Risk Distribution: Multiple Insureds

The vast majority of captive insurance companies satisfy the tax law requirement of risk distribution by having multiple insureds, and thereby comply with the so-called "multiple entity safe harbor" of Rev.Rulings 2002-90 and 2002-91 (reprinted in full below). These captives predominantly include both group captives and single-parent captives that insure numerous subsidiaries of the main holding company. The U.S. Tax Court has also validated arrangements with fewer subsidiaries where the captive was used to insure what amounts to many "points of insurance". in either event, the basic analysis is that the captive is spreading its risks over numerous diverse risks, thus satisfying the tax law test for risk distribution.

Nearly all the large corporate captives meet risk distribution through multiple insureds, which is normally easy for them since they may have dozens if not hundreds of subsidiary entities to insure. Group captives, i.e., captives that are comprised of numerous member that share and spread risks, also meet risk distribution through this test.

The multiple insured test is widely thought to be, based on numerous decisions of the U.S. Tax Court, the safest method of obtaining risk distribution. For businesses that cannot meet this test, because they are organized as a single organization or just several companies, must instead rely upon meeting risk distribution through the 50% third-party insurance test (discussed elsewhere in this website).

IRS Rev. Ruling 2002-90

Revenue Ruling 2002-90, 2002-52 I.R.B. 985 (12/30/2002)

Part I

Section 162. - Trade of Business Expenses

26 CFR 1.162-1: Business Expenses. (Also sections 801, 831)

Captive insurance. This ruling considers under which payments for professional liability coverage by a number of operating subsidiaries to an insurance subsidiary of a common parent constitute insurance for federal income tax purposes.

Rev. Rul. 2002-90

ISSUE

Are the amounts paid for professional liability coverage by domestic operating subsidiaries to an insurance subsidiary of a common parent deductible as "insurance premiums" under section 162 of the Internal Revenue Code.

FACTS

P, a domestic holding company, owns all of the stock of 12 domestic subsidiaries that provide professional services. Each subsidiary in the P group has a geographic territory comprised of a state in which the subsidiary provides professional services. The subsidiaries in the P group operate on a decentralized basis. The services provided by the employees of each subsidiary are performed under the general guidance of a supervisory professional for a particular facility of the subsidiary. The general categories of the professional services rendered by each of the subsidiaries are the same throughout the P group. Together the 12 subsidiaries have a significant volume of independent, homogeneous risks.

P, for a valid non-tax business purpose, forms S as a wholly-owned insurance subsidiary under the laws of State C. P provides S adequate capital and S is fully licensed in State C and in the 11 other states where the respective operating subsidiaries conduct their professional service businesses. S directly insures the professional liability risks of the 12 operating subsidiaries in the P group. S charges the 12 subsidiaries arms-length premiums, which are established according to customary industry rating formulas. None of the operating subsidiaries have liability coverage for less than 5%, nor more than 15%, of the total risk insured by S. S retains the risks that it insures from the 12 operating subsidiaries. There are no parental (or other related party) guarantees of any kind made in favor of S. S does not loan any funds to P or to the 12 operating subsidiaries. In all respects, the parties conduct themselves in a manner consistent with the standards applicable to an insurance arrangement between unrelated parties. S does not provide coverage to any entity other than the 12 operating subsidiaries.

LAW AND ANALYSIS

Section 162(a) of the Code provides, in part, that there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.

Section 1.162-1(a) of the Income Tax Regulations provides, in part, that among the items included in business expenses are insurance premiums against fire, storms, theft, accident, or other similar losses in the case of a business.

Neither the Code nor the regulations define the terms "insurance" or "insurance contract." The United States Supreme Court, however, has explained that in order for an arrangement to constitute "insurance" for federal income tax purposes, both risk shifting and risk distribution must be present. Helvering v. LeGierse, 312 U.S. 531 (1941).

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 the insurance payment. Risk distribution incorporates the statistical phenomenon known as the law of large numbers. 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 randomly over time, the insurer smooths out losses to match more closely its receipt of premiums. Clougherty Packing Co. v. Commissioner, 811 F.2d 1297, 1300 (9th Cir. 1987). Risk distribution necessarily entails a pooling of premiums, so that a potential insured is not in significant part paying for its own risks. See Humana Inc. v. Commissioner, 881 F.2d 247, 257 (6th Cir. 1989).

