2005 Insurance Tax Year
Review: Part I -- Federal Tax Matters
by Richard J. Burness and Frederic J. Gelfond
In the first installment of a four-part report from Deloitte Tax LLP,
Richard J. Burness and Rick Gelfond review some of the significant federal
insurance taxation developments of 2005.
Date: Mar. 9, 2006
2005
Insurance Tax Year Review: Part I -- Federal Tax Matters
Copyright © 2006 by Deloitte Development LLC.
All rights reserved.
by Richard J. Burness and Frederic J. Gelfond
Overview
Continuing a trend, the bulk of the
insurance tax activity in 2005 centered around insurance product -- rather than
insurance company -- tax matters. Perhaps the development from the past year
that could have the most significant effect on tax practitioners, whether they
work in the insurance industry or not, was an item that was not even released
by a tax authority: The Financial Accounting Standards Board released a
proposed interpretation of rules set forth under Financial Accounting Standard
1091 that could dramatically alter the way companies will be
required to reflect the results of uncertain tax positions. FASB plans to
release its final interpretation during the first quarter of 2006. In the
meantime, practitioners are hopeful that FASB will heed the many concerns that
have been publicly expressed regarding the proposed interpretation -- like it
has already done in tentatively moving from a "probable" to a
"more likely than not" standard for recognizing tax benefits. Of
course, the new tax practice rules under Circular 230, the final ethics and
independence rules issued by the Public Company Accounting Oversight Board, and
the effect of Sarbanes-Oxley all promise to also have a dramatic effect on tax
practice in the years to come.
That is not to say there were no meaningful insurance
company-specific tax developments during the past year. Below are discussions
of several of those events, including those dealing with the deductibility of
abandonment losses and insurance contract valuations, the classification of
certain regulated investment companies underlying segregated assets accounts,
the treatment of participation fees paid to a state insurance fund, and
additions to premium stabilization reserves.
Similar to previous years, the "2005
Insurance Tax Year in Review" consists of four separate articles: Federal
Tax Matters (Part I), Product Tax Matters (Part II, p. 217), State and Local
Tax Matters (Part III, p. 227), and International Tax Matters (Part IV, p.
235). Each article is divided into topical sections that highlight developments
of lasting significance to insurance companies. Similar to the format used in
previous years, we have provided only brief discussions of the selected
developments. For your convenience, Tax Analysts' citations and headnotes are
included in the areas designated "Citation" and "Overview,"
respectively. Also, Tax Analysts' headlines are used to introduce each
development discussed. The "Discussion" sections contain the authors'
analyses of the developments and the issues they raise. An appendix prepared by
Tax Analysts includes a list of full text insurance tax pronouncements from
2005 available in The Insurance Tax Review.
General Administrative and Legislative Tax Matters
IRS, Treasury Release 2005-2006 Priority Guidance Plan
Citation: 2005-2006 Priority Guidance Plan (Aug. 8, 2005). For the
2005-2006 Priority Guidance Plan, see The Insurance Tax Review, Sept.
2005, p. 477, Doc 2005-16766 [PDF],
or 2005 TNT 152-18 
.
Overview: The IRS and Treasury Department released their
2005-2006 priority guidance plan, listing the guidance projects the government
expects to complete by June 2006; the plan contains 254 projects, several of
which are needed to implement the AJCA.2
Discussion: Insurance-specific items in the 2005-2006 Priority
Guidance Plan include:
1. final regulations regarding taxable asset acquisitions and dispositions of
insurance companies;
2. final regulations
under section 402 on the valuation of life insurance distributed from qualified
plans;
3. guidance under
501(c)(15) on the calculation of gross receipts;
4. guidance on the
taxation of certain annuity contracts under section 72;
5. guidance on the
qualification of certain arrangements as insurance;
6. guidance on the
taxation of variable contracts as described in section 817(d);
7. final regulations
under section 7702 regarding the attained age of the insured for purposes of
testing the qualification of a contract as a life insurance contract;
8. guidance under
section 954(i) regarding insurance companies investing through partnerships;
and
9. a revenue ruling
providing a final determination under section 809 of the differential earnings
rate for 2004 for use by mutual life insurance companies to compute their
income tax liabilities for 2004.
The priority guidance plans that have been released in recent years have not
been as bold as they used to be in terms of the number and types of projects
listed. Then again, in years past, the plans repeated the same items year after
year -- that is, items seemed to never get done. The current plans, therefore,
typically give a more realistic picture of items the IRS and Treasury
anticipate producing over the course of a given year. Diminishing the meaning
of the more recent plans, however, is that many of the to-do's are items that
were completed and released before the release of the priority guidance plan.
As they say, planning is 20-20.
Tax Reform Panel Issues Final Report
Citations: Report of the President's Advisory Panel on Federal Tax
Reform (Nov. 1, 2005). For the panel's report, see Doc 2005-22112 [PDF]
or 2005 TNT 211-14 .
Summary: The President's Advisory Panel on Federal Tax Reform issued a final
report that includes proposals for a simplified income tax plan and a plan to
encourage growth and investment.
Discussion: The insurance industry has not responded favorably to
many of the proposals set forth in the report, given the significant
deleterious effect their adoption would likely have on both health and life
insurance products. For example, in a joint release, four life insurance
industry organizations (American Council of Life Insurers, Association for
Advanced Life Underwriting, National Association of Life Underwriters, and
National Association of Independent Life Brokerage Agencies) stated that while
simplifying the tax code is laudable, they believe the proposals disregard the
importance of financial planning. Their release also pointed out the significant
contributions of the insurance industry through the magnitude of its investment
in the economy.
Although the panel's final report will
provide fodder for public commentary over the next few years, the practical --
and political -- reality is that the proposals set forth are a long way from
being enacted. Indeed, just a month after the report was released, President
Bush indicated that he would not make tax reform part of his 2006 agenda.
IRS Describes Limited-Time Settlement
Initiative
Citations: Ann. 2005-80, 2005-46 IRB 967 (Oct. 27, 2005). For Ann.
2005-80, see Doc 2005-21864 [PDF]
or 2005 TNT 208- 11 .
Overview: The IRS launched a settlement initiative under which
eligible taxpayers may resolve the tax treatment of any of 21 abusive
transactions.
Discussion: Apparently the IRS believes that despite the harsh
toll needed to obtain a settlement under this initiative, taxpayers that settle
will fare better under the program than if they were to go to the IRS's Appeals
Office or to court. It is not clear that taxpayers, in general, agree with that
assessment. Perhaps it is telling that Congress found it necessary to include
in the Gulf Opportunity Zone Act of 20053 some additional incentive
to settle under the IRS's program through a provision that retroactively
repeals the suspension of interest penalties for taxpayers engaging in listed
and reportable transactions, except for those who settle under the program.
Previously, the repeal of the interest suspension applied only on a go-forward
basis from the 2004 date of enactment of the AJCA.
IRS Defers Schedule M-3 Reporting for
Insurance Companies
Citation: IR-2005-106 (Sept. 13. 2005). For IR-2005-106, see Doc
2005-19143 [PDF]
or 2005 TNT 180-18 .
Overview: The IRS deferred the planned effective date of
Schedule M-3 reporting for life and property and casualty insurance companies
and now requires Schedule M-3 reporting for Forms 1120L and 1120PC filings for
tax years ending on or after December 31, 2006.
Discussion: On December 13, 2005, the IRS released draft Schedule
M-3, "Net Income (LOSS) Reconcilication for Corporations With Total Assets
of $10 Million or More," and instructions for life and property and casualty
insurance companies. The IRS believes that the more detailed information
provided on the new forms will facilitate the identification of returns with
greater compliance risks, and that this, in turn, will lead to decreased
examination cycle time and reduced taxpayer burdens. Although C corporations
have already begun filing Schedule M-3 with their tax returns, the effective
date for insurance companies has been deferred, with the intent being that the
additional time will assist insurance companies in complying with the new
requirements.
The IRS gave taxpayers until February 10 to
comment on the new forms.
Terrorism Risk Insurance Act of 2002
Extended
Citations: Terrorism Risk Insurance Revision Act of 2005 (P.L. 109-144).
Overview: President Bush on December 22 signed into law a bill
that extends the Terrorism Risk Insurance Act (TRIA) of 2002 for another two
years. TRIA was scheduled to expire at the end of 2005.
Discussion: TRIA was enacted following the September 11, 2001,
terrorist attacks. TRIA requires insurance companies to offer terrorism
insurance to businesses, especially businesses highly vulnerable to terrorist
attacks. TRIA was enacted on a temporary basis, and it was due to expire at the
end of 2005. Proponents argued that it was necessary to extend TRIA to ensure a
thriving economic environment for cities at risk of terrorist attacks, such as
As enacted, the Terrorism Risk Insurance
Revision Act of 2005 increases the losses that insurers have to sustain before
becoming eligible for federal coverage from $5 million to $50 million in 2006,
and to $100 million in 2007. Further, it excludes coverage for certain damages
(for example, commercial and theft). It also increases an insurer's deductible
to 10 percent in 2006, and 15 percent in 2007.
Life Insurance Company Tax Matters
RICs Not Classified as Publicly Traded Partnerships After
Citations: LTR 200544018 (Nov. 4, 2005). For LTR 200544018, see The
Insurance Tax Review, Dec. 2005, p. 1025, Doc 2005-22568 [PDF],
or 2005 TNT 214-46 .
Overview: The IRS ruled that RICs supporting the variable
contracts of a life insurance company will be classified as partnerships, but
not publicly traded partnerships, after transferable units of interest in the
RICs are sold to the segregated asset accounts of other domestic life insurance
companies.
Discussion: Critical to reaching the desired result and the IRS's
ruling that the RICs are to be taxed as partnerships was the fact that the RICs
underlying the separate accounts were business trusts and never held themselves
out as state-law corporations.
Aside from the technical question being
directly addressed in the ruling, the pronouncement inherently accepts that
Congress permitted tremendous flexibility in terms of the legal form that a
fund underlying a separate account can take. Importantly, the specific rules
governing the taxation of life insurance companies for separate account
products under subchapter L are not contingent on the form that investment
takes. It remains unclear, therefore, why the IRS has been so intent on
following form regarding some of the positions it has articulated in recent
years relative to separate account dividends received deduction calculations
involving RICs versus those for which the underlying separate account
investments are acquired directly by the insurance company.
In particular, regarding the treatment of
short-term capital gains, the IRS has determined that the rules set forth under
subchapter M governing RICs trump the rules specifically governing insurance
companies under subchapter L. Not only does that result in accounting and
economic anomalies, but it ignores basic concepts of how one would normally
interpret the tax law. For example, see last year's decision in American
Family Mutual Insurance,4 a property and casualty company case,
in which the court found that the specific insurance tax rules under section
832(b)(4)(C) prevailed over the rules of general applicability set forth under
section 481.
Timing Unclear on Rights to Insurance
Premiums
Citation: Massachusetts Mutual Life Ins. Co. v. .
Overview: The U.S. Court of Federal Claims has denied summary
judgment over when an insurance company must accrue income from reduced premium
group policies that require the plan sponsor to fund a share of the benefits,
because it remains unclear when the insurer's right to the premiums becomes
fixed.
Discussion: Although the court found that open questions of fact
rendered summary judgment inappropriate, it is not likely that the ultimate
decision that is reached even after a trial on the facts will be that dramatic
from an insurance company tax perspective. The law is fairly clear once the
factual issue has been resolved. To the extent that an opinion after trial goes
into detail in analyzing the mechanics and rights set forth under a life
insurance policy, however, the decision may be somewhat informative from a
product tax perspective, particularly given the limited amount of existing
judicial analysis regarding the mechanical operation of an insurance policy.
Insurer's Treatment of Reserves Was
Unauthorized Change in
Accounting Method
Citations: ILM 200504030 (Oct. 15, 2004). For ILM 200504030, see The
Insurance Tax Review, Mar. 2005, p. 528, Doc 2005-1800 [PDF],
or 2005 TNT 19-16 .
Overview: In a legal memorandum, the IRS concluded that an
insurer's removal of obligations associated with deferred and uncollected
premiums calculation of its tax reserves was an unauthorized change in its
method of accounting.
Discussion: The issue of whether the IRS will treat a reserve
adjustment in a given situation as a "change in basis" that is spread
over a 10-year period continues to be an area in need of further specific
guidance.
Mutual Insurer's Conversion to Stock
Company Is
Recapitalization
Citations: LTR 200544006 (Nov. 4, 2005). For LTR 200544006, see The
Insurance Tax Review, Dec. 2005, p. 1016, Doc 2005-22556 [PDF],
or 2005 TNT 214-22 .
Summary: The IRS has ruled that a mutual insurance company's conversion to a
stock company will be a recapitalization under sections 368(a)(1)(E) and
368(a)(1)(F).
Discussion: In an analogy that has probably never been made in an
insurance tax context before, imagine the sound of a bag of popping corn in a
microwave. The sound reaches a crescendo of exploding kernels about two or
three minutes into the process. It then slows to an occasional pop of the last
few kernels as you take the bag out of the oven. Perhaps not exactly what we
have here, but it seemed that a few years back, tax news was full of rulings
dealing with demutualizations and formations of mutual insurance holding
companies. Now there are relatively few mutuals left, some of which might
"pop" over time, such as in the present case, and others that will
never change form.
Although the present case provided the
opportunity to make a somewhat meaningless analogy, it does not provide much in
the way of significant new developments.
An issue to watch for in the future, however,
involves the allocation of basis on the issuance of stock or other interest to
a current mutual company policyholder on a demutualization. Some commentators
have discussed whether any basis should be allocated to the stock or other
interest, and thus whether the sale of that interest for less than that amount
could result in a loss transaction.
Property and Casualty Insurance Company Tax Matters
IRS Guidance Takes Aim at Single Insurer Arrangements
Citations: Rev. Rul. 2005-40, 2005-27 IRB 4. For Rev. Rul. 2005-40 see The
Insurance Tax Review, Aug. 2005, p. 330, Doc 2005-13278 [PDF],
or 2005 TNT 117-1 .
Overview: The IRS issued Rev. Rul. 2005-40 to provide guidance
regarding the issue of risk distribution for purposes of qualifying a
transaction as an insurance transaction.
Discussion: Although we discuss this guidance in the products
discussion (Part II), we believe it worth emphasizing here as well, because
issues of risk distribution apply to all insurers.
The ruling provides four situations:
(1) Y insures X, a domestic corporation that conducts a courier transport
business. X owns and operates a large fleet of automotive vehicles representing
a "significant volume of independent, homogenous risks." Premiums are
established at arm's-length rates and there are no retrospective rating
provisions in the policy. X and Y are unrelated and Y has no other insureds.
(2) Same facts as
situation (1) except that Y also insures Z, also a domestic corporation with a
fleet of automotive vehicles used in a national courier transport business. Z's
premium income represents 10 percent of Y's total earned income on both a gross
and net basis and represents 10 percent of the total risk assumed by Y.
(3) Same facts as situation
(1) except that X operates its courier business through 12 single-member
limited liability companies. The LLCs are disregarded entities for federal tax
purposes. The LLCs own and operate a large fleet of automotive vehicles,
collectively representing a significant volume of independent, homogeneous
risks. None of the LLCs account for less than 5 percent or more than 15 percent
of the total risk assumed by Y under the agreements.
(4) Same facts as
situation (3) except the single-member LLCs elect to be treated as separate
corporations rather than as passthrough entities.
The ruling concludes that situation (1) is not insurance, because there is
insufficient risk distribution when there is a single insured, regardless of
how many independent, homogenous risks are in a "significant volume."
As noted in the Products Tax Matters article, the IRS is seeking to establish a
unique definition of risk distribution for federal tax purposes. In Helvering
v. LeGierse, (312 U.S. 531 (1941)) the Supreme Court looked to the
fundamental principles of what constitutes insurance in the context of life
insurance and annuity contracts. It is unfortunate that the law regarding those
principles has not developed in the same context, but rather in a captive
insurance context. The government's long- standing aversion to captive
insurance continues to create a helter- skelterish body of law with
ever-increasing complexity in application.
