INSURANCE COMPANY'S FIXED PAYMENTS FOR SPECIFIED INJURIES ARE REPORTABLE.

UIL Number(s) 6041.00-00

                                             Date: August 17, 1995

This is in response to your letter of February 14, 1995, in which you requested a ruling on behalf of X. Specifically, you requested a ruling regarding X's obligation under section 6041 of the Internal Revenue Code to file information returns in connection with certain benefits paid by X to insureds pursuant to employer-paid individual health insurance contracts, where the benefits are paid on an indemnity basis in a predetermined amount upon the occurrence of contractually specified events.

FACTS

X is an insurance company that offers a number of different accident and health insurance policies providing various benefits. The policies typically provide coverage that is supplemental to other primary insurance of an insured.

Certain policies provide benefits that are paid specifically to reimburse for certain medical expenses actually incurred by an insured. Benefits under these policies are paid in an amount equal to actual medical expenses incurred upon occurrence of a defined accidental injury or sickness and use of some medical service, such as treatment by a physician, use of an ambulance, emergency room treatment, etc. Other policies provide benefits that are paid on an indemnity basis in a predetermined amount upon the occurrence of a particular event. Included in such policies are benefits paid in a predetermined amount upon (1) death of an insured due to an accident; (2) disability of an insured due to a sickness or an accident; and (3) occurrence of accidental loss of a finger, toe, hand, foot, or sight of an eye. Some of the policies provide for benefits to be paid directly to doctors or other healthcare service providers under a contractual assignment of benefit provision. This ruling does not address and is inapplicable to any payments made under any of the above policies.

In addition, X provides benefits under two other types of policies (the Policies) that are at issue herein. Under one of the Policies, predetermined benefits are paid upon the occurrence of a defined accidental injury or sickness (e.g., cancer) and diagnosis or treatment by a physician. Under the other of the Policies, benefits are paid in a predetermined amount upon occurrence of a defined accidental injury or sickness and use of some medical service such as use of an ambulance, emergency room treatment, hospital confinement, etc. Under both Policies, benefits are paid regardless of whether medical expenses are actually incurred by an insured. The benefits under the Policies are employer provided.

It may be that benefits under the Policies will be used to pay medical expenses incurred by an insured. Use of the insurance proceeds is unrestricted, however, and X is not in a position to know whether benefits paid by X under the terms of the Policies are in fact used to pay such expenses.

APPLICABLE LAW

Section 105(a) of the Code states that except as otherwise provided in section 105, amounts received by an employee through accident or health insurance for personal injuries or sickness shall be included in gross income to the extent that such amounts (1) are attributable to contributions by the employer which were not includible in the gross income of the employee, or (2) are paid by the employer.

Section 105(b) of the Code provides in part that except in the case of amounts attributable to (and not in excess of) deductions allowed under section 213 (relating to medical, etc., expenses) for any prior taxable year, gross income does not include amounts referred to in section 105(a) if such amounts are paid, directly or indirectly, to the taxpayer to reimburse the taxpayer for expenses incurred by him for the medical care (as defined in section 213(d)) of the taxpayer, his spouse, and dependents (as defined in section 152).

Section 1.105-2 of the Income Tax Regulations provides in part that section 105(b) applies only to amounts which are paid specifically to reimburse the taxpayer for expenses incurred by him for the prescribed medical care. Thus, section 105(b) does not apply to amounts which the taxpayer would be entitled to receive irrespective of whether or not he incurs expenses for medical care.

Section 6041(a) of the Code provides in general that all persons engaged in a trade or business and making payment in the course of such trade or business to another person, of rent, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable gains, profits, and income, of $600 or more in any taxable year, shall render a true and accurate return to the Secretary, under such regulations and in such form and manner and to such extent as may be prescribed by the Secretary, setting forth the amount of such gains, profits, and income, and the name and address of the recipient of such payment.

Section 1.6041-1(a)(2) of the regulations provides in part that the return required by section 6041(a) shall be made on Forms 1096 and 1099 except in certain situations not applicable herein.

Section 1.6041-1(c) of the regulations defines "fixed or determinable income." Income is fixed when it is paid in amounts definitely predetermined. Income is determinable whenever there is a basis of calculation by which the amount to be paid may be ascertained.