In Humana, the United States Court of Appeals for the Sixth Circuit held that arrangements between a parent corporation and its insurance company subsidiary did not constitute insurance for federal income tax purposes. The court also held, however, that arrangements between the insurance company subsidiary and several dozen other subsidiaries of the parent (operating an even larger number of hospitals) qualified as insurance for federal income tax purposes because the requisite risk shifting and risk distribution were present. But see Malone & Hyde, Inc. v. Commissioner, 62 F.3d 835 (6 th Cir. 1995) (concluding the lack of a business purpose, the undercapitalization of the offshore captive insurance subsidiary and the existence of related party guarantees established that the substance of the transaction did not support the taxpayer's characterization of the transaction as insurance). In Kidde Industries, Inc. v. United States, 40 Fed. Cl. 42 (1997), the United States Court of Federal Claims concluded that an arrangement between the captive insurance subsidiary and each of the 100 operating subsidiaries of the same parent constituted insurance for federal income tax purposes. As in Humana, the insurer in Kidde insured only entities within its affiliated group during the taxable years at issue.

In the present case, the professional liability risks of 12 operating subsidiaries are shifted to S. Further, the premiums of the operating subsidiaries, determined at arms-length, are pooled such that a loss by one operating subsidiary is borne, in substantial part, by the premiums paid by others. The 12 operating subsidiaries and S conduct themselves in all respects as would unrelated parties to a traditional insurance relationship, and S is regulated as an insurance company in each state where it does business. The narrow question presented is whether P's common ownership of the 12 operating subsidiaries and S affects the conclusion that the arrangements at issue are insurance for federal income tax purposes. Under the facts presented, we conclude the arrangements between S and each of the 12 operating subsidiaries of S's parent constitute insurance for federal income tax purposes.

HOLDING

The amounts paid for professional liability coverage by the 12 domestic operating subsidiaries to S are "insurance premiums" deductible under section 162.

EFFECT ON OTHER DOCUMENTS

Rev. Rul. 2001-31, 2001-1 C.B. 1348, is amplified.

DRAFTING INFORMATION

The principal author of this revenue ruling is William Sullivan of the Office of the Associate Chief Counsel (Financial Institutions & Products). For further information regarding this revenue ruling contact Mr. Sullivan at (202) 622-3970 (not a toll-free call).

IRS Rev. Ruling 2002-91

Revenue Ruling 2002-91, 2002-52 I.R.B. 991 (12/30/2002)

Part I

Section 831 - Tax on Insurance Companies other than Life Insurance Companies

26 CFR 1.831-3: Tax on insurance companies (other than life or mutual), mutual marine insurance companies, mutual fire insurance companies issuing perpetual policies, and mutual fire or flood insurance companies operating on the basis of premium deposits; taxable years beginning after December 31, 1962. (Also sections 162, 801; 1.162-1, 1.801-3.)

Rev. Rul. 2002-91

ISSUE

Whether a "group captive" formed by a relatively small group of unrelated businesses involved in a highly concentrated industry to provide insurance coverage is an insurance company within the meaning of section 831 of the Internal Revenue Code under the circumstances described below.

FACTS

X is one of a small group of unrelated businesses involved in one highly concentrated industry. Businesses involved in this industry face significant liability hazards. X and the other businesses involved in this industry are required by regulators to maintain adequate liability insurance coverage in order to continue to operate. Businesses that participate in this industry have sustained significant losses due to the occurrence of unusually severe loss events. As a result, affordable insurance coverage for businesses that participate in this industry is not available from commercial insurance companies.

X and a significant number of the businesses involved in this industry (Members) form a so-called "group captive" (GC) to provide insurance coverage for stated liability risks. GC provides insurance only to X and the other Members. The business operations of GC are separate from the business operation of each Member. GC is adequately capitalized.

No Member owns more than 15% of GC, and no Member has more than 15% of the vote on any corporate governance issue. In addition, no Member's individual risk insured by GC exceeds 15% of the total risk insured by GC. Thus, no one member controls GC.

