Feds Move To End P-C Shells Hiding Fat Cat Income

Feds Move To End P-C Shells Hiding Fat Cat Income

By Steven Brosoff, Washington Editor

NU Online News Service, Jan. 15, 2:27 p.m. EST, Washington?The Treasury Department is proposing legislation aimed at preventing wealthy individuals from using exemptions created for small property-casualty insurance companies to avoid paying taxes.[@@]

As part of a broader effort to eliminate abusive tax shelters, Treasury announced last week that it will seek changes in the small-company tax rules to prevent their use for the creation of shell companies that exist largely to earn tax-free investment income.

Under present law, a p-c company is exempt from federal income taxation if its net written premiums or direct written premiums do not exceed $350,000.

In addition, a company can elect to be taxed only on its taxable investment income if its net written or direct written premiums exceed $350,000 but do not exceed $1.2 million.

Treasury says that it has become aware of some taxpayers who have established insurance companies in order to claim the tax exemption. Its proposal, Treasury says, would prevent individuals from taking advantage of the targeted exemption.

At press time, Treasury had not released specific language, but sources said that Treasury's proposal would track an approach currently pending in the Senate Finance Committee.

Under that approach, the term "insurance company" would be defined to mean any company that devotes more than one-half of its business to the issuing of insurance or reinsurance contracts.

A company whose investment activities outweigh its insurance activities would not be considered an insurance company for purposes of the exemption.

Treasury estimates that its proposal will raise $1.184 billion in revenue over 10 years.

Marliss Browder, a representative of the Indianapolis-based National Association of Mutual Insurance Companies, said that NAMIC supports efforts to curtail abuses but also believes the exemption should be preserved for small p-c companies for whom it was originally intended.