CART Act of 2023

I 118TH CONGRESS 1ST SESSION H. R. 3014 To amend the Internal Revenue Code of 1986 to establish a system for the taxation of catastrophic risk transfer companies to ensure sufficient capital to cover catastrophic insurance losses, and for other purposes. IN THE HOUSE OF REPRESENTATIVES APRIL 28, 2023 Mr. LAHOOD (for himself and Mr. HIMES) introduced the following bill; which was referred to the Committee on Ways and Means, and in addition to the Committee on the Judiciary, for a period to be subsequently deter- mined by the Speaker, in each case for consideration of such provisions as fall within the jurisdiction of the committee concerned A BILL To amend the Internal Revenue Code of 1986 to establish a system for the taxation of catastrophic risk transfer companies to ensure sufficient capital to cover cata- strophic insurance losses, and for other purposes. Be it enacted by the Senate and House of Representa- 1 tives of the United States of America in Congress assembled, 2 SECTION 1. SHORT TITLE. 3 This Act may be cited as the ‘‘Catastrophic Risk 4 Transfer Act of 2023’’ or the ‘‘CART Act of 2023’’. 5 VerDate Sep 11 2014 01:42 Jun 21, 2023 Jkt 039200 PO 00000 Frm 00001 Fmt 6652 Sfmt 6201 E:\BILLS\H3014.IH H3014 pbinns on DSKJLVW7X2PROD with $$_JOB 2 •HR 3014 IH SEC. 2. TAXATION OF CATASTROPHIC RISK TRANSFER 1 COMPANIES. 2 (a) IN GENERAL.—Subchapter M of chapter 1 of the 3 Internal Revenue Code of 1986 is amended by adding at 4 the end the following new part: 5 ‘‘PART V—CATASTROPHIC RISK TRANSFER 6 COMPANIES 7 ‘‘Sec. 860M. Catastrophic risk transfer companies. ‘‘Sec. 860N. Taxation of catastrophic risk transfer companies. ‘‘Sec. 860O. Taxation of security holders of catastrophic risk transfer company; limitations applicable to dividends received from catastrophic risk transfer company. ‘‘Sec. 860P. Dividends paid by catastrophic risk transfer company after close of taxable year. ‘‘SEC. 860M. CATASTROPHIC RISK TRANSFER COMPANIES. 8 ‘‘(a) GENERAL RULE.—For purposes of this subtitle, 9 the term ‘catastrophic risk transfer company’ means any 10 domestic corporation which— 11 ‘‘(1) is— 12 ‘‘(A) created or organized under the laws 13 of a State which has enacted a State law which 14 enables the organization and licensure of a spe- 15 cial purpose insurer (whether or not designated 16 as such under such State law) which is capable 17 of carrying out the activities described in para- 18 graph (2), and 19 ‘‘(B) regulated and licensed as such a spe- 20 cial purpose insurer by the State commissioner 21 VerDate Sep 11 2014 01:42 Jun 21, 2023 Jkt 039200 PO 00000 Frm 00002 Fmt 6652 Sfmt 6201 E:\BILLS\H3014.IH H3014 pbinns on DSKJLVW7X2PROD with $$_JOB 3 •HR 3014 IH of insurance or other State official charged with 1 regulation of insurance within the State, 2 ‘‘(2) the principal purpose of which is the car- 3 rying out of the activities of catastrophic risk trans- 4 fer, but only if— 5 ‘‘(A) substantially all of such activities re- 6 late to business other than general annuity 7 business, and 8 ‘‘(B) such activities are limited to— 9 ‘‘(i) issuing equity and debt securities, 10 ‘‘(ii) owning qualified investments, 11 and 12 ‘‘(iii) entering into one or more insur- 13 ance or reinsurance agreements covering 14 catastrophic risks from persons who are 15 not related to such corporation at any time 16 during the period beginning with the date 17 such agreements are entered into and end- 18 ing with the last day of the period such 19 agreements are in effect, and 20 ‘‘(3) is authorized by the State commissioner of 21 insurance or other State official charged with regula- 22 tion of insurance within the State to carry out the 23 activities of catastrophic risk transfer. 