REVENUE RULING 68-101
1968-1 C.B. 319

[IRS Annotation]
A corporation that is primarily engaged in the business of writing bail bonds is not an insurance company subject to the tax imposed by section 831 of the Internal Revenue Code of 1954.

[Rev. Rul. 68-101]
Advice has been requested whether a corporation that is primarily engaged in the business of writing bail bonds is an insurance company, subject to the tax imposed by section 831 of the Internal Revenue Code of 1954.

The taxpayer is incorporated under the laws of state X and is authorized to write all types of fidelity and surety bonds, including bail [320] bonds. It is both chartered and licensed as an insurance company under the statutes of state X. It is subject to State premium taxes, is required to file annual statements, and is subject to regulations of the State insurance department.

The taxpayer writes some surety and fidelity bonds. However, its primary and predominant business activity is the writing of bail bonds.

The Internal Revenue Code does not contain a definition of an insurance company; however, section 1.801-3 of the Income Tax Regulations, relating to life insurance companies, defines the term "insurance company" as a company whose primary and predominant business activity during the taxable year is the issuing of insurance or annuity contracts or the reinsuring of risks underwritten by insurance companies. Thus, though its name, charter powers, and subjection to State insurance laws are significant in determining the business which a company is authorized and intends to carry on, it is the character of the business actually done in the taxable year which determines whether a company is taxable as an insurance company under the Internal Revenue Code. Section 1.831-1 of the regulations, applicable to taxable years beginning after December 31, 1953, but before January 1, 1963, and ending after August 16, 1954, and section 1.831-3 of the regulations, applicable to taxable years beginning after December 31, 1962, provide that this definition is equally applicable to insurance companies taxable under section 831 of the Code.

In the instant case, the primary and predominant business activity of the taxpayer is the writing of bail bonds. Thus, in order to determine whether the taxpayer is an insurance company, it is necessary to determine whether bail bonds may be classified as insurance contracts.

An insurance contract must involve the element of a monetary loss, or its equivalent, the risk of which can be and is shifted to another. Jordan, Superintendent of Insurance v. Group Health Association, 107 F.2d 239 (1939).

In general, a bail bond or recognizance is a contract between the sovereign on the one side, and the accused (principal) and surety on the other which, when executed and filed with the court, is evidence of a bail bond arrangement whereby the accused is released from the court's custody to another person or persons who become security for his later appearance in court to answer charges there pending against him. Under this arrangement, the surety guarantees the appearance of the accused under penalty of a forfeiture of the bond upon the accused's failure to appear. The required appearance by the accused at the time set, as the condition of the bond, is not shifted to or assumed by another by the payment of money or the performance of any act. Failure of the accused to appear may cause forfeiture of the bond but such forfeiture nevertheless does not absolve the accused from his obligation to appear for the legal process. The forfeiture appears to be in the nature of a penalty and, depending on the statutes under which the bail is granted, such forfeiture may be remitted upon surrender of the accused, either voluntarily or by arrest, or upon the impossibility of surrender due to Act of God, or law, or of the sovereign obligee. See Continental Casualty Co. v. U.S., 314 U.S. 527 (1941); U.S. v. Rosenfeld, 109 F.2d 908, 910 (1940). The surety may also have the right of indemnification against the accused.

[321]

The forfeiture is not reimbursement for the failure of the accused to perform his condition of the bond to appear before the court at the time set, nor is it reimbursement for possible expenditures which may be incurred in obtaining the appearance of the accused. The forfeiture under a bail bond arrangement is therefore not a shift of any monetary loss from the court which is assumed by a surety.

Nor is there monetary loss incurred by a principal which is shifted to and assumed by the surety. The possibility that the surety will not be indemnified by the accused after a forfeiture of the bond is, as between the principal and the surety, first, not a monetary loss upon the happening of a contingency contemplated in the bail bond arrangement and, second, not a loss which is shifted to and assumed by the surety.

In view of the above, it is concluded that a bail bond or recognizance lacks the indispensable element of an insurance contract whereby the insurer promises to pay money or its equivalent upon the happening of the contingency contemplated in the contract, thus making the insurer liable for a loss suffered by the insured.

Accordingly, since the primary and predominant business activity of the taxpayer in the instant case is the writing of bail bonds, it is not an insurance company subject to tax imposed by section 831 of the Code.