SECTION 2. BACKGROUND

.01 Section 801(a) imposes a tax on the life insurance company taxable income of a life insurance company. For purposes of computing life insurance company taxable income, §§ 803(a)(2) and 807(a) include in gross income a decrease over the taxable year in reserves described in § 807(c). Sections 805(a)(2) and 807(b) permit a deduction for an increase over the taxable year in such reserves.

.02 Section 831(a) imposes a tax on the taxable income of a nonlife insurance company. For purposes of computing taxable income of a nonlife insurance company, § 832(b)(4) provides that a decrease in unearned premiums over the taxable year increases premiums earned for that year and an increase in unearned premiums over the taxable year reduces premiums earned for that year. The flush language of § 832(b)(4) includes life insurance reserves, as determined under § 807, in unearned premiums for this purpose.

.03 Section 807(c) enumerates items that a life insurance company must account for on a reserve basis and take into account under § 807(a) and (b).

.04 Section 807(c)(1) includes life insurance reserves as an item that is taken into account under § 807(a) and (b). Under § 807(d), the amount of the life insurance reserves for any contract is generally determined based on the tax reserve method applicable to the contract, which is the Commissioners’ Reserve Valuation Method (CRVM), Commissioners’ Annuity Reserve Valuation Method (CARVM), or other method prescribed by the National Association of Insurance Commissioners (NAIC) that covers the contract as of the date the reserve is determined.

.05 Section 807(f) provides rules for life insurance companies to implement a change in the basis of computing items referred to in § 807(c). Rev. Rul. 65–240, 1965–2 C.B. 236, concludes that because a nonlife insurance company includes life insurance reserves in unearned premiums under § 832(b)(4), a nonlife insurance company likewise should account for a

change in basis of computing such reserves under § 810(d)(1) of the Code as it existed then, which was similar to § 807(f)(1) of the Code prior to its amendment by the TCJA.

.06 Prior to amendment by the TCJA, § 807(f)(1) provided that if the amount of a § 807(c) reserve at the close of a taxable year was determined on a basis that differed from the basis for such determination at the close of the preceding taxable year, then 1/10th of the difference between the amount determined at the close of the taxable year under the old basis and the amount determined at the close of the taxable year under the new basis, to the extent attributable to contracts issued before the taxable year, was taken into account for each of the succeeding ten taxable years as a deduction under § 805(a)(2) or as gross income under § 803(a)(2), as appropriate.

.07 Section 13513 of the TCJA amended § 807(f)(1) to treat the adjustments required under § 807(f) as adjustments under § 481 attributable to a change in method of accounting initiated by the taxpayer and made with the consent of the Secretary of the Treasury (Secretary). The § 481 adjustment takes into account only amounts attributable to contracts issued before the taxable year of change. The amendments made by section 13513 are effective for taxable years beginning after December 31, 2017.

.08 To avoid duplication or omission of amounts related to changes that arose under § 807(f) in a year beginning prior to January 1, 2018, a taxpayer must continue the ten-year spread under prior law by taking such amounts into account as described in § 807(f)(1) before its amendment by the TCJA. See § 807(d)(1)(D); § 13513(b) of the TCJA.

.09 Section 13517 of the TCJA, among other things, amends § 807(d) to provide a new method for computing the amount of life insurance reserves, effective for taxable years beginning after December 31, 2017. Section 13517(c)(3) of the TCJA provides a transition relief rule that generally requires the difference between (1) the amount of life insurance reserves with respect to any contract as of the close of the taxable year preceding the first taxable year beginning after December 31, 2017, computed using the method prescribed by the TCJA (the post–TCJA closing bal

January 7, 2019 296 Bulletin No. 2019–02

ance) and (2) the amount of such reserves computed using the method prior to the amendments by the TCJA (the pre-TCJA closing balance), to be taken into account over the eight succeeding taxable years. To avoid duplication or omission of income, the computation of the pre-TCJA closing balance must take into account any change in basis that is taken into account as required by § 807(f).

