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IRS/Treasury Adopt NAMIC Position on Gross Receipts

WASHINGTON (April 24, 2006)—The National Association of Mutual Insurance Companies (NAMIC) welcomes the IRS/Treasury Department’s ruling released late last Friday providing much-needed guidance on the definition of “gross receipts” for non-life insurance companies covered under tax code Section 501(c)(15). NAMIC requested priority guidance on this issue following the enactment of the Pension Equity Funding Act of 2004 that replaced the 501(c)(15) premium test of $350,000 with a gross receipts standard. The change from a premium test to a gross receipts test resulted from widely reported abuses by wealthy corporations and individuals who formed small property/casualty companies to use Section 501 (c)(15) as a tax shelter for investment income. NAMIC led the battle to preserve section 501 (c)(15) for its legitimate intended purpose to help small property/casualty companies serve their communities and policyholders.

Notice 2006-42 advised taxpayers that IRS will include amounts received from the following sources during the taxable year in “gross receipts” for purposes of that section of the code:

  • Premiums-including deposits and assessments—without reduction for return premiums or premiums paid for reinsurance;
  • Items described in Section 834(b), gross investment income of a non-life insurance company; and
  • Other items included in the taxpayer’s gross income under subchapter B of chapter 1, subtitle A of the code.

“We are pleased that the IRS agreed with NAMIC that gross receipts include both tax-free interests and the gain (but not the entire amount realized) from the sale or exchange of capitol assets,” said NAMIC Federal Affairs Senior Vice President David A. Winston. “We’re also pleased that the IRS agreed that gross receipts do not include reinsurance recoverables.”

Towards the end of 2004, NAMIC contacted the IRS to seek priority guidance to clarify the issue arising from the lack of definition of “gross receipts” in the Pension Equity Funding Act of 2004. The Pension Funding Equity Act of 2004 (“2004 Act”) amended section 501(c)(15) to base qualification for the exemption for small non-life insurance companies on a ceiling amount of “gross receipts,” rather than net written premiums as it had been since the Tax Reform Act of 1986 (“pre-2004 law”). The purpose of this change was to prevent investment companies, which wrote a minimal amount of insurance but had disproportionately high capital and surplus and investment income, from qualifying for tax exemption on all their income because they were under the net premium ceiling.

As amended, the exemption applies only to non-life insurance companies with “gross receipts” for the taxable year that do not exceed $600,000, if premiums make up more than 50 percent of gross receipts. A mutual non-life insurance company also may be exempt if its premiums make up more than 35 percent of its gross receipts and its gross receipts do not exceed $150,000.

“This new definition gives NAMIC member companies the much needed guidance in order to file their 2005 taxes and re-file their 2004 returns,” Winston stated.

For further information, contact
Rick Nelson, APR, CAE
(317) 875-5250 Tel
(317) 879-8408 Fax

Georgiann Howell
(202) 628-1558 Tel
(202) 628-1601 Fax

Posted: Monday, April 24, 2006 12:00:00 AM. Modified: Tuesday, April 25, 2006 9:33:24 AM.

317.875.5250 - Indianapolis  |  202.628.1558 - Washington, D.C.

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