GC issues insurance contracts and charges premiums for the insurance coverage provided under the contracts. GC uses recognized actuarial techniques, based, in part, on commercial rates for similar coverage, to determine the premiums to be charged to an individual Member.

GC pools all the premiums it receives in its general funds and pays claims out of those funds. GC investigates any claim made by a Member to determine the validity of the claim prior to making any payment on that claim. GC conducts no other business than the issuing and administering of insurance contracts.

No Member has any obligation to pay GC additional premiums if that Member's actual losses during any period of coverage exceed the premiums paid by that Member. No Member will be entitled to a refund of premiums paid if that Member's actual losses are lower than the premiums paid for coverage during any period. Premiums paid by any Member may be used to satisfy claims of the other Members. No Member that terminates its insurance coverage or sells its ownership interest in GC is required to make additional premium or capital payments to GC to cover losses in excess of its premiums paid. Moreover, no Member that terminates its coverage or disposes of its ownership interest in GC is entitled to a refund of premiums paid in excess of insured losses.

LAW AND ANALYSIS

Section 162(a) of the Code provides, in part, that there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.

Section 1.162-1(a) of the Income Tax Regulations provides, in part, that among the items included in business expenses are insurance premiums against fire, storms, theft, accident, or other similar losses in the case of a business.

Section 831(a) of the Code provides that taxes computed under section 11 are imposed for each tax year on the taxable income of every insurance company other than a life insurance company.

Section 1.801-3(a) provides that an insurance company is "a company whose primary and predominant business activity is the issuing of insurance or annuity contracts or the reinsuring of risks underwritten by insurance companies."

Neither the Code nor the regulations define the terms "insurance" or "insurance contract." The United States Supreme Court, however, has explained that in order for an arrangement to constitute insurance for federal income tax purposes, both risk shifting and risk distribution must be present. Helvering v. LeGierse, 312 U.S. 531 (1941).

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 the insurance payment. Risk distribution incorporates the statistical phenomenon known as the law of large numbers. 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 randomly over time, the insurer smooths out losses to match more closely its receipt of premiums. Clougherty Packing Co. v. Commissioner, 811 F.2d 1297, 1300 (9th Cir. 1987). Risk distribution necessarily entails a pooling of premiums, so that a potential insured is not in significant part paying for its own risks. See Humana, Inc. v. Commissioner, 881 F.2d 247, 257 (6th Cir. 1989).

No court has held that a transaction between a parent and its wholly-owned subsidiary satisfies the requirements of risk shifting and risk distribution if only the risks of the parent are "insured." See Stearns-Roger Corp. v. United States, 774 F.2d 414 (10th Cir. 1985); Carnation Co. v. Commissioner, 640 F.2d 1010 (9th Cir. 1981), cert. denied , 454 U.S. 965 (1981). However, courts have held that an arrangement between a parent and its subsidiary can constitute insurance because the parent's premiums are pooled with those of unrelated parties if (i) insurance risk is present, (ii) risk is shifted and distributed, and (iii) the transaction is of the type that is insurance in the commonly accepted sense. See, e.g., Ocean Drilling & Exploration Co. v. United States, 988 F.2d 1135 (Fed. Cir. 1993); AMERCO, Inc. v. Commissioner, 979 F.2d 162 (9th Cir. 1992).

Additional factors to be considered in determining whether a captive insurance transaction is insurance include: whether the parties that insured with the captive truly face hazards; whether premiums charged by the captive are based on commercial rates; whether the validity of claims was established before payments are made; and whether the captive's business operations and assets are kept separate from the business operations and assets of its shareholders. Ocean Drilling & Exploration Co. at 1151.

In Rev. Rul. 2001-31, 2001-1 C.B. 1348, the Service stated that it will not invoke the economic family theory in Rev. Rul. 77-316 with respect to captive insurance arrangements. Rev. Rul. 2001-31 provides, however, that the Service may continue to challenge certain captive insurance transactions based on the facts and circumstances of each case.