The ruling further concludes that not even
the addition of another insured is sufficient to create risk distribution when
the second insured accounts for only 10 percent of the earned premiums and only
10 percent of the risk assumed, again when all parties are unrelated. Query: Is
the magic number for risk distribution -- as the IRS defines the term -- two
insureds with 50 percent each of the risk transferred or four with 25 percent
each of the risk transferred? Also: Will the IRS begin to hold commercial
insurance companies to the standards established for captive insurance? In any
event, as explained in the Products Tax Matters article, the IRS's magic number
of insureds, whatever it may be is irrelevant. It is the number of independent
risks, not the number of insureds, that is determinative of the
technical question of whether there is risk distribution.
In situation (3), the IRS concludes that
single-member LLCs, as passthrough entities not separate from the parent entity
for federal tax purposes, are not separate entities for any federal tax
purposes, regardless of the juridical standing of those entities for state law
purposes. In situation (4), the very same entities, having elected to be
treated as separate corporations for federal tax purposes, will be respected
for purposes of establishing risk distribution. That is an interesting
form-over-substance position for the IRS to take in the insurance tax area.
Nothing in substance has changed between the disregarded single-member LLCs and
the regarded wholly owned subsidiaries, particularly if the subsidiaries file a
consolidated return with the parent company. Nevertheless, for federal tax
purposes, one form creates insurance while one form does not.
Although the IRS and Treasury are undoubtedly
working valiantly to provide guidance and clarify the issues surrounding what
constitutes insurance, this ruling is only one example of many in which good
intentions are paving the road to even greater uncertainty.
As a further example, in the first paragraph
of the analysis of the ruling, the IRS points out that there is no certainty
regarding transactions that do not qualify as insurance and how those
transactions should be treated for tax purposes -- "as a deposit
arrangement, a loan, a contribution to capital (to the extent of net value, if
any), an indemnity arrangement that is not an insurance contract, or otherwise,
based on the substance of the arrangement between the parties. The proper
characterization of the arrangement may determine whether the issuer qualifies
as an insurance company and whether amounts paid under the arrangement may be
deductible."
Undaunted, however, and good intentions to
the fore, the IRS and Treasury have requested comments on captive insurance
matters in Notice 2005-49. The notice acknowledges that further guidance is
necessary and requests comments on four particular areas:
(1) the factors to be considered determining whether a cell captive arrangement
constitutes insurance and, if so, the mechanics of any applicable federal tax
elections;
(2) circumstances
under which the qualification of an arrangement between related parties as
insurance may be affected by a loan back of amounts paid as premiums;
(3) the relevance of
homogeneity in determining whether risks are adequately distributed for an
arrangement to qualify as insurance; and
(4) federal income
tax issues raised by transactions involving finite risk.
The captive insurance industry responded to the call for comments on the
taxation of cell captive arrangements. Several of the comments share thoughts
on the impracticality of risk distribution standards (as defined by the IRS)
applied to cell captive arrangements, suggesting that segregation of risk
exposure is an underlying purpose for the creation of cell captives and,
further, that cell captives do not insure unrelated persons. The comments
advocate a need for sufficient capital reserves that are reviewed annually by
professional actuaries. They also support the retention of assets and a lenient
enforcement of the earnings and profits tax of section 531. (For the comments,
see The Insurance Tax Review, Dec. 2005, p. 1043, Doc 2005-21257
[PDF],
or 2005 TNT 203-32 ; The Insurance
Tax Review, Dec. 2005, p. 1083, Doc 2005-21259 [PDF],
or 2005 TNT 203-34 ; and The
Insurance Tax Review, Dec. 2005, p. 1071, Doc 2005-21260 [PDF],
or 2005 TNT 203-35 .)
Insurer Granted Extension to Elect
Domestic Corporation Status
Citation: LTR 200540009 (June 13, 2005). For LTR 200540009, see The
Insurance Tax Review, Dec. 2005, p. 1021, Doc 2005-20489 [PDF],
or 2005 TNT 195-36 .
Overview: The IRS granted an insurance company an extension to
make an election under section 953(d) to be treated as a domestic corporation
for
Discussion: As noted in the Product Tax Matters article, this
ruling touches on several issues related to the question of what is insurance.
Additions to Premium Stabilization
Reserves Are Return
Premiums
Citations: Rev. Rul. 2005-33, 2005-23 IRB 1155. For Rev. Rul. 2005-33,
see The Insurance Tax Review, July 2005, p. 82, Doc 2005-10634 [PDF],
or 2005 TNT 93-9 .
Overview: The IRS concluded that an insurance company's
additions to premium stabilization reserves are return premiums for purposes of
determining the amount of premiums earned on insurance contracts in a tax year
under section 832(b)(4).
Discussion: The ruling illustrates the mechanical operation of
the rules for determining the amount of premiums written on a nonlife insurance
contract. By the same token, it also illustrates the relevance of the insurance
contract for determining the tax treatment of both the insurance company and
the policyholder, and therefore, why the input of product tax professionals in
the earliest stages of the policy design process is so important. In fact, it
is a key element of a fully integrated product tax management system.
Insurer's Participation Fee in State
Insurance Fund Is
Deductible
Citation: TAM 200517030 (Jan. 31, 2005). For TAM 200517030, see The
Insurance Tax Review, June 2005, p. 1078, Doc 2005-9050 [PDF],
or 2005 TNT 83-17 .
Overview: In technical advice, the IRS ruled that a fee paid by
an insurer to participate in a state insurance fund is currently a deductible
section 162 expense that should not be capitalized, because payment of the fee
does not result in a distinct property interest or significant future benefit
for the insurer.
Discussion: The ruling is useful in that it provides a road map
for how the IRS will determine whether an item is deductible or must be
capitalized. A potentially more meaningful aspect of the pronouncement,
however, relates to the nature of the underlying coverage that is the subject
of the ruling. That issue is discussed in the Product Tax Matters article.
Permission to Revoke Election Granted to
Underwriter
Citation: LTR 200531001 (Apr. 27, 2005). For LTR 200531001, see The
Insurance Tax Review, Sept. 2005, p. 507, Doc 2005-16672 [PDF],
or 2005 TNT 151-44 .
Overview: The IRS granted a reciprocal underwriter permission
to revoke an election under section 835.
Discussion: Here, the IRS acted reasonably in permitting the
revocation under circumstances that would otherwise have left the taxpayer
bound by an election that was causing an unfair result that was not intended to
occur under section 835.
Insolvent Insurance Company Is Still
Exempt
Citation: LTR 200528027 (Apr. 22, 2005). For LTR 200528027, see Doc
2005-15117 [PDF]
or 2005 TNT 136-34 .
Overview: The IRS ruled that an insolvent insurance company's
tax-exempt status as an organization described in section 501(c)(15) will not
be adversely affected when it distributes its remaining assets.
Discussion: The effect of this ruling is fairly narrow, because
the provisions at issue will affect only certain section 501(c)(15) companies
in receivership, through tax years ending by December 31, 2007, at the latest.
It does serve as a reminder, however, of the recent amendments to section
501(c)(15) that changed the requirements to qualify for a tax exemption under
that provision.5
Blue Cross and Blue Shield (BCBS) Tax Matters
Coordinated Issue Paper Addresses BCBS Abandonment Loss
Deductions
Citation: Coordinated Issue Paper (May 27, 2005). For the coordinated
issue paper, see The Insurance Tax Review, July 2005, p. 114, Doc
2005-12100 [PDF],
or 2005 TNT 106-23 .
Overview: In a coordinated issue paper for the health and life
insurance industry, the IRS announced it will continue to challenge abandonment
loss deductions under the legal theories of previously released guidance and in
light of recent litigation involving taxpayer valuations.
Discussion: This coordinated issue paper affirmed the conclusions
in Notice 2000-34 regarding abandonment losses. The paper concluded that the
IRS would challenge such loss deductions brought forth by taxpayers, and that
any deductions that were not previously examined would now be scrutinized based
upon the Tax Court's decision in Capital Blue Cross v. Commissioner.6
Perhaps the IRS should have waited. As
suggested in our "Halftime 2005" report,7 the boldness
with which the Service staked out its position in this coordinated issue paper
is extraordinary given the fact that even in the lower court decision in Capital
Blue Cross, the case on which it relies most heavily, the IRS was soundly
defeated on all of the legal issues. Moreover, that case was on appeal when the
coordinated issue paper was released, and many observers of the oral arguments
had noted the prospects of a reversal of the lower court decision or, at the
least, a remand. Well, guess what . . .
Third Circuit Reverses Tax Court's Capital
Blue Cross
Decision
Citation: Capital Blue Cross et al. v. Comm'r, No. 04-2645 (3d.
Cir. Dec. 5, 2005). For the Third Circuit's decision in Capital Blue Cross,
see the March 2006 issue of The Insurance Tax Review and Doc
2005-24488 [PDF]
or 2005 TNT 233-8 . (For the Tax Court's opinion in Capital
Blue Cross 122 T.C. 224, see The Insurance Tax Review, May 2004, p.
769, Doc 2004-5382 [PDF],
or 2004 TNT 50-18 .)
Overview: The Third Circuit has reversed a Tax Court decision
denying Capital Blue Cross's request for a refund of overpayment of taxes,
finding that the Tax Court erred because it discounted expert testimony and
incorrectly determined Capital Blue Cross's basis at zero.
Discussion: In rendering its decision, the Third Circuit set
forth the standard by which a valuation put forth by a taxpayer must be
evaluated. The court indicated that to be respected, a taxpayer's valuation
must be "essentially reasonable." Further, it stated that the mere
identification of some problems in a valuation process does not justify a
finding of a zero basis in the item being valued. Moreover, to rebut a
taxpayer's valuation, any objections must be specific and quantified.
The decision also underscores a difference
between performing a valuation of insurance contracts or businesses and
valuation methods used for other assets or businesses. That is, for
insurance-related valuations, insurance or actuarial principles must be used.
In several instances, the IRS has put forth arguments that attempt to disregard
notions of insurance and actuarial science that make the valuation of those
items possible.
It will be interesting to observe the IRS's
strategy when this case goes back to the Tax Court on remand. The IRS is
currently challenging other taxpayers on the same theory it used to challenge
Capital Blue Cross -- that is, declaring that the taxpayers in those cases also
cannot claim any value on their contracts. As such, it may be put in a position
in which it is telling some taxpayers at the administrative or early litigation
stages that their contracts cannot be valued; yet it will likely need to follow
the decision of the Third Circuit, which has indicated that that would not be
an appropriate response on remand.
Finally, it is also hoped that the strong
conclusion in this case at last puts to rest the IRS's attempts to use its
"mass asset theory." If nothing else, certainly the IRS will need to
reconsider the harsh stand it put forth in its coordinated issue paper.
BCBS Organization's Stock Issuance After
Becoming For-Profit Is
Material Change
Citation: TAM 200528026 (Mar. 16, 2005). For TAM 200528026, see The
Insurance Tax Review, Sept. 2005, p. 496, Doc 2005-15116 [PDF],
or 2005 TNT 136-16 .
Overview: In technical advice, the IRS concluded that a
nonstock, nonprofit Blue Cross Blue Shield organization's issuance of stock as
part of its conversion to a for-profit stock corporation is a material change
under section 833(c)(2)(C) that results in the loss of federal tax benefits
described in section 833 and section 1012.
Discussion: There are a lot of facts to analyze, but not a lot of
law on which to base a conclusion. Hence, regardless of the conclusion that was
reached in this case, the memorandum is meaningful in terms of how the IRS went
about performing its analysis. The IRS spent a great deal of time discussing
colloquies, committee reports, and other documents that it, in other forums,
has suggested do not provide sufficient levels of authority.
Conclusion
The message from 2005? Although there were a few developments with broad
impact, there has not been a great deal of change in the substantive tax law,
or significant unexpected judicial or administrative interpretations. The world
in which tax practitioners will be required to operate, however, has changed.
As 2006 unfolds, we will see how well everyone can adapt.
FOOTNOTES
1 "Proposed Interpretation of Statement 109, Accounting for
Uncertain Tax Positions," Proposed Interpretation 1215-001 (July 14,
2005).
2 P.L. 108-357.
3 P.L. 109-135.
4 American Family Mutual Ins. Co. v. United States, No.
04-C-0764-C (W.D. Wis. July 11, 2005). See Doc 2005-17094 [PDF]
or 2005 TNT 158-6 . In that case, the court
held that an insurance company cannot claim any additional adjustment under
section 481, because section 832(b)(4)(C) provides explicit instructions for
the transition adjustment governing the taxation of unearned premiums.
5 See the Pension Funding Equity Act, P.L. 108- 218.
6 See Capital Blue Cross et al. v. Comm'r, 122 T.C. No. 11, 122 T.C.
224 (2004). See also discussion of this ruling in "2004 Insurance
Tax Review: Part I -- Federal Tax Matters," The Insurance Tax Review,
Feb. 2005, p. 299.
7 See Frederic J. Gelfond "Halftime 2005 -- Selected Federal
Insurance Tax Developments," The Insurance Tax Review, Aug. 2005,
p. 253.
END OF FOOTNOTES
Tax Analysts Information
Code Section: Section 801 -- Life Insurance Company Tax; Section 831 --
Tax on Other Insurance Companies
Geographic Identifier:
Subject Area: Insurance company taxation
Industry Group: Insurance
Author: Burness, Richard J.; Gelfond, Frederic J.
Institutional Author: Deloitte Tax LLP
Tax Analysts Document Number: Doc 2006-535 [PDF]
Tax Analysts Electronic Citation: 2006 TNT 46-44
2005 Insurance Tax Year
in Review: Part II -- Product Tax Matters
by Frederic J. Gelfond
In the second installment of a four-part report from Deloitte Tax LLP, Rick
Gelfond, who is based in the firm's
Date: Mar. 9, 2006
2005
Insurance Tax Year in Review: Part II -- Product Tax Matters
Copyright © 2006 by Deloitte Development LLC.
All rights reserved.
by Frederic J. Gelfond
Introduction
Thanks mostly to New York State Attorney General -- and gubernatorial hopeful
-- Eliot Spitzer, the question of what should qualify as insurance is now being
asked by a much larger audience. From a tax perspective, notions of risk
transfer and risk distribution have been fairly well developed over the years;
although, similar to what is happening in the real -- that is, the nontax --
world, there will likely continue to be debates in certain situations over
whether a given transaction possesses enough of these elements to be respected
as insurance.
At the same time, taxpayers continue to cry
out for further articulation by the IRS as to what it would agree constitutes
an insurance risk. The courts have spoken to the issue, from both tax and
nontax perspectives. Industry practitioners, academics, and actuaries, among
others, have spoken as well. It has never been clear, however, exactly what
standard the IRS will follow in making the determination. As discussed in the
"What Is Insurance?" section below, it is hoped that taxpayers and
the IRS will find common ground on the issue as (1) the number, types, and
degree of exposures that businesses and individuals face continue to evolve,
and (2) the need for greater certainty regarding the tax treatment of
transactions becomes more important in an increasingly stringent regulatory
environment.
The following pages describe some of the more
significant tax developments during 2005 regarding the "What is
insurance?" question and provide updates to several items covered in the
"Halftime 2005" report,1 including such things as
corporate-owned life insurance, life insurance contract qualification, variable
product diversification, the secondary market for life insurance, insurance
policy fair market value, and basis.
Corporate-Owned Life Insurance
A Substantive Challenge?
The IRS has gone retro. In moves reminiscent
of activity in the late 1900s, several corporate policyholders have been
challenged by examining agents on their interest deductions relating to loans
incurred in connection with life insurance policies covering the lives of
multiple employees. In fact, there is at least one taxpayer -- Xcel Energy,
Inc. -- that is currently slated to go to trial over the issue.
Although that might seem like old news, the
headline on this item is that the contracts that are the subject of the current
challenges were purchased on or before June 20, 1986 (pre-1986 contracts).
Unlike the contracts purchased after June 20, 1986 (post- 1986 contracts), that
continue to be the subject of highly publicized litigation, interest deductions
relating to the pre-1986 contracts that are being challenged have been
specifically protected through grandfathering language a fully informed
Congress included in three major tax acts (1986, 1996, and 1997)2
that otherwise limited the deductibility of interest related to post-1986
contracts. These contracts involved the physical transfer of cash -- as opposed
to an application of dividends or partial withdrawals -- to pay premiums in
nonborrowing policy years. Further, they do not contain experience rating
features that could arguably eliminate the transfer of mortality risk.
In the decided (that is, post-1986 contract)
COLI cases, a finding of the presence or absence of the mortality risk was the
essential factor for the courts in deciding whether the subject transactions
possessed economic substance. That is, they ultimately recognized that an
insurance arrangement that involves a transfer of risk is necessarily imbued
with economic substance.
