Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 69-100

1969-1 C.B. 289

IRS Headnote

The tax imposed by section 4371 of the Code applies to additional premiums paid for extended coverage endorsements which are subsequently attached to foreign marine and war risks policies originally issued to cover risks occurring wholly or partly within the United States.

Full Text

Rev. Rul. 69-100

The Internal Revenue Service has been asked whether the excise tax imposed by section 4371 of the Internal Revenue Code of 1954 on policies issued by foreign insurers applies to the additional premiums paid in the circumstances described below.

A marine policy and a war risk policy were originally issued by a foreign insurer to a domestic corporation at basic rate premiums. The insurance policies covered the insured's shipping vessel and insures the vessel's hull, machinery, etc., against hazards, risks, losses, or liabilities wholly or partly within the United States. Trading limits stated in the policy define waters in which the vessel is covered against the specified risks. If the insured breaches the trading warranties by traveling in waters outside the specified trading limits, the vessel's hull, machinery, etc., are not covered by the policies. However, the policies could be extended to cover additional trading limits if the insured notified the insurer of such intention, paid the additional premiums, and endorsements for such additional coverage were attached to the original policies. By agreeing to this condition the insurer had no right to refuse the insured's election for extended coverage, but only the right to determine the amount of the additional premiums to be paid. The insured elected to extend the coverage to additional trading limits wholly outside the United States and paid the additional premiums for this extended coverage.

Section 4371 of the Code imposes a tax on premiums paid for casualty insurance policies and indemnity bonds issued by any foreign insurer if issued to or for, or in the name of, an insured as defined in section 4372(d).

Section 4372(d) of the Code provides that for purposes of section 4371(1), the term "insured" includes "a domestic corporation or partnership, or an individual resident of the United States, against, or with respect to hazards, risks, losses, or liabilities wholly or partly within the United States, * * *." (Emphasis added.)

Section 145.5-1(c)(2) of the temporary regulations provides that as used in section 4371 of the Code, the term "premium" means the agreed price or consideration for assuming and carrying the risk or obligation, and includes any additional assessment or charge that may be assessed or charged under the contract, whether payable in one sum or installments.

The basic issue presented is whether the endorsements added to the original policies constitute contracts of insurance separate and distinct from the policies to which they are added, or are integral and inseparable parts of the original policies. If the endorsements are separate contracts, they constitute policies of insurance covering risks wholly outside the United States and, therefore, are not subject to the tax imposed by section 4371 of the Code. If the endorsements are not separate contracts, they are parts of contracts covering risks wholly or partly within the United States, and premiums paid based on the additional risk coverage are subject to the tax imposed by section 4371 of the Code.

As indicated above, by the terms of the original policies the insurer was committed to accept endorsements for additional coverage, if the insured so elected. Under these circumstances the extended coverage endorsements subsequently attached to the insurance policies issued by the foreign insurer are part of the original insurance policies, for purposes of the tax imposed by section 4371 of the Code. Therefore, since the policies of which the endorsements are a part cover risks wholly or partly within the United States, the tax imposed by section 4371 of the Code applies to the additional premiums paid for the extended coverage endorsements.