SERVICE ANNOUNCES SUBSTANTIVE AND PROCEDURAL GUIDANCE FOR CONTROLLED FOREIGN INSURANCE COMPANIES TO ELECT DOMESTIC CORPORATION TREATMENT.

Notice 89-79

This Notice provides substantive and procedural rules regarding the election under section 953(d) of the Internal Revenue Code of 1986. Additional guidance for the application of section 953(d) will be provided in regulations to be issued in the future.

I. Substantive Rules

Section 953(d) allows a controlled foreign corporation engaged in the insurance business to elect to be treated as a United States corporation for purposes of imposing United States tax. The election can be made for taxable years beginning after December 31, 1987. A foreign corporation that makes this election will be subject to tax in the United States on its worldwide income. However, such corporation will not be subject to the branch profits tax or the branch-level interest tax imposed by section 884.

The election is available to a foreign corporation which is a controlled foreign corporation (as defined in section 953(d)(1)(A)) that would be taxable under subchapter L for the taxable year if it were a domestic corporation. A corporation that makes the election under section 953(d) must waive all benefits granted to it by the United States under any treaty between the United States and any foreign country.

As required by section 843, an electing foreign corporation must use the calendar year as its annual accounting period for U.S. tax purposes unless it joins in the filing of a consolidated return and adopts the taxable year of the parent corporation. An election under section 953(d) shall not operate to terminate a taxable year. The first taxable year for which a corporation makes an election shall begin on the first day following the close of the corporation's prior taxable year.

A distribution from earnings and profits accumulated in taxable years beginning before January 1, 1988 (or from earnings and profits accumulated in taxable years beginning before the first taxable year for which an election is made, if an election is not made for the first taxable year beginning after December 31, 1987), by a corporation for which an election is in effect, shall be treated as a distribution by a foreign corporation. A distribution by such corporation from earnings and profits accumulated in taxable years beginning after December 31, 1987 (or from earnings and profits accumulated in taxable years beginning on or after the first day of the first taxable year for which an election is made, if an election is not made for the first taxable year beginning after December 31, 1987), shall be treated as a distribution by a domestic corporation, except for a distribution that would qualify as a distribution of previously taxed earnings and profits under section 959 if distributed by a foreign corporation. Any distribution by an electing corporation that would qualify as a distribution of previously taxed earnings and profits under section 959 if distributed by a foreign corporation, shall be treated as if distributed by a foreign corporation, and shall be excluded as provided under section 959. For purposes of this paragraph, distributions shall be treated first as distributions from previously taxed earnings and profits under section 959, to the extent thereof, and then as distributions from the corporation's most recently accumulated earnings and profits, pursuant to section 316.

If an electing corporation invests earnings accumulated in pre- election years in United States property, section 956 will apply to such investments, notwithstanding that the corporation is otherwise treated as a domestic corporation. Further guidance on this issue will be provided in regulations to be issued in the future.

A taxpayer that has made the election under section 953(d) and that has, in a taxable year before the election became effective, reduced its dividend equivalent amount otherwise taxable under section 884(a) by taking into account an increase in U.S. net equity (as defined in section 884), will be subject to the branch profits tax under section 884(a) if its U.S. net equity as of the close of a taxable year for which an election is in effect is less than its U.S. net equity as of the last day of the last taxable year before the election became effective.

If a corporation that makes the election to be treated as a domestic corporation is treated as a member of an affiliated group for purposes of chapter 6, any loss of the corporation shall be treated as a dual consolidated loss as defined in section 1503(d), without regard to the exception in section 1503(d)(2)(B) and the regulations thereunder.

Section 953(d)(6) requires an electing corporation to pay a tax equal to three-quarters of one percent of capital and accumulated surplus of the corporation as of December 31, 1987 (but not exceeding $1,500,000). A corporation making the election under section 953(d) must pay the additional tax imposed by section 953(d)(6) at the time prescribed for payment of taxes under section 6151. If the election is not accepted, the tax imposed under section 953(d)(6) will be refunded.

The tax imposed by section 953(d)(6) is not in lieu of the tax that would be imposed pursuant to section 367 on United States persons holding stock in the electing corporation. Thus, notwithstanding the payment of tax under section 953(d)(6), earnings and profits accumulated in taxable years beginning before January 1, 1988 that previously have not been included in the gross income of a United States shareholder under section 951(a) shall be treated as other earnings and profits as defined in section 959(c)(3).

