IRS revokes PLR on vehicle roadside assistance contracts

The IRS issued a private letter ruling (PLR 202443012), revoking a prior PLR that determined certain vehicle roadside assistance contracts could be classified as insurance contracts for income tax purposes.

The prior PLR, issued in 1999, determined that certain vehicle roadside assistance contracts contained the requisite risk shifting and risk distribution required to classify such contracts as insurance contracts for federal income tax purposes. But the IRS’s views on the topic have changed, leading to the new private letter ruling that supersedes the agency’s old position.

The new Oct. 25 PLR re-examined the roadside assistance contracts, determining the contracts did not constitute insurance due to the absence of insurance risk.

 At the time the 1999 PLR was issued, a majority of the taxpayer’s business involved the provision of roadside assistance to purchasers of vehicles from “manufacturer X,” “manufacturer Y” and “manufacturer Z.” The contracts vary by manufacturer as follows:

• Manufacturer X contracts
  “The taxpayer” and manufacturer X entered into an agreement whereby taxpayer was obligated to provide emergency roadside service to manufacturer X’s customers.  Under the terms of the agreement, manufacturer X paid the taxpayer a set fee per each covered vehicle in exchange for taxpayer’s provision of services to manufacturer X’s customers. Such fee constituted the taxpayer's total compensation. However, if the cumulative number of dispatches regarding covered vehicles exceeded an agreed upon amount, manufacturer X was required to reimburse the taxpayer for actual service costs incurred by the taxpayer. Additionally, In the event dispatches fell below an agreed upon amount, the taxpayer was required to provide manufacturer X an agreed upon credit (fee refund) per covered vehicle. 
• Manufacturer Y contracts
  The contracts entered into between the taxpayer and manufacturer Y required manufacturer Y to pay the taxpayer a fee per each covered vehicle. In return for the fee, the taxpayer agreed to provide emergency roadside services. The responsibility for the expenses associated with the roadside services were entirely borne by the taxpayer.
• Manufacturer Z contracts
  The taxpayer's roadside assistance contract with manufacturer Z was a no risk contract. Although the taxpayer charged an administrative fee for each covered vehicle sold by manufacturer Z, the costs associated with emergency roadside service incurred by the taxpayer were passed on to and paid by manufacturer Z.

Neither the Code nor the Treasury regulations define “insurance.” The 1999 PLR stated that the accepted definition of “insurance” for federal tax purposes is found in Helvering v. Legierse, 312 U.S. 531 (1941), in which the Supreme Court stated that historically and commonly insurance involves risk-shifting (i.e., the insured shifts its risk to the insurer) and risk-distributing (i.e., the insurer distributes actual losses among a large group of insureds with similar risks). Using this definition as a framework for its analysis, the 1999 PLR concluded the following:

• The contract between the taxpayer and manufacturer Z is an example of a fee-for-service arrangement, which does not involve a shifting of insurance risk. As such, this contract was determined not to be an insurance contract.

The contracts between taxpayer and manufacturers X and Y were determined to be insurance contracts.  The PLR supported this conclusion by reasoning that the taxpayer, for a fixed price, was obligated to indemnify a contract holder for the economic loss arising from any emergency roadside assistance during the contract period (risk shifting). Further, by accepting a large number of risks, the taxpayer distributed the risk of loss under the contracts so as to make the average loss on a contract more predictable (risk distributing). Because the contracts with manufacturers X and Y represented the taxpayer's primary and predominant business, the 1999 PLR reasoned that the taxpayer qualified to be taxed as an insurance company.

The 2024 PLR also evaluated the definition of insurance under case law and similarly held that to be considered insurance, an arrangement must involve risk-shifting and risk distribution, along with “insurance risk” (See, e.g., Avrahami v. Commissioner,  149 T.C. 144, 177 (2017)).

Insurance risk is involved when an insured faces some loss-producing hazard, and an insurer accepts a payment as consideration for agreeing to perform some act if and when that hazard occurs. The 2024 PLR stated that there is no risk unless there is uncertainty or fortuitousness with respect to the possible occurrence of the hazard and the potential payment of insurance proceeds. The IRS concluded that a contract that lacks the requisite fortuity does not hold insurance risk and is not a contract that constitutes insurance for federal income tax purposes.

The 2024 PLR then reasoned that because of its particular fee refund provision, the contract with manufacturer X did not have the requisite fortuity to constitute an insurance risk. As such, the contract did not constitute insurance for federal income tax purposes. Since a significant portion of the taxpayer's revenue was from the contract with manufacturer X, the taxpayer's primary and predominant business activity was not the issuing of insurance or annuity contracts or the reinsuring of risks underwritten by insurance companies. As a result, the IRS determined the taxpayer was not an insurance company for federal income tax purposes when the 1999 PLR was issued, and revoked the 1999 PLR.

Despite this, the agency continues to agree with its determination in 1999 that the contract with manufacturer Y was insurance for federal income tax purposes.

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