On April 9, 2021, the IRS released Private Letter Ruling (PLR 202114002), addressing whether a corporation operating in the insurance field meets the Section 1202 / QSBS criteria of being a “Qualified Trade or Business”.
The company in question in this PLR:
- helps customers obtain property, casualty, surety, personal, medical, worker’s compensation, employee benefits, and professional practice insurance.
- has contracts with insurance companies to sell a product, but also to perform administrative services such as reporting, recordkeeping, and claims investigation, adjustment and settlement services.
- has contracts with insurance wholesalers.
Under 1202(e)(3), businesses that perform “brokerage services” are specifically excluded from identification as a qualified trade or business. However, “brokerage services” are never defined in Section 1202 and there is limited further clarification in legislative history. In the absence of legislative guidance, this ruling applied the common definition of a broker or brokerage:
“an agent who negotiates contracts of purchase and sale (as of real estate commodities or securities).”
The ruling notes:
Business’s role is not that of a mere intermediary. Contracts with insurance companies require Business to perform a number of administrative services beyond those that would be performed by a mere intermediary facilitating a transaction between two parties. For example, Business must promptly report all known incidents, claims, suits and notices of loss to the insurance company or its designated claims adjuster and cooperate fully to facilitate any investigation, adjustment, settlement and payment of any claim. It also must keep true and complete records and accounts of all transactions and correspondence with the insureds at its principal office, which records and accounts must be open to examination, inspection, verification and audit by the insurance company upon reasonable notice.
Driven by the additional administrative services the company performs, the IRS determined that the business “was engaged in a qualified trade or business as defined in Section 1202(e)(3)”..
This ruling could have implications for Fintech and Insurtech companies, which supply tools, technologies, and administrative services for insurance companies, financial services firms, and banks. However, note that private letter rulings apply directly only to the taxpayer who requested the ruling and cannot serve as official precedent.
This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.