Small-Insurer Tax Abuse Eyed
Washington
The U.S. Treasury Department is proposing legislation aimed at preventing the abuse of the small property-casualty insurance company tax rules.
As part of a broader effort to eliminate abusive tax shelters, Treasury announced that it will seek changes in the small-company tax rules to prevent 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 not $1.2 million.
Treasury says that it has become aware of some taxpayers who have established insurance companies to claim the tax exemption. Its proposal, Treasury says, would prevent individuals from taking advantage of the targeted exemption.
Sources said that Treasurys proposal would track an approach pending in the Senate Finance Committee. Under that approach, the term "insurance company" would be defined to mean any company that devotes more than half its business to issuing insurance or reinsurance contracts. A company whose investment activities outweigh its insurance activities would not be considered an insurer 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 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.
Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, January 23, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.
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