SECTION 3. DISCUSSION

The Treasury Department and IRS are mindful that if sections 807, 816 and 7702 are not amended by Congress in anticipation of Proposed AG VACARVM and Proposed Life PBR, taxpayers will need timely guidance on how to file their federal income tax returns once Proposed AG VACARVM and Proposed Life PBR have been adopted. The Treasury Department and IRS believe that the issues raised in this notice are most appropriately considered together to the extent they affect both projects. Although these projects remain in development, the following paragraphs set forth a preliminary, nonexclusive list of federal income tax issues that have been identified. The paragraphs also identify some of the approaches that the Treasury Department and IRS may consider to address these issues, subject to further study and public comment.

.01 Continued taxation of issuers under Part 1 of Subchapter L. Some commentators have asked whether reserves determined under Proposed AG VACARVM or Proposed Life PBR would constitute “life insurance reserves” within the meaning of section 816(b). The Treasury Department and IRS think it would be inappropriate to apply a literal application of the 50-percent reserve ratio test of section 816(a), such that all life insurance companies would be taxed under part 2 of subchapter L, rather than part 1 of that subchapter, due solely to changes in the methodology of determining such reserves for purposes of statutory accounting. To prevent this result, if Proposed AG VACARVM or Proposed Life

2008–5 I.R.B. 364 February 4, 2008

tax purposes only to contracts that are issued after the date of adoption and not to previously issued contracts that are in force on that date, regardless of the applicability of the new rules to previously issued contracts for regulatory purposes. The Treasury Department and IRS assume this approach would render moot any issue concerning the applicability of a 10-year spread under section 807(f) for adjustments resulting from the adoption of these proposed rules.

.07 Tax principles that override statu- tory accounting . Notwithstanding the deference accorded statutory accounting under subchapter L, the Treasury Department and IRS do not anticipate changes to existing guidance that requires that tax principles override statutory accounting principles in appropriate cases. See, e.g ., § 1.801–4(e) (enumerating reserves and liabilities that do not qualify as life insurance reserves for federal income tax purposes).

.08 Tax administration . As a matter of tax administration, the Treasury Department and IRS are concerned that the degree of discretion that would be vested in taxpayers to determine the CTE amount (under Proposed AG VACARVM) or the stochastic reserve (under Proposed Life PBR) could render those amounts difficult or impossible for examiners to audit. These concerns will weigh heavily in the resolution of the issues identified in sections 3.01 through 3.07, and may weigh in favor of recognizing only the standard scenario amount (in the case of Proposed AG VACARVM) or the deterministic reserve (in the case of Proposed Life PBR).