.10 A change in basis of computing reserves is a type of change in method of accounting. See Am. Gen. Life & Accident Ins. Co. v. United States, 90–1 USTC (CCH) ¶ 50,010 (M.D. Tenn. 1989). After the amendment of § 807(f) by section 13513 of the TCJA, an insurance company must follow the administrative procedures for a change in method of accounting to change its basis of computing reserves. See H.R. Rep. No. 115–466, at 467 (2017) (Conf. Rep.). Section 13513 of the TCJA, however, does not set forth the administrative procedures for an insurance company to change the basis of computing reserves to comply with § 807(f) and does not specify whether an insurance company is entitled to audit protection or ruling protection.

.11 In general, § 446(e) requires a taxpayer to secure the consent of the Secretary before changing a method of accounting for federal income tax purposes. Section 1.446–1(e)(3)(ii) provides that the Commissioner may prescribe administrative procedures under which a taxpayer will be permitted to change a method of accounting. Except as otherwise provided in § 1.446– 1(e)(3)(ii), a taxpayer must file a Form 3115, “Application for Change in Accounting Method,” in order to secure the Commissioner’s consent to change a method of accounting. Rev. Proc. 2015–13, 2015–5 I.R.B. 419, as clarified and modified by Rev. Proc. 2015–33, 2015–24 I.R.B. 1067, and as modified by Rev. Proc. 2016–1, 2016–1 I.R.B. 1, and Rev. Proc. 2017–59, 2017–48 I.R.B. 543, provides the general procedures by which a taxpayer may obtain automatic consent of the Commissioner to change a method of accounting described in the List of Automatic Changes. Rev. Proc. 2018–31 contains the current List of Automatic Changes.

.12 Section 481(a) provides that in computing the taxpayer’s taxable income for any taxable year (referred to as the

year of the change), if such computation is under a method of accounting different from the method under which the taxpayer’s taxable income for the preceding taxable year was computed, then there shall be taken into account those adjustments that are determined to be necessary solely by reason of the change in order to prevent amounts from being duplicated or omitted.

.13 Section 481(c) provides that in the case of any change described in § 481(a), the taxpayer may, in such manner and subject to such conditions as the Secretary may by regulations prescribe, take the adjustments required by § 481(a) into account in computing the tax imposed by Chapter 1 for the taxable year or years permitted under such regulations.

.14 Section 1.481–1(c)(2) provides that if a change in method of accounting is voluntary (that is, initiated by the taxpayer), then the entire amount of the adjustments required by § 481(a) is generally taken into account in computing taxable income in the taxable year of the change, regardless of whether the adjustments increase or decrease taxable income. Section 1.481–1(c)(2) references §§ 1.446–1(e)(3) and 1.481–4, however, which provide that the Commissioner may prescribe the taxable year or years in which the adjustments are taken into account. Under section 7.03(1) of Rev. Proc. 2015–13, the § 481(a) adjustment period generally is one taxable year (year of change) for a negative § 481(a) adjustment and four taxable years (year of change and next three taxable years) for a positive § 481(a) adjustment.

.15 Under § 1.481–1(c)(1), the reference to “adjustments” as used in § 481 means the net amount of the adjustments required by § 481(a) with regard to a change.

.16 Rev. Rul. 94–74 applies § 807(f) (as it existed then) to several factual situations. Among the holdings of Rev. Rul. 94–74 are (1) there is no requirement under § 446(e) to obtain the Commissioner’s consent to change the basis of computing life insurance reserves, (2) the adjustment rule of § 807(f) applies if the recomputation is initiated by the Service, and (3) if a change in basis of computing life insurance reserves is required to correct for an erroneous application of the computation

rules of § 807(d)(2) (as it existed then), either the taxpayer or the Service may make the change retroactively by amending (or adjusting) the taxpayer’s return (not otherwise barred by the statute of limitations) for periods for which there was an erroneous application of the prescribed rules. Similarly, Rev. Rul. 2002–6 permits a taxpayer to file an amended return for past taxable years to recalculate its life insurance reserves for such years to take into account omitted factors. These holdings of Rev. Rul. 94–74 and Rev. Rul. 2002–6 are inconsistent with the general rules for changing a method of accounting under § 446(e) and § 1.446– 1(e). Rev. Rul. 94–74 and Rev. Rul. 2002–6 are modified to the extent they are inconsistent with the general rules for changing a method of accounting under § 446(e) and § 1.446–1(e).

.17 This revenue procedure modifies Rev. Proc. 2018–31 to provide procedures for an insurance company to obtain automatic consent of the Commissioner to change its basis of computing reserves pursuant to § 807(f).