For purposes of section 367, an electing corporation shall be treated as transferring, as of the first day of the first taxable year for which the election is effective, all of its assets to a domestic corporation in an exchange to which section 354 applies. In determining the extent to which gain is recognized pursuant to section 367, earnings and profits of the foreign corporation accumulated in taxable years beginning before January 1, 1988, shall not be included in the gross income of shareholders of the electing corporation. Therefore, if a corporation makes an election that becomes effective for the first taxable year beginning on or after January 1, 1988, its shareholders will not include any earnings and profits of the electing corporation in gross income pursuant to section 367. If a corporation makes the election for a taxable year that is not the first taxable beginning on or after January 1, 1988, its shareholders may be required to include in gross income, pursuant to section 367, earnings and profits of the electing corporation accumulated during the period from the first taxable year beginning on or after January 1, 1988 to the beginning of the taxable year for which the election is made. If a foreign corporation that has made an election under section 953(d) becomes a United States corporation pursuant to a transaction described in section 367(b)(1), earnings and profits of the corporation accumulated in taxable years beginning before January 1, 1988 must be included in the gross income of shareholders of the corporation to the extent provided in section 367 and the regulations thereunder. II. Procedural Rule.

To be effective for a taxable year, the election must be filed by the due date prescribed in section 6072(b) (with extensions) for the United States income tax return that is due if the election becomes effective. Pursuant to this Notice, a corporation making an election for the first taxable year beginning after December 31, 1987 is granted an automatic six-month extension of time to file the United States income tax return that is due if the election becomes effective. A corporation that has already filed its United States income tax return for the 1988 taxable year may use the extended due date provided in this Notice to file its election. Such corporation must attach a copy of the election statement (described later in this Notice) to its amended income tax return.

An electing corporation must determine the tax due on its income as if it were a domestic corporation subject to part I or part II of subchapter L. The extension of time provided by this Notice for filing an income tax return does not operate to extend the time for payment of the tax due. Additions to tax under section 6651(a)(1) and (2), and section 6653(a) will not be imposed for the 1988 taxable year if the electing corporation files its United States income tax return by the due date, as extended by this Notice, and pays the tax due by such extended due date. The penalty for underpayment of estimated tax under section 6655 for installment payments due for the 1988 taxable year will not be waived. A corporation that pays the tax due for its taxable year in anticipation of making the election may obtain a refund if the election does not become effective.

The election is effective for the first taxable year for which it is made and for each subsequent taxable year in which the requirements of this Notice are satisfied. If the electing corporation fails to timely file a return, pay the tax due as stated on the return or comply with other requirements for making the election contained in this Notice or the regulations issued under section 953(d), the Commissioner, in his discretion, may revoke the election for any taxable year after the taxable year with respect to which the failure occurs. The Commissioner may also terminate the election pursuant to a request of the electing corporation. If an election is revoked or terminated, the foreign corporation and its successors will be barred from making another election under section 953(d) without the consent of the Commissioner.

Revocation of the election may cause the U.S. shareholders of the foreign corporation to be liable for subpart F inclusions for taxable years in which the revocation is in effect and make the foreign corporation and its premium payors liable for the excise tax on premiums for insurance or reinsurance issued by the foreign corporation. Funds obtained by the Internal Revenue Service under the security agreement (described later in this Notice) may be applied to the taxes due from the foreign corporation. If a corporation's section 953(d) election ceases to apply for any subsequent taxable year, for purposes of section 367 the corporation will be treated as a domestic corporation transferring (as of the first day of the subsequent taxable year) all of its property to a foreign corporation in connection with an exchange to which section 354 applies.

The process of making a section 953(d) election must be initiated by mailing an original election statement, in the form provided below, to: Internal Revenue Service, Assistant Commissioner (International), IN:C:C:51, 950 L'Enfant Plaza South, S.W., Washington, D.C. 20024. When the corporation files its annual income tax return, Form 1120PC or Form 1120L, it must attach a copy of the election statement. The return is filed with the Internal Revenue Service Center, Philadelphia, Pennsylvania unless the corporation is part of a consolidated group which files elsewhere.

The section 953(d) election is effective on the first day of the first taxable year (including a short taxable year) for which: (1) an election statement is filed in accordance with this Notice; (2) a closing agreement is provided; (3) the corporation executes Form 2848-D, to designate a United States resident as its authorized representative to receive confidential tax information, including any notice of deficiency, on behalf of the electing corporation; and (4) the corporation agrees to produce its books and records, or a true and accurate copy thereof, in the United States upon request of the Internal Revenue Service.

A closing agreement, however, will not be required if the corporation: (1) maintains an office or other fixed place of business in the United States; and (2) owns assets which are physically located in the United States with an adjusted basis equal to 10% of the corporation's gross income for the prior year. For purposes of this Notice, the term "gross income" means "life insurance gross income" as defined in section 803, or "gross income" as defined in section 832(b)(1) (with the phrase "gross premiums written less return premiums and premiums paid for reinsurance," substituted for the term "underwriting income" where that term appears in section 832(b)(1)(A)).

