The Internal Revenue Service has ruled that dealers no longer must identify producer-owned reinsurance companies, or PORCs, as tax shelters on their federal tax returns.
The previous policy had placed owners of PORCs under greater IRS scrutiny.
As many as 40 percent of dealers own PORCs.
Many high-volume dealers create them to increase insurance profits. When dealers share the risk of underwriting the credit life insurance policies and vehicle service contracts they sell, they get a share of the underwriting profit as well as the dealership commission.
The IRS stepped up scrutiny of these companies last year.
The agency alleged that dealerships and other businesses were using them to dodge taxes.
Some PORCs qualify for tax advantages as small insurance companies.
"The rescission of the reporting requirements was as unexpected as the initial announcement of the reporting requirements," says Jim Smith, CEO of SouthwestRe. The Albuquerque, N.M., company sets up PORCs for dealers.
The IRS changed its policy for two reasons.
1. Congress tightened federal rules that specify which insurers are tax-exempt.
2. IRS audits showed abuse of PORCs was not rampant.
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