b'TaxStill Trying After All These Years: IRC 1297(b)(2)(B) and Active Conduct of an Insurance Business by a Qualifying Insurance CompanyOur Year In Review Tax Section returns once again to the topic of the exception in Internal Revenue Code section 1297(b)(2)(B) from the general definition of passive income. Regular readers will recall that when the passive foreign income company (PFIC) provisions were in the final stages of the legislative process in 1986, representatives of the insurance industry succeeded in persuading the conference committee that the pending legislation unfairly caught insurance companies in its web. The PFIC legislation was intended to end tax deferral and capital gain treatment for US investors in foreign investment funds. Until the passage of the PFIC regime, savvy US investors invested in a foreign mutual fund, held their investment for a number of years without taking distributions from the fund, and then sold their invest-ment. Not only did the US investors defer until the date they sold their stock in the fund any US taxation on the current interest or dividends that the foreign investment fund might generate, but the US investors could turn that interest and dividends into capital gain when they finally sold their shares of the foreign mutual fund at a gain.The legislation before the House-Senate Conference Committee was designed to end that deferral and capital gain treatment for US taxpayers who held shares of a PFIC. The legisla-tion defined a PFIC as a foreign corporation for which more than 75% of its income for the taxable year was passive income, or more than 50% of the corporations assets were held for the production of passive income. That definition of a PFIC would surely catch most foreign mutual funds. Unfortunately, it might also catch many foreign insurance companies, whose investment portfolios might easily exceed 50% of their assets.Representatives of the insurance industry persuaded the Conference Committee to create an exception to the definition of passive income for PFIC purposes. Section 1297(b)(2)(B) of the bill as enacted excluded from the definition of passive income any income . . . derived in the active conduct of an insurance business by a foreign corporation which would be subject to tax as an insurance company if it were a domestic corporation. 1This provision apparently protected the fisc while allowing the offshore insurance industry to grow and prosper. However, around the turn of the millennium Wall Street began to package investment vehicles to take advantage of the PFIC exception for insurance companies. Promoters offered shares in foreign corporations that were a hybrid between hedge funds and insurance companies, with (hopefully) enough of the substance of an insurance com-pany that a US taxable investor could take advantage of the tax deferral and capital gain 104GLOBAL INSURANCE INDUSTRY | YEAR IN REVIEW2020'