Can the IRS sustain an economic substance
challenge under the types of facts involved in the pre-1986 contract cases, or
is the IRS mistakenly going one case too far? Although it has had some recent
success in challenging certain COLI transactions, the IRS has more recently
suffered significant losses on the economic substance front. (See Black
& Decker,3 Coltec,4 and TIFD-III-E.5)
One is left to wonder whether challenging interest deductions related to
pre-1986 COLI contracts will ultimately result in a further chipping away of
the prior gains achieved by the IRS in the economic substance arena or whether
there are going to be several more long rounds of COLI litigation.
As discussed below, the first round of
litigation on that issue has not provided an answer, as the U.S. District Court
in
Insurable Interest and COLI
In an interesting side note to the Xcel
case, the Department of Justice, on the heels of the recent decision under
Oklahoma state law in Tillman v. Camelot Music,7 cross-moved
for summary judgment, arguing that the taxpayer did not have an insurable
interest in its covered employees. The court denied the motion and granted
Xcel's cross-motion for summary judgment that it had an insurable interest in
the employees it covered. The court reached that decision because it found that
the company had a reasonable right to believe it would receive some pecuniary
benefit from the continued employment of each individual, or fear a loss due to
benefits to be paid out with each death; and under Colorado law, an insured may
designate a beneficiary without limitation as to the class of the beneficiary.
It was not relevant to the court that not every individual was classified as a key
employee.
Although a finding either way on insurable
interest, should have no bearing on a decision as to the economic substance of
the transaction -- or the ability of a taxpayer to deduct policy loan interest
-- the question of insurable interest is an issue that has captured the
attention of many business owners of life insurance.
Although the question is a matter of state
law, various members of Congress have sought to clearly identify ways in which
businesses should be permitted to continue to purchase life insurance on their
employees and still be able to exclude the associated death benefits from
taxable income. As discussed previously in our "2003 Insurance Tax Year in
Review,"8 Senate Finance Committee member Jeff Bingaman,
D-N.M., initially sought to generally eliminate the exclusion for death
benefits received by businesses on former employees who were not employed by
the company during the year before death. As one might suspect, that provision
was met with a groundswell of opposition from the insurance industry and
resulted in an amendment proposed by Finance Committee member Kent Conrad,
D-N.D. Conrad's amendment set forth conditions for businesses purchasing life
insurance on employees, that if met, would enable those businesses to continue to
exclude death benefits. Members of the insurance industry voiced their support
for the Conrad amendment in the event that bill was ever put before the full
Senate. This past May, a bill, the COLI Best Practices Act of 2005, containing
language similar to the Conrad amendment, was introduced in the House by Ways
and Means Committee member Thomas M. Reynolds, R-N.Y.9 In November a
similar provision was included in the pension reform bill that passed in the
Senate.10 The House version of that bill, which passed on December
15, 2005,11 did not contain the provision. It is anticipated that if
the COLI provision doesn't make its way into the final pension bill negotiated
by House and Senate conferees, it will be included in some future legislative
proposal.
It would seem that the result on the question
of insurable interest in Xcel and Dow Chemical,12 and
in other places in which the IRS has unsuccessfully raised the issue, as well
as the existence of the above pending legislation, will finally put to rest any
further attempts by the IRS to continue to raise insurable interest as a means
of challenging business-owned life insurance.
Life Insurance Contract Qualification
Sometimes the IRS really does deliver. It might not always deliver as much as
taxpayers would like -- and might not always answer all the questions -- but a
little something can be better than a whole lot of nothing. Case in point: the
IRS released a few droplets of guidance during the first part of this year
under section 7702, where the thirst for administrative direction has been well
documented. For example:
IRS Rules Charges for Qualified Additional
Benefits Should Be
Taken Into Account Under Expense Charge Rule
Citations: Rev. Rul. 2005-6, 2005-6 IRB 471. For Rev. Rul. 2005-6, see The
Insurance Tax Review Mar. 2005, p. 511, Doc 2005-1201 [PDF],
or 2005 TNT 13-14 .
Overview: The IRS ruled that charges for qualified additional
benefits (QABs) should be taken into account under the expense charge rule of
section 7702(c)(3)(B)(ii) -- rather than under the mortality charge rule of
section 7702(c)(3)(B)(i) -- to determine whether a contract qualifies as a life
insurance contract under section 7702 or as a modified endowment contract under
section 7702A.
Discussion: In certain instances, the application of this ruling
will result in a guideline premium limitation for a given contract that may be
lower than what might have been determined had an opposite conclusion been
reached. The sole justification for the conclusion in the ruling, however, is
an analogy it draws to the rules setting forth the treatment of QABs under the
cash value accumulation test. Unlike the guideline premium rules that are
silent on the issue, the rules setting forth the cash value accumulation test
specifically provide for treatment of QABs under the expense charge rule.
Although the result may be supportable, it is not completely certain that it is
appropriate to infer that Congress necessarily intended similar treatment for
QABs under both tests. Indeed, it could be argued that if the conclusion set
forth in the ruling truly comported with congressional intent, Congress would
have provided similar specific direction under both parts of section 7702.
That said, the ruling is very reasonable in
terms of how it permits insurance companies that are currently accounting for
QABs under the mortality charge rule to comply with its holding. Nevertheless,
to the extent that changes will need to be made to a company's administration
system -- a system that technically might not be "broken" depending
on one's interpretation of the code on this issue -- costs will ultimately be
incurred.
In a subsequent notice,13 the IRS
responded to administrative concerns raised by insurance companies by
permitting the identification of contracts under this revenue ruling to be
provided in electronic format.
Insurers Granted Waivers for Life
Insurance Contracts
Citations: LTR 200503021 (Oct. 6. 2004), LTR 200519025 (Jan. 27, 2005),
LTR 200521009 (Feb. 22, 2005), LTR 200528018 (Apr. 25, 2005), and LTR 200525007
(Mar. 22, 2005).
For LTR 200503021, see The Insurance Tax
Review, Mar. 2005, p. 533, Doc 2005-1311 [PDF],
or 2005 TNT 14-28 . For LTR200519025, see The
Insurance Tax Review, July 2005, p. 139, Doc 2005-10485 [PDF],
or 2005 TNT 93-56 . For LTR 200521009, see The
Insurance Tax Review, July 2005, p. 136, Doc 2005- 11719 [PDF],
or 2005 TNT 103-51 . For LTR 200528018, see The
Insurance Tax Review, Sept. 2005, p. 504, Doc 2005-15108 [PDF],
or 2005 TNT 136-50 . For LTR 200525007, see The
Insurance Tax Review, Aug. 2005, p. 338, Doc 2005-13757 [PDF],
or 2005 TNT 122-7 .
Overview: The IRS granted life insurance companies a waiver
under sections 101(f)(3)(H) and 7702(f)(8) for life insurance contracts that
inadvertently failed to satisfy the requirements of sections 101(f) and 7702.
Discussion: Although these may, at first blush, appear to be just
further examples of waivable errors to add to the list, it is potentially very
helpful for insurance company personnel with section 7702 compliance
responsibilities to pay attention to the specific types of errors that are
described in the handful of waiver rulings that seem to be released each year,
as there are practical lessons to be learned. For example, in LTR 200503021,
the company appears to have a fairly thoughtful compliance system in place.
Nevertheless, the ruling demonstrates the importance of ensuring sufficient
controls or compliance system checks are in place to ensure that the systems
continue to operate as intended. LTR 200503021 also provides a good
illustration of how different personnel from multiple departments in an
insurance organization potentially play a role in ensuring section 7702
compliance -- whether they realize it or not. LTR 200519025 highlights the
types of errors that could occur upon the conversion of an administration
system -- one of the most common circumstances under which section 7702 and
section 7702A errors are discovered.
For the past several years, this space has
been used to compliment the IRS on its consistently reasonable application of
the section 7702 waiver provision. This year is no different. In a footnote to
LTR 200503021, however, there is a bold statement that a particular type of
error is "not waivable." Yet it is questionable whether there might
be circumstances where a failure of the type described in that footnote could
not be the result of reasonable error. Is it appropriate to adopt such an
advance position when in any given situation, regardless of the type of error,
there may be mitigating facts and circumstances that might render the
occurrence of that error reasonable?
IRS Proposes Regulations on Life Insurance
Contact
Qualification
Citations: REG-0168892-03, 70 F.R. 29617-29673 (May 24, 2005). For
REG-0168892-03, see The Insurance Tax Review, July 2005, p. 71, Doc
2005-11240 [PDF]
or 2005 TNT 98-34 .
Overview: The IRS has issued proposed regulations explaining
how to determine the attained age of an insured when testing whether a contact
covering multiple lives qualifies as a life insurance contact for federal
income tax purposes.
Discussion: The preamble states that the treatment provided under
the proposed rules is consistent with what Treasury and the IRS believe to be
industry practice. Although there may be several companies that operate in ways
similar to what is called for in the proposed regulations, there are, in fact,
differences in various assumptions or practices among insurance companies and
their products that are not necessarily considered or otherwise adequately
dealt with under the proposed regulations. Nevertheless, any certainty that is
offered in this arena through regulations or otherwise is certainly welcome. Of
course, one would hope that the proposed regulations do not pose the same
concerns for the IRS and Treasury that have kept prior proposed regulations under
section 7702 from being finalized.
Diversification
IRS Issues Guidance on Application of Look-Through Rule
Ever wonder why the more you thrash about in a pile of quicksand trying to get
yourself out, the further down you sink? (Probably not, but let's just
pretend.) Well, many tax practitioners get that same feeling when they begin to
play with the segregated asset account diversification rules. The rules seem
straightforward. But just try to apply them, and you find yourself with more
and more questions the deeper you get involved. Sometimes you think you know
what the answer should be, but the words are not quite there in either the
statute or the underlying regulations. Other times, the words are there, but
you are not as up on your Sanskrit as you used to be. Over the past year or so,
the IRS has appeared to be more willing to throw taxpayers a line by providing
further guidance regarding open industry questions in this area.
In 2005 the IRS and Treasury provided public
and private guidance regarding the application of the look-through rule. Rev.
Rul. 2005-714 dealt with an investment in a regulated investment
company that owned an interest in another RIC; LTR 20050800215
applied the rule in a scenario in which an insurer's subaccount invested in lower-
and upper-tier RIC funds. Under the facts of both cases, it appeared that the
IRS's primary concern in this area -- that is, that investment in the
underlying funds not be available to the general public other than through the
purchase of a variable contract -- was adequately addressed, and therefore, use
of the look-through rule to satisfy the diversification requirements was
permitted.
Treasury and the IRS provide an appropriate
degree of flexibility regarding the mechanical application of the diversification
requirements. The analyses in both rulings, however, similar to most
pronouncements in this area, contain at least some passing reference to what
the IRS refers to as the "investor control" doctrine, as though that
theory would be a viable means for challenging a transaction in court. In fact,
the investor control doctrine is little more than a watered-down version of the
economic substance or substance over form doctrine that could never withstand
serious scrutiny in light of both changes in the code governing insurance
contracts, as well as the evolution of those more serious doctrines in the
courts in the years since the investor control theory was initially put forth.
Yet another development this year relating to
diversification and the look-through rule involved the issuance of final
regulations16 that made the look-through rule unavailable for
purposes of counting the assets of a nonregistered partnership to satisfy the
diversification requirements. The fact that this change was finalized is not
surprising. In doing so, the IRS acknowledged taxpayer comments that there may
be other areas, or entities, to which it would be appropriate to make the
look-through rules available, but it did not act on those suggestions.
Secondary Market for Life Insurance
There is a white elephant sitting over there in the corner, and it is beginning
to stand up. Although not many folks within the life insurance industry seem to
want to talk about it, a new market for life insurance contracts has begun to
take root -- a secondary market in which investors seek to profit from changed
underwriting assumptions relating to the subject insured since the time the
contract was initially issued by the insurance company. Essentially, a growing
number of well-financed buyers, who are willing to pay policyholders more for
their contracts than the policyholders could achieve through a contract
surrender, have stepped to the fore. There has been some debate between
participants in the market and those who oppose its development as to whether
the pricing dynamics of an evolving market are causing policyholders to dispose
of their contracts at something less than their full value, despite the
greater-than-cash-value lifetime payoffs that are now available.
While the societal benefits of this new
industry will likely continue to be debated for some time, there are few on
either side of the debate who are unwilling to express their concern over some
of the practices that have begun to appear on the fringes of the secondary
market. Those apprehensions include growing stories of investors seeking to
rent "insurable interests" by convincing uninsured individuals to
apply for insurance for the sole purpose of selling the policies to the
investors, as well as the apparently growing practice of using charitable and
other tax-favored organizations for the sole purpose of facilitating life
insurance investments. The latter practice has resulted in proposed legislation
intended to curb perceived abuses in that area. A bipartisan proposal in the
Senate would apply a 100 percent excise tax and impose substantial reporting
requirements for some life insurance contract acquisitions involving tax-exempt
organizations.17
Life Insurance Contract Fair Market Value
IRS Modifies Guidance on Determining Fair Market Value of
Some Life Insurance Contracts
Citations: Rev. Proc. 2005-25, 2005-17 IRB 962 (Apr. 8, 2005). For Rev.
Proc. 2005-25, see The Insurance Tax Review, June 2005, p. 1071, Doc
2005-7286 [PDF],
or 2005 TNT 68-9 .
Overview: The IRS explained how to determine the fair market
value of contracts that provide life insurance protection for purposes of
applying the rules of sections 79, 83, and 402.
Discussion: This revenue procedure referenced prior guidance
related to fair market valuation, including Rev. Rul. 59- 195, Notice 89-25,
and Rev. Proc. 2004-16. If nothing else, the ruling and the discussion
contained therein illustrate not just the many tax purposes for which one would
need to value a life insurance contract, but also the variety of ways that have
evolved over the years for doing so. In light of the developing secondary
market for life insurance contracts described above, it will be interesting to
see if there will soon be an outcry to develop yet another way to determine the
fair "market" value of a life insurance contract.
In other developments, the IRS issued final
regulations (T.D. 9220),18 that reference Rev. Proc. 2005-25 in
dealing with the tax consequences of converting a non-Roth IRA annuity to a
Roth IRA, and clarifying that the fair market value of the annuity contract on
the date of conversion is to be treated as if it were distributed. The IRS also
issued T.D. 9223,19 which provides that life insurance contracts
distributed from a qualified retirement plan to employees must be taxed at
their full fair market value.
At the end of December 2005, the IRS released
Rev. Proc. 2006- 13,20 which provides safe harbor methods that may
be used in determining the fair market value of an annuity includible in income
as a result of conversion to a Roth IRA.
Life Insurance Policy Basis
Class-Action Damages Not Income to Extent of Insurance Policy
Basis
Citations: ILM 200504001 (Oct. 12, 2004). For ILM 200504001, see The
Insurance Tax Review, Mar. 2005, p. 530, Doc 2005-1813 [PDF],
or 2005 TNT 19-14 .
Overview: In a legal memorandum, the IRS advised that a
class-action member's damages in a suit against an insurer are included in
income to the extent they exceed the individual's basis in life insurance
policies.
Discussion: Yet another question that might make its way into a
louder public debate as the result of the evolution of the secondary market for
life insurance is the proper means of measuring the basis of a life insurance
contract. Taxpayers and the IRS have previously wrangled over whether both
gains and losses (assuming for the moment it is proper to recognize a loss on a
life insurance contract) relating to life insurance contracts are measurable
based on the section 72 "investment in the contract" theory or the
section 1001 notions of basis, as well as whether there is a difference between
the two concepts. Among the major points of contention in this debate are
whether basis should be reduced by the costs of insurance coverage that have
been expended during the time the contract was in force, and whether the
difference between the amount of premiums paid and the amount that can be
achieved upon the surrender of a contract is the proper measure of the costs of
insurance coverage, a theory based on decades-old, and perhaps outdated,
judicial guidance.
What Is Insurance?
