Rev. Rul. 89-91

Rev. Rul. 89-91

ISSUE

Are the insurance premiums that are received by a foreign corporation in the circumstances described below subject to the income tax imposed on premiums by section 881(a) of the Internal Revenue Code of 1986?

FACTS

X is a foreign casualty insurance company organized under the laws of foreign country FC. In 1987, X insured United States risks as defined in section 861(a)(7) of the Code, and the income derived from this activity was therefore from sources within the United States.

The insurance policies issued by X were not signed or countersigned in the United States by any officer or agent of X. During 1987, X was not engaged in a trade or business in the United States within the meaning of section 864(b) of the Code. Premiums on the policies were subject to the excise tax of section 4371.

LAW AND ANALYSIS

Section 881(a)(1) of the Code imposes an income tax of 30 percent on certain kinds of gross income, including premiums, that foreign corporations receive from sources within the United States, to the extent not effectively connected with the corporation's United States trade or business. Section 1442 requires the payor of the income to withhold this tax.

Chapter 34 of the Code (sections 4371-4374), as in effect in 1987, imposed an excise tax on certain premiums paid to foreign insurers and reinsurers of United States risks. Policies that were signed or countersigned in the United States by an officer or agent of the insurer were generally exempt from the tax. (Section 1012(q)(13) of the Technical and Miscellaneous Revenue Act of 1988, Pub. L. No. 100-647, 102 Stat. 3342, 3525, prospectively amended section chapter 34 to exempt from the excise tax any amount effectively connected wit the conduct of a trade or business within the United States, subject to exceptions.)

Rev. Rul. 80-222, 1980-2 C.B. 211, holds that premiums for the insurance of United State risks by foreign insurers not engaged in a United States trade or business are subject to excise tax under section 4371 of the Code, but not to income tax and withholding under sections 881 and 1442. Rev. Rul. 80-222 restates the conclusions and reasoning of I.T. 1359, I-1 C.B. 292 (1922). The two reasons given for the holding are: (1) Congress intended to impose income tax and withholding on items of gross income only if the items have a high content of net income, and insurance premiums do not; and (2) the premiums are subject to a stamp or excise tax that Congress intended as a substitute for an income tax.

Only the second of these reasons finds explicit support in the legislative history of the excise tax (and the stamp tax that preceded it) on premiums paid to foreign insurers having no United States trade or business. Congress believed that such premiums were not subject to an income tax, and the excise and stamp taxes were intended to reduce the competitive advantage of a foreign insurer's otherwise tax-free operation. See H.R. Rep. No. 2333, 77th Cong., 2d Sess., at 61 (1942); 61 Cong. Rec. 7180-81 (1921).

The Service has re-examined the legislative history described above and concluded that the "high content of net income" theory is unnecessary to the holding of Rev. Rul. 80-222. Rev. Rul. 80-222 is therefore modified to eliminate reliance on this theory.

HOLDING

The insurance premiums received by a foreign corporation in the circumstances described above are not subject to the income tax imposed on premiums by section 881(a) of the Code.

EFFECT ON OTHER DOCUMENTS

Rev. Rul. 80-222 is modified and superseded.

DRAFTING INFORMATION

The principal author of this revenue ruling is Joseph Rosenthal of the Office of the Associate Chief Counsel (International). For further information, call Mr. Rosenthal at (202) 252-8219 (not a toll-free call).