To satisfy the 10% test of the preceding paragraph, a corporation may include an asset only to the extent that any claim of the United States government with respect to the asset, which may arise from the failure of the corporation to pay any tax imposed by the Internal Revenue Code, is not subordinated to the claims of any other creditor. Intangible personal property will qualify as an asset physically located in the United States only if the income from that property is income from sources within the United States, within the meaning of section 861, and the evidence of ownership of such property is physically present in the United States.

A foreign corporation that does not maintain an office in the United States and satisfy the United States asset test set forth above must provide a signed closing agreement and a letter of credit to secure payment of taxes due from the foreign corporation. After filing the election statement, the corporation's designated representative will be provided with a closing agreement form and further instructions for completing the election process. The corporation's election will not be accepted until a sufficient letter of credit has been provided. The letter of credit must be in an amount equal to 10% of the prior year's gross income (as this term is defined above). A minimum amount of $75,000 will be required, and the maximum amount required will not exceed $10,000,000. Taxpayers may be required to provide evidence to support the computation of the amount of security determined under these guidelines.

The following is the suggested format for the election statement, which must set forth the following information:

       FOREIGN INSURANCE COMPANY ELECTION UNDER SECTION 953(d)

(2) (NAME OF CORPORATION) waives all benefits under any treaty between the United States and any foreign country.

(3) (NAME OF CORPORATION) agrees to timely file a U.S. income tax return and timely remit the income tax due on its income, determined as if (NAME OF CORPORATION) were a domestic corporation subject to part I or part II of subchapter L, and the additional tax imposed under section 953(d)(6).

(4) Attached to this election statement is a complete list of all U.S. shareholders (within the meaning of section 953(c)(1)(A)) as of a date no more then 90 days prior to the date this election statement is mailed. The list includes the name, address, tax identification number and ownership percentage for each U.S. shareholder. (NAME OF CORPORATION) agrees to file an updated list containing the information prescribed in this paragraph determined as of the last day of each taxable year. This updated list will be filed with the U.S. tax return reporting the income earned by the corporation for each taxable year the election is in effect.

(5) Attached to this election statement is the Form 2848-D designating a United States resident authorized to receive confidential tax information, including any notice of deficiency, on behalf of (NAME OF CORPORATION). (NAME OF CORPORATION) agrees to produce its books and records, or a true and accurate copy thereof, in the United States upon request of the Internal Revenue Service.

(6) (NAME OF CORPORATION) maintains an office or other fixed place of business in the United States located at under and owns assets which are physically located in the United States with an adjusted basis equal to 10% of the prior year's gross income of (NAME OF CORPORATION).

or

(6) (NAME OF CORPORATION) agrees to provide security for the payment of any amounts due under the Code. The security will be in an amount and upon such terms as stated in a closing agreement to be executed between the Internal Revenue Service and (NAME OF CORPORATION). Attached is the power of attorney, Form 2848, of the person authorized to execute a closing agreement on behalf of (NAME OF CORPORATION).

(7) This election shall be effective as of the first day of the corporation's taxable year (including a short taxable year) commencing _________. The undersigned declares under penalty of perjury that the statements contained in this election and accompanying documents are true and complete to the best of his/her knowledge and belief.

         _____________ __________________________________

A corporation that has previously made the election under section 953(c)(3)(C) to treat related person insurance income as income effectively connected with a U.S. trade or business can revoke that election and make the election under section 953(d) without requesting the consent of the Commissioner. Any such corporation must state in its section 953(d) election statement that it revokes its election under section 953(c)(3)(C), effective as of the date its election under section 953(d) commences.

A stamped copy of the election statement and, if applicable, the executed closing agreement will be returned to each electing corporation. If an insured or broker receives a copy of the stamped election statement he will no longer be liable under section 4374 with respect to the excise tax imposed under section 4371. The exemption from the excise tax is effective as of the first day of the first taxable year for which the election is made. Any excise taxes that have been paid for periods for which the election is effective may be refunded to the person who remitted the taxes. A refund of excise tax (including statutory interest) may be obtained by filing a claim on Form 720 or Form 843.

This Notice serves as an "administrative pronouncement" as that term is described in section 1.6661-3(b)(2) of the Income Tax Regulations and may be relied upon to the same extent as a revenue ruling or revenue procedure.

For further information concerning the execution of a closing agreement pursuant to this election, contact the Assistant Commissioner (International), Special Procedures Section, at (202) 287-4605 (not a toll-free number). For further information concerning other issues contained in this Notice, contact Valerie Mark at (202) 566-6645 (not a toll-free number). Written comments on this Notice may be sent to:

     Office of Associate Chief Counsel (International)