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Idle Thought #2: How the Rich Get Richer June 26, 2003

Posted by worldspectacle in Uncategorized.

How it reads: “In an attempt to create parity between stock and mutual insurance companies, the 1986 Tax Reform Act liberalized IRC 501(c)(15), by allowing stock as well as mutual companies to qualify for exemption from federal income tax, and by changing the measure of the dollar ceiling from a gross receipts test to a premium income test. The law now provides that insurance companies (other than life) are exempt from federal income tax if their net written premiums (or if greater, direct written premiums) for the taxable year do not exceed $350,000.”

How it works: We set up Miss Monica’s Pet Surety Company. We insure your Fluffy against a variety of veterinary risks. We make sure total net premiums are less than $350,000 per year. Then we take our vast investment portfolio (did we forget to mention that we own a vast investment portfolio?) and contribute it to the Pet Surety Company (did we forget to mention that we own 100% of the stock?). Thereafter all of the portfolio earnings — interest, dividends, capital gains, etc. — are completely tax free. Oh sure, we might take out a dividend or two eventually, but probably at vastly reduced tax rates.

Completely legal.



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