percentage percent of an insurance company’s income is received from a relatively large number of unrelated insureds the requirement of risk_distribution is satisfied the source of the remaining percent is irrelevant on the issue whether sufficient risk_distribution is present because of the significant presence of unrelated risks on page paragraph of the response the cpa made the following statement in its preliminary report the service merely states that due to percent of premiums being direct written premiums for coverages written to four insureds which in fact owned no interest in org there is a lack of adequate risk_distribution the service’s position ignores the fact that when taking into account all the insurance policies and reinsurance contracts all of the premiums were attributable to many thousands or 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 form 886-a department of the treasury-internal revenue service catalog number 20810w publish no irs gov page of form 886-a ni einer explanations of items schedule number or exhibit name of taxpayer tax identification_number year period ended 20xx 20xx 20xx 20kx org can be insurance if the percentage of business exceed sec_50 percent of the total insurance_business conducted even the cpa claim 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 are entities making up the nearly zero risk concentration in all the years at issue the service's interpretation of the harper group is consistent with the conclusions reached by the service in situation of revrul_2002_89 and situation of revrul_2005_40 taxpayer’s position on page paragraph of the response 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 in the march 20xx response to information_document_request question the cpa indicated that 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 cpa’s method the taxpayer assumed risks as follows 20xx direct written premiums quota share reinsurance assumed other reinsurance assumed total dollar_figure dollar_figure 0o o direct written premiums dollar_figure o 20xx form 886-a department of the treasury-internal revenue service catalog number 20810w publish no irs gov page of schedule number or exhibit form rev date explanations of items 886-a name of taxpayer tax identification_number org year period ended 20xx 20xx 20xx 20xx quota share reinsurance assumed other reinsurance assumed total 20xx direct written premiums quota share reinsurance assumed other reinsurance assumed total 20xx direct written premiums quota share reinsurance other reinsurance assumed total dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure -0- dollar_figure -0- under this method the service concluded that the taxpayer’s the primary and predominant activity conducted was assuming risk under the direct written contracts with the affiliated business interests because the activity accounted for more than percent of the business and premiums during the years under audit taxpayer’s position on page of the response the cpa stated that based on the recent tax_court decision in rent-a-center inc affiliated subsidiaries v commissioner 142_tc_1 it is clear that the insurance and reinsurance contracts issued by org did not lack requisite risk_distribution government’s response the opinion and dissent in this court case emphasized the following points 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 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 rev date explanations of items name of taxpayer tax identification_number year period ended 20xx 20xx 20xx 20xx org 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 20xx-31 20xx-1 c b pincite the service may continue to challenge certain and circumstances of each case transactions insurance captive based facts the on e 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 in this 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 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 taxpayer’s position on page paragraph the cpa stated that in reaching its incorrect conclusion in the preliminary report the service appears to ignore revrul_2001_31 in which the service conceded that it would no longer assert the economic family theory due to its rejection by the courts government’s response the current service position is expressed in ruling revenue r b date which provides irs issued guidance emphasizing that the requirement of risk_distribution must be met the ruling demonstrated that this risk_distribution requirement cannot be satisfied if the issuer of the contract enters into such a contract with only one policyholder if the contract fails to constitute insurance then the premiums_paid are not deductible business_expenses under code sec_162 and the issuing company is not an 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 three premium paying insureds does not constitute risk_distribution because of the very in this case the large concentration of insurance 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 rev date explanations of items tax identification_number year period ended 20xx 20xx 20xx 20xx name of taxpayer org high likelihood of the insureds paying for its claims with its own premiums such an arrangement is not insurance but a form of self-insurance however when the arrangements between the companies do constitute insurance for federal_income_tax purposes and assuming these arrangements represented more than percent of the insuring company's business the company will be an insurance_company within the meaning of sec_816 and sec_831 and the premium payments may be deductible under code sec_162 assuming the requirements for deduction are otherwise satisfied taxpayer’s position in paragraph on page the cpa stated that service’s current position is directly contrary to the position it has taken in hundreds of prior sec_501 tax-exempt determination letters that it has issued including the tax-exempt determination_letter issued to org there has been no intervening change in law to account for the service’s disparate tax treatment between org and such similarly situated taxpayers government's position the service did issue a favorable ruling letter dated october 20xx granting sec_501 tax-exempt status to org org relied on this favorable determination for seven years prior to the initial tax_year under audit 20xx through 20xx the service is not precluded from revoking the ruling letter if the taxpayer did not meet the requirements for sec_501 tax-exempt status each taxpayer stands alone the audit of the activities and books_and_records of org and the outcome of such audit stands alone taxpayer’s position in the last page paragraph the cpa stated that org qualified for tax-exempt status as an insurance_company described in sec_501 during all of the years under review as org made a valid election under sec_953 to be treated as a domestic_corporation the service’s conclusion that org is a controlled_foreign_corporation is incorrect government’s response according to the form_1024 application_for recognition of tax-exempt status administrative file the taxpayer filed its sec_953 election with the service on february 20xx irs records reveal that the sec_953 election was approved by the service and commenced on december 20xx sec_953 allows foreign_insurance_company to elect to be treated as a domestic company for tax purposes if company must be a company that would qualify as an insurance_company under part or il of subchapter_l for the taxable_year if it were a domestic_corporation see sec_953 it meets certain requirements one such requirement is that the foreign form 886-a catalog number 20810w publish no irs gov page of department of the treasury-internal revenue service schedule number or exhibit 886-a form rev date name of taxpayer explanations of items tax identification_number org year period ended 20xx 20xx 20xx 20xx since the service determined that the taxpayer is not an insurance_company within the meaning of subchapter_l of the code for the years under audit it fails to meet the requirements for the election under sec_953 to be treated as a domestic_corporation in addition because the taxpayer does not meet the requirements to make the sec_953 election and thus is not a domestic_corporation the taxpayer should be treated as a controlled_foreign_corporation and the provisions of subpart_f of the internal_revenue_code sections should apply conclusion because you do not qualify as an insurance_company for federal_income_tax purposes you fail to meet the requirements of sec_501 of the code thus you do not qualify for recognition of exemption under sec_501 of the code as an organization described in sec_501 of the internal_revenue_code thus the exempt status should be revoked effective january 20xx the revocation covers the tax years ended december 20xx through december 20xx since the taxpayer does not qualify as an insurance_company the sec_953 election filed by org is not valid form 886-a department of the treasury-internal revenue service catalog number 20810w publish no irs gov page of