It is somewhat amazing that after so many years of asking this question,
controversy over how to analyze the insurance nature of a given transaction
rages on. There is a degree of acceptance that for a transaction to be
respected as insurance for federal income tax purposes (at least by the IRS),
there likely will need to be a demonstrable element of risk shifting and risk
distribution. How those terms are defined is yet another matter. And, of
course, infused in those debates are questions regarding the presence of -- or
the need to demonstrate -- common notions of insurance, or whether there is
even authority to challenge the nature of an otherwise accepted insurance
transaction unless there is a compelling tax reason to do so (for example,
because the transaction lacks economic substance). Perhaps part of the
disconnect here is due to the IRS's failure, until recently, to even partially
acknowledge in its pronouncements the existence of this latter standard,
despite its appearance in Sears,21 one of the most
significant modern appellate-level decisions dealing with the question of what
is insurance, as well as the refusal by other appellate courts in the Sears
line of cases to be limited by a strict three-prong test.22
The IRS's public divorce in Rev. Rul 2001-31
from its long-held "economic family" position has paved the way in
recent years for it to open up a bit on its guidance on captive insurance
arrangements, which have historically served as the backdrop to much of the
existing guidance on the issue of what is insurance. See, for example, the safe
harbor revenue rulings released in the last days of 2003, as well as the risk
distribution revenue ruling described below. Although most of the ink that has
been spilled to date has focused on the concepts of risk shifting and risk
distribution, the prediction here continues to be that the real drama in the
coming months and years in the "What is insurance?" area is going to
revolve around the much more fundamental question of what is an insurance risk.
There are many reasons for this, including the continuing product convergence
of the various financial services industries; but perhaps an even more
important driver is the ongoing innovation relating to the measurement and
management of a growing variety of risk exposures.
Today, it is becoming more common that the
commercial marketplace is either unwilling or unable to provide types of coverage
for which there are important societal needs. Examples might include coverage
for certain types of environmental exposures, terrorism risks, and various
forms of liability. Among the responses of those facing such exposures have
been increases in the formation of captive insurance companies, risk retention
groups, and other risk sharing arrangements. As the developing needs and
solutions created to deal with them continue to evolve, it is hoped that the
IRS will be even more willing to work with taxpayers in forging a tax scheme
that is able to identify, and appropriately respect as insurance, those
vehicles that do, in fact, provide for the transfer and sharing of risks.
This is an issue that is growing in
importance as the regulatory environment continues to fuel demands for greater
certainty in the characterization of transactions for financial reporting and
other purposes, much of which includes questions regarding how those
transactions will be treated for federal income tax purposes.
IRS Guidance Targets at Single Insurer
Arrangements
Citations: Rev. Rul. 2005-40, 2005-27 IRB 4. For Rev. Rul. 2005-40, see The
Insurance Tax Review, Aug. 2005, p. 330, Doc 2005-13278 [PDF]
or 2005 TNT 117-1 .
Overview: The IRS has issued guidance reiterating that the
elements of risk shifting and risk distribution must be present for an
arrangement to be considered insurance for federal income tax purposes. The
gist of the ruling, however, was that an arrangement involving an insurance
company that had only a single policyholder could not involve risk distribution
-- and hence, was not insurance -- despite the fact that the arrangement
covered multiple homogeneous risks.
Discussion: There are many comments that can be made about this
ruling. Immediately coming to mind are those that deal with the fundamental
issue of how one determines whether an arrangement involves risk distribution,
and the impact the tax classification of an entity should have on determining
whether an arrangement in which that entity is a party can constitute
insurance. Those issues are discussed below.
Perhaps the most extraordinary issue raised
by this ruling, however, results from a subtle, almost unnoticeable change from
previous public IRS rulings. This change appears in the boilerplate description
of what is required to have an insurance arrangement that tax practitioners are
used to reading in most "What is insurance?" pronouncements. Among
other things -- risk shifting, risk distribution, and so forth -- the IRS
boilerplate typically includes a reference to LeGierse23 in
support of the proposition that the arrangement cannot provide coverage solely
for investment risk. Rev. Rul. 2005-40, however, contains a dramatic expansion
of this proposition, suggesting that the risk that is transferred "must
not be merely an investment or business risk" (emphasis added). It
provides no authority for its inclusion of a reference to business risk other
than citations to LeGierse and Rev. Rul. 89-96 (commonly referred to as
the MGM ruling). Those authorities are somewhat clear in their statements that
insurance must involve something more than an investment risk. Neither one of
those authorities, however, provides any reference to -- let alone any
prohibition of -- coverage of business risks.
Despite the fact that this is the first time
the IRS has set forth this standard in a public pronouncement (identical
language first appeared last year in a private letter ruling), the IRS does not
provide any discussion of what it means by the term "business risk."
The term has previously appeared in IRS pronouncements proscribing insurance
treatment of "coverage" provided by service providers -- such as
certain HMOs -- in describing the risks borne by those entities. The use of
that term in the present context, however, reflects a clear attempt on the part
of the IRS to expand a limitation on what qualifies as an insurance risk. There
is no existing authority, however, that supports the IRS's position. Moreover,
given that it does not even provide a definition of what it means by the term
"business risk," one could argue that the position of the IRS is that
any insurance coverage purchased by a business cannot qualify as insurance.
That clearly cannot be the case.
Now, back to the more mundane. The issue
raised by Rev. Rul. 2005-40 that has so far captured the most attention deals
with its application of the notion of risk distribution. The concept of risk
distribution refers to an application of Bernoulli's Theorem, or the scientific
notion of the law of large numbers. In an insurance context, that concept
describes how the pooling of a sufficient number of independent risks makes the
ultimate experience of the group as a whole somewhat predictable. Given the
knowledge of the performance of the group as a whole, the insurance company can
determine the premium amount it would need to collect from each insured to
cover its aggregate expected loss. The amount each insured would need to pay,
or its share of the expected loss, would be less than the amount it would need
to set aside in the event its risk was not pooled with the other covered risks.
The identity of the insureds is irrelevant to the notion of risk distribution.
That is, the predictability of aggregate level of loss that comes from the
pooling of risks would be the same regardless of whether the pooled risks are
transferred to the insurance company by a single insured or by many insureds.
Namely, assume an insurance company provided
flood insurance to several policyholders all located on the same flood plain.
That arrangement would likely be deemed not to involve risk distribution
because the arrangement involves only a single element of risk -- a flood on
that plain. Assume next that each policyholder is instead located on a
different flood plain. In the latter case, risk distribution is possible given
the independent nature of each of the covered risks -- a flood on any of the
plains. The only thing that changed in that case was the number of independent
risks involved. Hence, the presence or absence of risk distribution was a
function of the number of independent covered risks, not the identity or number
of policyholders. That is, the theory would hold true regardless of whether the
properties were owned by a single entity or several.
The revenue ruling nevertheless reaches its
conclusion that a case involving multiple independent risks but only a single
policyholder does not involve insurance as the result of a lack of risk
distribution. That is inconsistent with above-established notions of insurance.
A possible retort to those comments is that
even if the pooling of risks did operate to reduce the costs of each individual
covered risk, the fact of the matter is that because there is only a single
insured party, that party is not relieved of the burden of paying for the
aggregate covered risks. Such a reply, however, is irrelevant, both for the
reasons set forth above as well as because that point goes to whether there has
been risk shifting, not whether there has been risk distribution. Further, as
with any insurance arrangement, the premiums collected by the insurance company
are intended to cover its aggregate expected loss, with the insurance company
taking on the risk that actual losses will be greater than what was expected.
This dynamic is present even when there is only a single policyholder,
including the scenarios set forth in this revenue ruling.
Another significant issue highlighted by this
ruling relates to Situation 3, in which the subject taxpayer's single member
limited liability companies through which it operates its business are treated
as disregarded entities for purposes of determining whether an insurance
arrangement exists. The question, of course, is whether the classification of
an entity for tax reporting purposes should be determinative in interpreting
whether a transaction among legally separate entities that, in fact,
economically shift and distribute risk should be respected as insurance.
Whether the approach set forth in the ruling is appropriate will likely be the
subject of continued public debate. In the interim, taxpayers who are
considering checking the box should be cognizant of the impact the IRS's
enforcement of its current position might have on the qualification of their
arrangements.
Many of the same issues dealt with in Rev.
Rul. 2005-40 are also addressed in LTR 200518010.24
IRS Seeks Comment on Single Insurer
Arrangements
Citations: Notice 2005-49, 2005-27 IRB 14. For Notice 2005-49, see The
Insurance Tax Review, Aug. 2005, p. 333, Doc 2005-13279 [PDF]
or 2005 TNT 117-3 .
Overview: The IRS has requested comments on newly released
guidance that is intended to clarify the standards for determining whether an
arrangement constitutes insurance for federal income tax purposes.
Discussion: The IRS's recognition of the fact that further
guidance is needed in this area -- and its expressed willingness to obtain
taxpayer input -- was welcome news. Many taxpayers provided comments on issues
such as cell companies, the use of loans among the parties, and other general
concerns relating to how the ruling interprets and applies the concept of risk
distribution. Time will tell whether those comments will affect the future
application of the law.
Insurer's Participation Fee in State
Insurance Fund Is
Deductible
Citation: TAM 200517030 (Jan. 31, 2005). For TAM 200517030, see The
Insurance Tax Review, June 2005, p. 1078, Doc 2005-9050 [PDF],
or 2005 TNT 83-17 .
Overview: In technical advice, the IRS ruled that a fee paid by
an insurer to participate in a state insurance fund is a currently deductible
section 162 expense that should not be capitalized, because payment of the fee
does not result in a distinct property interest or significant future benefit
for the insurer.
Discussion: As noted in the Federal Tax Matters article, this
ruling provides a useful road map for how the IRS will determine whether an
item is deductible or must be capitalized. Another potentially interesting
aspect of this ruling, however, relates to the nature of the underlying
coverage that is the subject of the ruling. It is unclear from the facts set
forth in the memorandum whether some or all of the coverage that is being
purchased is for liabilities resulting from an event that has already occurred.
It appears that is the case. If so, it is helpful to taxpayers in that the
ruling clearly acknowledges acceptance by the IRS that insurance can be
purchased that is limited to covering severity risks, regardless of whether an
element of frequency risk is also present. It would also demonstrate the limits
of the reach of Rev. Rul. 89-96 (the MGM ruling) in denying insurance tax
treatment (that is, to transactions in which both the timing and amount of a
loss are known in advance).
Further, it demonstrates the IRS's
acknowledgment, as supported by the case law, of taxpayer arguments that
coverage that provides for the reduction of a future expense is not the same as
the creation of an asset with future benefit. As such, in a case like the
present one, in which the coverage clearly does not create a future benefit
apart from minimization of costs associated with past business activity,
premiums paid for such coverage are currently deductible.
Issuer's Vehicle Service Contracts Are
Insurance
Citations: LTR 200509005 (Nov. 17, 2004). For LTR 200509005, see The
Insurance Tax Review, Apr. 2005, p. 697, Doc 2005-4435 [PDF],
or 2005 TNT 43-32 .
Overview: The IRS concluded that a company not recognized as an
insurance company under state law that plans to only issue vehicle service
agreements is an insurer for federal tax purposes because the agreements are
insurance contracts that are "aleatory" and involve risk shifting and
distribution.
Discussion: Aside from the fact that the taxpayer seeking the
ruling here is not an insurance company under state law, this case involved a
fairly noncontroversial fact pattern that falls squarely within prior favorable
guidance that has been provided by the IRS. Although the taxpayer apparently
got the result it was looking for, there are several concepts that are quickly
glossed over in the ruling, including the manner in which it addresses the
elements discussed above involving insurance risk, risk shifting, and risk
distribution. At first, those concepts may seem straightforward; but in other
factual circumstances, they may involve substantial complexity.
Other rulings in this area issued this year
include LTR 20052500425 (addressing vehicle service contracts) and
LTR 20053801226 (dealing with a workers' compensation arrangement).
Organization's Failure to Operate as
Insurance Company Causes Loss
of Exempt Status
Citation: LTR 200520035 (Dec. 3, 2004). For LTR 200520035, see The
Insurance Tax Review, July 2005, p. 123, Doc 2005-11165 [PDF],
or 2005 TNT 98-67 .
Overview: The IRS has revoked an organization's tax- exempt
status as an organization described under section 501(c)(15), noting its
failure to qualify as an insurance company as defined under that provision.
Discussion: There are several tax issues dealt with in this
technical advice memorandum, many of which concern the complexities of section
953(d). Perhaps the least complex question was whether the subject organization
was an insurance company for federal income tax purposes. The facts provided
appeared to make it easy for the IRS to determine that, under the law
applicable at the time, the primary and predominant activity of the entity was
not providing insurance.
Conclusion
Taxpayers and the IRS will not always agree in their interpretation of the tax
law. Nevertheless, it remains important to the effective administration of the
tax laws -- and hence, our economy -- that taxpayers and the IRS continue to be
able to work together toward identifying where the real issues are. In the
insurance arena, it is that much more important given the industry's role in
fulfilling essential societal needs.
FOOTNOTES
1 See Frederic J. Gelfond. "Halftime 2005 -- Selected Federal
Insurance Tax Developments." The Insurance Tax Review, Aug. 2005,
p. 253.
2 Tax Reform Act of 1986, P.L. 99-514 (1986); Health Insurance
Portability and Accountability Act of 1996, P.L. 104-191 (1996); Taxpayer
Relief Act of 1997, P.L. 105-34 (1997).
3 Black & Decker Corp. v. .
4 Coltec Indus. v. .
5 TIFD-III-E, Inc. v.
6 For Xcel Energy Inc. v. United States, see Doc 2005-20816
[PDF]
or 2005 TNT 199-13 .
7 Betina L. Tillman v. Camelot Music Inc., No. 03-5172 (10th Cir.
May 11, 2005). For Betina L. Tillman v. Camelot Music Inc., see The
Insurance Tax Review, July. 2005, p. 49, Doc 2005-10398 [PDF],
or 2005 TNT 92-11 . See also, Scott Mayo v.
Hartford Life Ins. Co., 354 F.3d 400 (5th Cir. 2004); reprinted in The Insurance
Tax Review, Mar. 2004, p. 379, Doc 2004-648 [PDF],
or 2004 TNT 8-11 .
8 See Frederic J. Gelfond, "2003 Insurance Tax Year in Review: Part
II - Product Tax Matters," The Insurance Tax Review, Feb. 2004, p.
197.
9 H.R. 2251, COLI Best Practices Act of 2005 (May 1, 2005). For H.R.
2251, see The Insurance Tax Review, July 2005. p. 181, Doc 2005-10431
[PDF],
or 2005 TNT 92-55 .
10 S. 1783.
11 H.R. 2830.
12 Dow Chemical v. United States, No. 00-10331- BC (E.D. Mich.
Aug. 12, 2003), Doc 2003-19615 [PDF]
or 2003 TNT 172-10 ; reprinted in The Insurance Tax
Review, Oct. 2003, p. 595.
13 For Notice 2005-35, 2005-21 IRB 1087, see Doc 2005-9333 [PDF]
or 2005 TNT 85-5 .
14 Rev. Rul. 2005-7, 2005-6 IRB 464. For Rev. Rul. 2005-7, see The
Insurance Tax Review, Mar. 2005, p. 514, Doc 2005-1202 [PDF],
or 2005 TNT 13-12 .
15 LTR 200508002 (Sep. 30, 2004). For LTR 200508002, see The Insurance
Tax Review, Apr. 2005, p. 692, Doc 2005- 3802 [PDF],
or 2005 TNT 38-35 .
16 T.D. 9185, 70 F.R. 9869-9872 (Mar. 1, 2005). For T.D. 9185, 70 F.R.
9869-9872, see The Insurance Tax Review, Apr. 2005, p. 665, Doc
2005-4019 [PDF],
or 2005 TNT 39-10 .
17 Legislation introduced by Senate Finance Committee Chair Charles
Grassley, R-Iowa, and ranking minority member Max Baucus, D-Mont. (May 1,
2005). For legislation, see The Insurance Tax Review, July. 2005, p.
184, Doc 2005-9363 [PDF],
or 2005 TNT 85-21 .
18 For T.D. 9220, 70 F.R. 48868-48871, see The Insurance Tax Review,
Oct. 2005, p. 685, Doc 2005-17557 [PDF],
or 2005 TNT 161-4 .
19 For T.D. 9223, 70 F.R. 50967-50972, see The Insurance Tax Review,
Oct. 2005, p. 677, Doc 2005-17913 [PDF],
or 2005 TNT 166-4 .
20 For Rev. Proc. 2006-13, 2006-3 IRB 315 (Dec. 27, 2005), see p. 309, Doc
2005-25907 [PDF]
or 2005 TNT 248-3 .