24 VerDate Sep 11 2014 01:42 Jun 21, 2023 Jkt 039200 PO 00000 Frm 00003 Fmt 6652 Sfmt 6201 E:\BILLS\H3014.IH H3014 pbinns on DSKJLVW7X2PROD with $$_JOB 4 •HR 3014 IH ‘‘(b) LIMITATIONS.—A corporation shall not be con- 1 sidered a catastrophic risk transfer company for any tax- 2 able year unless— 3 ‘‘(1) it files with its return for the taxable year 4 an election to be a catastrophic risk transfer com- 5 pany or has made such election for a previous tax- 6 able year, 7 ‘‘(2) at least 90 percent of its gross income is 8 derived from— 9 ‘‘(A) investment income from qualified in- 10 vestments, and 11 ‘‘(B)(i) reinsurance premiums received 12 from a regulated insurance company, or 13 ‘‘(ii) insurance premiums from— 14 ‘‘(I) a governmental agency, 15 ‘‘(II) a company the assets of which 16 exceed $100,000,000, or 17 ‘‘(III) a company that is transferring 18 a sufficiently large pool of a single type of 19 underlying risk that the insurance of such 20 pool of risk would on a stand-alone basis 21 constitute operation of an insurance busi- 22 ness under part II of subchapter L, and 23 ‘‘(3) the limit of the insurance or reinsurance 24 being provided is fully collateralized. 25 VerDate Sep 11 2014 01:42 Jun 21, 2023 Jkt 039200 PO 00000 Frm 00004 Fmt 6652 Sfmt 6201 E:\BILLS\H3014.IH H3014 pbinns on DSKJLVW7X2PROD with $$_JOB 5 •HR 3014 IH ‘‘(c) SPECIAL RULE FOR SERIES ISSUANCES.—If a 1 catastrophic risk transfer company (within the meaning 2 of subsection (a)), or a protected cell of such company, 3 issues a series or class of securities which primarily has 4 recourse to, or is primarily linked to, a designated reinsur- 5 ance agreement and pool of collateral or assets, such series 6 or class shall be treated as a separate corporation for pur- 7 poses of this title (other than determining whether the re- 8 quirements of subsection (a) are met). 9 ‘‘(d) FAILURE TO SATISFY GROSS INCOME TEST.— 10 ‘‘(1) DISCLOSURE REQUIREMENT.—A cata- 11 strophic risk transfer company which fails to meet 12 the requirement of paragraph (2) of subsection (b) 13 for any taxable year shall nevertheless be considered 14 to have satisfied the requirement of such paragraph 15 for such taxable year if— 16 ‘‘(A) following the catastrophic risk trans- 17 fer company identification of the failure to meet 18 such requirement for such taxable year, a de- 19 scription of each item of its gross income de- 20 scribed in such paragraph is set forth in a 21 schedule for such taxable year filed in the man- 22 ner provided by the Secretary, and 23 VerDate Sep 11 2014 01:42 Jun 21, 2023 Jkt 039200 PO 00000 Frm 00005 Fmt 6652 Sfmt 6201 E:\BILLS\H3014.IH H3014 pbinns on DSKJLVW7X2PROD with $$_JOB 6 •HR 3014 IH ‘‘(B) the failure to meet such requirement 1 is due to reasonable cause and not due to will- 2 ful neglect. 3 ‘‘(2) IMPOSITION OF TAX ON FAILURES.—If 4 paragraph (1) applies to catastrophic risk transfer 5 company for any taxable year, there is hereby im- 6 posed on such company a tax in an amount equal to 7 the excess of— 8 ‘‘(A) the gross income of such company 9 which is not derived from sources referred to in 10 subsection (b)(2), over 11 ‘‘(B) one-ninth of the gross income of such 12 company which is derived from such sources. 13 ‘‘(e) DEFINITIONS.—For purposes of this part— 14 ‘‘(1) CATASTROPHIC RISK.— 15 ‘‘(A) IN GENERAL.—The term ‘cata- 16 strophic risk’ means a risk of loss which has a 17 low likelihood of occurring but which will be 18 large in amount. 19 ‘‘(B) SPECIAL RULES.