rr-13-27.pdf

Preserve advance releases and the authoritative Internal Revenue Bulletin rendition; directory timestamps are file-publication metadata, not legal effective dates. HTML bulletins begin June 2003; earlier available issues require full PDF parsing.

This collection currently includes the publisher’s available advance-release directory. Historical bulletin renditions are discovered separately; an advance-release record alone does not certify the collection archive complete.

# Part I

Section 61 .- Gross Income Defined

Rev. Rul. 2013-27

## ISSUE

Are amounts a covered entity collects from policyholders to offset the cost of the
annual fee imposed on health insurance providers under § 9010 of the Affordable Care
Act included in the covered entity's gross income under § 61(a) of the Internal Revenue
Code?

# FACTS

M is a United States corporation that is engaged in the business of providing
health insurance for United States health risks. Section 9010 of the Patient Protection
and Affordable Care Act (PPACA), Public Law No. 111-148 (124 Stat. 119 (2010)), as
amended by section 10905 of PPACA, and as further amended by section 1406 of the
Health Care and Education Reconciliation Act of 2010, Public Law 111-152 (124 Stat.
1029) (2010)) (collectively, the Affordable Care Act or ACA), imposes an annual fee on
each covered entity engaged in the business of providing health insurance (annual fee).
M is a "covered entity" within the meaning of § 9010(c)(1).

In Taxable Year X, the annual fee imposed on M pursuant to § 9010 is $10x. To
offset part of the cost of the annual fee, M imposes a surcharge totaling $6x on certain

<!-- PageBreak -->

of M's health insurance policyholders that is separately stated from the premium billed
to them. To offset the remaining cost of the annual fee, M increases by a total of $4x
the amount charged for health insurance premiums to M's remaining policyholders. The
additional charge is not stated separately on the policyholders' bills. M collects from
policyholders the total amount of the $10x cost of the annual fee imposed by § 9010.
LAW

Section 61(a) provides that, except as otherwise provided in subtitle A, gross
income means all income from whatever source derived.

Section 9010(a) of the ACA imposes an annual fee on each covered entity
engaged in the business of providing health insurance. Under § 9010(c)(1), a covered
entity is generally an entity that provides health insurance for a United States health
risk. A covered entity is liable for the annual fee in each calendar year beginning after
2013.

Section 9010(f)(2) treats the annual fee as a tax described in § 275(a)(6), which
denies a deduction for certain taxes.

ANALYSIS

Unless a specific exclusion from income applies, an amount a taxpayer collects
from a third party to cover the cost of a liability, including deductible and nondeductible
liabilities incurred in a trade or business, is included in the taxpayer's gross income
under § 61. Amounts a taxpayer charges customers for goods and services typically
offset the taxpayer's costs of doing business. No provision of the Code or other law
excludes these amounts from a taxpayer's gross income simply because the taxpayer is

<!-- PageBreak -->

passing overhead costs and other business expenses to its customers. As discussed
below, these amounts consistently have been found to be includible in income.

Rev. Rul. 79-27, 1979-1 C.B. 217, involves a taxpayer engaged in mining and
selling coal, on which a federal excise tax was imposed. The taxpayer separately
stated the excise tax on invoices to its customers. Noting that the excise tax was the
liability of the taxpayer and could not be assessed on the customer, the ruling holds that
additional amounts the taxpayer received from its customers on account of the
separately stated excise tax were included in the taxpayer's gross income. See also
Lowa Southern Utilities Co. v. United States, 841 F.2d 1108 (Fed. Cir. 1988) (surcharge
utility collected from customers to offset specific expense is includable in gross income);
Hinshaw's Inc. v. Commissioner, T.C. Memo. 1994-327 (1994) (recoupment from
customers of cost of insurance that state law required taxpayer to purchase is included
in taxpayer's gross income).

Section 9010 of the ACA imposes the annual fee on a covered entity, not on the
covered entity's health insurance policyholders. The fee is part of the covered entity's
cost of doing business. No exemption or exclusion from gross income applies to
additional amounts that the covered entity charges its policyholders to cover the cost of
this fee. Accordingly, M charging and collecting from its policyholders the $10x,
whether or not separately stated, is no different than M passing other business
expenses on to its customers as part of M's charges for providing health insurance. As
a result, M must include the $10x in gross income.
HOLDING

<!-- PageBreak -->

Amounts a covered entity collects from policyholders to offset the cost of the
annual fee imposed on health insurance providers under § 9010 of the ACA are
included in the covered entity's gross income under § 61(a).

# DRAFTING INFORMATION

The principal author of this revenue ruling is Edward C. Schwartz of the Office of
Associate Chief Counsel (Income Tax and Accounting). For further information
regarding this revenue ruling, contact Mr. Schwartz at (202) 317-7006 (not a toll-free
call).