In a private letter ruling (PLR 201724012
), the IRS Office of Chief Counsel concluded that an insurance company’s payment to a state fund that supported graduate medical education in the state was deductible under Section 162 and was not capitalizable as an intangible under Treas. Reg. Sec. 1.263(a)-4.
Under the facts of the PLR, the “association” is a non-stock insurance company created by the state’s statute. With minor exceptions, every insurer authorized to write liability insurance on a direct basis within the state is required to be a member of the association. The association is taxed as an insurance company and writes medical malpractice insurance for medical service providers and nursing homes in a state. The association was required by a state statute to make a payment to a fund created by the state. The state is expected to use the fund to support grants to hospitals and medical schools for graduate medical education programs and to create first-year residency positions.
The IRS determined that the payment to the state fund was deductible as an ordinary and necessary business expense under Section 162. The IRS noted that state law required payment to the fund, and a failure to make the payment could jeopardize the association’s continued business in the state.
Without providing much analysis, the IRS concluded that the payment was not required to be capitalized as an intangible under Treas. Reg. Sec. 1.263(a)-4. The IRS stated that the payment was not an amount paid to create or enhance a separate and distinct intangible asset within the meaning of Treas. Reg. Sec. 1.263(a)-4(b)(3), it was not the acquisition of an intangible under Treas. Reg. Sec. 1.263(a)-4(c), and most importantly, the payment did not create an intangible in Treas. Reg. Sec. 1.263(a)-4(d).
The last ruling is perhaps the most interesting, as the association may have been concerned whether the IRS would treat the payment as required to be capitalized as a created intangible under Treas. Reg. Sec. 1.263(a)-4(d). Although the IRS did not go through each type of created intangible listed in the regulation, the list includes, for example, a right obtained from a governmental agency and certain memberships and privileges. Because the association was required to make the payment to continue selling its services in the state, the association may have been concerned whether the IRS would view the payment as creating or facilitating a right obtained from a governmental agency or a membership or privilege.
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