—For purposes of 20 subparagraph (A)— 21 ‘‘(i) in the case of direct insurance, a 22 risk of loss shall not be treated as large in 23 amount unless such loss would exceed 24 $25,000,000 if it occurs, and 25 VerDate Sep 11 2014 01:42 Jun 21, 2023 Jkt 039200 PO 00000 Frm 00006 Fmt 6652 Sfmt 6201 E:\BILLS\H3014.IH H3014 pbinns on DSKJLVW7X2PROD with $$_JOB 7 •HR 3014 IH ‘‘(ii) in the case of mortality risk, the 1 risk of loss transferred may be taken into 2 account under subparagraph (A) only if it 3 involves a pool of mortality or longevity 4 risks. 5 ‘‘(2) INVESTMENTS AND INCOME.— 6 ‘‘(A) QUALIFIED INVESTMENT.—The term 7 ‘qualified investment’ means— 8 ‘‘(i) cash, 9 ‘‘(ii) interests in money market funds, 10 and 11 ‘‘(iii) investment-grade debt securities 12 and funds primarily holding such debt se- 13 curities. 14 ‘‘(B) INVESTMENT INCOME.—The term 15 ‘investment income’ means interest that is ac- 16 crued or received on, distributions in connection 17 with, or proceeds from the disposition of, quali- 18 fied investments. 19 ‘‘(3) REGULATED INSURANCE COMPANY.—The 20 term ‘regulated insurance company’ means any com- 21 pany which is licensed to engage in the business of 22 insurance in a State and which is subject to State 23 law which regulates insurance (within the meaning 24 of section 514(b)(2) of the Employee Retirement In- 25 VerDate Sep 11 2014 01:42 Jun 21, 2023 Jkt 039200 PO 00000 Frm 00007 Fmt 6652 Sfmt 6201 E:\BILLS\H3014.IH H3014 pbinns on DSKJLVW7X2PROD with $$_JOB 8 •HR 3014 IH come Security Act of 1974, as in effect on the date 1 of the enactment of this section). 2 ‘‘(4) RELATED PERSON.—A person shall be 3 treated as related person to another person if such 4 person bears a relationship to such other person de- 5 scribed in section 267(b) or 707(b). 6 ‘‘SEC. 860N. TAXATION OF CATASTROPHIC RISK TRANSFER 7 COMPANIES. 8 ‘‘(a) REQUIREMENTS APPLICABLE TO CATA- 9 STROPHIC RISK TRANSFER COMPANIES.—The provisions 10 of this part (other than subsection (c) of this section) shall 11 not be applicable to a catastrophic risk transfer company 12 for a taxable year unless— 13 ‘‘(1) the deduction for dividends paid during 14 the taxable year (as defined in section 561) equals 15 or exceeds 90 percent of its catastrophic risk trans- 16 fer company taxable income for the taxable year de- 17 termined without regard to subsection (b)(2)(C), and 18 ‘‘(2) as of the close of the taxable year, the cat- 19 astrophic risk transfer company has no earnings and 20 profits accumulated in any taxable year to which the 21 provisions of this part (or the corresponding provi- 22 sions of prior law) did not apply to it. 23 ‘‘(b) METHOD OF TAXATION OF COMPANIES.— 24 VerDate Sep 11 2014 01:42 Jun 21, 2023 Jkt 039200 PO 00000 Frm 00008 Fmt 6652 Sfmt 6201 E:\BILLS\H3014.IH H3014 pbinns on DSKJLVW7X2PROD with $$_JOB 9 •HR 3014 IH ‘‘(1) IMPOSITION OF TAX ON CATASTROPHIC 1 RISK TRANSFER COMPANIES.—There is hereby im- 2 posed for each taxable year upon the catastrophic 3 risk transfer company taxable income of every cata- 4 strophic risk transfer company a tax computed as 5 provided in section 11, as though the catastrophic 6 risk transfer company taxable income were the tax- 7 able income referred to in section 11. 8 ‘‘(2) CATASTROPHIC RISK TRANSFER COMPANY 9 TAXABLE INCOME.—The catastrophic risk transfer 10 company taxable income shall be the taxable income 11 of the catastrophic risk transfer company adjusted 12 as follows: 13 ‘‘(A) The net operating loss deduction pro- 14 vided in section 172 shall not be allowed. 15 ‘‘(B) The deductions for corporations pro- 16 vided in part VIII (except section 248) in sub- 17 chapter B (section 241 and following, relating 18 to the deduction for dividends received, etc.) 19 shall not be allowed. 20 ‘‘(C) The deduction for dividends paid (as 21 defined in section 561) shall be allowed. 