Rev. Rul. 78-110, 1978-1 C.B. 390, holds that the uncertainty of the year that a farmer might include crop insurance proceeds in income does not affect the status of the insurance proceeds as "fixed or determinable" income. Therefore, an insurance-company is required, pursuant to section 6041 of the Code, to file information returns to report crop insurance proceeds of $600 or more paid to farmers.

Rev. Rul. 80-22, 1980-1 C.B. 286, clarifies Rev. Rul. 78-110 and discusses whether an insurance company is required, pursuant to section 6041 of the Code, to file an information return to report crop insurance proceeds paid to a farmer who capitalizes certain expenses relating to the crops and who has informed the insurance company that such expenses have been capitalized. The ruling notes that the capitalization of expenses would establish the farmer's basis in the crops. The ruling further notes that the determination of whether any insurance proceeds received for the destroyed crops were in excess of the basis of the destroyed crops and, thus, constitute "gains, profits, or income" depends upon the farmer's basis in the crops. Because the insurance company cannot require a farmer to disclose the basis in the destroyed crops, the amount of "gains, profits, or income," if any, resulting from the crop insurance proceeds is not fixed or determinable by the insurance company. The ruling holds that the insurance company is not required to file an information return if the farmer has informed the insurance company that certain expenses relating to the crops have been capitalized. However, if the farmer does not inform the insurance company that the expenses relating to the crops have been capitalized then the insurance company is required to file an information return.

Rev. Rul. 82-93, 1982-1 C.B. 196, follows the holdings of Rev. Rul. 78-110 and Rev. Rul. 80-22, and holds that the Federal Crop Insurance Corporation (FCIC) is required, pursuant to section 6041, to file an information return for a payment to a farmer of crop insurance proceeds of $600 or more a year. However, if a farmer capitalizes certain expenses relating to the crops, and so notifies the FCIC, then an information return is not required.

ANALYSIS

No opinion is expressed concerning whether any portion of the proceeds paid by X under the Policies would not be includible in an insured's gross income under section 105(b) of the Code. It may be possible that under certain facts and circumstances a portion or all of the benefits received under the Policies would not be includible in an insured's gross income. X has no knowledge, however, of the facts and circumstances required to make such a determination.

Rev. Rul. 80-22 and Rev. Rul. 82-93 treat the payment of crop insurance proceeds as a payment of gross income to a farmer. An exception to this rule exists where a portion or all of the payment constitutes a recovery of basis. Whether a portion or all of a payment constitutes a recovery of basis depends upon facts and circumstances ordinarily beyond the knowledge of the payor. If a farmer notifies the payor that certain expenses relating to crops were capitalized, however, the payor would know that all or a portion of the payment would be a recovery of basis and that the entire amount of the payment could not be characterized as gross income. Further, since the payor could not require a farmer to disclose the basis in the destroyed crops, the payor could not know if the $600 reporting threshold under section 6041 had been met. Therefore, the payor was not required to file an information return. However, if a farmer did not notify the payor that certain expenses relating to crops were capitalized then the payor would not know that some portion of its payment would be a recovery of capital and therefore, the payor was required, under section 6041, to file an information return for any payment of $600 or more.

Under section 105(a), the benefits paid by X under the Policies would be includible in an insured's gross income unless section 105(b) applied to a portion or all of the payment. Whether section 105(b) applies to a portion or all of a payment depends on facts and circumstances beyond the knowledge of X. Therefore, X is required to file an information return, pursuant to section 6041, for the entire amount of any payment of $600 or more made under the Policies.

Except as specifically ruled above, no opinion is expressed as to the federal tax treatment of the transaction under other provisions of the Internal Revenue Code and Income Tax Regulations that may be applicable. No opinion is expressed as to the tax treatment of any conditions existing at the time of or effects resulting from the transaction that are not specifically covered by the above ruling.

A copy of this letter ruling should be attached to the taxpayer's appropriate federal income tax return.

This letter is directed only to the taxpayer who requested it. Section 6110(j)(3) of the Code provides that it may not be used or cited as precedent.

                                   Sincerely,