Part I. Rulings — Internal Revenue Bulletin 2008-28

Section 108.—Income From Discharge of Indebtedness

Law school loan repayment assis- tance programs. This ruling clarifies that a law school loan made under a Loan Repayment Assistance Program (LRAP) generally satisfies the requirements of section 108(f)(1) of the Code, and is a “student loan” within the meaning of section 108(f)(2).

Rev. Rul. 2008–34

ISSUE

Do the terms of a loan made under the Loan Repayment Assistance Program (LRAP) described below satisfy the requirements of § 108(f)(1) of the Internal Revenue Code, and is the LRAP loan a “student loan” within the meaning of § 108(f)(2)?

FACTS

A, an individual, attended law school and has student loan debt. Neither the loans nor the underlying loan documents addressed whether any of the indebtedness would be forgiven if A worked in a particular profession for a specified period of time.

A ’s law school offers a Loan Repayment Assistance Program (LRAP) to help reduce the student loan debt of graduates who engage in public service. The LRAP is designed to encourage graduates to enter into public service in occupations or areas with unmet needs. Under the LRAP, the law school makes loans that refinance the graduates’ original student loan(s). To qualify for an LRAP loan, a graduate must work in a law-related public service position for, or under the direction of, a tax-exempt charitable organization or a governmental unit, including a position in (1) a public interest or community service organization, (2) a legal aid office or clinic, (3) a prosecutor’s office, (4) a public defender’s office, or (5) a state, local, or federal government office. The amount of the

LRAP loan is based on the graduate’s outstanding student loan debt and annual income. After the graduate works for the required period in a qualifying position, the law school will forgive all or part of the graduate’s LRAP loan.

After A graduates from law school, A signs an LRAP promissory note and accepts the terms and conditions of the law school’s LRAP loan. The LRAP loan provides that the indebtedness will be forgiven if A works for a certain minimum period of time in a qualifying law-related public service position.

LAW

Section 61(a) provides that gross income means all income from whatever source derived. Section 61(a)(12) provides that gross income includes income from the discharge of indebtedness.

Section 108(f)(1) provides that in the case of an individual, gross income does not include any amount which (but for § 108(f)) would be includible in gross income by reason of the discharge (in whole or in part) of any student loan if such discharge was pursuant to a provision of such loan under which all or part of the indebtedness of the individual would be discharged if the individual worked for a certain period of time in certain professions for any of a broad class of employers.

Section 108(f)(2) defines “student loan” for purposes of § 108(f) to include any loan to an individual to assist the individual in attending an educational organization described in § 170(b)(1)(A)(ii) made by (A) the United States, or an instrumentality or agency thereof, (B) a State, territory, or possession of the United States, or the District of Columbia, or any political subdivision thereof, or (C) certain tax-exempt public benefit corporations. The Taxpayer Relief Act of 1997 (1997 Act), Pub. L. 105–34, added § 108(f)(2)(D), which amended and expanded the definition of “student loan” to include loans made by the educational organizations themselves if the loans were made either:

(i) pursuant to an agreement with any entity described in subparagraph (A), (B), or (C) under which the funds from which the loan was made were provided to such educational organization, or

(ii) pursuant to a program of such educational organization which is designed to encourage its students to serve in occupations with unmet needs or in areas with unmet needs and under which the services provided by the students (or former students) are for or under the direction of a governmental unit or an organization described in section 501(c)(3) and exempt from tax under section 501(a).

The 1997 Act further amended § 108(f)(2) to provide that the term “student loan” includes any loan made by an educational organization described in section 170(b)(1)(A)(ii) or by an organization exempt from tax under section 501(a) “to refinance a loan to an individual to assist the individual in attending any such educational organization but only if the refinancing loan is pursuant to a program of the refinancing organization which is designed as described in subparagraph (D)(ii).” ¹ The legislative history to the 1997 Act explains that, in the case of loans made or refinanced by educational organizations (and loans refinanced by certain tax-exempt organizations), the student’s work must fulfill a “public service requirement.” See H.R. Conf. Rep. No. 105–220, at 375–76 (1997).

ANALYSIS

The terms of A ’s LRAP loan provide for loan forgiveness only if A works for a certain minimum period of time in a qualifying law-related public service position. This requirement is consistent with the requirement in §108(f)(1) to work in certain professions for a certain period of time.