21 Sears Roebuck &
22 The Harper Group v. Comm'r, 96 T.C. 45 (1991); AMERCO v.
Comm'r, 96 T.C. 18 (1991).
23 Helvering v. Le Gierse, 312
24 LTR 200518010 (Jan. 21, 2005). For LTR 200518010, see The Insurance
Tax Review, June 2005, p. 1091, Doc 2005- 9580 [PDF],
or 2005 TNT 88-39 . The Service ruled that arrangements
between a tax-exempt parent, its domestic subsidiaries, and its foreign
subsidiary, in which the foreign sub under a binder letter assumes from a
domestic insurer the risks associated with the domestic group's provision of
healthcare, are not insurance or reinsurance for federal tax purposes.
25 For LTR 200525004 (Nov. 9, 2004), see The Insurance Tax Review,
Aug. 2005, p. 341, Doc 2005-13754 [PDF],
or 2005 TNT 122-14 .
26 For LTR 200538012 (June 20, 2005), see The Insurance Tax Review,
Nov. 2005, p. 841, Doc 2005-19522 [PDF],
or 2005 TNT 185-30 .
END OF FOOTNOTES
Tax Analysts Information
Code Section: Section 801 -- Life Insurance Company Tax; Section 831 -- Tax
on Other Insurance Companies; Section 7702 -- Life Insurance Contract Defined;
Section 7702A -- Modified Endowment Contracts; Section 79 -- Group Term
Insurance; Section 83 -- Property Transferred for Services; Section 402 --
Trust Beneficiary's Tax; Section 162 -- Business Expenses
Geographic Identifier:
Subject Area: Insurance company taxation
Industry Group: Insurance
Author: Gelfond, Frederic J.
Institutional Author: Deloitte Tax LLP
Tax Analysts Document Number: Doc 2006-536 [PDF]
Tax Analysts Electronic Citation: 2006 TNT 46-45
2005 Insurance Tax Year
in Review: Part III -- State and Local Tax Matters
by Fred von Rueden and
Brett Whitcomb
In the third installment of a four-part report, Fred von Rueden and Brett
Whitcomb of Deloitte Tax LLP, discuss some of the significant state and local
tax developments in 2005 affecting the insurance industry.
Date: Mar. 9, 2006
2005
Insurance Tax Year in Review: Part III -- State and Local Tax
Matters
Copyright © 2006 by Deloitte Development LLC.
All rights reserved.
by Fred von Rueden and Brett Whitcomb
Overview
Long before evolutionary theory
preoccupied discussions surrounding school curricula, social philosophers such
as Herbert Spencer applied Charles Darwin's theories to the harsh tempest of
19th century capitalism. Unfortunately, Spencer and his contemporaries
oversimplified
In 2005, from a state tax policy perspective, the
issue of how to achieve these goals was less a question of competition versus
collaboration than it was a debate over the use of tax incentives versus tax
increases. As the discussion that follows indicates, this is an area that has
not yet become a victim of oversimplification.
Other significant state tax issues that made
their way into the public spotlight this past year involved such matters as the
Multistate Tax Commission draft regulation on unitary tax calculations, state
tax nexus, the impediments of the federal ERISA to state regulation of certain
employee benefit plans, state taxation of captive insurance companies, and
Tax Incentives Versus Tax Increases
Although states did not subject insurers to any tempest during 2005, there are
a number of storm clouds on the horizon that underscore the need for the
insurance industry to remain vigilant in its quest to avoid becoming a
lightning rod for state legislators seeking revenue targets for depleted
coffers. In a recent article, Sarah Beth Coffey, a policy analyst with the
Georgia Budget and Policy Institute in Atlanta, criticized the use of corporate
tax incentives for economic development.1 Citing a study by economist
Peter Fisher of the University of Iowa, which determined that 96 percent of
location decisions made by subsidized companies are not actually influenced by
those subsidies, Coffey observes that the quality of a business climate is not
solely based on taxes; rather, it involves a complex set of factors, including
the presence of skilled labor and needed infrastructure.
Among the more significant developments in
2005 involving the question of incentives were the Supreme Court's announcement
that it would hear an appeal of Cuno2 and legislative
activity in the state of
Cuno
On September 27, 2005, the U.S. Supreme Court announced that it would weigh in
on the U.S. Court of Appeals for the Sixth Circuit's decision in Cuno v.
DaimlerChrysler, which held that
By way of background, it is normally within
the purview of Congress, and not the courts, to determine what constitutes a
burden on interstate commerce. Under the Dormant Commerce Clause, Congress may
exercise its unquestioned power to regulate the state taxation of interstate
commerce in one of two ways: (1) Congress may circumscribe a state's taxing
authority; or (2) Congress may expand a state's taxing power.
With the enactment of the McCarran-Ferguson
Act,4 Congress accomplished two objectives. First, Congress
clarified that the Sherman Act5 did not apply to the business of
insurance. Second, Congress expressly immunized state insurance taxes and
regulations from Dormant Commerce Clause challenges.
A short time after its enactment, the
validity of the McCarran- Ferguson Act came before the Supreme Court in Prudential.6
The law was upheld, including the ability it granted states to impose
discriminatory insurance taxes. Ultimately, however, Congress's primary purpose
in enacting the McCarran-Ferguson Act was to shield state laws from
constitutional challenge, not to insulate the insurance industry from federal
regulation.
This discussion of Cuno and
McCarran-Ferguson raises a couple of considerations. First, even though the Supreme
Court granted certiorari in Cuno, this does not mean the Court will be
able to resolve all of the issues surrounding the legal viability of state tax
incentives. The Court decides cases in a very narrow and circumspect manner,
focusing only on the particular facts and issues briefed by the respective
litigants. As noted above, in granting the petitions for certiorari in Cuno,
the Supreme Court's sole focus was on the question of whether the plaintiffs
had standing to challenge the subject tax credit. Second, what will Congress
do, if anything, to address the issues identified in Cuno? If Congress
does nothing, it will take years for the courts to address the legal standing
of state tax incentives that are now a standard fixture in the statutes of
virtually every state in this country. Importantly, before the Court's
announcement regarding certiorari in Cuno, Sen. George V. Voinovich,
R-Ohio, and Rep. Patrick J. Tiberi, R-Ohio, had introduced legislation seeking
to protect a state's authority to grant investment tax credits.
Proponents of tax cuts claim that tax incentives create jobs, enhance the
business climate, lower a heavy business tax burden, and help promote certain
social and environmental welfare objectives. For example, there is now evidence
that the federal brownfields program,7 along with tax incentives
such as premium tax credits for new job creation at brownfields sites, is
encouraging the redevelopment of brownfields, which may thereby decrease urban
sprawl, job loss, loss of tax revenues, and environmental justice problems.
Nevertheless, insurance companies can sometimes become easy targets for states
seeking to expand their revenue base. Indeed, armed with the opinions of
analysts and researchers such as Coffey and Fisher, state legislators and the
general public are raising the stakes in the discussion surrounding the proper
use of tax incentives to achieve certain social objectives, including economic
development. Recent events in
To stimulate the economy in
Ultimately, on December 20, 2005, Granholm
signed an eight-bill business tax relief plan that lawmakers had overwhelmingly
approved on December 14. Key features of the plan are a 15 percent personal
property tax credit for manufacturers beginning on January 1, 2006, and a 100
percent personal property tax credit over the next three years for companies
that move into
It is particularly important to the insurance
industry that the enacted legislation will no longer be subsidized by its own
members. Instead, the costs of the tax plan are expected to be covered by
increased revenues the state is hoping for in fiscal 2006 and beyond.10
It appears that the business tax relief
package adopted in December is only the first phase of an initiative to reform
Multistate Tax Commission Draft Regulation
on Unitary Tax
Calculations
Another storm cloud the insurance industry is monitoring is an MTC draft
regulation that would include insurance companies in state unitary
calculations. In part, the impetus for this regulation is the expanded use of
"captive" insurance companies, some of which are being used to trap
income that would otherwise be subject to state income tax. During 2005 the MTC
conducted hearings and solicited public comments on the matter before
transmitting the draft regulation to its member states. Of course, even if the
MTC formally approves the regulation, each state would have an opportunity to
scrutinize the regulation before it was subjected to a separate adoption
process under state law. The industry is strongly opposed to the MTC draft
regulation and to the principle that insurance company and non-insurance
company activities should be combined when determining the total amount of unitary
income subject to tax in an individual state.
Nexus
Apart from the legality of state tax incentives, 2005 also witnessed
congressional action concerning state tax nexus. In April, Reps. Bob Goodlatte,
R-Va., and Rick Boucher, D-Va., introduced legislation11 adopting a
federal physical presence standard that states would use in determining when to
impose a business activity tax (BAT). The bill cleared the House Judiciary
Subcommittee on Commercial and Administrative Law on December 13. However, because
the legislation had no Senate counterpart, it went no further during the past
year. That was the third consecutive time Congress attempted to establish
bright lines for state BAT nexus. The proposed legislation targeted taxes on
gross receipts, gross income, or gross profits; taxes imposed on vendors for
the privilege of doing business at retail; taxes on receipts of public
utilities; and taxes imposed in lieu of net income taxes and similar types of
taxes. Taxes on insurance gross premiums, however, were not on the probable
list of state taxes that would have been preempted by the legislation. The MTC
legal staff concluded that those taxes were protected by the McCarran-Ferguson
Act.12
ERISA's Impediment to State Regulation
One area of continuing disappointment for congressional observers is
healthcare, and 2005 was no exception. For example, many political pundits
remain hopeful that Congress will one day amend ERISA13 to provide
equal legal treatment for employees in insured and self-insured employer
healthcare benefits plans (EBPs). Since its enactment in 1974, ERISA has served
as a major impediment to advocates of increased regulation of health insurance
benefits in the era of "managed care." As enacted, ERISA applies to
all fringe benefits provided by private employers to their employees. From a
state perspective, the statute shields benefit plans from state regulation in
two ways: (1) a "preemption clause" prohibits state laws that
"relate to" employee benefit plans; and (2) a "savings
clause" exempts state laws that "regulate insurance" from the
statute's preemptive force. The latter exception is further limited by the
"deemer clause," which prevents state insurance regulations from
reaching EBPs that are self-insured, as opposed to EBPs that purchase insurance
coverage from a third party. Therefore, ERISA partially shields all EBPs from
state regulation. Ultimately, because this partial shield engenders a
two-tiered regulatory system in which employees in "insured" plans
enjoy the protections of state law denied to their counterparts in
"self-insured" plans, ERISA has elicited sharp criticism.14
Within the past four years, the U.S. Supreme
Court decisions in Rush Prudential HMO15 and
State Taxation of Captive Insurance
Companies
The manner in which states tax captive insurance companies and address surplus
lines and self-procurement tax considerations also continued to be the subject
of increasing scrutiny during 2005. Three examples include: (1) the first major
revision of Delaware's captive insurance company statute, which was initially
enacted in 1984, to enhance Delaware's appeal as a domicile for captive
insurance companies;17 (2) the institution of a cap on the amount of
aggregate taxes that can be paid by a captive insurance company in Montana to
$100,000 per year;18 and (3) clarification in California that
surplus line brokers are subject to those same lien provisions that apply to
other insurers.19
Finally, although states did not subject insurers to any tempest during 2005,
lightning did strike in the form of an alternative method
Legislative and Regulatory Developments
Over the past several years, state legislatures were on the hunt for revenue.
In 2004, states increased revenue through good old- fashioned taxation, whether
through increasing rates or eliminating incentives. This year, states became
more creative in their solutions to raising revenue, maybe because of
surprisingly positive economic reports that indicate increased tax bases. In
any event, 13 states continued to search for revenue through general corporate
tax increases and other states simply extended their reach to places that used
to be untouched by the legislative branch.
Revenue raisers from the insurance industry
in 2005 consisted primarily of expansions in existing tax programs. For
example, New Jersey began subjecting all health service corporations to the
premium tax and took away the 12.5 percent cap;21 Minnesota crafted
legislation to overturn the 2003 Minnesota Supreme Court decision in Blue
Cross Blue Shield of Minnesota;22 and in New Mexico, the 1
percent health insurance premium surtax will now apply to disability insurance.23
As a result of the changes in Minnesota, stop-loss insurance purchased in
connection with self-insurance plans will now be subject to the premium tax.24
Lastly, Maryland's state legislature overrode a veto from Gov. Robert Ehrlich
(R) in order to eliminate a 30-year exemption HMOs had received from insurance
premium taxes.25 Maryland projects that the new tax will generate
$64.4 million in additional revenue for the state.
In some cases, the expansions in existing tax
programs extended to captive insurance companies. For example, the District of
Columbia started assessing a premium tax on captives with a minimum tax of
either $7,500 or $10,000, if the captive is a member of a risk retention group.26
Utah took a different approach, eliminating the premium tax for captive
insurance company direct premiums altogether and replacing it with an annual
fee.27 It remains to be seen whether Utah's approach, while
administratively simpler, accomplishes its revenue-raising goals.
While
Lawmakers in
From an incentive perspective, Texas adopted
the certified capital company (CAPCO) credit that may be used to offset the
premium tax liability32 and passed legislation that allows title
insurance companies who pay a premium tax to participate in the CAPCO
investment program.33 Colorado now offers a premium tax credit to
taxpayers who contribute to economic development in the Rocky Mountain state.34
Modifications that enhance some of the already existing state tax incentives
include changes to the Iowa capital seed fund credit, making it easier for
companies doing business in Iowa to take advantage of the credit,35
and Connecticut's changes to the urban and industrial credit. Connecticut has
now enabled insurance companies to benefit from the urban and industrial site
reinvestment credit by reducing the required investment amount from $20 million
to $5 million.36 Finally, Arizona extended the terms of the military
"reuse" zone and associated tax incentives from 5 to 10 years,37
thereby allowing more businesses in the reuse zone to qualify for reduced
insurance premium taxes.
Some of the more interesting credits include
Oklahoma's wind turbine credit38 that can now be used to offset
insurance premium taxes, and Louisiana's automobile liability credit.39
Insurers in Louisiana that extend a 12.5 percent discount on automobile
liability insurance policies until July 1, 2006, and a 25 percent discount
thereafter to military personnel on active duty will receive a tax credit in an
amount equal to the discount provided.
Premium Tax Issues
Cap Statute Unconstitutional
Citations: American Fire and Casualty Co. et al. v. Division of
Taxation, Docket Nos. A-2708-03 T2 et al. (Mar. 9, 2005). See The
Insurance Tax Review, May 2005, p. 826, Doc 2005-5086 [PDF]
or 2005 STT 51-16 .
Overview: The New Jersey Superior Court, Appellate Division,
has held that the director of taxation improperly applied the premium tax and
retaliatory tax statutes in a manner that unconstitutionally discriminated
against foreign insurance companies.
Discussion:
Premium Tax Rate
Citations: Hearing No. 44,425. See The Insurance Tax Review, June
2005, p. 1166, Doc 2005-6304 [PDF],
or 2005 STT 72-24 .
Overview: The Texas comptroller of public accounts has ruled
that a Pennsylvania insurance company that sells property and casualty
insurance in Texas and in other states does not qualify for a lower insurance
premium tax rate and is responsible for all assessed taxes, penalties, and
interest.
Discussion: During 1998 and 1999 the premium tax rate for an
insurance company in
Whether the
Citations: Stewart Title Guaranty Co. v. State Tax Assessor, Ken.
Cty. .
Overview: Maine's Kennebec County Superior Court recently held
that the term "gross direct premium" in the Maine insurance premium
tax statute means the amount paid to a company as consideration for insurance,
finding that only amounts for the actual insurance of risks are subject to
premiums tax.
Discussion: After 15 years of paying premium taxes based on the
actual insurance of risks rather than the full amount of direct premiums
reported on the Annual Statement's Schedule T without objection from the Maine
Revenue Service, the taxpayer found itself subject to a challenge from the
state that was resolved May 5, 2005. The taxpayer, a title insurance company,
had excluded payments for administrative services to third parties from its
premium tax calculation. The Maine Kennebec County Superior Court ruled in
favor of the taxpayer. The Schedule T instructions specify that the
"direct premiums amount" is not intended to be used for the
calculation of the amount of premium tax due to states. The Revenue Service
applied for appeal from the Superior Court's decision to the
It would be interesting to see whether there
are a large number of taxpayers that change the manner in which they are
calculating their premium taxes based on this decision (that is, because they
have previously been doing so in a manner consistent with what the state argued
was appropriate). It also would be interesting to know if there are any other
states in which this might be an issue.
