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26 U.S.C. sec. 831

News and upcoming events involving captive insurance companies and alternative risk management, including association meetings, educational forums, etc. Please send us your news, press release, or meeting information to add to our list! Send to jay <at> captivebook.com

26 U.S.C. sec. 831

Postby Riser Adkisson LLP » Thu Nov 27, 2008 8:32 am

CURRENT WITH NEW 2015 CHANGES
=====================================

26 U.S. Code § 831 - Tax on insurance companies other than life insurance companies

(a) GENERAL RULE

Taxes computed as provided in section 11 shall be imposed for each taxable year on the taxable income of every insurance company other than a life insurance company.


(b) ALTERNATIVE TAX FOR CERTAIN SMALL COMPANIES

(1) IN GENERAL

In lieu of the tax otherwise applicable under subsection (a), there is hereby imposed for each taxable year on the income of every insurance company to which this subsection applies a tax computed by multiplying the taxable investment income of such company for such taxable year by the rates provided in section 11(b).

(2) COMPANIES TO WHICH THIS SUBSECTION APPLIES

(A) In general

This subsection shall apply to every insurance company other than life if—

(i)

the net written premiums (or, if greater, direct written premiums) for the taxable year do not exceed $2,200,000,

(ii)

such company meets the diversification requirements of subparagraph (B), and

(iii)

such company elects the application of this subsection for such taxable year.

The election under clause (iii) shall apply to the taxable year for which made and for all subsequent taxable years for which the requirements of clauses (i) and (ii) are met. Such an election, once made, may be revoked only with the consent of the Secretary.

(B) DIVERSIFICATION REQUIREMENTS.

(i)

IN GENERAL. -- An insurance company meets the requirements of this subparagraph if --

(I)

no more than 20 percent of the net written premiums (or, if greater, direct written premiums) of such company for the taxable year is attributable to any one policyholder, or

(II)

such insurance company does not meet the requirement of subclause (I) and no person who holds (directly or indirectly) an interest in such insurance company is a specified holder who holds (directly or indirectly) aggregate interests in such insurance company which constitute a percentage of the entire interests in such insurance company which is more than a de minimis percentage higher than the percentage of interests in the specified assets with respect to such insurance company held (directly or indirectly) by such specified holder.

(ii) DEFINITIONS.

For purposes of clause (i)(II)

(I) SPECIFIED HOLDER.

The term ‘specified holder’ means, with respect to any insurance company, any individual who holds (directly or indirectly) an interest in such insurance company and who is a spouse or lineal descendant (including by adoption) of an individual who holds an interest (directly or indirectly) in the specified assets with respect to such insurance company.

(II) SPECIFIED ASSETS.

The term ‘specified assets’ means, with respect to any insurance company, the trades or businesses, rights, or assets with respect to which the net written premiums (or direct written premiums) of such insurance company are paid.

(III) INDIRECT INTEREST.

An indirect interest includes any interest held through a trust, estate, partnership, or corporation.

(IV) DE MINIMIS.

Except as otherwise provided by the Secretary in regulations or other guidance, 2 percentage points or less shall be treated as de minimis.

(C) Controlled group rules

(i) In general

For purposes of this paragraph

(I) In determining whether any company is described in clause (i) of subparagraph (A), such company shall be treated as receiving during the taxable year amounts described in such clause (i) which are received during such year by all other companies which are members of the same controlled group as the insurance company for which the determination is being made, and

(II) in determining the attribution of premiums to any policyholder under subparagraph (B)(i), all policyholders which are related (within the meaning of section 267(b) or 707(b)) or are members of the same controlled group shall be treated as one policyholder.

(ii) Controlled group

For purposes of clause (i), the term “controlled group” means any controlled group of corporations (as defined in section 1563(a)); except that—

(I)

“more than 50 percent” shall be substituted for “at least 80 percent” each place it appears in section 1563(a), and

(II)

subsections (a)(4) and (b)(2)(D) of section 1563 shall not apply.

(D) INFLATION ADJUSTMENT.

In the case of any taxable year beginning in a calendar year after 2015, the dollar amount set forth in subparagraph (A)(i) shall be increased by an amount equal to --

(i) such dollar amount, multiplied by

(ii) the cost-of-living adjustment determined under section 1(f)(3) for such calendar year by substituting ‘calendar year 2013’ for ‘calendar year 1992’ in subparagraph (B) thereof.

