Insurer may revoke its section 831(b) election

Plain-English summary

A nonlife insurance company had elected under section 831(b) to be taxed only on its taxable investment income. Its business later grew until its premium revenue exceeded the statutory limit for that election. The company represented that it had no net operating losses, was not revoking the election to eliminate tax, and would not make another section 831(b) election. The IRS consented to the revocation beginning in the requested year. The consent required the company not to elect section 831(b) treatment during any of the following five years.

Ruling snapshot

• Question: Could a nonlife insurer revoke its section 831(b) election after its premium revenue exceeded the eligibility limit?
• Outcome: Approved, conditioned on no new section 831(b) election for the following five years.
• Key authorities: IRC §§ 11(b), 831, and 834(a); Technical and Miscellaneous Revenue Act of 1988 § 1010(f)(1)

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201927016                                              Third Party Communication: None
Release Date: 7/5/2019                                         Date of Communication: Not Applicable
Index Number: 831.00-00
                                                               Person To Contact:
----------------                                               ----------------------, ID No. ------------------
---------------------                                          Telephone Number:
------------------------------------------------------------   ----------------------
--------                                                       Refer Reply To:
-------------------------------------------------              CC:FIP:B04
---------------------------                                    PLR-125623-18
                                                               Date:
                                                               April 03, 2019




Taxpayer       =   -----------------------------------------------------------------
Year 1         =   -------
Year 2         =   -------
Year 3         =   -------
State          =   ----------


Dear ---------------:


This letter is in reply to your request for consent to revoke Taxpayer’s election under
section 831(b) of the Internal Revenue Code, effective for the taxable year beginning
Year 3.

                                                     FACTS

Taxpayer is a legal defense insurance program that was formed in Year 1 in State.
Taxpayer is an insurance company other than a life insurance company. In Year 2,
Taxpayer elected to be taxed only on its taxable investment income pursuant to section
831(b).

Since Year 2, Taxpayer’s business has increased, and Taxpayer’s premium revenue
now exceeds the limitation of section 831(b)(2)(A)(i). Taxpayer requests to revoke its
election under section 831(b). Taxpayer has no net operating losses. Taxpayer
represents that it will not make a future section 831(b) election.

PLR-125623-18                                 2

                                  LAW AND ANALYSIS

Section 831(a) imposes a tax for each taxable year on the taxable income of every
insurance company other than a life insurance company.

Section 831(b) provides an alternative tax to the tax imposed by section 831(a) for
certain insurance companies. The alternative tax for these companies is a tax
computed for each year by multiplying the taxable investment income (defined in
section 834(a)) of the company for the taxable year by the rates in section 11(b).

Section 831(b)(2)(A) provides that the alternative tax applies to every insurance
company other than a life insurance company if (i) the company’s net written premiums
(or, if greater, direct written premiums) for the taxable year do not exceed $2,200,000
(adjusted for inflation), (ii) the company meets the diversification requirements laid out in
subparagraph (B) of the section, and (iii) the company elects the application of section
831(b) (the alternative tax) for the taxable year.

Section 1010(f)(1) of the Technical and Miscellaneous Revenue Act of 1988 added the
flush paragraph following section 831(b)(2)(A)(ii) (now section 831(b)(2)(A)(iii)), which
states the following:

              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 the clauses (i) and (ii) are met.
              Such an election, once made, may be revoked only with the
              consent of the Secretary.

This clarification reflects Congress’ intent that the election not be used as a means of
eliminating tax liability (e.g., by making the election only for the years the taxpayer does
not have net operating losses). S. Rep. No. 445, 100th Congress, 2d Sess. 127 (1988).

Taxpayer represents that its business has increased to the point that it exceeds the
premium limitation of section 831(b)(2)(A)(i). Taxpayer represents it has no net
operating losses and is not revoking its election as a means of eliminating tax liability.
Further, Taxpayer represents that it will not make a future section 831(b) election.

                                      CONCLUSION

Consent is hereby granted to Taxpayer to revoke its section 831(b) election effective for
Year 3, provided that Taxpayer does not make an election under section 831(b) to be
taxed on only its investment income for any of the first five years following the year to
which the consent relates.

PLR-125623-18                               3

The ruling contained in this letter is based upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by an appropriate party. This office has not verified any of the material submitted in
support of the request for ruling and it is subject to verification on examination.

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter, including, but not limited to, whether any part of Taxpayer’s business
constitutes insurance, whether Taxpayer qualified as an insurance company for any
Year involved, or whether Taxpayer was properly taxed under section 831(b) for any
year.

This ruling is directed only to the taxpayer(s) requesting it. Section 6110(k)(3) of the
Code provides that it may not be used or cited as precedent. A copy of this letter must
be attached to any federal income tax return to which it is relevant.


                                                Sincerely,




                                                John E. Glover
                                                Senior Counsel, Branch 4
                                                Associate Chief Counsel
                                                (Financial Institutions and Products)




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