NAMIC Defends Small Company Tax Rules

By Steven Brostoff

Washington

The National Association of Mutual Insurance Companies is hopingthat recently publicized allegations of abuse involving smallproperty-casualty company tax rules will not derail legislativeefforts to update the rules.

“It doesnt help,” said Monte Ward, vice president of federalaffairs with the Indianapolis-based NAMIC, referring to a recentNew York Times article charging that some individuals areusing the small p-c company tax exemption as a way to earn tax-freeincome without actually underwriting insurance.

But despite the article, Mr. Ward said, there is a legitimateneed for legislation, S. 735, which would increase the amount ofthe exemption.

Mr. Ward said he could not speak to the legitimacy of theallegations of abuse, but added that any time there is taxexemption, the potential for abuse is there.

But that does not negate the real need to increase the exemptionfor small companies that serve rural communities.

Under current law, p-c insurance companies with $350,000 or lessin direct or net written premium are tax exempt. Companies withpremiums between $350,000 and $1.2 million can elect to be taxedsolely on their investment income.

S. 735 would increase the thresholds to $575,000 and $1.971million, respectively.

Sen. Christopher Bond, R-Mo., is the lead sponsor of S. 735. Ina statement on the floor of the Senate, he said, the legislation isnecessary to allow small insurance companies serving ruralcommunities in Missouri and other farming states to remaincompetitive.

National Underwriter called Sen. Bonds office for acomment on how the controversy would affect the legislation andwhether the Senator might add any anti-abuse language, but the callwas not returned.

One source, who asked not to be identified, said hisunderstanding is that the issue involving abuse is actually one ofenforcement. The source said that the Internal Revenue Servicealready has the authority to deny the tax exemption to insurancecompanies that are set up as a sham solely to avoid taxes.

The question, he said, is whether IRS has the resources to dothe job effectively.

Reproduced from National Underwriter Edition, April 7, 2003.Copyright 2003 by The National Underwriter Company in the serialpublication. All rights reserved. Copyright in this article as anindependent work may be held by the author.