Rev. Rul. 78-338, 1978-2 C.B.107, presented a situation in which 31 unrelated corporations created a group captive insurance company to provide those corporations with insurance that was not otherwise available. In that ruling, none of the unrelated corporations held a controlling interest in the group captive. In addition, no individual corporation's risk exceeded 5 percent of the total risks insured by the group captive. The Service concluded that because the corporations that owned, and were insured by, the group captive were not economically related, the economic risk of loss could be shifted and distributed among the shareholders that comprised the insured group.

X and the other Members face true insurable hazards. X and the other Members are required to maintain general liability insurance coverage in order to continue to operate in their industry. X and the other Members are unable to obtain affordable insurance from unrelated commercial insurers due to the occurrence of unusually severe loss events. Notwithstanding the fact that the group of Members is small, there is a real possibility that a Member will sustain a loss in excess of the premiums it paid. No individual Member will be reimbursed for premiums paid in excess of losses sustained by that Member. Finally, X and the other Members are unrelated. Therefore, the contracts issued by GC to X and the other Members are insurance contracts for federal income tax purposes, and the premiums paid by the Members are deductible under section 162.

GC is an entity separate from its owners. GC is adequately capitalized. GC issues insurance contracts, charges premiums, and pays claims after investigating the validity of the claim. GC will not engage in any business activities other than issuing and administering insurance contracts. Premiums charged by GC will be actuarially determined using recognized actuarial techniques, and will be based, in part, on commercial rates. As GC's only business activity is the business of insurance, it is taxed as an insurance company.

HOLDING

The arrangement between X and GC constitutes insurance for federal income tax purposes, and the amounts paid as "insurance premiums" by X to GC pursuant to that arrangement are deductible as ordinary and necessary business expenses. GC is in the business of issuing insurance and will be treated as an insurance company taxable under section 831.

DRAFTING INFORMATION

The principal author of this revenue ruling is Melissa Luxner of the Office of the Associate Chief Counsel (Financial Institutions & Products). For further information regarding this revenue ruling contact Ms. Luxner at (202) 622-3142 (not a toll-free call).

IRS Rev. Ruling 2005-40

IRS Rev. Rul. 2005-40

Revenue Ruling 2005-40, I.R.B. 2005-27, 7/5/2005

Insurance, federal income tax purposes.

This ruling considers four circumstances in which arrangements between unrelated entities do, and do not, constitute insurance for federal income tax purposes and whether the issuer qualifies as an insurance company for federal income tax purposes.

ISSUE

Do the arrangements described below constitute insurance for federal income tax purposes? If so, are amounts paid to the issuer deductible as insurance premiums and does the issuer qualify as an insurance company?

FACTS

Situation 1.

X, a domestic corporation, operates a courier transport business covering a large portion of the United States. X owns and operates a large fleet of automotive vehicles representing a significant volume of independent, homogeneous risks. For valid, non-tax business purposes, X entered into an arrangement with Y, an unrelated domestic corporation, whereby in exchange for an agreed amount of "premiums," Y "insures" X against the risk of loss arising out of the operation of its fleet in the conduct of its courier business.

The amount of "premiums" under the arrangement is determined at arm's length according to customary insurance industry rating formulas. Y possesses adequate capital to fulfill its obligations to X under the agreement, and in all respects operates in accordance with the applicable requirements of state law. There are no guarantees of any kind in favor of Y with respect to the agreement, nor are any of the "premiums" paid by X to Y in turn loaned back to X. X has no obligation to pay Y additional premiums if X's actual losses during any period of coverage exceed the "premiums" paid by X. X will not be entitled to any refund of "premiums" paid if X's actual losses are lower than the "premiums" paid during any period. In all respects, the parties conduct themselves consistent with the standards applicable to an insurance arrangement between unrelated parties, except that Y does not "insure" any entity other than X.

Situation 2.

The facts are the same as in Situation 1 except that, in addition to its arrangement with X, Y enters into an arrangement with Z, a domestic corporation unrelated to X or Y, whereby in exchange for an agreed amount of "premiums," Y also "insures" Z against the risk of loss arising out of the operation of its own fleet in connection with the conduct of a courier business substantially similar to that of X. The amounts Y earns from its arrangements with Z constitute 10% of Y's total amounts earned during the taxable year on both a gross and net basis. The arrangement with Z accounts for 10% of the total risks borne by Y.