Bond Issuers
Citations: .
Overview: The
Discussion: The
The court found in Dow Chemical v.
Rylander that no independently procured insurance tax was owed to
A third issue addressed in the letter ruling,
also relating to the secondary market, involved a trustee for a unit investment
trust who purchased the bonds and procured the insurance. Although the risk
originated with the
It appears that
Scheme
Citations: First American Title Ins. Co. et al. v. Strayhorn, No.
03-04-00342-CV. See The Insurance Tax Review, Aug. 2005, p. 317, Doc
2005-12327 [PDF],
or 2005 STT 110-26 .
Overview: The Texas Court of Appeals, Third District, has upheld the
comptroller of public accounts' interpretation of the insurance premium tax and
retaliatory tax statutes, which permit foreign title insurance companies to
include only 15 percent of the premium tax in their calculation for determining
whether a retaliatory tax is due.
Discussion: The out-of-state taxpayers contended that the comptroller's
new interpretation of the 15 percent limitation was wrong and unconstitutional.
The court found that the comptroller was correct in the new interpretation. In
the 1990s the comptroller had taken the position that the premium tax statute
required insurance agents to pay a portion of the premium, and payment of title
insurance premiums was not solely the obligation of the insurance company.
Agents were entitled to retain 85 percent of the total premium collected from
policyholders and the remaining 15 percent was remitted to the insurers. The
insurance company received the premium tax due on the agent's portion and
remitted it to the state. The comptroller's new interpretation allowed a
retaliatory tax reduction of only the insurers' 15 percent portion. The court
found there was no constitutional violation when the comptroller uniformly
enforced the statute until a specific date before it changed and uniformly
enforced the statute in a different manner. The court further held that
taxpayers do not acquire a right to pay less tax simply because they have paid
less tax in the past or because a tax policy has been incorrectly limited.
It seems somewhat arbitrary behavior on the
part of the comptroller that, after 15 years of interpreting a statute one way,
it would seek to apply it differently despite the fact there has been no change
in the statute. Whether or not it now takes the position that the statute
should be interpreted differently, at some point in time, taxpayers should be
able to take comfort in the fact that they are properly following a statute in
a manner that is consistent with a previous, uniformly expressed position of
the state.
New York Tax Department Explains Taxation
of Health Insurance
Premiums
Citations: Advisory Opinion TSB-A-04(18)C (Dec. 13, 2004). See Doc
2005-83 [PDF]
or 2005 STT 2-15 .
Overview: The New York Department of Taxation and Finance has explained that
when an insurance corporation includes in its premiums the amount of tax it is
charged as an insurer under section 1502-a, a tax-exempt organization is
required to pay that amount because the incidence of tax is imposed on the
insurer, not the insured.
Discussion: The New York Department of Taxation and Finance
received a petition for an advisory opinion from a tax-exempt school district
in
Retaliatory Taxes
Assessment
Citations: Home Ins. Co. v. .
Overview: The
Discussion: The court based its decision on the premise that the
purpose of the
Conclusion
As we begin 2006, it is clear from the debate surrounding incentives that all
of us in the tax policy arena face the daunting task of forging a Hegelian
synthesis from the twin forces of social competition and collaboration in our
quest to appropriately balance tax incentives and tax increases. At the end of
the day, it is imperative that the tax policy debate navigate away from a tooth
and claw "survival of the fittest" struggle between competing
factions (for example, states versus corporations, states versus other states,
and so forth.) and find a collaborative middle ground that will ensure each
faction achieves its goals, including sustained economic growth. Collaboration
is indeed a hopeful thought to carry into the New Year.
FOOTNOTES
1 Sarah Beth Coffey, "The Questionable Link Between State
Corporate Income Taxes and Economic Development," State Tax Notes,
Oct. 10, 2005, p. 207, Doc 2005-17290 [PDF],
or 2005 STT 195-2 . After noting that
in Georgia's 2005 legislative session, the "corporate income tax was weakened
by a sizable tax cut to multistate corporations" and projecting that the
2006 session could lead to further evisceration of the corporate income tax, as
legislators consider H.B. 24 -- a bill to abolish the corporate income tax by
2011 -- Coffey maintains that Georgia should use nontax policy and direct
appropriations to strengthen its corporations.
2 Cuno v. DaimlerChrysler. The Sixth Circuit's original decision
in Cuno may be found at Doc 2004- 17647 [PDF]
or 2004 STT 173-28 .
3 For additional information regarding Cuno, see Doc
2005-25303 [PDF]
or 2005 STT 241-1 . "CRS Reports on
Investment Tax Credits in Light of Cuno Proceedings." The
Congressional Research Service updated a report on state investment tax credits
to reflect judicial and legislative developments, including the Supreme Court's
grant of certiorari in Cuno and the introduction of federal legislation
designed to give states the authority to offer investment incentives.
4 Act of Mar. 9, 1945 (McCarran-Ferguson Act), ch. 20, 59 Stat. 33
[codified as amended at 15 U.S.C. §§ 1011-1015 (2000)]. When Congress enacted
the Gramm-Leach-Bliley Act of 1999 [Gramm-Leach-Bliley Act, Pub. L. No.
106-102, 113 Stat. 1338 (1999), codified as amended in scattered sections of 12
and 15 U.S.C.], it specified in section 104(a) of the Act that the
McCarran-Ferguson Act remains the law of the United States; however, at the
same time, it also undercut or limited a number of state regulatory powers over
insurance activities.
5 Act of July 2, 1890 (Sherman Act), ch. 647, 26 Stat. 209 (codified as
amended at 15 U.S.C. §§ 1-7).
6 Prudential Ins. Co. v. Benjamin, 328
7 "[T]he term brownfield site means real property, the expansion,
redevelopment, or reuse of which may be complicated by the presence or
potential presence of a hazardous substance, pollutant, or contaminant."
Farah Rodenberger, "Brownfields Programs and Tax Incentives Are
Stimulating the Redevelopment of Brownfields Properties in
8 See Robert Klein, "As Fall Arrives, Michigan Business
Reform Becomes Political Football," State Tax Notes, Oct. 3, 2005,
p. 115, Doc 2005-19698 [PDF],
or 2005 STT 187-15 .
9 See Robert Klein, "Michigan Governor Signs Business Tax
Relief Package," State Tax Notes, Dec. 26, 2005, p. 1054, Doc
2005-25613 [PDF],
or 2005 STT 244-20 .
10 For additional background regarding the new Michigan legislation, see
Robert Klein, "Michigan Lawmakers Approve Business Tax Relief
Package," State Tax Notes, Dec. 19, 2005, p. 983, Doc 2005-25165
[PDF],
or 2005 STT 241-20 . For information addressing
changes in Michigan law involving the use tax, please refer to Doc
2005-24539 [PDF]
or 2005 STT 239-22 , "Michigan Final H.B. 5098
Subjects Insurance Companies to Use Tax; Eliminates Apprenticeship
Credit." Michigan H.B. 5098, signed into law as Public Act 229, eliminates
insurance companies' exemption from the use tax and eliminates the
apprenticeship tax credit for all companies except construction contractors --
approved by the governor on Nov. 21, 2005; filed with the secretary of state on
Nov. 21, 2005; no effective date: Tie-barred to bill that was vetoed.
11 H.R. 1956.
12 For a state perspective on H.R. 1956, see National Governors
Association, "Impact of H.R. 1956, Business Activity Tax Simplification
Act of 2005, on States," State Tax Notes, Nov. 7, 2005, p. 557, Doc
2005-21107 [PDF],
or 2005 STT 214-5 . The National Governors
Association criticized H.R. 1956, saying it would upset existing state business
activity taxation.
13 Employee Retirement Income Security Act of 1974, Pub. L. No. 93-406,
88 Stat. 829 (codified as amended at 29 U.S.C. §§ 1001-1461 (2000)).
14 For additional background on this issue, see Russell Korobkin,
"The Battle Over Self-Insured Health Plans," or "One Good
Loophole Deserves Another," 5 Yale J. Health Pol'y L. & Ethics
89 (Winter 2005).
15 Rush Prudential HMO v. Moran, 536
16
17 ". Delaware H.B. 218, signed into
law as Chapter 150, amends provisions regarding the tax on premiums collected
by captive insurance companies.
18 ". Montana S.B. 134, signed into law
as Chapter 205, limits the amount of aggregate taxes that can be paid by a
captive insurance company to $100,000 per year.
19 ". California A.B. 1424, signed into
law as Chapter 231, subjects surplus line brokers to the same gross premium tax
collection provisions as other insurers.
20 ". Florida H.B. 1813, signed into
law as Chapter 280, clarifies the exemption from sales tax on boats and yachts
imported into Florida for the purpose of being sold at retail, clarifies estate
tax filing, and provides various tax credits; and "Florida Governor Vetoes
Salary Credit for Insurance Companies," Doc 2005-13551 [PDF]
or 2005 STT 120-7 . Florida Gov. Jeb Bush (R) vetoed
a $2.6 million portion of an omnibus tax bill (H.B. 1813), saying that it was
approved with insufficient study and appeared to benefit just one company; the
provision would have allowed a salary credit for employees of mutual insurance
holding companies in existence before January 1, 2000.
21 N.J. Rev. Stat. Section 54:18A-6 (2005); revised by Act 128 (A.B.
4401).
22 In June 2003 the Minnesota Supreme Court ruled that premiums received
by an insurer on stop-loss policies are not subject to the state's premium tax
(Blue Cross Blue Shield of Minnesota v. Comm'r of Revenue, No.
C8-02-1647, (.)
23 N.M. Stat. Ann. § 59A-6-2 (2005); revised by Ch. 132 (H.B. 444).
24
25
26 D.C. Code Ann. § 13 (2005); Act 15-638.
27
28
29
30
31
32
33
34
35
36
37
38
39
40 State Board of Ins. v. Todd Shipyards, 370
41 PA Stat. 40 P.S. § 50 (2005).
END OF FOOTNOTES
Tax Analysts Information
Code Section: Section 801 -- Life Insurance Company Tax; Section 831 --
Tax on Other Insurance Companies
Geographic Identifier:
Subject Area: Insurance company taxation
Industry Group: Insurance
Author: von Rueden, Fred; Whitcomb, Brett
Institutional Author: Deloitte Tax LLP
Tax Analysts Document Number: Doc 2006-537 [PDF]
Tax Analysts Electronic Citation: 2006 TNT 46-46
2005 Insurance Tax Year
in Review: Part IV -- International Tax Matters
by Richard Safranek, Mary Gillmarten, and Jim Cohen
In the fourth installment of a four-part report, Richard Safranek, Mary
Gillmarten, and Jim Cohen of Deloitte Tax LLP discuss international tax events
from 2005 affecting the insurance industry.
Date: Mar. 9, 2006
2005
Insurance Tax Year in Review: Part IV -- International Tax
Matters
Copyright © 2006 by Deloitte Development LLC.
All rights reserved.
by Richard Safranek, Mary Gillmarten, and Jim Cohen
Introduction
2005 has been the year of the hurricane. Hurricanes in the
A game of great charm in the adoption of mathematical measurements to the
timing of human movements, the exactitudes and adjustments of physical ability
to hazardous chance. The speed of the legs, the dexterity of the body, the
grace of the swing, the elusiveness of the slide -- these are the features that
make Americans everywhere forget the last syllable of a man's last name or the
pigmentation of his skin.
-- Branch Rickey, May 1960
Described thus, baseball is clearly
an insurance practitioner's sport! It has something for everyone: mathematical
measurements, the exactitudes of adjustments and hazardous chance for actuaries
and risk managers; dexterity and grace for accountants; and, for tax lawyers
and accountants, the elusiveness of a simple key to understanding how the IRS
interprets the Internal Revenue Code, which Rep. Steny Hoyer, D-Md., described
in 2004 as that "Kafkaesque maze of complexity."
The Nationals made a strong showing their first year
in Washington, and were dubbed the "One Run Wonders" by The
Washington Post for their often thrilling, late inning, one-run victories.
Despite the lack of a pennant, that's not bad for a team playing without an
owner in a stadium designed for another time. Oh, does that sound like the tax
provisions applicable to the insurance industry! This year, the efforts by
Treasury and the IRS seemed to focus on making guidance useful to insurance
practitioners. That effort however, was demonstrated more by the repeated
requests for comment than the release of actual guidance; but just as baseball
fans are preparing for the first truly international "World Series"
this spring, hope remains that we will see more conclusive -- rather than
elusive -- guidance in the coming year.
The pages that follow provide a commentary on the
significant developments in international tax and domestic tax guidance in 2005
that may affect the international operations of both domestic insurance
companies and non-U.S. insurers alike. That includes a discussion of the
long-awaited discussion draft of the Organization for Economic Cooperation and
Development's (OECD's) Report on the Attribution of Profits to a Permanent
Establishment (Insurance). Also, we set forth the significant developments in
legislation (Section I); foreign operations of
Section I -- Legislation
Unlike 2004, which brought us the American Jobs Creation Act (AJCA, P.L.
108-357) -- the most comprehensive corporate tax reform legislation since the
Tax Reform Act of 1986 -- this year has been relatively quiet on the
legislative front. Although several bills were considered, few passed both
houses to reach the Oval Office. The greatest motivator for Congress this year
was the need to provide some relief to those affected by the major hurricanes
that hit the
The Gulf Opportunity Zone Act of 2005
Citations: For the Joint Committee on Taxation's technical explanation
of H.R. 4440, see Doc 2005-25442 [PDF]
or 2005 TNT 242-8 .
Overview: On December 21, 2005, President Bush signed into law
the Gulf Opportunity Zone Act of 2005 (the act). Although the purpose of the
act is to provide business and individual tax incentives to aid in the recovery
and rebuilding of areas in the
Discussion: Perhaps the most significant international tax aspect
of the act is found in the technical explanation prepared by the Joint
Committee on Taxation staff. The technical explanation contains significant new
guidance for the application of section 965. The act gives Treasury authority
to issue regulations to prevent avoidance of the purposes of section 965(b)(3),
including regulations that would provide that "cash dividends" are
not to be taken into account under section 965(a) "to the extent such
dividends are attributable to the direct or indirect transfer of cash or other
property from a related person to a controlled foreign corporation." The
technical explanation provides that "if a related person transfers cash to
a [CFC] in a sale of assets by the [CFC] to the related person for non-tax
business purposes, such transfer will not be considered to have a principal
purpose of avoiding [section 965(b)(3)]." Although the opportunity to use
the one-time dividends received deduction (DRD) under section 965 has already
expired, and Treasury has not issued regulations under section 965, pursuant to
the technical explanation, it is expected that generally applicable tax
principles would be invoked to reach results consistent with the principles
espoused in the legislative history.
The act enacted technical corrections to the
international provisions of the AJCA, including: (1) permitting taxpayers to
elect to avoid the general retroactivity of the repeal of the separate foreign
tax credit limitation for dividends from noncontrolled section 902 corporations
(10/50 companies); and (2) clarifying the interaction of the corporate
inversion rules of section 7874(a) and (b) of the code so that the taxable
income floor in section 7874(a)(1) does not apply to an entity that is an
expatriated entity pertaining to a corporation treated as domestic under section
7874(b).
The act also provides a technical correction
to section 961(c) (enacted in the Taxpayer Relief Act of 1997). Section 961(c)
permits a CFC to avoid subpart F income from gain on the sale of stock of a
lower-tier CFC, by providing a limited-purpose basis step-up to the extent of
the lower-tier CFC's prior subpart F income. The technical correction extends
the basis step-up to stock of higher-tier CFCs in the same chain of ownership.
For purposes of determining whether a CFC is
a 25 percent owner regarding a partnership under section 954(c)(4), the CFC
will be treated as the owner of a partnership interest under rules similar to
section 958(b). That conforms the code to the legislative history of the AJCA
and potentially expands the number of cases in which the code would provide
that CFC gains on disposition of interests in partnerships are excluded from
passive and subpart F income.
Section II -- Foreign Operations of U.S. Insurance Companies
Section 965: Repatriation of Foreign Earnings
Citations: For Notice 2005-10, 2005-6 IRB 474, see Doc 2005-887 [PDF]
or 2005 WTD 10-13 . For Notice
2005-38, 2005-22 IRB 1100, see The Insurance Tax Review, July 2005, p.
