GROSS PREMIUMS INCLUDE AMOUNTS INSURER CHARGED ITSELF.

Rev. Rul. 92-94

ISSUE

If an insurance company subject to tax under section 831 of the Internal Revenue Code charges itself an amount representing premiums for the insurer's liability to pay insurance and annuity benefits for its employees, is the company required to include those amounts in "gross premiums written on insurance contracts during the taxable year" for purposes of computing premiums earned under section 832(b)(4) of the Code?

FACTS

IC, an insurance company subject to tax under section 831 of the Code, charges itself an amount representing premiums for its liability to pay insurance or annuity benefits for its employees. On its annual statement for 1991, IC included in gross premiums written the amount that the company charged itself with respect to its liability for insurance and annuity benefits for its employees.

LAW AND ANALYSIS

Section 831(a) of the Code generally imposes a tax on the taxable income of an insurance company other than a life insurance company. The taxable income of a nonlife insurance company is determined under section 832.

Section 832(b) of the Code provides that, in the case of an insurance company subject to tax under section 831, gross income includes the combined gross amount earned during the taxable year from investment income and underwriting income, computed on the basis of the underwriting and investment exhibit of the annual statement approved by the National Association of Insurance Companies. The term "underwriting income" is defined by section 832(b)(3) as "the premiums earned on insurance contracts during the taxable year less losses incurred and expenses incurred."

Section 832(b)(4) of the Code provides that premiums earned on insurance contracts during the taxable year are computed as follows:

(A) From the amount of gross premiums written on insurance contracts during the taxable year, deduct return premiums and premiums paid for reinsurance.

(B) To the result so obtained, add 80 percent of the unearned premiums on outstanding business at the end of the preceding taxable year and deduct 80 percent of the unearned premiums on outstanding business at the end of the taxable year.

(C) To the result so obtained, in the case of a taxable year beginning after December 31, 1986, and before January 1, 1993, add an amount equal to 3-1/3 percent of unearned premiums on outstanding business at the end of the most recent taxable year beginning before January 1, 1987.

For this purpose, unearned premiums include life insurance reserves, as defined in section 816(b) but determined as provided in section 807. Under section 832(b)(7)(A), however, the 20 percent reduction to unearned premium reserves does not apply with respect to life insurance, annuity, and noncancellable accident and health insurance contracts described in section 816(b)(1)(B).

For life insurance companies, section 1.809-4(a)(1) of the Income Tax Regulations defines the term "premiums" to include amounts that a life insurance company charges itself representing premiums with respect to liability for insurance and annuity benefits for its employees. Similarly, section 1.809-5(a)(12) of the regulations states that (subject to certain limitations) a life insurance company shall be allowed a deduction for amounts representing premiums that the company charges itself with respect to liabilities for insurance and annuity benefits for its employees in accordance with the rules prescribed in sections 162 and 404 of the Code and the regulations thereunder.

Although the Deficit Reduction Act of 1984, Pub. L. 98-369, 98 Stat. 494 (1984), revised the pre-1984 life insurance company tax provisions, Congress intended that the regulations under the pre-1984 law serve as an interpretative guide to those new provisions which are based on the pre-1984 law. See H.R. Rep. 432, Part 2, 98th Cong., 2d Sess. 1401 (1984); 1 Committee on Finance, United States Senate, 98th Cong., 2d Sess., Deficit Reduction Act of 1984: Explanation of Provisions Approved by the Committee on March 21, 1984, at 524 (Comm. Print 1984). Thus, the regulations issued under pre-1984 sections 809(c)(1) and (d)(11) of the Code continue to provide guidance for the interpretation of sections 803(a)(1) and 805(a)(8).

As regulations do not specifically address the treatment of these amounts representing premiums for insurance companies other than life insurance companies, this revenue ruling clarifies that if IC included as premiums written on its annual statement for 1991 the amounts that IC charged itself with respect to its liability for insurance and annuity benefits for its employees, those amounts are taken into account in computing IC's gross premiums written under section 832(b)(4) of the Code.

IC's assumption of this liability is not merely self-insurance because the assumption shifts the employee's risks to the insurance company. Thus, deductions for the amounts that IC charges itself as premiums are not barred by the self-insurance/captive insurance doctrine explained in Rev. Rul. 88-72, 1988-2 C.B. 31, clarified, Rev. Rul. 89-61, 1989-1 C.B. 75.

HOLDING

IC's "gross premiums written on insurance contracts during the taxable year" within the meaning of section 832(b)(4)(A) of the Code include the amounts representing premiums that IC charges itself with respect to liability for insurance and annuity benefits for its employees.

DRAFTING INFORMATION

The principal author of this revenue ruling is William T. Sullivan of the Office of the Assistant Chief Counsel (Financial Institutions and Products). For further information regarding this revenue ruling contact Mr. Sullivan on (202) 622-3970 (not a toll- free call).