Commonwealth Underwriting & Annuity Services, Inc. v. Comm’r, T.C. Memo. 2023-27| March 2, 2023 | Carluzzo, J. | Dkt. No. 8228-18X

Summary: Commonwealth challenges the IRS’s denial of application for tax exemption under 501(a), claiming, by submission for declaratory judgment, to be an organization described in section 501(c)(15). Commonwealth was organized in Belize. Its sole shareholder was “its only flesh and blood officer.” It was formed to engage in any act or activity not prohibited under any law in Belize, including for carrying “on the business of an investment company.” It had no bylaws. It sold annuity contracts to individuals in consideration for purchase payments. Upon receipt, purchase payments were transferred to a segregated trust account and subaccounts administered by an independent trustee. By contract, the assets were the property of Commonwealth rather than of the clients that provided the purchase payments, and each fund was to be assessed investment management fees. The value of each segregated trust account and each annuity depended on the performance of the investment. Commonwealth received $82,621,231 and $2,131,442 in purchase payments in 2013 and 2014, respectively, as consideration for the sale of the annuity contracts. Commonwealth also received $150,000 and $194,782 in maintenance fees in 2013 and 2014, respectively.

On May 12, 2014, Commonwealth submitted to the IRS a Form 1024, Application for Recognition of Exemption Under Section 501(a) of the Internal Revenue Code, claiming to be in the business of issuing and managing annuity contracts and making other disclosures relating to that purported business. The IRS issued a final adverse determination letter, denying the application and informing Commonwealth that it did not qualify for exemption from federal income tax under section 501(a) as an organization described in section 501(c)(15). Basis: Commonwealth is not an insurance company described in section 816 (other than life) within the meaning of section 501(c)(15), and it does not meet the requirements of section 501(c)(15) that its gross receipts not exceed $600,000 and that more than 50 percent of its receipts consist of premiums.

Key Issues: Whether Commonwealth’s Form 1024 Application was sufficient to qualify Commonwealth for exemption from federal income tax under section 501(a) as an organization described in section 501(c)(15) such that the IRS’s denial was erroneous?

Primary Holdings: No. Commonwealth failed the financial test in section 501(c)(15).

Key Points of Law:

Organization Under Section 501(c)(15). An organization that is described in section 501(c)(15) can qualify for exemption from federal income tax under section 501(a) if the organization: (1) is an insurance company as defined in section 816(a) (other than a life insurance company) and (2) the organization’s gross receipts for the taxable year do not exceed $600,000 and more than 50% of its receipts consist of premiums (financial test). See 26 U.S.C. § 501(c)(15)(A)(i).

Insurance Premiums. Insurance premiums are includable in an insurance company’s gross income. See Avrahami v. Commissioner, 149 T.C. 144, 174–75 (2017).

Insights: This may be the most straightforward and succinct Tax Court opinion in at least the last 187 opinions. A refreshing read in this week of seven opinions under Tax Court in Brief management.

Have a legal question? Contact Jason Freeman And Freeman Law Legal Team.