Service Issues Guidance on Insurance Premiums Paid by Parent to Subsidiary
Tax Analysts Document #2002-27068

      The Service has provided guidance on whether arrangements between a parent and a subsidiary insurance qualified as an insurance arrangement and whether premiums paid were deductible under section 162.

Citations: Rev. Rul. 2002-89, 2002-52 IRB 1



The Service has provided guidance (Rev. Rul. 2002-89) on whether arrangements between a parent and a subsidiary insurance qualified as an insurance arrangement and whether premiums paid were deductible under section 162.

The Service outlined two situations. In the first, a domestic corporation entered into an annual arrangement with its wholly-owned insurance subsidiary. In doing so, the subsidiary either insures or reinsures the professional liability risks of the parent corporation. The amounts paid are established according to customary industry rating formulas and the parties conduct themselves consistently as unrelated parties. All business funds and records of both the parent and the subsidiary are maintained separately and the parent does not guarantee the subsidiary's risks. The subsidiary also performs insurance business with unrelated parties. However, 90 percent of the total premiums are received from the parent corporation on both a gross and net basis.

In the second situation, the premiums earned by the subsidiary are less than 50 percent of the total premiums on both a gross and net basis. Moreover, the liability coverage provided by the subsidiary accounts for less than 50 percent of the total risks borne by it.

The Service pointed out that in the first situation the total risk and liability coverage is more than 90 percent for the subsidiary. It said that no court has treated such an arrangement as insurance. In this instance, there is no risk shifting and risk distribution. Accordingly, the Service ruled that in the first situation, there was no insurance arrangement and that amounts paid by the parent to the subsidiary wasn't deductible. In the second situation, the Service concluded that there was risk shifting and risk distribution. Accordingly, it ruled that the arrangement qualified as an insurance arrangement and that premiums paid by the parent were deductible as insurance premiums under section 162.