Additionally, the law school’s LRAP is designed to encourage its students to engage in public service in occupations or areas with unmet needs. All of the positions listed in the LRAP are for, or under the direction of, a governmental unit or a tax-exempt charitable organization. Fur

1 A technical correction clarified that gross income does not include amounts from the forgiveness of loans made by educational organizations and certain tax-exempt organizations to refinance any existing student loan (and not just loans made by educational organizations). See Pub. L. 105–206, § 6004(f)(1), and H. R. Rep. No. 356, 105th Cong., 1st Sess. 10 (1997).

2008–28 I.R.B. 76 July 14, 2008

tions, or rules of that particular State. As in Situation 1, however, IC actually holds the highest aggregate minimum amount of reserve required for its insurance contracts under the rules of any State in which IC does business.

On its 2007 annual statement filed with and accepted by the insurance regulatory authorities in State X, which is the State in which IC is chartered, IC reported $402,540,000 of end-of-year aggregate reserves with regard to items described in § 807(c). This amount ($402,540,000) was the lowest amount of reserves reported by IC on the annual statement filed with and accepted by any State, and would not have satisfied the minimum legal reserve requirements of one or more States in which IC does business. The $402,540,000 aggregate reserves included $9,942 of life insurance reserves with respect to Contract A .

On its 2007 annual statement filed with and accepted by the insurance regulatory authorities in State Y, IC reported $405,955,000 of end-of-year aggregate reserves with regard to items described in § 807(c). This amount ($405,955,000) was the lowest amount of reserves that satisfied minimum requirements of State Y, which has the highest minimum reserve requirements of any of the States in which IC does business. The $405,955,000 aggregate reserves included $9,992 of life insurance reserves with respect to Contract A .

LAW AND ANALYSIS

In general, a life insurance company must pay tax on its life insurance company taxable income, which is defined in § 801(b) to mean life insurance gross income less life insurance deductions. Life insurance gross income is defined in § 803(a) to mean the sum of (i) premiums, (ii) net decreases in certain reserves under § 807(a), and (iii) other amounts generally included by a taxpayer in gross income. Section 805(a)(2) authorizes a deduction for the net increase in certain reserves under § 807(b).

For purposes of determining a life insurance company’s income or deduction from decreases or increases in life insurance reserves, § 807(d)(1) provides that the amount of the life insurance reserves for any contract is the greater of— (i) the

ther, the LRAP loan was made to refinance A ’s original student loans. Therefore, the LRAP loan meets the definition of a “student loan” in § 108(f)(2).

HOLDING

The terms of the loan made under the LRAP satisfy the requirements of § 108(f)(1), and the LRAP loan is a “student loan” within the meaning of § 108(f)(2).

DRAFTING INFORMATION

The principal author of this revenue ruling is Craig R. Wojay of the Office of Associate Chief Counsel (Income Tax & Accounting). For further information regarding this revenue ruling, contact Craig R. Wojay at (202) 622–4920 (not a toll-free call).

Section 807.—Rules for Certain Reserves

Life insurance company, statutory reserves. This ruling provides that, if a life insurance company does business in several states with different minimum reserve requirements, the amount of the company’s statutory reserves is the highest aggregate reserve amount set forth on an annual statement pursuant to the minimum reserving requirements of any state in which the company does business.

Rev. Rul. 2008–37

ISSUE(S)

What is the amount of a life insurance company’s statutory reserves within the meaning of § 807(d)(6) if the company does business in several States with different minimum reserve requirements?

FACTS

Situation 1

IC is a life insurance company as defined in § 816(a) of the Internal Revenue Code, and is the issuer of Contract A, which is a “life insurance contract” as defined in § 7702.

IC does business in forty-five States. IC is subject to regulation under the insurance

laws of each State in which it does business. Each State has express statutory provisions, or rules and regulations promulgated in the exercise of a power conferred by statute, for determining the minimum amount of the reserves that IC is required to set aside to mature or liquidate policyholder or beneficiary claims arising from its insurance and annuity contracts.

To avoid State-by-State variations, IC actually holds and reports to each State insurance regulatory authority on its annual statement approved by the National Association of Insurance Commissioners (NAIC) the highest aggregate minimum amount of reserves required for its insurance and annuity contracts under the statutes, regulations, or rules of any State in which IC transacts business. The State insurance regulatory authorities in each State accept the amount of reserves reported on the annual statement as the amount IC has set aside to mature or liquidate policyholder or beneficiary claims arising from its insurance and annuity contracts.

On its 2007 annual statement, IC reported end-of-year aggregate reserves of $405,955,000 with regard to items described in § 807(c). The $405,955,000 aggregate reserves included $9,992 of life insurance reserves with respect to Contract A .