Situation 3.

X, a domestic corporation, operates a courier transport business covering a large portion of the United States. X conducts the courier transport business through 12 limited liability companies (LLCs) of which it is the single member. The LLCs are disregarded as entities separate from X under the provisions of § 301.7701-3 of the Procedure and Administration Regulations. The LLCs own and operate a large fleet of automotive vehicles, collectively representing a significant volume of independent, homogeneous risks. For valid, non-tax business purposes, the LLCs entered into arrangements with Y, an unrelated domestic corporation, whereby in exchange for an agreed amount of "premiums," Y "insures" the LLCs against the risk of loss arising out of the operation of the fleet in the conduct of their courier business. None of the LLCs account for less than 5%, or more than 15%, of the total risk assumed by Y under the agreements.

The amount of "premiums" under the arrangement is determined at arm's length according to customary insurance industry rating formulas. Y possesses adequate capital to fulfill its obligations to the LLCs under the agreement, and in all respects operates in accordance with the licensing and other requirements of state law. There are no guarantees of any kind in favor of Y with respect to the agreements, nor are any of the "premiums" paid by the LLCs to Y in turn loaned back to X or to the LLCs. No LLC has any obligation to pay Y additional premiums if that LLC's actual losses during the arrangement exceed the "premiums" paid by that LLC. No LLC will be entitled to a refund of "premiums" paid if that LLC's actual losses are lower than the "premiums" paid during any period. Y retains the risks that it assumes under the agreement. In all respects, the parties conduct themselves consistent with the standards applicable to an insurance arrangement between unrelated parties, except that Y does not "insure" any entity other than the LLCs.

Situation 4.

The facts are the same as in Situation 3, except that each of the 12 LLCs elects pursuant to § 301.7701-3(a) to be classified as an association.

LAW

Section 831(a) of the Internal Revenue Code provides that taxes, computed as provided in § 11, are imposed for each taxable year on the taxable income of each insurance company other than a life insurance company. Section 831(c) provides that, for purposes of § 831, the term "insurance company" has the meaning given to such term by § 816(a). Under § 816(a), 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.

Section 162(a) provides, in part, that there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. Section 1.162-1(a) of the Income Tax Regulations provides, in part, that among the items included in business expenses are insurance premiums against fire, storms, theft, accident, or other similar losses in the case of a business.

Neither the Code nor the regulations define the terms "insurance" or "insurance contract." The United States Supreme Court, however, has explained that in order for an arrangement to constitute insurance for federal income tax purposes, both risk shifting and risk distribution must be present. Helvering v. Le Gierse, 312 U.S. 531 (1941).

The risk transferred must be risk of economic loss. Allied Fidelity Corp. v. Commissioner, 572 F.2d 1190, 1193 (7th Cir.), cert. denied, 439 U.S. 835 (1978). The risk must contemplate the fortuitous occurrence of a stated contingency, Commissioner v. Treganowan, 183 F.2d 288, 290-91 (2d Cir.), cert. denied, 340 U.S. 853 (1950), and must not be merely an investment or business risk. Le Gierse, at 542; Rev. Rul. 89-96, 1989-2 C.B. 114.

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. Risk distribution incorporates the statistical phenomenon known as the law of large numbers. 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 randomly over time, the insurer smooths out losses to match more closely its receipt of premiums. Clougherty Packing Co. v. Commissioner, 811 F.2d 1297, 1300 (9th Cir. 1987).

