Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 61-85

1961-1 C.B. 45

Sec. 162

Sec. 164

Sec. 264

IRS Headnote

The license tax imposed on insurance companies by Chapter 59 of the General Ordinances of the City of Louisville, Kentucky, 1956 Revised Compilation, is not a `State or local sales tax' within the meaning of section 164(c) of the Internal Revenue Code of 1954. Therefore, the tax is not deductible under that section as a retail sales tax by purchasers of insurance to whom the tax is passed on by the insurance companies. However, where the insurance premiums are paid in connection with the operation of a trade or business, the premiums, including the tax, may be deductible as a business expense by the purchaser of the insurance under section 162 of the Code.

Full Text

Rev. Rul. 61-85

Advice has been requested whether a license tax is imposed on insurance companies by the City of Louisville, Kentucky, is deductible as a retail sales tax, under section 164(c) of the Internal Revenue Code of 1954, by purchasers of insurance.

Under Chapter 59 of the General Ordinances of the city of Louisville, Kentucky, 1956 Revised Compilation, a license tax is imposed on all insurance companies, corporations, firms, individuals and associations doing business within that City. The license tax is payable to the City Sinking Fund at a specified rate for each $100 of all premiums received in cash or otherwise on all business written or done within the City during the year ending December 31 immediately preceding the time the license tax is payable. The ordinance provides that any insurance company, etc., failing to pay the license tax shall be subjected to specified penalties.

Legal liability for the license tax falls on the insurers. In actual practice, the burden of the license tax is passed on to the policyholders by the insurers by separately specifying the amount thereof on the policy as an addition to the insurance premium due and paid.

Section 164(a) of the Code provides that, in computing taxable income, there shall be allowed as a deduction taxes paid or accrued within the taxable year with certain exceptions not applicable in this case.

Section 164(c)(1) of the Code, relating to the deduction of retail sales and gasoline taxes in computing taxable income, provides, in part, that in the case of any State or local sales tax, if the amount of the tax is separately stated, then, to the extent that the amount so stated is paid by the consumer (otherwise than in connection with the consumer's trade or business) to his seller, such amount shall be allowed as a deduction to the consumer as if it constitutes a tax imposed upon, and paid by, such consumer.

Section 164(c)(2) of the Code provides, in substance, that the term `State or local sales tax' means a tax imposed by a State, a Territory, a possession of the United States, a political subdivision of any of the foregoing, or by the District of Columbia, which tax is imposed on persons selling tangible personal property at retail (or on persons selling gasoline or other motor vehicle fuel at wholesale or retail) and is a stated sum per unit of property sold or is measured either by the gross sales price or gross receipts from the sale, or is imposed on persons furnishing services at retail and is measured by the gross receipts for furnishing such services.

Section 1.164-1 of the Income Tax Regulations provides that, in general, taxes are deductible only by the person upon whom they are imposed. Section 1.164-5 of the regulations provides that any amount representing a State or local sales tax paid by a consumer of services or tangible personal property is deductible by such consumer as a tax, provided it is separately stated and not paid in connection with his trade or business.

The term `insurance' means a contract whereby, for an agreed premium, one party undertakes to compensate the other for loss on a specified subject by specified perils. The `premium' is the consideration for the contract of insurance, and is a certain amount or a certain rate upon the value at risk.

The selling of insurance does not constitute the sale of tangible personal property at retail within the meaning of section 164(c) of the Code. Neither does the sale of insurance constitute the `furnishing of services at retail' to the person to whom an insurance contract has been sold, as that term is used in section 164(c) of the Code.

Accordingly, it is held that the license tax imposed on insurance companies and others under the provisions of Chapter 59 of the General Ordinances of the City of Louisville, Kentucky, is not a `State or local sales tax' within the meaning of section 164(c) of the Code. Therefore, the amount added to the premium and collected by the insurance company from the purchaser of insurance is not deductible by the purchaser of the insurance under section 164(c) of the Code as a retail sales tax. However, where the insurance premiums are paid in connection with the operation of a trade or business, the premiums, including the tax added thereto, may be deductible as a business expense under section 162 of the Code. See section 1.162-1(a) of the regulations. See also sections 262 and 264 of the Code and the regulations thereunder, with respect to the nondeductibility of amounts paid in connection with certain life insurance contracts.