Read today’s notice [PDF 12 KB]
Life insurance deductions include general deductions, including the net increase in certain reserves under section 807(b) and life insurance reserves.
To determine a life insurance company’s decreases or increases in life insurance reserves, the amount of the life insurance reserve for any contract is the greater of
- The contract's net surrender value, or
- The contract's reserve determined under the federally prescribed reserve
Importantly, the flush language of section 807(d)(1) provides that in no event may the reserve for a contract exceed the amount that would be taken into account with respect to the contract in determining statutory reserves as defined in section 807(d)(6)—i.e., statutory reserves provide a ceiling on tax reserves for life insurance contracts.
The term “statutory reserves” is defined in section 807(d)(6) to mean the aggregate amount set forth in the annual statement with respect to items described in section 807(c). Accordingly, it may seem clear that the statutory cap would equal statutory reserves.
After considering the statutory cap issue for a number of years, and examining the legislative history of section 807, the IRS concluded that because the term “statutory reserves” for purposes of the statutory reserve cap was defined by cross-reference to a former section (former section 809(b)(4)(B)(i)), which was the predecessor to section 807(d)(6) and defined statutory reserves identically to section 807(d)(6), the statutory reserve cap includes deficiency reserves. The conclusion is consistent with the unambiguous language of the statute and the legislative history.
While this issue might appear to be relatively uncontroversial, IRS agents around the country had been proposing adjustments based upon the position that deficiency reserves are not to be included in the statutory cap. This guidance is expected to clarify the issue and eliminate such challenges.
The notice does not address other statutory capping issues, such as whether the Conditional Tail Expectation (CTE) reserve computed under Actuarial Guideline 43 is to be included in the statutory cap. One would expect that in light of this guidance, it would be difficult to rationalize excluding the CTE from the statutory cap.
For more information, contact a KPMG tax professional:
(312) 665 5267