Rev. Rul. 80-222

ISSUE

Are the insurance premiums received by M under the circumstances described below subject to taxation under section 881 of the Internal Revenue Code, in light of the position stated in I.T. 1359, I-1 C.B. 292 (1922), with respect to the taxability of certain insurance premiums?

FACTS

M is a foreign casualty insurance company organized under the laws of country X. Its principal business is the reinsurance of risks initially assumed by other insurance companies, some of which are risks located in the United States and are, therefore, United States risks within the meaning of section 861(a)(7) of the Code. The policies issued by M for the reinsurance of these risks are neither signed nor countersigned in the United States by any officer or agent of M. M is not otherwise engaged in the conduct of any insurance business in the United States within the meaning of section 842 or the conduct of any trade or business in the United States within the meaning of section 864(b). The policies of reinsurance referred to above are subject to the excise tax imposed by section 4371(3).

LAW AND ANALYSIS

Section 881(a) of the Code imposes a tax of 30 percent of the amount received by foreign corporations from sources within the United States as premiums and other fixed or determinable annual or periodical income to the extent such amount is not effectively connected with the conduct of a trade or business within the United States.

Section 1442 of the Code provides for the withholding from foreign corporations of a 30-percent tax in the same manner and on the same items of income as is provided in section 1441.

Section 1441(a) of the Code requires all persons paying any of the items of income listed in subsection (b) to any nonresident alien individual that constitutes gross income from sources within the United States to deduct and withhold a tax of 30 percent from such items. Subsection (b) includes in the list of these income items "premiums" and "other fixed or determinable annual or periodical income."

Section 4371 of the Code imposes a tax of a specified percentage of the premiums paid on each policy of insurance or reinsurance issued by a foreign insurer or reinsurer covering a United States risk. However, such policies that are signed or countersigned by an insurer's officer or agent in a state or the District of Columbia, within which the insurer is authorized to do business, are specifically excepted by section 4373(1) from the imposition of this excise tax.

I.T. 1359 concludes that insurance premiums received from insuring United States risks by foreign insurance companies not engaged in the conduct of any trade or business in the United States are not fixed or determinable and, thus, are not subject to withholding under the predecessor of section 1442 of the Code. See also I.T. 3061, 1937-1 C.B. 114 I.T. 1359 gives two reasons for this conclusion: (1) Congress, in enacting the withholding provisions, intended to require withholding on only those kinds of gross income items having a high content of net income, but insurance premiums do not have this high content of net income and often yield a loss; and (2) the impracticability of collecting an income tax on premiums from which little net income, if any, is derived was one reason Congress retained the stamp tax (Revenue Act of 1918, Title XI, Schedule A, paragraph 15, the predecessor of the section 4371 excise tax) on premiums received by insurance companies not engaged in a trade or business in the United States.

The legislative history of the stamp tax supports the result reached in I.T. 1359. Its history demonstrates that Congress did not believe that any income tax, including a withholding tax, was applicable to insurance premiums paid to foreign insurance companies not engaged in a trade or business in the United States. Thus, in order to eliminate the competitive imbalance created by the fact that such foreign insurance companies, unlike their domestic competitors, were not subject to any United States income tax, Congress imposed the stamp tax on premiums received by such foreign insurance companies. See 61 Cong. Rec. 7180-81 (1921); Hearings on H.R. 7378 Before the Senate Finance Comm. (Vol. 1), 77th Cong., 1st Sess. 121-22 (1942); H.R. Rep. No. 2333, 77th Cong., 1st Sess. 61 (1942), 1942-2 C.B. 372, 420.

Subsequent to the publication of I.T. 1359, Congress has taken legislative action with respect to the taxation of insurance premiums received by foreign insurance companies that is consistent with the conclusion reached in I.T. 1359. Congress, aware of I.T. 1359's holding for many years, has consistently reenacted both the insurance and withholding tax provisions without altering the result in I.T. 1359. See, e.g., Message From the President of the United States (Exhibit VIII), Doc. No. 140, 87th Cong., 1st Sess. 289-290 (1961), which restates the rationale of I.T. 1359 and notes that a 30-percent withholding tax on the premiums "would destroy a normal and essential channel of insurance business, which is important to the American economy where only a foreign company is equipped to handle the risk."

In the Revenue Act of 1962, Pub. L. 87-834, 1962-3 C.B. 111, Congress added section 952 to the Code, which treats income not effectively connected with the conduct of a trade or business in the United States and derived from the insurance of United States risks by a controlled foreign corporation as "subpart F income" that is taxable currently to certain United States shareholders of such corporations. This section was added on the assumption that the 30-percent withholding tax did not apply to such insurance premium income. This treatment was considered necessary in order to prevent tax avoidance schemes that would not have been possible if such premiums were subject to the 30-percent tax imposed by section 881(a). See H.R. Rep. No. 1447, 87th Cong., 2d Sess. 60 (1962), 1962-3 C.B. 405, 464; 108 Cong. Rec. 5305 (1962).

These actions taken by Congress without any attempt to reverse the longstanding position stated in I.T. 1359 indicate that I.T. 1359 correctly states the tax law applicable to the premiums under consideration. See United States v. Correll, 389 U.S. 299, 305-06 (1967), 1968-1 C.B. 64. HOLDING

The insurance premiums received by M under the circumstances described above are not subject to taxation under section 881 of the Code and, therefore, are not subject to the withholding of tax under section 1442.

EFFECT ON OTHER DOCUMENTS

I.T. 1359 and I.T. 3061 are amplified and superseded since the position stated therein is restated under current law in this revenue ruling.