Payments for future remediation expenses are not insurance premiums.

• Author: Lindbloom, John W.

The IRS ruled in Rev. Rul. 2007-47 that payments to an insurance company to cover future capped costs were not insurance payments for tax purposes. The "premium" was an amount equal to the present value of estimated future remediation costs required by the government.

The taxpayer in the ruling is an accrual-method domestic corporation (X) that conducts a business that is inherently harmful to people and property. X is required by government regulation to remediate that harm. X will incur certain future costs when it ceases to conduct its operations. These costs will be expended to restore its business location to its pre-operational condition. The exact amount and timing of the future remediation costs will depend on several factors. There is, however, no doubt that the remediation costs will be incurred.

X estimated that the present value of future remediation costs was $150 million, based on the relevant factors and use of an appropriate discount rate. X paid an unaffiliated domestic insurance company $150 million. The insurance company agreed to reimburse X for future remediation costs not to exceed $300 million. There were no limits on the duration of the coverage.

Insurance premiums for coverage against casualty, theft, or other similar losses are deductible as an ordinary and necessary business expense under Sec. 162. Accrual-basis taxpayers generally incur and take into account a liability in the tax year in which all the events have occurred that establish the fact of the liability, the amount of the liability can be determined with reasonable accuracy, and economic performance has occurred with respect to the liability (Regs. Sec. 1.461-1(a)(2)).When a liability arises out of payments for insurance, economic performance occurs as the payment is made to the person to whom the liability...