87, Doc 2005-10171 [PDF],
or 2005 WTD 90-7 . For Notice
2005-64, 2005-36 IRB 471, see The Insurance Tax Review, Oct. 2005, p.
700, Doc 2005-17558 [PDF],
or 2005 WTD 161-9 .
Overview: Section 965 offers a one-year tax benefit in the form
of an 85 percent DRD for some extraordinary cash dividends received by
Discussion: Section 965 continues to stir up much excitement and,
frankly, some confusion for domestic companies with non-U.S. operations in
low-tax jurisdictions seeking to efficiently repatriate funds back to the
Final Regulations on Subpart F
Citations: For T.D. 9222, 70 F.R. 49864-49869, see The Insurance Tax
Review, Oct. 2005, p. 692, Doc 2005-17748 [PDF]
or 2005 WTD 164-10 .
Overview: Treasury finalized the proposed subpart F regulations
under section 951.
Discussion: The new regulations set forth special pro rata share
rules that apply to
The regulations are basically a clarification
of the general income inclusion rules, an example of Treasury and the IRS
trying to bring their outdated "stadium" into modern times.
Proposed Regulations on Dual Consolidated
Losses
Citations: For REG-102144-04, 70 F.R. 29868-29907, see Doc 2005-11119
[PDF]
or 2005 WTD 98-23 .
Overview: Treasury issued proposed dual consolidated loss (DCL)
regulations under section 1503(d) of the code that also cover section 953(d)
electing companies.
Discussion: The purpose of the DCL provisions is to prevent
The newly proposed regulations do not change
the DCL rules applicable to foreign insurance companies, but they do clarify
the application of the rules under section 953(d). Specifically, prop. reg.
section 1.1503-(d)(1) expands the class of dual resident corporations (DRC)
(those subject to the loss limitation rule) to include foreign insurance
companies that make an election to be treated as domestic corporations under
section 953(d) and are members of an affiliated group, regardless of how the
entities are taxed by the foreign country. Furthermore, prop. reg. section
1.1503(d)(4) provides that a foreign insurance company that elects to be
treated as a domestic corporation under section 953(d) may not make a domestic
use election. That rule is consistent with section 953(d)(3), which limits the
losses of foreign insurance companies that elect to be treated as domestic
corporations. Promulgating that guidance under section 1503(d) could create a
trap for the unwary as, in a given situation, it may not be intuitive for a
taxpayer reviewing the DCL rules applicable to domestic electing foreign
insurers to look to the 1503(d) regulations for additional guidance.
Final Regulations on Entity Classification
Citations: For T.D. 9235, 70 F.R. 74658, see p. 307 Doc 2005-25257
[PDF],
or 2005 WTD 241-12 .
Overview: Treasury and the IRS have finalized regulations under
section 7701 to add several additional entities to the list of per se
corporations under the check-the-box regulations.
Discussion: The European Societas Europaea (SE) is the newest
sibling in the family of per se corporations under Treas. reg. section
301.7701-2(b)(8). The preamble to the temporary regulations states that the
status and treatment of an SE may be relevant to the application of various
federal income tax provisions (for example, the subpart F provisions), and it
invites further comment from the industry and practitioners. Other new
additions to the per se corporation family include the Estonian Aktsiaselts,
the Latvian Akciju Sabiedriba, the Lithuanian Akcine Bendroves, the Slovenian
Delniska Druzba, and the Liechtenstein Aktiengesellschaft.
Revenue Ruling on Entity Classification
Citation: For Rev. Rul 2006-3, 2006-2 IRB 276, see Doc 2005-25490
[PDF]
or 2005 TNT 243-9 .
Overview: Effective July 26, 2005, Yugen Kaisha business
entities (YKs) are abolished under Japanese corporate law, and those entities
are automatically converted to a special type of Kabushiki Kaisha (KK) called
Tokurei Yugen Kaisha business entities (TYKs) under the Company Law and
Coordination Law (as promulgated by the Japanese Diet on June 29, 2005).
Discussion: TYKs are not per se corporations under the
check-the-box regulations. However, Rev. Rul. 2006-3 operates to treat TYKs in
the same manner as YKs before the effective date of the Japanese change of law.
Therefore, a YK that becomes a TYK will remain an eligible entity for purposes
of Treas. reg. section 301.7701-1 through -3.
Section III --
Section 842(b) Amounts
Citations: For Rev. Proc. 2005-64, 2005-36 IRB 492, see The Insurance
Tax Review, Nov. 2005, p. 837, Doc 2005- 18253 [PDF],
or 2005 TNT 171-12 .
Overview: Treasury released the domestic asset/liability
percentages and domestic investment yields needed by foreign life insurance
companies and foreign property and liability insurance companies to compute
their minimum effectively connected net investment income under section 842(b)
on their
Effectively Connected Income of Foreign
Insurance Companies
Citations: For T.D. 9226, 70 F.R. 57509-57510, see The Insurance Tax
Review, Nov. 2005, p. 835, Doc 2005-20108 [PDF],
or 2005 TNT 190-10 .
Overview: Treasury finalized, without change, proposed
regulations on the determination of effectively connected
Discussion: As discussed in last year's article, section 864
generally provides rules to determine whether fixed or determinable, annual, or
periodic income from
As noted last year, section 805(a)(4)(E)
contemplates that a foreign life insurance company could receive a DRD for
dividends from its wholly owned
Foreign Tax Credit Disallowance Under
Sections 901(k), 901(l), and
Variable Contracts
Citations: For Notice 2005-90, 2005-51 IRB 1163, see The Insurance
Tax Review, Jan. 2006, p. 81, Doc 2005- 24196 [PDF],
or 2005 TNT 230-4 .
Overview: The notice provides guidance regarding the
application of section 901(l), which disallows a foreign tax credit for some
withholding taxes on items of income or gain to the extent the recipient of the
item is under an obligation to make related payments regarding positions in
substantially similar or related property.
Discussion: Notice 2005-90 reiterates the Treasury and IRS
concern about transactions that involve trafficking in foreign tax credits, specifically
the separation of the foreign taxes from the related foreign-source income.
Section 901(l) disallows a foreign tax credit for some withholding taxes on
items of nondividend income or gain to the extent the recipient is under an
obligation to make related payments regarding positions in
substantially similar or related property (emphasis added). Section 901(k)
disallows a foreign tax credit for some withholding taxes on dividends to the
extent the recipient of the dividend is under an obligation to make related
payments regarding positions in substantially similar or related
property dividends (emphasis added). Although the notice only addresses an
exception under the former subsection (relating to nondividends), it requests
comments under both subsections.
The notice states that both statutory
language and legislative history to section 901(l) make it clear that Treasury
has regulatory authority to provide exceptions to the general foreign tax
credit disallowance rule in appropriate circumstances. The notice describes a
back-to-back computer program licensing arrangement in the ordinary course of
the licensor's and licensee's respective trades or businesses as an example of
a transaction to which the disallowance rule of section 901(l) need not apply
to further the purposes of section 901(l). The notice defines, for purposes of
the notice, a back-to-back computer program licensing arrangement, and what
constitutes use in the ordinary course of the licensor's and licensee's
respective trades or businesses.
The notice then suggests there may be other
types of arrangements or transactions that are not within the purposes of
section 901(l), and it requests comments on which arrangements or transactions
would qualify and why they should qualify, as well as comments on the
definitions of "related payments" and "positions in
substantially similar or related property" for purposes of both 901(k) and
901(l). The IRS notes that "[i]n particular, comments are requested on the
application of section 901(k) where the recipient of a dividend is obligated to
make payments under an arrangement where such payments reflect not only the
amount of the dividend but also other factors, such as changes in the value of
the dividend-paying stock, dividend performance or changes in the value of a
portfolio of stocks, or obligations under a debt instrument, annuity, or
insurance contract."
Clearly, Treasury and the IRS are concerned
about the appropriate disallowance of foreign tax credits and are attempting to
ensure that appropriate exceptions are made for some transactions. Insurance
companies do not have offsetting obligations to pay out investment income, but
under some variable life and annuity products, there is a contractual
obligation to credit variable accounts with a net return tied to various items
of investment income. It is possible that without a clear definition of a
"position in substantially similar or related property," some
confusion could arise, resulting in an inappropriate disallowance of foreign
tax credits to insurance companies.
Section IV -- Other Developments Affecting International Insurance
Companies
The OECD Released a Discussion Draft on the Attribution of Profits
to a Permanent Establishment of an Insurance Company.
Overview: The OECD released the discussion draft (Part IV Insurance) of
the "Report of the Attribution of Profits to a Permanent
Establishment" (the draft). The purpose of the draft is to establish
common interpretation and consistent application of the taxation of insurance
company PEs. The issue of the attribution of profits to PEs is an issue of
significant importance to the insurance industry. Below, we summarize the
OECD's approach for determining the profits attributable to a PE of an
insurance enterprise, including highlights of some of the comments that have
been filed with the OECD from insurers, reinsurers, and practitioners at large.
Discussion: The draft's primary aim is to attribute profits to a
PE in accordance with article 7(2) of the OECD Model Tax Convention (model treaty).
Article 7(2) determines "the profits which [the PE] might be expected to
make if it were a distinct and separate enterprise engaged in the same or
similar activities under the same or similar conditions." The draft treats
a PE as a distinct and separate enterprise under the functional and factual
analysis method. The functional and factual analysis method identifies the
significant risks of the insurance business, as well as the functions that give
rise to those risks. Specifically, the analysis tests the key entrepreneurial
risk-taking (KERT) functions of the enterprise and the extent to which the PE
performs or manages those functions. The KERT functions of the enterprise are
those that require active decisionmaking regarding the taking on and day-to-day
management of the individual risks and portfolio of risks that have been
identified as the most important under the functional and factual analysis
method. Applying the functional and factual analysis method is one of several
critical steps in determining the profits attributable to a PE. The other steps
include: (1) the attribution of surplus based on the attribution of risks and
the subsequent attribution of the income from the assets arising from the
investment of the surplus; (2) the pricing on an arm's-length basis of dealings
that can appropriately be recognized; (3) the recognition of transactions
between the enterprise and associated enterprises and independent third parties
that are attributed to the PE; and (4) the determination of comparability
between dealings and uncontrolled transactions.
Subsequent to the release of the draft, the
OECD invited comments from the insurance industry on the proposed steps. The
OECD requested comments on the following:
- the factual accuracy of the analysis of the most
important functions of the modern insurance industry;
- the impact of regulation, and in particular host
country regulation, on the conduct of the insurance business;
- the commercial rationale for internal reinsurance
within a single enterprise;
- the use of alternative risk transfer mechanisms, such
as catastrophe bonds;
- the types of risk that require surplus and how to
determine the quantum of surplus and its location within a single
enterprise; and
- other issues as identified within the draft.
A number of insurers, reinsurers, and practitioners submitted comments in
response to that request. Some notable commentary and viewpoints include:
- The hypothetical distinct and separate enterprise
approach is generally an appropriate method; however, there are
considerable difficulties in applying that approach to the insurance
industry because of the lack of a global framework for insurance capital
requirements and regulation. Thus, further guidance is needed.
- The draft describes the operational functions of
insurance, but it fails to identify the strategic functions performed,
such as the creation and implementation of business strategy. That is
important because the creation and implementation of a business strategy
for a multinational insurance enterprise extends cross-border and ensures
the entire operation is as profitable as possible.
- There is inadequate recognition that underwriting and
reinsurance can be loss-making activities.
- Greater recognition should be given to the fact that
the insurance industry, like other industries, faces business cycles that
may affect an insurer's surplus and the attribution of income over time.
- A new section should be included to address risk
prioritization and capital allocation. Insurance companies are subject to
regulatory controls. Those controls are quite significant, and they cover
both the asset and liability sides of an insurer's balance sheet. They
also deal with the calculation of reserves, determination of
capitalization thresholds, and limitation of portfolio investments. That
information is typically disclosed in regulatory returns filed in
accordance with the rules of a company's host jurisdiction. It is the
position of several business commentaries that conducting a separate
factual and functional analysis is administratively burdensome for
insurance companies when duplicate information is recorded in the
regulatory return.
- Further clarification and guidance should be issued
regarding dependent agent PEs.
- The KERT model focuses on managing risk on a day-to-day
basis. Such a model may not be suitable for a long-lived insurance
business in which risk cannot be so micro-managed.
- The creditworthiness of a PE should not be the same as
the enterprise as a whole because no two PEs are ever likely to have identical
risk portfolios and/or the same level of local capital (as required by
local regulations).
- The method of allocating capital to a PE should result
in a total allocation no greater than the capital of the entire
enterprise.
The OECD is in receipt of those and other comments, and a decision is pending
whether it would be useful to have a face-to-face discussion with industry
commentators. It should also be noted that the OECD is still processing a
substantial number of comments regarding Part I of the draft, which may have an
impact upon the finalization of Part IV.
Proposed Regulations on Cost-Sharing
Citations: For REG-144615-02, see Doc 2005-17678 [PDF]
or 2005 WTD 162-8 .
Overview: Treasury and the IRS on August 22, 2005, issued
long-awaited proposed regulations governing the application of section 482 to
intercompany cost-sharing agreements (CSAs). The proposed regulations, over 200
pages long, adopt sweeping changes to the conceptual framework for determining
so-called buy-ins, now referred to as preliminary or contemporaneous
transactions (PCTs). The proposed regulations also provide new guidance on the
application of periodic adjustments to buy-ins.
Discussion: In the new framework, taxpayers are now required to
base their valuations of PCTs on a hypothetically constructed "Reference
Transaction," in which the contributor grants perpetual and exclusive
territorial rights in the covered intangibles under a CSA to the CSA
participants. Several new valuation methods are specified, and the IRS is given
broader powers to impose periodic adjustments when results are considered to
diverge from predicted outcomes.
In what amounts to a philosophical shift, the
proposed regulations adopt the theoretical "investor model" rather
than relying on the empirical arm's-length standard. The proposed rules are
very prescriptive and, unlike the current regulations, generally require
taxpayers to adopt inflexible prescribed contractual and economic arrangements
to which taxpayers can make only limited ex post adjustments. To that
end, the proposed regulations impose four administrative requirements: (1)
contractual requirements; (2) documentation requirements; (3) accounting
requirements; and (4) reporting requirements. The administrative requirements
appear to be fundamentally designed to enforce the emphasis in the proposed
rules on CSAs being a reflection of a deal that has been struck between the
participants at a particular point in time, thereby limiting taxpayers' ability
to take a "wait and see" approach to CSAs.
Excise Taxes
As a result of Rev. Proc. 2003-78, which provides guidance to foreign insurance
companies for obtaining a closing agreement with the IRS ensuring exemption
from the federal excise tax imposed on premiums paid to foreign insurers, we
have seen far less public activity in this area. Private letter rulings are no
longer required, so the IRS no longer makes public closing agreements reached
with individual insureds.
However, despite Rev. Proc. 2003-78, there
was some confusion within the transatlantic insurance market regarding the
applicability of the closing agreement process in Rev. Proc. 2003-78 to
premiums paid to insurance companies resident in the
Section V Tax Treaties
The following developments in the treaty arena may affect insurance company
business and tax operations.
Citations: For IRS news release IR-2005-15, see Doc 2005-2796 [PDF]
or 2005 WTD 28-14 .
Overview: The
Discussion: The competent authorities of the
Citations: For IRS news release IR-2005-107, see Doc 2005-19183 [PDF]
or 2005 WTD 182-24 .
Overview: The competent authorities of the
Discussion: The competent authorities of the
Citations: For the Protocol Amending the Convention Between the
Government of the United States of America and the Government of Sweden for the
Avoidance of Double Taxation and the Prevention of Fiscal Evasion With Respect
to Taxes on Income, see Doc 2005-20178 [PDF]
or 2005 WTD 191-13 .
Overview: The competent authorities of the
Discussion: The competent authorities of the United States and
Sweden signed a protocol that provides for a zero rate of withholding on
dividends paid between parties of either contracting state, provided that the
beneficial owner is a company that is a resident of the other contracting state
that has owned, directly or indirectly, 80 percent or more of the voting shares
of the payer for a 12-month period ending on the date on which the entitlement
to the dividends is determined. If the payee is a publicly traded company, then
that payment may qualify for a zero rate of withholding provided that the
company's principal class of shares is either primarily traded on a recognized
stock exchange in the contracting state where the company is resident, or the
company's primary place of management and control is in that state. If the
payee owns at least 10 percent of the voting shares of the payer, then a 5
percent withholding rate applies. In all other cases, a 15 percent withholding
rate applies. Also, the competent authorities extended the limitation on
benefits provision to include some fiscally transparent entities under the laws
of either contracting state.
