IRS To Clarify Mutual Tax Law

Washington–The Internal Revenue Service said it plans to make it a priority this year to develop guidance for small farm mutual insurers concerning a tax exemption recently altered by legislation.

The clarification relates to the tax exemption for small “farm mutual” property and casualty insurance companies, which have traditionally been formed by groups of farmers to provide coverage for their properties.

In recent years, however, some investment companies have sought to take advantage of the exemption by forming a company and writing a minimal amount of coverage while keeping an exceedingly high capital and surplus investment income within the company.

As a result, a revision was made to the Pension Funding Equity Act of 2004, changing the qualification for the tax exemption from net written premiums to “gross receipts.”

The change had been sought by the National Association of Mutual Insurance Companies, which represents farm mutuals. However, in making the change, lawmakers failed to include a specific definition for the term “gross receipts” in the legislation, and NAMIC has said that no consistent definition exists within the U.S. Tax Code. The group also worked to have the issue included among the IRS' priorities for this year.

Many farm mutuals invest their capital in government bonds, according to NAMIC, and if the term “gross receipts” is defined to include all of the proceeds of the sale of an asset, the simple maturation of those bonds along with reinvestment could cause a farm mutual to exceed the threshold to be considered tax exempt.

However, NAMIC noted that some existing Treasury Regulations include only gains on the sale of an asset, which it argues would produce a much more reasonable requirement. Because of the importance of “gross receipts” in determining tax exempt status, NAMIC has called for the issue to be resolved by changing the statute rather than through regulation.