IRVINE, Calif. — A recent ruling by the Internal Revenue Service marks a significant victory for the Portfolio program and its participants. The IRS ruled favorably as to all aspects of the Portfolio dealer reinsurance program that it reviewed, including purpose, structure, operation and management.

Responding to reports of possible abuse of reinsurance programs, the IRS began investigating several programs and individual reinsurance companies in 2002. By the end of 2002, the IRS issue Notice 2002-70, in which certain reinsurance programs were deemed “listed transactions,” meaning they were subject to mandatory disclosure provisions under tax shelter rules. (Notice 2002-70 was effectively rescinded by the recent Notice 2004-65; reinsurance programs are no longer “listed transactions.”)

Portfolio was among the programs subjected to IRS examination. Various challenges were raised by IRS investigators. Portfolio produced thousands of documents and spent countless hours responding to IRS requests. Ultimately, the investigators and Portfolio agreed to request a Technical Advice Memorandum (TAM) on three key disputed issues from the national office of the IRS.

The results of the request were learned just recently. The TAMs will be released to the public on Dec. 31. They represent a complete validation of the Portfolio program.

  • The first issue considered by the TAM is whether the reinsurance company participating in the Portfolio program qualified as an insurance company for tax purposes. The IRS considered the issues and concluded that the company “qualified as an insurance company.”
  • The second issue was a technical question about the eligibility of the reinsurance company to make an election to be treated as a domestic company under section 953(d) of the Internal Revenue Code; the national office ruled that the company was eligible to make that election.
  • The third issue was whether the arrangements constituted a sham. The IRS ruled unequivocally, stating that “The arrangements at issue were not a sham for federal income tax purposes.”

Andrew J. Weill, attorney for the taxpayers in the case, said the TAMs are important on several levels.

“It’s a clear ruling that the reinsurance concept is valid. It’s also a strong vindication for the particular program that was scrutinized,” Weill said, noting the ruling emphasized the importance of choosing the right program. “This ruling doesn’t mean that all reinsurance programs are valid, and individual companies aren’t excused from compliance with the law. But this ruling means that properly run reinsurance programs — such as the one in the TAMs — can offer their participants a much greater degree of confidence in their decision.”