Section 832.—Insurance Company Taxable Income

26 CFR 1.832–4.— Gross income.

Insurance companies; premium sta- bilization reserves. This ruling holds that additions to premium stabilization reserves are return premiums for purposes of determining the amount of premiums earned on insurance contracts during a taxable year.

Rev. Rul. 2005–33

ISSUE

Are additions to a premium stabilization reserve return premiums for purposes of determining the amount of premiums earned on insurance contracts during the taxable year under § 832(b)(4)?

FACTS

IC is an insurance company other than a life insurance company, taxable under § 831(a) of the Internal Revenue Code. More than half of IC ’s business is the issuing of insurance and annuity contracts, including group insurance contracts. Many of IC ’s group insurance contracts are experience rated and provide for premium stabilization reserves.

IC ’s premium stabilization reserves are funds that it maintains under its group insurance contracts to stabilize the group policyholders’ premiums over a number of years. These reserves are funded by experience rate credits on the group insurance policies. Specifically, rather than rebate amounts already included in gross premiums written to group policyholders based on experience, IC retains the amounts in premium stabilization reserves to pay extraordinary claims or to offset future premium increases for those policyholders. Each premium stabilization reserve arrangement is individually negotiated with the affected group policyholder. IC is contractually obligated to follow the formula outlined in the insurance contract for applying the premium stabilization reserve

If written advice concerns more than one Federal tax issue, the advice must comply with the requirements of paragraph (c) of this section with respect to any Federal tax issue not described in the preceding sentence.

• • • • (8) Prominently disclosed . An item is prominently disclosed if it is readily apparent to a reader of the written advice. Whether an item is readily apparent will depend on the facts and circumstances surrounding the written advice including, but not limited to, the sophistication of the taxpayer and the length of the written advice. At a minimum, to be prominently disclosed an item must be set forth in a separate section (and not in a footnote) in a typeface that is the same size or larger than the typeface of any discussion of the facts or law in the written advice.
• • • • (10) The principal purpose . For purposes of this section, the principal purpose of a partnership or other entity, investment plan or arrangement, or other plan or arrangement is the avoidance or evasion of any tax imposed by the Internal Revenue Code if that purpose exceeds any other purpose. The principal purpose of a partnership or other entity, investment plan or arrangement, or other plan or arrangement is not to avoid or evade Federal tax if that partnership, entity, plan or arrangement has as its purpose the claiming of tax benefits in a manner consistent with the statute and Congressional purpose. A partnership, entity, plan or arrangement may have a significant purpose of avoidance or evasion even though it does not have the principal purpose of avoidance or evasion under this paragraph (b)(10).

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Mark E. Matthews, Deputy Commissioner for Services and Enforcement,

Internal Revenue Service.

Approved May 12, 2005.

James W. Carroll, Acting General Counsel, Department of the Treasury.

(Filed by the Office of the Federal Register on May 18, 2005, 8:45 a.m., and published in the issue of the Federal Register for May 19, 2005, 70 F.R. 28824)