22 ‘‘(D) The taxable income shall be com- 23 puted without regard to section 443(b) (relating 24 VerDate Sep 11 2014 01:42 Jun 21, 2023 Jkt 039200 PO 00000 Frm 00009 Fmt 6652 Sfmt 6201 E:\BILLS\H3014.IH H3014 pbinns on DSKJLVW7X2PROD with $$_JOB 10 •HR 3014 IH to computation of tax on change of annual ac- 1 counting period). 2 ‘‘(E) The taxable income shall be com- 3 puted without regard to section 454(b) (relating 4 to short-term obligations issued on a discount 5 basis) if the company so elects in a manner pre- 6 scribed by the Secretary. 7 ‘‘(F) There shall be deducted an amount 8 equal to the tax imposed by subsection (d)(2) of 9 section 860M for the taxable year. 10 ‘‘(G) There will be allowed as a deduction 11 loss adjustment expenses and expenses of— 12 ‘‘(i) modeling firms, claims reviewers, 13 loss reserve specialists, attorneys, account- 14 ants, actuaries, indenture trustees (includ- 15 ing reinsurance trustees and paying 16 agents), independent directors, administra- 17 tors of the catastrophic risk transfer com- 18 pany, rating agencies of any securities 19 issued by the catastrophic risk transfer 20 company, reset and calculation agents, re- 21 porting agencies, data providers, model es- 22 crow agents, securities listings, and securi- 23 ties listing agents, and 24 VerDate Sep 11 2014 01:42 Jun 21, 2023 Jkt 039200 PO 00000 Frm 00010 Fmt 6652 Sfmt 6201 E:\BILLS\H3014.IH H3014 pbinns on DSKJLVW7X2PROD with $$_JOB 11 •HR 3014 IH ‘‘(ii) other professionals or service 1 providers, or other out-of-pocket costs in- 2 curred with issuing securities, reasonably 3 related thereto. 4 ‘‘(3) SECTION 311(b) NOT TO APPLY TO CER- 5 TAIN DISTRIBUTIONS.—Section 311(b) shall not 6 apply to any distribution by a catastrophic risk 7 transfer company to which this part applies, if such 8 distribution is in redemption of its stock or securi- 9 ties upon the demand of the holder. 10 ‘‘(4) TIME CERTAIN DIVIDENDS TAKEN INTO 11 ACCOUNT.—For purposes of this title, any dividend 12 declared by a catastrophic risk transfer company 13 during any calendar year and payable to security 14 holders of record on a specified date in such a year 15 shall be deemed— 16 ‘‘(A) to have been received by each security 17 holder on December 31 of such calendar year, 18 and 19 ‘‘(B) to have been paid by such company 20 on December 31 of such calendar year (or, if 21 earlier, as provided in section 860P). 22 The preceding sentence shall apply only if such divi- 23 dend is actually paid by the company prior to the 24 VerDate Sep 11 2014 01:42 Jun 21, 2023 Jkt 039200 PO 00000 Frm 00011 Fmt 6652 Sfmt 6201 E:\BILLS\H3014.IH H3014 pbinns on DSKJLVW7X2PROD with $$_JOB 12 •HR 3014 IH 15th day of the 9th month of the following calendar 1 year. 2 ‘‘(c) EARNINGS AND PROFITS.— 3 ‘‘(1) DISTRIBUTIONS TO MEET REQUIREMENTS 4 OF SUBSECTION (a)(2).—Any distribution which is 5 made in order to comply with the requirements of 6 subsection (a)(2)— 7 ‘‘(A) shall be treated for purposes of this 8 subsection and subsection (a)(2) as made from 9 earnings and profits which, but for the distribu- 10 tion, would result in a failure to meet such re- 11 quirements (and allocated to such earnings on 12 a first-in, first-out basis), and 13 ‘‘(B) to the extent treated under subpara- 14 graph (A) as made from accumulated earnings 15 and profits, shall not be treated as a distribu- 16 tion for purposes of subsection (b)(2)(C) and 17 section 860P. 18 ‘‘(2) CATASTROPHIC RISK TRANSFER COM- 19 PANY.—For purposes of this subsection, the term 20 ‘catastrophic risk transfer company’ includes a do- 21 mestic corporation which is a catastrophic risk 22 transfer comp [Text truncated for display. 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