Life insurance reserves and election to recompute interest rates

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October 2019

Overview

The IRS on September 27 released a chief counsel advice memorandum (CCA 201939003) limiting the ability of a life insurer to make a pre-tax reform election to redetermine interest rates every five years for purposes of computing life insurance reserves. The CCA concludes that the election may not be made on an amended return and may not be made for contracts issued five or more years before the year of the election. 

The takeaway

In some respects, the CCA's conclusions are not unexpected. The issues addressed in the CCA are novel, and it is not surprising that the IRS would apply the same five-year limitation to a new election that it previously applied to both revocations.

Like a private letter ruling or technical advice memorandum, a CCA is not precedential and is not accorded any deference by a court. Instead, a CCA is evidence of the IRS view of an issue in a particular case, and carries weight according to how persuasive its analysis is. Accordingly, other companies that made the same election will need to consider the strength of the analysis in the CCA, which will not be a straightforward task. 

On the one hand, the IRS logic -- to the extent there is no interest rate risk to a taxpayer that makes the election on the eve of its repeal -- is easily grasped. On the other hand, the CCA leaves many questions unanswered:

  • Are there arguments under Section 807(d) that would suggest a different result?
  • How is the five-year interest rate election different from other changes in accounting method that the IRS processed under provisions repealed by the Act?
  • How distortive is the election if it results in a valuation of December 31, 2017 reserves based on current interest rates rather than interest rates that could be as many as three decades old?
  • Why does it matter that the election could result in different treatment of similarly situated companies -- is that not always the case when one company makes a tax election and another does not?

The CCA's observation that the taxpayer at issue may raise arguments under Rev. Rul. 94-74 ‘in the future’ suggest that the IRS may be aware of cases that could end up in Appeals or litigation. The issues in the CCA are complex, and the CCA is unlikely the last word.

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Julie Goosman

Insurance Tax Leader, PwC US

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