In addition, the administration is proposing that the tax exemption would only be available to domestic companies organized in and subject to regulation in a single state, which only writes insurance or reinsurance contracts on risk located within that same state.

The proposal came in the administration's fiscal year 2005 budget and is aimed at eliminating alleged abuses in the small p-c company tax rules.

Under current law, all p-c companies with $350,000 or less in annual premium are tax exempt.

In the budget, the administration notes that certain entities established as insurance companies have limited their premium receipts, claimed tax-exempt status and accumulated investment income tax free.

"These actions represent a misuse of the tax exemption and violate the original intent of the exemption, which was to assist small mutual insurers," the administration said.

Thus, the administration said, the exemption should be limited to mutual companies.

In addition to reforming the tax exemption rules, the administration is proposing to alter the small company election rules. Under current law, a p-c company with between $350,000 in annual premiums but less than $1.2 million may elect to be taxed solely on its investment income.

The administration is proposing that to determine eligibility for the election, amounts received by members of the same controlled group, including foreign and tax-exempt entities, would be aggregated.

The Treasury Department would develop appropriate reporting requirements to assure compliance.

The election would remain available to any p-c company with annual premiums up to $1.2 million.