SECTION 2. BACKGROUND

.01 Under §§ 816(a) and 831(c), an insurance company is any company more than half the business of which during the taxable year is the issuing of insurance or annuity contracts or the underwriting of risks underwritten by insurance companies. Although its name, charter powers, and subjection to State insurance laws are significant in determining the business which a company is authorized and intends to carry on, it is the character of the business actually done in the taxable year which determines whether a company is taxable as an insurance company under the Internal Revenue Code. Treas. Reg. § 1.801–3(a)(1).

industry-wide? (ii) What is the relevance of a tax or regulatory characterization of Proposed AG VACARVM and Proposed Life PBR as CARVM or CRVM, respectively, for purposes of applying section 807? Does such a characterization limit or broaden the discretion of the Treasury Department and IRS to provide guidance? (For example, if Proposed AG VACARVM and Proposed Life PBR are characterized as CARVM or CRVM, respectively, for regulatory purposes, could the Treasury Department and IRS nevertheless conclude they do not constitute CARVM or CRVM as Congress envisioned those terms to apply in 1984; alternatively, if Proposed AG VACARVM and Proposed Life PBR were not characterized as CARVM or CRVM, respectively, for purposes of applying section 807, could Proposed AG VACARVM and Proposed Life PBR nonetheless be required as the appropriate tax reserve method under the authority of section 807(d)(3)(A)(iv)); (iii) what criteria or other parameters would limit the selection of scenarios taken into account in determining the CTE amount (under Proposed AG VACARVM) or the stochastic reserve (under Proposed Life PBR); and (iv) In the case of Proposed Life PBR, what is the appropriate treatment of company-specific expense, lapse and margin assumptions for purposes of applying section 807? For example, are such assumptions permitted to be taken into account at all, either for purposes of the federally-prescribed reserve or the statutory reserve cap? If so, what limits apply to a taxpayer’s discretion with respect to those assumptions, and would a 10-year spread result under section 807(f) from the unlocking of those assumptions in later years?

.02 The Treasury Department and IRS are concerned about the use of a gross premium valuation methodology in the case of Proposed Life PBR, because such a methodology generally is not permitted under existing authorities. See, e.g., Mary- land Casualty Co. v. U.S., 251 U.S. 342 (1920), § 1.801–4(e), Rev. Rul. 77–451, 1977–2 C.B. 224. In general, a gross premium valuation takes into account the present value of all cash flows under the contract, including future death benefits, future surrender benefits, premiums, future profits, and future expenses. Thus, a

reserve determined using a gross premium valuation may include amounts, such as future expenses and margins, that are not now included in life insurance reserves for federal income tax purposes. How will a gross premium valuation under Proposed Life PBR differ from current valuation methods? Is the discretion to permit a gross premium valuation methodology for federal income tax purposes limited by sections 461 and 811, or by the deficiency reserve rule of section 807(d)(3)(C)? Are similar issues raised in the case of Proposed AG VACARVM? If not, are expense, policy owner behavior, surrender rates, and other parameters nonetheless included in the valuation of reserves under Proposed AG VACARVM?

3. The Treasury Department and the IRS are concerned that, except in the case of the standard scenario under Proposed AG VACARVM, the proposed methods contemplate revising certain parameters and assumptions on an annual basis. How is this procedure consistent with the existing statutory framework that contemplates that such parameters and assumptions are determined as of the date a contract is issued, and, in general, are not adjusted thereafter? Would such annual changes in assumptions constitute a change of basis subject to a 10-year spread under section 807(f)? .04 Comments should be submitted in writing on or before May 5, 2008, and should contain a reference to this Notice 2008–18. Comments may be submitted to CC:PA:LPD:PR (Notice 2008–18), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Alternatively comments may be submitted electronically via the following e-mail address: Notice.Comments@irscounsel.treas.gov . Please include “Notice 2008–18” in the subject line of any electronic communications.

.05 Submissions may be hand-delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (Notice 2008–18), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC 20224. All comments will be available for public inspection and copying.

2008–5 I.R.B. 366 February 4, 2008

or regarding the treatment of the Protected Cell Company of which it is a part.

.04 Effective date . The proposed guidance would be effective for the first taxable year beginning more than 12 months after the date the guidance is published in final form.