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Author: irasmilo Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121265  
Subject: Re: How exactly do accountants help the rich? Date: 12/18/2003 10:58 PM
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IRC section 501(c)(15) provides exemption from Federal income tax for insurance companies or associations other than life if the net written premiums, or if greater direct written premiums, for the taxable year do not exceed $350,000. This exemption also includes interinsurers and reciprocal underwriters.

Now if I just had a few $Million to protect from taxes... at least I know how!

Are we missing the bolded part of the code? If you are running an insurance company, and your premiums are under $350k, you're in deep do-do. And you probably aren't making any money anyway. Not exactly my kind of tax shelter.


That's why you're not among the super rich.<g> Here's the premise according to the article.

"A business owner creates an insurance company, often in Bermuda or another tax haven where there are few regulations, but under rules subjecting it to American tax law. The owner then applies to the I.R.S. to have the company taxed under Section 501(c)(15) of the tax code, which makes it exempt from taxes so long as it takes in less than $350,000 of premiums.

"The owner then insures his own businesses and, sometimes, solicits some business from others, in many cases collecting only a few thousand dollars in total premiums.

"It is the second and third steps that make the deal attractive, especially to someone with an asset that has soared in value.

"Say the owner has stock worth $100 million that, if sold, would cause a $20 million capital gains tax, leaving him with $80 million. By contributing the stock to his insurance company, as a reserve against claims, and having his company sell the stock he avoids the capital gains tax because the insurance company is tax exempt.

"The $100 million is then used to buy a diversified portfolio of stocks and bonds, eliminating the risk from being highly concentrated in one stock. The dividends, interest and any future capital gains on this money are tax-free so long as the money stays with the insurance company. If this $100 million grows to $150 million and the owner then decides to close the insurance company, he could take the money back and owe taxes only on the $50 million gain.

"Ms. MacNab laughed at the thought that anyone doing this would even pay those taxes, however. "The I.R.S. would never notice" if the taxes were not paid, she said."

Ira
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