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A section 6114 and Delaware update.

A Section 6114 and Delaware Update

Following discussions in June of filing requirements under Section 6114 of the Internal Revenue Code of 1986, it became clear that, in view of Internal Revenue Service Notice 90-40, reporting was waived for insureds and U.S. or foreign brokers for taxpayers exempt by treaty from federal excise taxes on premiums paid to a foreign insurer. Previously, foreign insurers did not have to file if they had made a closing agreement governing excise taxes with the IRS.

Most Bermuda insurers have not made closing agreements regarding the excise tax exemption available under the Bermuda Treaty from Jan. 1, 1986, to Dec. 31, 1989. In last month's column, I indicated that Bermuda companies might be obligated to file under Section 6114 even if the company or its shareholders sought a refund of excise taxes under the treaty.

Apparently, the IRS has taken the position that regarding instructions contained in Revenue Procedure 89-24 dealing with refund claims under the treaty, Bermuda insurance and reinsurance companies, or their insureds, making a refund claim for overpayment of excise tax under the treaty will be treated as having taken a treaty position that is disclosable under Section 6114.

Comments submitted to the IRS suggest that the final regulations be amended to waive the reporting requirements under Section 6114 if the Bermuda company or the insured complied with the provisions of Revenue Procedure 89-24. Requiring reporting in such instances could be duplicative because the information required to be disclosed under Section 6114 will have been supplied with the refund claim under Revenue Procedure 89-24.

Unless the final regulations are amended, Bermuda insurers and reinsurers that filed refund claims, or whose insureds or reinsureds filed such claims for excise taxes paid in 1989 or the last quarter of 1988, must comply with reporting requirements under Section 6114. The filing date for these periods has been extended to Aug. 15, 1990.

Delaware Update

The July column discussed Delaware House bill 193, which grants some Delaware chartered banks and trust companies the power to act as an insurer, broker or agent for all lines of insurance except title insurance. Since enactment of the bill, the Delaware Senate passed bill 415 which modified certain insurance powers under bill 193. In addition, several insurance associations have petitioned the Federal Reserve Board to prohibit certain bank holding companies from expanding insurance operations based on bill 193 as modified by bill 415.

The new bill, which was passed on May 30, 1990, stipulates that a Delaware bank or trust company owned by an out-of-state bank holding company or any subsidiary may not exercise the newly permitted insurance powers in a manner and at a location likely to attract customers from the state's general public. The legislation also provides that any insurance product offered through an insurance division of a Delaware bank or its subsidiary may be solicited only by licensed insurers.

In addition, when the new bill was passed a petition was filed with the Federal Reserve by various insurer associations requesting that it prohibit particular bank holding companies from expanding certain insurance operations in reliance on the modified bill 193.

Arguments were made concerning the fact that under federal law, an operating subsidiary of a state chartered bank, which is a member of a federal bank holding company system, may engage only in directly conducted activities permitted by state law. Petitioners argued that bill 193 does not permit Delaware banks to sell or underwrite insurance directly; rather, these insurance powers must be conducted by an insurance department or division within the bank and should be treated as a separate, affiliated company and not part of the bank. As such, it was argued that insurance powers currently permitted under Delaware banking law are prohibited under federal law.

Also, as a result of bill 415, Delaware banks that are owned by out-of-state bank holding companies or subsidiaries may not exercise the newly expanded insurance powers under Delaware state law, but may exercise, with limited exceptions, such powers outside the state. It was argued that these new laws permit the same activities prohibited by the board's decision in Citicorp (South Dakota), including non-banking activities in and out of state. Petitioners are urging the board to rule in this instance, as in the Citicorp decision, that the proposed use of the new law is an impermissible evasion of federal law. The board is under no legal compulsion to act on these requests.

P. Bruce Wright, a member of the New York Bar, is with the law firm LeBoeuf, Lamb, Leiby and MacRae.
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Title Annotation:Internal Revenue Code of 1986
Author:Wright, P. Bruce
Publication:Risk Management
Article Type:column
Date:Aug 1, 1990
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