Annuity applicant appears to exceed exemption receipts limit

Plain-English summary

A foreign applicant sought exemption under section 501(c)(15) as an insurance company other than a life insurance company. It received large purchase payments under contracts labeled as deferred variable and immediate annuities, but the materials did not establish the guarantees, binding terms, or actual activities needed to decide whether more than half of its business involved issuing insurance or annuity contracts. Chief Counsel therefore could not reach a definitive conclusion on insurance-company status under section 816(a). Even if the applicant qualified as an insurance company, its purchase payments appeared to push annual gross receipts above the $600,000 ceiling in section 501(c)(15). Counsel also observed that treating most of those payments as something other than premiums or gross income would make it difficult to show that more than half of the applicant's business was insurance activity.

Ruling snapshot

• Question: Does the applicant qualify for section 501(c)(15) exemption as a nonlife insurance company?
• Outcome: advice given; the record was insufficient on insurance-company status, and gross receipts appeared to exceed the statutory limit
• Key authorities: IRC §§ 501(c)(15), 816(a), 832(b)(5)(A)(i), 834(b); Rev. Rul. 77-286; Notice 2006-42

Full text (IRS public release)

       Office of Chief Counsel
       Internal Revenue Service
       memorandum
       Number: 201702037
       Release Date: 1/13/2017
       CC:FIP:B04:JEGlover                            Third Party Communication: None
       POSTU-100264-15                                Date of Communication: Not Applicable

UILC: 831.00-00, 501.15-00

date: September 14, 2016

 to:   Patrick Greenleaf
       Area Counsel (Mid-Atlantic)
       Tax Exempt Governmental Entities

from: Alexis A. MacIvor
Chief, Branch 4
Associate Chief Counsel (Financial Institutions & Products)

subject: Application for Exemption under § 501(c)(15)

       This Chief Counsel Advice responds to your request for assistance. This advice may
       not be used or cited as precedent.


       LEGEND

       Applicant    =      ------------------------------------------------------------------------

       Year 1       =      -------

       Year 2       =      -------

       Country      =      ---------

       X            =      ----------------

       Y            =      --------------

       ISSUE

       Does Applicant qualify as an insurance company other than a life insurance company
       within the description of § 501(c)(15)?

POSTU-100264-15 2

CONCLUSION

The information provided does not allow us to reach a definitive conclusion as to
whether Applicant qualifies as an insurance company other than a life insurance
company; however, even if Applicant does qualify, Applicant’s gross receipts for Year 1
and Year 2 appear to exceed the $600,000 per year limitation in § 501(c)(15).

FACTS

Briefly stated, Applicant was formed in Country during Year 1 and is not a mutual
company. Applicant received “purchase payments” in Year 1 and Year 2 under two
contracts that are labelled annuity contracts; one is a characterized as deferred variable
contract and the other is characterized as an immediate annuity. In the specimen
contracts provided, it is not clear whether Applicant provided any contractual
guarantees. Specifically, neither contract provides for a guaranteed purchase rate1 and
both contracts allow for selection of an annuity settlement option that is not specified in
the contract but is to be agreed between the counterparty and Applicant in the future.
Moreover, the terms of the deferred contract may not necessarily comply with § 72(s).

The information provided does not indicate the nature of Applicant’s actual activities
including, for example, whether and under what binding terms either of the specimen
contracts was actually issued, though Applicant reports that it received “purchase
payments” of $ X during Year 1 and $ Y during Year 2.

LAW AND ANALYSIS

Section 501(a) provides that an organization described in § 501(c) shall be exempt from
the income tax, unless denied under § 502 or 503.

The list of organizations described in § 501(c) includes insurance companies (as
defined in § 816(a)) other than life (including interinsurers and reciprocal underwriters)
if, in the case of a stock insurance company, the gross receipts for the taxable year do
not exceed $600,000 and more than 50% of such gross receipts consist of premiums.

Section 816(a) defines an insurance company to “mean any company more than half of
the business of which during the taxable year is the issuing of insurance or annuity
contracts or the reinsuring of risks underwritten by insurance companies.”

Section 816(a) provides that the term life insurance company

             means an insurance company which is engaged in the
             business of issuing life insurance and annuity contracts
             (either separately or combined with accident and health

1
The “immediate” annuity does not annuitize at inception but within one year of inception and annuitizes
at the purchase rate in effect at annuitization (which could be different than the rate in effect at inception).
POSTU-100264-15 3

         insurance), or noncancellable contracts of health and
         accident insurance, if – (1) its life insurance reserves (as
         defined in § 816(b)), plus (2) unearned premiums, and
         unpaid losses (whether or not ascertained), on
         noncancellable life, accident, or health policies not included
         in life insurance reserves, comprise more than 50 percent of
         its total reserves (as defined in § 816(c)).

The House Report explains this provision, and as it relates to what business is an
insurance activity, advises that

         whether a contract with less than a permanent guarantee
         should be considered an insurance or annuity contract would
         depend on the terms of the contract. That is, it will depend
         on whether the company has assumed a significant
         insurance risk or has made an annuity guarantee (for life or
         a fixed period). Generally, the assumption of solely an
         investment risk would not give rise to an insurance liability.

H. Rep. 98-432 (Pt II) at 1404 (1984). In addition, Rev. Rul. 77-286, 1977-2 C.B. 228,
provides

         …The deposit administration contract contains a limited
         annuity purchase rate guarantee lasting for a stated initial
         period. … However, since the contract does not provide for
         permanent purchase rate guarantees during the employees’
         active lives, it does not constitute an annuity contract during
         its accumulation phase, and accordingly, the funds held
         under the deposit administration contract do not qualify has
         life insurance reserves.

Notice 2006-42, 2006-1 C.B. 878, advises that gross receipts for purposes of
§ 501(c)(15) include premiums (including deposits and assessments), without reduction
for return premiums or premiums paid for reinsurance, items described in § 834(b)
(gross investment income of a non-life insurance company), and other items that are
properly included in the taxpayer’s gross income under subchapter B of chapter 1,
subtitle A, of the Code. Gross receipts for purposes of § 501(c)(15) do not include
amounts other than premium income or gross investment income unless those amounts
are otherwise included in gross income; the term does not include contributions to
capital excluded from gross income or salvage or reinsurance recovered that offset
losses incurred under §832(b)(5)(A)(i).

Here, from the specimen contracts it cannot be determined whether more than half of
Applicant’s business involves the issuance of insurance or annuity contracts as
POSTU-100264-15 4

contemplated by § 816(a), and, if so, whether Applicant is a life insurance company
within the meaning of § 816(a).

Moreover, to meet the $600,000 limitation on annual gross receipts in § 501(c)(15), a
substantial portion of the “purchase payments” received by Applicant in Year 1 and Year
2 would have to be characterized as amounts other than premiums or other gross
income. If the “purchase payments” were so characterized, Applicant has not explained
how more than half of its business during each taxable year is the issuing of insurance
or annuity contracts or the reinsuring of risks underwritten by an insurance company. In
fact, given that $ X and $ Y so significantly exceed $600,000, it is difficult to imagine any
set of circumstances in which Applicant could in each taxable year both (i) qualify as an
insurance company because more than half of its business is the issuing of insurance
and annuity contracts or the reinsuring of risks underwritten by an insurance company
and (ii) have gross receipts of less than $600,000.

This writing may contain privileged information. Any unauthorized disclosure of this
writing may undermine our ability to protect the privileged information. If disclosure is
determined to be necessary, please contact this office for our views.

Please call (202) 317-4450 if you have any further questions.