SECTION 4. REQUEST FOR

COMMENTS

.01 The Treasury Department and IRS request comments on the issues raised in this notice, and on any other issues that will need to be addressed if Proposed AG VACARVM or Proposed Life PBR are adopted by one or more states and Congress has not amended sections 807, 816 and 7702. In addition, comments are requested regarding the following issues: (i) What is the status of any efforts to model the effects of Proposed AG VACARVM or Proposed Life PBR, either on a company-by-company basis, a product-by-product basis, or

or deterministic reserve determined under Proposed AG VACARVM or Proposed Life PBR would more closely resemble the methodology in effect when Congress enacted section 807 in 1984 than would the CTE amount or stochastic reserve. For example, a reserve determined under the standard scenario or under the deterministic reserve methodology (i) would be determined on a contract-by-contract basis; (ii) would be based upon an expected value, rather than the worst case tail of a distribution of outcomes; and (iii) in the case of Proposed AG VACARVM, would be determined based on standard, industry-wide interest rate and mortality factors, rather than on prudent estimates that vary from company to company. Both Proposed AG VACARVM and Proposed Life PBR would provide a methodology for apportioning stochastically-determined reserve amounts among individual contracts. The Treasury Department and IRS, however, are concerned more fundamentally that because the CTE amount (under Proposed AG VACARVM) or stochastic reserve (under Proposed Life PBR) would not represent an expected value of a company’s obligations with respect to the underlying contracts, some or all of these amounts are nondeductible “solvency” or “contingency” reserves. If this concern is not satisfied, the Treasury Department and IRS may (i) permit a contract-by-contract apportionment of a stochastically-determined reserve, but with appropriate adjustments so that reserve reflects an expected value of the company’s obligations (for example, by adjusting the CTE from 65 to 0, assuming that the chosen scenarios have a uniform probability distribution and the scenarios not chosen have a zero probability); (ii) conclude that the methodology of Proposed AG VACARVM or Proposed Life PBR is so different from that which was in effect when Congress enacted section 807 in 1984 that taxpayers must continue to apply section 807 as if Proposed AG VACARVM or Proposed Life PBR had not been adopted; or (iii) interpret the statutory cap under section 807(d)(1) and CARVM/CRVM under section 807(d)(2) to encompass only the standard scenario amount (in the case of Proposed AG VACARVM) or the deterministic reserve (in the case of Proposed Life PBR).

.04 Prevailing state assumed interest rate . Section 807(d)(2)(B) requires that the tax reserve with respect to a contract be determined using the greater of the applicable Federal interest rate (AFR) or the prevailing State assumed rate. It has been suggested that in the case of Proposed Life PBR, the absence of a single, prescribed interest rate means that taxpayers should be allowed to determine tax reserves simply using the AFR. This approach, however, would nullify an important safeguard against situations where the AFR is an inappropriately low rate for determining a fair valuation of the tax reserve with respect to a contract. Rather than interpret the term “prevailing State assumed interest rate” to refer to a null set, the Treasury Department and IRS may require the use of a rate that is the greater of the AFR and some other objective rate or rates, such as (i) the rate implicit in the aggregate reserves that are determined stochastically; (ii) the rate used by the company in pricing the contract; or (iii) the rate used to determine the deterministic reserve.

.05 Prevailing mortality tables . The Treasury Department and IRS are concerned that determining an aggregate reserve stochastically and, after the fact, using the reserve so determined to “map” to one of a large number of NAIC-approved mortality tables would not satisfy the requirement of section 807(d)(2) that the prevailing commissioners’ standard tables be used for purposes of determining the tax reserve for a contract. If this concern is not satisfied, the Treasury Department and IRS may interpret the prevailing commissioners’ standard mortality tables under section 807(d)(5) to mean either (i) the 2001 CSO mortality tables; (ii) the mortality tables, if any, which served as the basis for pricing the particular contract; (iii) if more than one standard mortality table or option could apply to a particular contract, whichever table generally would yield the lowest reserve for the contract (see section 807(d)(5)(E)); or (iv) in the case of Proposed AG VACARVM, the mortality tables used for purposes of determining the standard scenario amount with respect to a contract,

.06 Transition rules: application to in-force contracts. If Proposed AG VACARVM or Proposed Life PBR is adopted, it is anticipated the new rules would apply for federal income

February 4, 2008 365 2008–5 I.R.B.

DRAFTING INFORMATION

The principal author of this notice is James A. Polfer of the Office of the Associate Chief Counsel (Financial Institutions & Products). For further information regarding this notice, contact Mr. Polfer at (202) 622–3970 (not a toll-free call).

Cell Captive Insurance Arrangements: Insurance Company Characterization and Certain Federal Tax Elections

Notice 2008–19