Dealers using offshore reinsurance-company accounts to “shelter” their warranty-contract and credit insurance income have been struck a blow by the Internal Revenue Service.

Under a notice published in the November 4, 2002 Internal Revenue Bulletin, the IRS has challenged the position that so-called producer-owned reinsurance companies (PORCs) incorporated abroad are tax-exempt if premiums do not exceed $350,000 a year.

Most PORC accounts are based on tax-free islands like Grand Cayman or Turcks and Caicos in the Caribbean Sea. Dealers using these accounts are on the increase, according to Robert C. Zwiers, dealer taxation executive for the Crowe Chizek CPA firm in Grand Rapids, MI, who says the impact on them could be “severe.”

“For federal income tax purposes,” says the IRS Bulletin, #2002-70, “an insurance company is a company whose primary and predominant business activity is the issuing of insurance or annuity contracts or the reinsuring of risks underwritten by insurance companies.”

The Bulletin declares that exceptions for foreign corporations are only available to those engaged in the insurance business.

A number of warranty and credit life and health providers have advised dealer customers to ‘park’ premiums in PORC accounts maintained offshore. Zwiers, a former IRS officer specializing in dealer taxations, voiced surprise that the IRS seems to be reversing a policy of permitting such accounts as tax-free funds.

IRS officials who prepared the tax-shelter bulletin are John Glover, Theodore Setzer and Sheila Ramaswamy, located in the agency’s Washington headquarters.