Citations: For the Memorandum of Understanding Between the Competent
Authorities of Canada and the United States Regarding the Mutual Agreement
Procedure, see Doc 2005-12243 [PDF]
or 2005 WTD 107-13 .
Overview: The competent authorities of the
Discussion: Under the MOU, the competent authorities also agreed
to follow the OECD's transfer pricing guidelines for multinational enterprises
and tax administrations to resolve substantive issues in cases involving
transactions between related parties. The competent authorities highlighted the
following issues that have, or may, result in a failure to resolve taxation or
taxation adverse to the Canada-U.S. treaty: (1) an arm's-length compensation
for consignment manufacturing operations; (2) whether a business is integrated
to the point when a profit-split method is appropriate; (3) the presence of
nonroutine intangible assets and the determination of an arm's-length value;
(4) whether a PE exists and the amount of profit attributable to the PE; (5)
whether a transaction is properly characterized as a service versus a license
of intangibles; (6) the amount of compensation, if any, on either the closer of
relocation of a business or the allocation of associated closing costs; and (7)
appropriate relief when source and residence country's laws are in conflict.
Conclusion
More than any other American sport, baseball creates the
magnetic, addictive illusion that it can almost be understood.
-- Thomas Boswell, in Inside
Sports
Another year of tax legislation, Treasury and IRS guidance, and Treasury treaty
negotiation has come and gone. Your authors have done their best to provide you
the highlights and lowlights alike of the year just past and to provide a hint
of what we expect in the coming year.
Baseball is a singularly arbitrary sport: Why
three strikes and you're out? Why not four strikes? You get four balls!
Similarly, sometimes the IRS and Treasury can be arbitrary and code mystifying;
but, like baseball fans, we insurance tax practitioners keep lit the eternal
flame of hope that more than any other area of tax law, insurance creates the
magnetic, addictive illusion that it can almost be understood. Like baseball
fans, we keep coming back, sure that this year, it will all become clear.
Tax Analysts Information
Code Section: Section 801 -- Life Insurance Company Tax; Section 831 --
Tax on Other Insurance Companies
Geographic Identifier:
Subject Area: Insurance company taxation
Industry Group: Insurance
Author: Safranek, Richard; Gillmarten, Mary; Cohen, Jim
Institutional Author: Deloitte Tax LLP
Tax Analysts Document Number: Doc 2006-538 [PDF]
Tax Analysts Electronic Citation: 2006 TNT 46-47
2005 Insurance Tax Review
Year in Review Appendix
by J.
Christine Harris
The following chart, prepared by Tax Analysts, includes a listing of
insurance tax pronouncements reported in The Insurance Tax Review during 2005.
Date: Mar. 9, 2006
2005 Insurance Tax Review Year in Review Appendix
Tax Analysts'
Code
Sec. Headline
Case/Ruling
1(h)
IRS Addresses LTR
200543002
Effect of Repeal
(July 22, 2005)
of FPHC Provisions
on Foreign LLC's
Distributions
61
Dependent Group Life TAM 200502040
(Jan. 14, 2005)
Insurance Is Taxable
to Employees
61
Class-Action Damages ILM 200504001
(Oct. 12, 2004)
Not Income to Extent
of Insurance Policy
Basis
72
S. 3029 Would Provide Retirement Security
for Life
Exclusion for Lifetime Act of 2004 (S.
3029 Dec. 7, 2004)
Annuity Payments
72
Service Describes Tax LTR 200537043 (June
23, 2005)
Treatment of Annuity
Contracts
101
Insurer Granted Waiver LTR 200503021 (Oct. 6,
2004)
for Life Insurance
Contracts
101
Policy Transfers LTR
2005-14001 (Dec. 13, 2004)
Disregarded for Tax
Purposes
101
Insurance Company LTR 200519025
(Jan. 27, 2005)
Granted Waiver for
Flawed Contracts
108
IRS Publishes Final T.D. 9192, 70 F.R.
14395-14411
Regs on DOI Income of
Consolidated Group
Member
115
Association's Income LTR 200504008
(Oct. 8, 2004)
Is Tax-Exempt
115
Association's Income LTR 200453009
(Sept. 24, 2004)
Is Tax-Exempt
162
Insurer's Participation TAM 200517030 (Jan. 31,
2005)
Fee in State Insurance
Fund Is Deductible
162
IRS Issues LMSB (May 20,
2005)
Directive on
Examination of
Business Acquisition
Transaction Costs
163
Company Didn't Have Tillman v.
Camelot Music Inc.,
Insurable Interest in No. 03-5172
(10th Cir. May 10, 2005)
Employee's Life Under
COLI Policy
163
Company Had Insurable Xcel Energy Inc. et
al. v.
Interest in Employees'
Lives
(D.
165
Coordinated Issue Paper (May 27, 2005)
Addresses Blue Cross
Blue Shield
Abandonment Loss
Deductions
165
No Losses for Claymont
Invs. Inc. et al. v.
Terminated
Comm'r, T.C. Memo. 2005-254
Relationships; Foreign (Oct. 31, 2005)
Exchange Deferral
Allowed
165(i)
CRS Analyzes RL33060
(Sept. 2, 2005)
Catastrophic Risk
Insurance Reserves
Deduction
264
Payments to VEBA to TAM 200511015
(Dec. 8, 2004)
Buy Insurance to Fund
Benefits Plan Are
Deductible
351
Foreign Corporations' LTR 200546005 (Aug. 5,
2005)
Stock Exchange to
Create New Parent
Is Tax-Free
355
IRS Corrects Final Ann. 2005-41,
2005-23 IRB 1212
Anti-Morris Trust
Regs
355
Mutual Insurer's LTR
200444406 (July 28, 2005)
Conversion to Stock
Company Is
Recapitalization
355
IRS Publishes Final T.D. 9198; 70 F.R.
20279-20291
Anti-Morris Trust Regs
355
Proposed Reorganization LTR 200532036 (Apr. 26,
2005)
Will Be Tax-Free
367(a)
IRS Publishes Proposed REG-127740-04; 70 F.R.
Regs on Cross-Border
30036-30040
Stock Transfers
368(a)
Acquisition of LTR 200546007
(July 8, 2005)
(1)(C)
Regulated Investment
Company Is Tax-Free
401
CRS Summarizes NESTEG RS22221 (Aug. 12, 2005)
Act of 2005
402
IRS Modifies Guidance Rev. Proc. 2005-25,
on Determining Fair 2005-17
IRB 962
Market Value of Some
Life Insurance
Contracts
402
Final Regs Crack Down T.D. 9223; 70 F.R.
50967-50972
on Abusive Life
Insurance Valuations
402
IRS Corrects Final T.D. 9223; 70
F.R. 57750
Regs on Life Insurance
Valuations
403
Investors Insist Petition
for Writ of Certiorari,
Failure to Disclose Jay
Henderson et ux. et al. v.
Lack of Tax Benefit American
Skandia Life Assurance Corp.
Was SEC Violation et
al., (
(No. 04-599)
408
Insurer Can't Challenge The Equitable Life
Assurance Soc'y
IRS's Levy on
of the
Annuitants' IRAs
(E.D.
408A
IRS Publishes Temporary T.D. 9220; 70 F.R. 48868-48871
Regs on Annuity
Contract Valuation in
Roth Conversions
408A
IRS Publishes Proposed REG-122857-05;
Regs on Annuity
70 F.R. 48924-48925
Contract Valuation in
Roth Conversions
409A
IRS Issues First in Notice 2005-1,
Series of Guidance on 2005-02 IRB 274
Deferred Compensation
Plan Rules
412
IRS Announces Weighted Notice 2005-9,
Average Interest Rates 2005-4 IRB 369
for January
412
IRS Announces Weighted Notice 2005-19,
Average Interest Rates 2005-9 IRB 634
for February
412
IRS Announces Weighted Notice 2005-26,
Average Interest Rates 2005-12 IRB 758
for March
412
IRS Announces Weighted Notice 2005-34,
Average Interest Rates 2005-17 IRB 960
for April
412
IRS Announces Weighted Notice 2005-39,
Average Interest Rates 2005-21 IRB
1087
for May
412
IRS Announces Weighted Notice 2005-46,
Average Interest Rates 2005-26 IRB
1372
for June
412
IRS Announces Weighted Notice 2005-54,
Average Interest Rates 2005-30 IRB 27
for July
412
IRS Announces Weighted Notice 2005-63,
Average Interest Rates 2005-35 IRB 448
for August
412
IRS Announces Weighted Notice 2005-67,
Average Interest Rates 2005-40 IRB 621
for September
412
IRS Announces Weighted Notice 2005-72,
Average Interest Rates 2005-47 IRB 976
for November
415
IRS Announces Pension IR-2005-120 (Oct. 14,
2005)
Plan Limitations for
2006
461(i)
Levin Introduces Tax The Tax Shelter and Tax Haven
Shelter and Tax Haven Reform Act of
2005 (S. 1565
Reform Act of 2005 Aug.
1, 2005)
501
Nussle Introduces Bill H.R. 3360 (July 20,
2005)
to Enhance Incentives
for Small Property and
Casualty Insurance
Companies
501(c)15
Organization's Exempt LTR 200545051 (Aug. 18, 2005)
Status as Insurance
Company Is Revoked
501(c)(15)
Organization's Failure LTR 200520035 (Dec. 3, 2004)
to Operate as Insurance
Company Causes Loss of
Exempt Status
501(c)(15)
Organization's Exempt LTR 200531019 (Nov. 18, 2004)
Status as Insurance
Company Is Revoked
501(c)(15)
Organization Denied LTR 200529008 (Apr. 28, 2005)
Exempt Status as
Insurance Company
501(c)(15)
S. 1553 Would Enhance S.1553 (July 29, 2005)
Incentives for
Property, Insurance
Companies
801
Reynolds Introduces H.R. 2251, COLI
Best Practices
COLI Best Practices Act of
2005 (May 1, 2005)
Act of 2005
807
IRS Supplements Rev.
Rul. 2005-29,
Interest Rate
2005-21 IRB 1080
Schedules for
Insurance Reserve
Computation
807
Insurer's Treatment ILM 200504030
(Oct. 15, 2004)
of Reserves Was
Unauthorized Change
in Accounting Method
809
IRS Releases
Notice 2005-18,
Differential Earnings 2005-9 IRB 634
Rates
809
IRS Releases Final Rev. Rul.
2005-58,
Differential Earnings 2005-36 IRB 465
Rate for 2004
816
Issuer's Vehicle LTR
200509005 (Nov. 17, 2004)
Service Contracts Are
Insurance
817
IRS Publishes Final T.D. 9185; 70 F.R.
9869-9872
Regs on Look-Through
for Nonregistered
Partnerships
817
Look-Through Rules LTR 200508002
(Sept. 30, 2004)
Apply to Subaccounts
in Diversification Test
817
IRS Issues Guidance on Rev. Rul. 2005-7,
Application of Look- 2005-6 IRB
464
Through Rule to RICs
817
H.R. 2180 Would Provide H.R. 2180 (May 5, 2005)
for Taxation of Puerto
Rico Life Insurance
Contracts
831
IRS Guidance Takes Aim Rev. Rul. 2005-40,
at Single Insurer
2005-27 IRB 4
Arrangements
831
Insurer Is Taxable as LTR 200538012 (June 20,
2005)
Insurance Company Other
Than a Life Insurance
Company
832
Additions to Premium Rev. Rul. 2005-33,
Stabilization Reserves 2005-23 IRB
1155
Are Return Premiums
832
H.R. 2668 Would Create H.R. 2668, Policyholder
Disaster
Disaster Protection Protection
Act of 2005 (May 26, 2005)
Funds
832
Vehicle Service LTR
200525004 (Nov. 9, 2004)
Contracts Qualify as
Insurance
832
Arrangement Not Shams TAM 200453012 (Dec. 29,
2004)
for Federal Income Tax
Purposes
832
IRS Publishes Salvage Rev. Proc. 2005-73,
Discount Factors for 2005-49
IRB 1090
2005
832
Insurer Not Entitled to American Family Mutual
Ins. Co.
Additional Adjustment v.
for Unearned Premiums (W.D. Wis.
(July 11, 2005))
833
Loss of License, TAM
200453014 (Aug. 13, 2004)
Changes in BCBS
833
BCBS Org's Stock TAM
200528026 (Mar. 16, 2005)
Issuance After Becoming
For-Profit Is Material
Change
835
Permission to Revoke LTR 200531001 (Apr.
27, 2005)
Election Granted to
Underwriter
842
IRS Releases Domestic Rev. Proc. 2005-64,
Asset/Liability
2005-36 IRB 492
Percentages for
Foreign Life
Insurance Companies
846
IRS Publishes Loss Rev. Proc.
2005-72,
Payment Patterns,
2005-49 IRB 1078
Discount Factors for
2005
847
IRS Error, Marginal ILM 200512017
(Feb. 18, 2005)
Rate Increase Result
in Restoration of SETPs
855
Mutual Fund's Late LTR 200516013
(Jan. 3, 2005)
Elections Treated as
Timely Filed
863
Foreign Companies' FAA 20051001F
(Jan. 28, 2005)
Income Allocation
Method Is Rejected
as Improper
864
IRS Publishes Final T.D. 9226, 70 F.R.
57509-57510
Regs on Stock Held
by Foreign Insurers
894
Financing Company Was LTR 200525002 (Mar. 25,
2005)
Not Engaged in Business
in Foreign Country
901
Foreign Tax Credit Guardian
Indus. Corp. et al.
Allowed for Tax Paid v.
by Disregarded Entity T (Fed. Cl.
Mar. 31, 2005)
901
IRS Limits Application Notice 2005-90,
of Foreign Tax Credit 2005-51 IRB
1163
Disallowance Rules
for Back-to-Back
Licensing Deals
901
Dual-Resident Company ILM 200532044 (May 5,
2005)
Must Request Competent
Authorities to Resolve
Its Country of
Residence
951
IRS Publishes Final T.D. 9222; 70 F.R.
49864-49869
Regs on CFC Earnings
Allocations
953
Insurer Granted LTR
200540009 (June 30, 2005)
Extension to Elect
Domestic Corporation
Status
954
McCrery Bill Would H.R. 1417
(Mar. 17, 2005)
Permanently Extend
Subpart F Exemption
965
IRS Issues Additional Notice 2005-38,
Guidance on Foreign 2005-22
IRB 1100
Earnings Repatriation
965
Treasury Fact Sheet (May 10, 2005)
Explains New Section
965 Guidance
965
IRS Issues Additional Notice 2005-64,
Guidance on Foreign 2005-36
IRB 471
Earnings Repatriation
1092
Contingent Debt Creates TAM 200509022 (Oct. 6, 2004)
Straddle Positions
1274A
IRS Announces OID Rev. Rul. 2005-76,
Inflation-Adjusted
2005-49 IRB 1072
Dollar Amounts for
2006
1502
IRS Issues Proposed REG-131128-04;
Regs on Intercompany 70 F.R.
8552-8556
Transaction Rules
1502
Distributing Can't TAM 200514019 (Apr.
5, 2005)
Amend to Take Spun
Sub's Carryback Net
Operating Loss
1502
Legal Advice Issued on FAA 20051801F (Mar. 30, 2005)
Application of Step
Transaction Doctrine
1503
IRS Corrects Proposed Ann. 2005-56,
Regs on Dual
2005-33 IRB 318
Consolidated Losses
6043A
IRS Publishes Final T.D. 9230;
Regs on Inversion 70
F.R. 72376-72381
Transaction Reporting
6511
Policyholder Claims Brief for the Appellee, Greene
v.
Should Have Priority
Over Tax Claims,
2005) (No. 05-5032)
Insurer Argues
6511
Tax Claim Against Greene v.
Insolvent Insurance (Fed. Cir.
Mar. 24, 2005)(No. 05-5032)
Company Had Priority
6664
IRS Corrects Temporary T.D. 9186;
Regs on Qualified 70
F.R. 36345
Amended Returns
6664
IRS Corrects Temporary Ann. 2005-53,<