IRS GLAM disallows Section 952c election

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November 2019

Overview

The IRS Office of Chief Counsel on October 4 issued AM 2019-001, a Generic Legal Advice Memorandum (GLAM) regarding the availability of the Section 952(c)(1)(B)(vii)(I) election (the Section 952(c) election) to treat certain insurance income as subpart F income. The issuance of the GLAM may generate controversy between the IRS and those companies that have made (or are contemplating making) the Section 952(c) election.

The takeaway

A GLAM is issued by executives in the IRS Office of Chief Counsel to national program executives and managers to assist them in administering their programs by providing legal opinions on specific matters, such as industry-wide issues. Like a private letter ruling or technical advice memorandum, a GLAM is not precedential, and is not accorded any deference by the courts. Instead, a GLAM is evidence of the IRS view on a particular issue, and carries weight according to how persuasive its analysis is. Accordingly, companies that made (or are considering making) the Section 952(c) election should consider the strength of the analysis in the GLAM.  

Observation: This particular GLAM may be viewed as controversial by some companies because it assumes that after the AFE was made permanent the election became surplusage – i.e., that it had no other purpose. However, under current law, even if all of the insurance income of a CFC is considered exempt insurance income under Section 953(e), it may have investment income that is considered FPHCI to the extent it is not exempt under Section 954(i). Therefore, making the election would allow underwriting losses to offset such subpart F FPHCI. In such a scenario, the election arguably would not be surplusage.

Observation: The broken cross-reference to Section 953(a)(1) in Section 952 is not unique. When Section 953 was amended, it created similar broken cross-references in Sections 957(b), 953(c)(3)(B), 956(c)(2)(E), and 904(d)(2)(ii)(III). The Appropriations Act of 2018 fixed two of these cross-references -- in Section 957(b) and in Section 956(c)(2)(E). There is no legislative history explaining why only two of the five cross-references to Section 953(a)(1) were fixed. A possible conclusion is that these were considered technical corrections, but three out of the five errors were overlooked. Such a conclusion may seem reasonable given there does not appear to be any Congressional intent behind the unchanged cross-references to Section 953(a)(1) in Section 952, such as intent to repeal the election (or, for that matter, similar intent with respect to the relevant portions of Sections 953 and 954 that have the same cross-reference to Section 953(a)(1)). 

Observation: While the GLAM argues that the statutory language of Section 952(c) related to the election is unambiguous, the cross-reference to Section 953(a)(1) could be viewed as giving rise to ambiguity. There is a significant body of law on statutory construction that limits the concept of implied repeal, a doctrine on which the GLAM relies. In fact, repeals by implication are not favored by the courts. Generally, the courts would only consider a statutory provision to be repealed under this doctrine if an intent to repeal is ‘clear and manifest,’ which does not seem to be the case here (Rodriguez v. United States, 480 U.S. 522, 524, (1987)).

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Julie Goosman

Insurance Tax Leader, PwC US

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