The Internal Revenue Service said yesterday that, as part of its priorities for the next year, it will clarify the definition of the term "gross receipts" for small property and casualty insurers for determining tax exemption status.
The original intent of the exemption was to protect "farm mutuals"–small companies established among groups of farmers to provide coverage for their properties–but some investment companies exploited the exemption by writing a minimal amount of insurance while keeping disproportionately high capital and surplus and investment income.
The issues involving tax exemption for small property and casualty insurers were initially addressed by the Pension Funding Equity Act of 2004, which changed the standard for qualification in Section 501(C)(15) of the tax code from net written premiums to a "gross receipts" threshold. The effort to make that change was largely driven by the National Association of Mutual Insurance Companies.
Although the change was made, the legislation did not include a definition for the term "gross receipts," and NAMIC noted that no uniform definition exists in the current tax code. In light of this NAMIC lobbied the IRS, successfully, to include resolving the "gross receipts" issue in its 2005-2006 Guidance Plan.
In its letter to the IRS requesting the "gross receipts" issue's inclusion among IRS priorities for the next year, NAMIC noted that the definitions of "gross receipts" currently in the tax code could have unintended negative effects for small insurers.
As an example, the group noted that in one such definition, the sale of any assets not from inventory would have to be included. "The potential negative impact here is that the one-time sale of an asset could cause an otherwise exempt small insurance business to lose its exemption for the year in which the sale occurs, even if the asset is sold at a loss," NAMIC noted in a letter to the IRS sent earlier this year.
The group added, "Small insurance businesses, which the statute intends should benefit from exemption, might drift in and out of exempt status" based on that particular definition.
"NAMIC is leading efforts in regulation and legislation to clarify the definition of gross receipts in the revised Section 501(C)(15) enacted last year," said NAMIC Senior Vice President of Federal Affairs David Winston. "The decision by the IRS and Treasury to issue priority guidance on the gross receipts test in response to NAMIC's request is very encouraging for many NAMIC member companies."
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