Life insurance company taxable income (LICTI) - Income/expenses included with subsidiary’s check-the-box election 

March 24: The IRS publicly released a private letter ruling* concluding that the passive investment activities of the taxpayer’s subsidiary are properly treated as an insurance business following the subsidiary’s check-the-box election and, therefore, that the subsidiary’s income and expenses are to be included in computing tentative life insurance company taxable income (LICTI) and not limited by sections 806(b)(3)(C) or 1503(c).

Read text of the letter ruling PLR 201412001 [PDF 52 KB]

*Private letter rulings are taxpayer-specific rulings furnished by the IRS National Office in response to requests made by taxpayers and can only be relied upon by the taxpayer to whom issued. It is important to note that, pursuant to section 6110(k)(3), such items cannot be used or cited as precedent. Nonetheless, such rulings can provide useful information about how the IRS may view certain issues.


An insurance holding company—through direct and indirect subsidiaries—is engaged in a variety of insurance, financial services, and other investment-related businesses.

The holding company is the parent company of a stock holding company (Parent) that, in turn, owns all of the stock of a life insurance company (Company). The business operations of the life insurance company consist of life insurance products, annuities, mutual funds, pension, and institutional products.

The stock holding company (Parent) acquired a subsidiary, and on receiving regulatory approval, the holding company directed the stock holding company (Parent) to contribute the stock of the subsidiary to the life insurance company (Company). This restructuring was done for non-tax business reasons primarily related to disruptions in the credit markets and the negative impact on the insurance company’s ability to borrow and meet regulatory capital requirements following the impact of the worldwide financial crisis.

The insurance company owns all of the stock of the subsidiary, and the subsidiary invests in passive investment activities and also performs consulting activities with respect to similar passive investment activities.

The holding company filed a life-nonlife consolidated federal income tax return with its eligible members on a calendar year basis pursuant to a section 1504(c)(2)(A) election. Both the insurance company and its subsidiary are eligible members included in this life-nonlife consolidated return. The holding company treated:

  • The insurance company as part of the life insurance subgroup
  • The subsidiary as part of the nonlife subgroup

The transaction that is being proposed is for the subsidiary to segregate the consulting activities in a separate company owned by holding company or one of its non-life subsidiaries. The holding company will continue to treat the consulting activity as part of the non-life subgroup.

After segregation, the subsidiary will make an election on Form 8832 to be disregarded as a separate entity (i.e., a check-the-box election). Following the check-the-box election, the insurance company, for federal income tax purposes, will hold the assets relating to the passive investment activities and will continue such investment activities to support the life insurance and annuity contracts it issues.

IRS ruling

The IRS ruling concludes that the subsidiary’s passive investment activities are properly treated as an insurance business following the subsidiary’s check-the-box election; therefore, the subsidiary’s income and expenses are to be included in computing tentative life insurance company taxable income and not limited by sections 806(b)(3)(c) or 1503(c).

KPMG observation

The question of what constitutes an insurance business vs. a noninsurance business affects the small life company qualification and loss-use computations. Here, a check-the-box election brought the assets and activities of the non-insurance entity into the computation as insurance business.

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