If the amount as adjusted under the preceding sentence is not a multiple of $50,000, such amount shall be rounded to the next lowest multiple of $50,000.

(3) LIMITATION ON USE OF NET OPERATING LOSSES

For purposes of this part, except as provided in section 844, a net operating loss (as defined in section 172) shall not be carried—

(A)

to or from any taxable year for which the insurance company is not subject to the tax imposed by subsection (a), or

(B)

to any taxable year if, between the taxable year from which such loss is being carried and such taxable year, there is an intervening taxable year for which the insurance company was not subject to the tax imposed by subsection (a).


(c) INSURANCE COMPANY DEFINED

For purposes of this section, the term “insurance company” has the meaning given to such term by section 816(a).


(d) Reporting.

Every insurance company for which an election is in effect under subsection (b) for any taxable year shall furnish to the Secretary at such time and in such manner as the Secretary shall prescribe such information for such taxable year as the Secretary shall require with respect to the requirements of subsection (b)(2)(A)(ii).


(e) CROSS REFERENCES


(1)

For alternative tax in case of capital gains, see section 1201(a).

(2)

For taxation of foreign corporations carrying on an insurance business within the United States, see section 842.

(3)

For exemption from tax for certain insurance companies other than life, see section 501(c)(15).


Effective Date.

The amendments made by this section shall apply to taxable years beginning after December 31, 2016.
My book: Adkisson's Captive Insurance Companies: An Introduction to Captives, Closely-Held Insurance Companies and Risk Retention Groups
My website: http://www.captiveinsurancecompanies.com
My e-mail: jay >>>at<<< risad.com
My phone: 900-200-7284
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Riser Adkisson LLP
The Captive Insurance Lawfirm - http://www.risad.com
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26 U.S.C. sec. 831 Technical Explanations 2015

Postby Riser Adkisson LLP » Thu Dec 24, 2015 9:23 am

TECHNICAL EXPLANATION OF THE PROTECTING AMERICANS FROM TAX HIKES ACT OF 2015, HOUSE AMENDMENT #2 TO THE SENATE AMENDMENT TO H.R. 2029 (RULES COMMITTEE PRINT 114-40)

TITLE III. MISCELLANEOUS PROVISIONS

C. Additional Provisions

3. Modification to alternative tax for certain small insurance companies (sec. 333 of the bill and sec. 831(B) of the Code)

Present Law

Under present law, the taxable income of a property and casualty insurance company is the sum of the amount earned from underwriting income and from investment income (as well as gains and other income items), reduced by allowable deductions. For this purpose, underwriting income and investment income are computed on the basis of the underwriting and investment exhibit of the annual statement approved by the National Association of Insurance Commissioners. Insurance companies are subject to tax at regular corporate income tax rates.

In lieu of the tax otherwise applicable, certain property and casualty insurance companies may elect to be taxed only on taxable investment income under section 831(b). The election is available to mutual and stock companies with net written premiums or direct written premiums (whichever is greater) that do not exceed $1,200,000.

For purposes of determining whether a company meets this dollar limit, the company is treated as receiving during the taxable year amounts of net or direct written premiums that are received during that year by all other companies that are members of the same controlled group as the company. A controlled group means any controlled group of corporations as defined in section 1563(a), but applying a “more than 50 percent” threshold in lieu of the “at least 80 percent” threshold in the requirement that one of the corporations own at least 80 percent of the total combined voting power of all classes of stock entitled to vote or at least 80 percent of the total value of share of all classes of stock of each of the corporations; without treating insurance companies as a separate controlled group; and without treating life insurance companies as excluded members.

[ Footnote 654: Secs. 1563(a)(1), (a)(4), and (b)(2)(D), as modified by sec. 831(b)(2)(B). ]

Explanation of Provision

The provision modifies the section 831(b) eligibility rules for a property and casualty insurance company to elect to be taxed only on taxable investment income.

Increase and indexing of dollar limits

The provision increases the amount of the limit on net written premiums or direct written premiums (whichever is greater) from $1,200,000 to $2,200,000 and indexes this amount for inflation starting in 2016. The base year for calculating the inflation adjustment is 2013. If the amount, as adjusted, is not a multiple of $50,000, it is rounded to the next lowest multiple of $50,000.

Diversification requirements

The provision adds diversification requirements to the eligibility rules. A company can meet these in one of two ways.