Had IC reported on its 2007 annual statement the minimum aggregate reserves required under the statutes, regulations or rules of either the State in which IC was chartered, or the State in which Contract A was issued or delivered, IC would have reported only $402,540,000 of end-of-year aggregate reserves with regard to the items described in § 807(c). The $402,540,000 aggregate reserves would have included $9,942 of life insurance reserves with respect to Contract A . The $402,540,000 aggregate reserve amount would not have satisfied the minimum legal reserve requirements of one or more States in which IC does business.

Situation 2

The facts are the same as in Situation 1, except that on its annual statement IC reported to each State insurance regulatory authority the minimum amount of reserves required for its insurance and annuity contracts under the statutes, regula

July 14, 2008 77 2008–28 I.R.B.

HOLDING(S)

In both Situation 1 and Situation 2, the amount of IC ’s 2007 end-of-year statutory reserves under § 807(d)(6) is $405,955,000 - the highest aggregate reserve amount for § 807(c) items actually held and set forth on the annual statement pursuant to the minimum reserve requirements of any State in which IC does business.

IC ’s $405,955,000 of statutory reserves under § 807(d)(6) includes $9,992 of life insurance reserves with respect to Contract A . Accordingly, $9,992 is the amount taken into account with respect to Contract A in applying the statutory reserves limitation contained in the flush language of § 807(d)(1).

DRAFTING INFORMATION

The principal authors of this revenue ruling are Linda Boyd and Stephen Hooe of the Office of Associate Chief Counsel (Financial Institutions & Products). For further information regarding this revenue ruling, contact Linda Boyd at (202) 622–3970 or Stephen Hooe at (202) 622–3900 (not a toll-free call).

Section 816.—Life Insurance Company Defined

This revenue ruling provides that, if a life insurance company does business in several States with different minimum reserve requirements, the amount of the company’s statutory reserves is the highest aggregate reserve amount set forth on an annual statement pursuant to the minimum reserving requirements of any State in which the company does business. See Rev. Rul. 2008-37, page 77.

contract’s net surrender value, or (ii) the contract’s tax reserve determined under § 807(d)(2). However, the life insurance reserves for a contract cannot exceed the amount that would be taken into account with respect to the contract in determining “statutory reserves”, as defined in § 807(d)(6). Accordingly, the statutory reserves with respect to a contract operate as a limit on the amount of the contract’s life insurance reserves that might otherwise be taken into account in determining a life insurance company’s taxable income. Section 807(d)(1) (flush language).

Section 807(d)(6) defines “statutory reserves” to mean “the aggregate amount set forth in the annual statement with respect to items described in § 807(c).” See § 807(c)(1) (relating to “life insurance reserves” as defined in § 816(b)). Statutory reserves do not include any reserve attributable to deferred and uncollected premium if the establishment of such reserve is not permitted under § 811(c).

In Situation 1, IC held and reported $405,955,000 of reserves with regard to items described in § 807(c) on its 2007 annual statement filed in each State in which IC does business. This amount was the highest aggregate minimum amount of reserves required under the statutes, regulations, or rules of any State in which IC does business. That the minimum requirements of some States in which IC does business would have permitted IC to hold and report a lower aggregate minimum amount of reserves has no effect on the determination of IC ’s statutory reserves under §807(d)(6). The $405,955,000 of reserves was required to be held, was actually held, and was set forth in IC ’s annual statement, which was filed with and accepted by the insurance regulatory authority of each State in which IC does business. The amount of IC ’s “statutory re

serves” as defined in § 807(d)(6), therefore, is $405,955,000.

In Situation 2, IC held and reported $405,955,000 of reserves with regard to items described in § 807(c) on its 2007 annual statement filed with and accepted by the insurance regulatory authority in State Y . This amount was the minimum amount of reserves required under the statutes, regulations, or rules of State Y . That $405,955,000 was larger than the amount of reserves that would have been required under the rules of State X has no effect on the determination of IC ’s statutory reserves under § 807(d)(6). The $405,955,000 of reserves was required to be held, was actually held, and was set forth in IC ’s annual statement, which was filed with and accepted by the insurance regulatory authority in State Y . The amount of IC ’s “statutory reserves” as defined in § 807(d)(6), therefore, is $405,955,000. Cf . § 1.801–5(a) (permitting an insurance company to determine “total reserves” (as defined in § 816(c)) using the highest aggregate reserve required by any State or Territory or the District of Columbia in which the company transacts business, provided the company actually holds the reserve).

2008–28 I.R.B. 78 July 14, 2008