The Service concluded that the contracts issued by the group captive
to each of the members, including the taxpayer, were insurance
contracts because,
• each member faced true insurable hazards and was required to
maintain general liability coverage to operate in its industry;
• each member was unable to obtain affordable insurance coverage
from commercial insurers “due to the occurrence of unusually
severe loss events;”
• there was a real possibility that a member could realize losses
that exceeded the premiums that it paid and no member was reimbursed
for premiums that exceeded its losses; and,
• the taxpayer and other members were unrelated.
Federal Income Taxation of Insurance Companies
A professional corporation that employed 10 physicians and 15
registered nurses made non-assessable premium payments to a mutual
exchange, in Revenue Ruling 80-120.170 The exchange was formed and
qualified under state law to provide medical professional liability
coverage to all physicians and medical professional corporations that
were licensed to practice in the state and maintained at least 50
percent of their practice in the state. It insured more than 5000
physicians and several professional corporations. The Service ruled
that the payments were deductible as premiums under section 162
because the company covered a sufficient number of policyholders, no
one policyholder owned a controlling interest in the exchange, and the
policies were non-assessable.