Courts 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. Humana, Inc. v. Commissioner, 881 F.2d 247, 257 (6th Cir. 1989). See also Ocean Drilling & Exploration Co. v. United States, 988 F.2d 1135, 1153 (Fed. Cir. 1993) ("Risk distribution involves spreading the risk of loss among policyholders."); Beech Aircraft Corp. v. United States, 797 F.2d 920, 922 (10th Cir. 1986) ("'[R]isk distributing' means that the party assuming the risk distributes his potential liability, in part, among others."); Treganowan, at 291 (quoting Note, The New York Stock Exchange Gratuity Fund: Insurance that Isn't Insurance, 59 Yale L. J. 780, 784 (1950)) ("'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.'"); Crawford Fitting Co. v. United States, 606 F. Supp. 136, 147 (N.D. Ohio 1985) ("[T]he court finds . . . that various nonaffiliated persons or entities facing risks similar but independent of those faced by plaintiff were named insureds under the policy, enabling the distribution of the risk thereunder."); AMERCO and Subsidiaries v. Commissioner, 96 T.C. 18, 41 (1991), aff'd, 979 F.2d 162 (9th Cir. 1992) ("The concept of risk-distributing 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 risk between insureds.").

ANALYSIS

In order to determine the nature of an arrangement for federal income tax purposes, it is necessary to consider all the facts and circumstances in a particular case, including not only the terms of the arrangement, but also the entire course of conduct of the parties. Thus, an arrangement that purports to be an insurance contract but lacks the requisite risk distribution may instead be characterized as a deposit arrangement, a loan, a contribution to capital (to the extent of net value, if any), an indemnity arrangement that is not an insurance contract, or otherwise, based on the substance of the arrangement between the parties. The proper characterization of the arrangement may determine whether the issuer qualifies as an insurance company and whether amounts paid under the arrangement may be deductible.

In Situation 1, Y enters into an "insurance" arrangement with X. The arrangement with X represents Y's only such agreement. Although the arrangement may shift the risks of X to Y, those risks are not, in turn, distributed among other insureds or policyholders. Therefore, the arrangement between X and Y does not constitute insurance for federal income tax purposes.

In Situation 2, the fact that Y also enters into an arrangement with Z does not change the conclusion that the arrangement between X and Y lacks the requisite risk distribution to constitute insurance. Y's contract with Z represents only 10% of the total amounts earned by Y, and 10% of total risks assumed, under all its arrangements. This creates an insufficient pool of other premiums to distribute X's risk. See Rev. Rul. 2002-89, 2002-2 C.B. 984 (concluding that risks from unrelated parties representing 10% of total risks borne by subsidiary are insufficient to qualify arrangement between parent and subsidiary as insurance).

In Situation 3, Y contracts only with 12 single member LLCs through which X conducts a courier transport business. The LLCs are disregarded as entities separate from X pursuant to § 301.7701-3. Section 301.7701-2(a) provides that if an entity is disregarded, its activities are treated in the same manner as a sole proprietorship, branch or division of the owner. Applying this rule in Situation 3, Y has entered into an "insurance" arrangement only with X. Therefore, for the reasons set forth in Situation 1 above, the arrangement between X and Y does not constitute insurance for federal income tax purposes.

In Situation 4, the 12 LLCs are not disregarded as entities separate from X, but instead are classified as associations for federal income tax purposes. The arrangements between Y and each LLC thus shift a risk of loss from each LLC to Y. The risks of the LLCs are distributed among the various other LLCs that are insured under similar arrangements. Therefore the arrangements between the 12 LLCs and Y constitute insurance for federal income tax purposes. See Rev. Rul. 2002-90, 2002-2 C.B. 985 (similar arrangements between affiliated entities constituted insurance). Because the arrangements with the 12 LLCs represent Y's only business, and those arrangements are insurance contracts for federal income tax purposes, Y is an insurance company within the meaning of §§ 831(c) and 816(a). In addition, the 12 LLCs may be entitled to deduct amounts paid under those arrangements as insurance premiums under § 162 if the requirements for deduction are otherwise satisfied.

HOLDINGS

In Situations 1, 2 and 3, the arrangements do not constitute insurance for federal income tax purposes.

In Situation 4, the arrangements constitute insurance for federal income tax purposes and the issuer qualifies as an insurance company. The amounts paid to the issuer may be deductible as insurance premiums under § 162 if the requirements for deduction are otherwise satisfied.

DRAFTING INFORMATION

The principal author of this revenue ruling is John E. Glover of the Office of the Associate Chief Counsel (Financial Institutions & Products). For further information regarding this revenue ruling, contact Mr. Glover at (202) 622-3970 (not a toll-free call).

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