Rev. Rul. 83-132

ISSUE

Is a noncorporate business entity that is primarily engaged in the business of issuing insurance contracts an "insurance company" taxable as a corporation under the Internal Revenue Code?

FACTS

State X, by statute, created the state X Insurance Exchange (the Exchange). This statute allows insurers not organized in corporate form, including partnerships and individuals, to operate on the Exchange Insurers operating on the Exchange are subject to basic accounting rules imposed on all insurers under state X law.

The taxpayer, a member of the Exchange, is organized as a noncorporate business entity under the law of X. The primary and predominate business of the taxpayer is the underwriting of insurance risks typically underwritten by insurance companies taxed under the provisions of section 831 of the Code.

LAW AND ANALYSIS

Section 7701(a)(3) of the Code defines the term "corporation" to include insurance companies.

Section 301.7701-1(c) of the Income Tax Regulations provides that for purposes of taxation the classification of an organization is determined under the internal Revenue Code rather than under state law. The term "corporation" is not limited to the artificial entity usually known as a corporation, but includes also an insurance company.

Sections 1.801-3(a)(1), 1.821-4 (a)(1), and 1.831-3(a) of the regulations define the term "insurance company" for purposes of the tax on life insurance companies and other insurance companies.

Section 1.801-3(a)(1) of the regulations provides that though its name, charter powers, and subjection 'to state insurance laws are significant in determining the business that the company is authorized and intends to carry on, it is the character of the business actually done in the tax year that determines whether a company is taxable as an insurance company under the Code.

Under the classification rules of the Code and the regulations thereunder, the first determination that is made is whether an entity is a corporation. Although a business entity is not organized as a corporation under state law, it may be treated as a corporation for federal income tax purposes. Morrissey v. Commissioner, 296 U.S. 344 (1935), XV-1 C.B. 264 (1936). See also section 301.7701-1(c) of the regulations. Therefore, if an entity is determined to be a corporation within the meaning of section 7701(a)(3), the fact of its organization as a partnership, proprietorship, or any other noncorporate form under state law becomes immaterial.

Section 7701(a)(3) of the Code and the regulations thereunder require that any entity that is an insurance company is to be treated as a corporation for federal income tax purposes. Under section 1.801-3(a)(1) of the regulations it is the character of the business actually done in the taxable year that determines whether an entity is taxable as an insurance company. Thus, if an entity's primary and predominant business activity during the tax year is the underwriting of insurance risks, then that entity is an insurance company taxable as a corporation under the provisions of subchapter L (sections 801-844).

In the present situation, the taxpayer's primary and predominant business activity is underwriting insurance risks. Therefore, the taxpayer meets the definition of an insurance company as stated in section 1.801-3(a)(1) of the regulations for federal income tax purposes.

It should be noted, however, that a standard reinsurance arrangement under which one insurance company (reinsurer) accepts all or part of the risk of loss of another insurance company (reinsured) will not be considered to be, or give rise to, a separate entity.

HOLDING

A noncorporate business entity that is primarily engaged in the business of issuing insurance contracts is an insurance company and therefore a corporation within the meaning of section 7701(a)(3) of the Code. Thus, this entity is taxable as a corporation under the provisions of subchapter L (sections 801 844).

The Service will consider the application of section 7805(b) of the Code on a case by case basis.