Risk diversification test

An insurance company meets the diversification requirement if no more than 20 percent of the net written premiums (or, if greater, direct written premiums) of the company for the taxable year is attributable to any one policyholder. In determining the attribution of premiums to any policyholder, all policyholders that are related or are members of the same controlled group are treated as one policyholder.

[ Footnote 655: For this purpose, persons are related within the meaning of section 267(b) or 707(b). ]

[Footnote 656: Members of the same controlled group are determined as under present law for purposes determining whether a company meets the dollar limit applicable to net written premiums (or, if greater, direct written premiums). The provision relocates the controlled group definition, as modified for purposes of section 831, in section 831(b)(2)(C). ]

Relatedness test

If the company does not meet this 20-percent requirement, an alternative diversification requirement applies for the company to be eligible to elect 831(b) treatment. Under this requirement, no person who holds (directly or indirectly) an interest in the company is a specified holder who holds (directly or indirectly) aggregate interests in the company that constitute a percentage of the entire interests in the company that is more than a de minimis percentage higher than the percentage of interests in the specified assets with respect to the company held (directly or indirectly) by the specified holder. Except as otherwise provided in regulations or other guidance, two percentage points or less is treated as de minimis. An indirect interest for this purpose includes any interest held through a trust, estate, partnership, or corporation.

[ Footnote 657: These added eligibility rules reflect the concern expressed by the Finance Committee upon reporting out S.905, “A Bill to Amend the Internal Revenue Code of 1986 to Increase the Limitation on Eligibility for the Alternative Tax for Certain Small Insurance Companies,” when the Committee stated, “The Committee notes that the provision does not include a related proposal that would narrow eligibility to elect the alternative tax in a manner intended to address abuse potential, but that may cause problems for certain States. The Committee therefore wants the Treasury Department to study the abuse of captive insurance companies for estate planning purposes, so Congress can better understand the scope of this problem and whether legislation is necessary to address it.” S. Rep. 114-16, April 14, 2015, page 2. ]

A specified holder means, with respect to an insurance company, any individual who holds (directly or indirectly) an interest in the insurance company and who is a spouse or lineal descendant (including by adoption) of an individual who holds an interest (directly or indirectly) in the specified assets with respect to the insurance company.

The specified assets with respect to an insurance company mean the trades or businesses, rights, or assets with respect to which the net written premiums (or direct written premiums) of the company are paid.

For example, assume that in 2017, a captive insurance company does not meet the requirement that no more than 20 percent of its net (or direct) written premiums is attributable to any one policyholder. The captive has one policyholder, Business, certain of whose property and liability risks the captive covers (the specified assets), and Business pays the captive $2 million in premiums in 2017. Business is owned 70 percent by Father and 30 percent by Son. The captive is owned 100 percent by Son (whether directly, or through a trust, estate, partnership, or corporation). Son is Father's lineal descendant. Son, a specified holder, has a non-de minimis percentage greater interest in the captive (100 percent) than in the specified assets with respect to the captive (30 percent). Therefore, the captive is not eligible to elect section 831(b) treatment.

If, by contrast, all the facts were the same except that Son owed 30 percent and Father owned 70 percent of the captive, Son would not have a non-de minimis percentage greater interest in the captive (30 percent) than in the specified assets with respect to the captive (30 percent). The captive would meet the diversification requirement for eligibility to elect section 831(b) treatment. The same result would occur if Son owned less than 30 percent of the captive (and Father more than 70 percent), and the other facts remained unchanged.

Any insurance company for which an 831(b) election is in effect for a taxable year must report information required by the Secretary relating to the diversification requirements imposed under the provision.

The provision also makes a technical amendment striking an unnecessary redundant parenthetical reference to interinsurers and reciprocal underwriters.

Effective Date

The provision is effective for taxable years beginning after December 31, 2016.
My book: Adkisson's Captive Insurance Companies: An Introduction to Captives, Closely-Held Insurance Companies and Risk Retention Groups
My website: http://www.captiveinsurancecompanies.com
My e-mail: jay >>>at<<< risad.com
My phone: 900-200-7284
User avatar
Riser Adkisson LLP
The Captive Insurance Lawfirm - http://www.risad.com
The Captive Insurance Lawfirm - http://www.risad.com
 
Posts: 135
Joined: Sun Nov 23, 2008 8:41 pm
Location: Admitted in Arizona, California, Nevada, Oklahoma and Texas


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