SECTION 3. AUTOMATIC — Internal Revenue Bulletin 2019-2

METHOD CHANGE

Rev. Proc. 2018–31 is modified to add new section 26.04 to the List of Automatic Changes to read as follows:

.04 Changes in basis of computing re- serves under § 807(f) .

(1) Description of change and applica- bility . This automatic change applies to a change in basis of computing reserves, as described in § 807(f), by a life insurance company or by an insurance company that is not a life insurance company.

(2) Manner of making change . (a)(i) In general . If the basis of computing any reserves referenced in § 807(c) is changed during a taxable year (year of change), then for purposes of applying § 807(a) and (b) with respect to contracts issued before the year of change, the amount of reserves at the close of the year of change attributable to those contracts is determined on the old basis and the amount of reserves at the opening of the succeeding taxable year attributable to those contracts is determined on the new basis. Reserves attributable to contracts issued during the year of change and

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thereafter must be computed on the new basis.

(ii) Requirement to file Form 3115 . A taxpayer that changes its basis of computing reserves is subject to the procedures that apply to obtain the automatic consent of the Commissioner to change a method of accounting. Under these procedures, (A) the taxpayer must file Form 3115 as provided in this section 26.04, (B) the taxpayer may receive audit protection for taxable years prior to the year of change as provided in section 8.01 of Rev. Proc.

2015–13 in connection with the change, and (C) the § 481(a) adjustment period generally will be 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 in accordance with section 7.03(1) of Rev. Proc. 2015–13. (iii) Example . The following example illustrates the rules of sections 26.04(2) (a)(i) and (ii) of this revenue procedure in two situations: (A) the change in basis in

computing reserves for contracts issued prior to the year of change results in an increase in the reserves at the end of the year of change (negative § 481(a) adjustment) and (B) the change in basis in computing reserves for contracts issued prior to the year of change results in a decrease in the reserves at the end of the year of change (positive § 481(a) adjustment). The following table summarizes the reserve amounts for contracts issued before the year of change.

New Basis (Negative § 481(a)

New Basis (Positive § 481(a)

Old Basis Adjustment) Adjustment)

End of Year Prior to Year of Change 100

End of Year of Change 105 109 101

End of Year Following Year of Change 112 104 Section 481(a) Adjustment 105–109�(4) 105–101�4

Old Basis

Adjustment)

Under section 26.04(2)(a)(i) of this revenue procedure, reserves for contracts issued before the year of change are reported under the old basis at the close of the year of change and under the new basis at the beginning of the year following the year of change; reserves for contracts issued during the year of change and thereafter are computed under the new basis. The remainder of this example describes only the deductions and income inclusions relating to reserves for contracts issued before the year of change.

Deduction for a net increase in re- serves for the year of change . In both the negative and positive § 481(a) adjustment situations, the company must take $105 of reserves into account (on the old basis) at the end of the year of change, resulting in a $5 increase in reserves ($105 - $100) and a corresponding deduction for a net increase in reserves for the year of change.

Negative § 481 adjustment situation . As described in section 26.04(2)(a)(ii) of this revenue procedure, the negative § 481(a) adjustment of $4 ($109–$105) is taken into account in the year of change, such that the company would recognize a deduction for an increase in reserves under § 807(f) of $4 in the year of change. This results in total deductions in the year of change of $9 ($5 - $4).

At the beginning of the following year, the company must take $109 of reserves

into account (new basis) and the deduction for the net increase in reserves for that year is $3 ($112 - $109).

Positive § 481 adjustment situation . As described in section 26.04(2)(a)(ii) of this revenue procedure, the positive § 481(a) adjustment of $4 ($101-$105) is taken into account over four years, such that the company recognizes additional income from a decrease in reserves under § 807(f) of $1 (1/4th of the § 481(a) adjustment) in the year of change. This results in a net reduction in taxable income in the year of change of $4 ($5 - $1).

At the beginning of the following year, the company takes $101 of reserves into account (new basis), and the deduction for the net increase in reserves for that year is $3 ($104 - $101). The company also would recognize another 1/4th of the § 481(a) adjustment, resulting in a $1 increase in income due to a decrease in reserves under § 807(f), and a net reduction in taxable income of $2 ($3 - $1) in that year. The remaining $2 of the § 481 adjustment is recognized as increases in income due to a decrease in reserves under § 807(f) in each of the two remaining years of the § 481 adjustment period.

(b) Section 481(a) adjustment . (i) Computation of § 481(a) adjustment at end of year . In general, a change in basis of computing reserves under § 807(f) requires an adjustment under § 481(a). The

§ 481(a) adjustment is computed as of the end of the year of change and is only with respect to contracts issued before the year of change.

(ii) Eligibility for additional change within five taxable years . The eligibility rule in section 5.01(1)(f) of Rev. Proc. 2015–13 does not apply to a change under this section 26.04.

(iii) Number of § 481(a) adjustments . Multiple changes during the same taxable year in methods, assumptions, or factors, each of which alone would constitute a change in basis of computing reserves under § 807(f) for the same type of contract (life insurance, annuity, etc.), are considered a single change in basis, and the effects of such multiple changes are netted and treated as a single net negative § 481(a) adjustment or net positive § 481(a) adjustment.

A change in basis of computing the reserve for each type of contract (life insurance, annuity, etc.) is considered a separate change in basis. A separate § 481(a) adjustment must be determined for each type of contract, and each such § 481(a) adjustment must be taken into account separately.

(c) No ruling protection for year of change or subsequent years . The consent granted under section 9 of Rev. Proc. 2015–13 for a change under this section 26.04 is not a determination by the Com

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missioner that the new basis of computing reserves is a permissible basis of computing reserves and does not create any presumption that the new basis is a permissible basis of computing reserves. The Director may ascertain whether the new method of accounting is a permissible method of accounting. Thus, a taxpayer that changes its basis of computing reserves under this section 26.04 may be required to change or modify that basis of computing reserves for the year of change or any subsequent year if it is determined by the Commissioner that the basis to which the taxpayer changed does not meet the requirements of federal income tax law.

(d) Information required to be fur- nished .

(i) In view of the amendment of § 807(f) by section 13513 of the Tax Cuts and Jobs Act, Pub. L. No. 115–97 (December 22, 2017) and the information required in section 26.04(2)(d)(ii) of this revenue procedure, the information required under § 1.801–5(c) is not required to be furnished with the taxpayer’s return or on Form 3115.

(ii) A taxpayer that files a Form 3115 under this section 26.04 is required to complete or provide only the following information on Form 3115:

The identification section of page 1 (above Part I);
The signature section at the bottom of page 1;
Part I;
Part II, lines 4, 5, 6a–d, 7a–b, 8a–d, 9, 11a–c, 12, 17, and 18;
The following information, in lieu of completing Part II, line 14:
The item in § 807(c) to which the change in basis relates,
The type of contract (e.g., life insurance, annuity) to which the change relates,
If a life insurance reserve, a description of the applicable tax reserve method (e.g., Commissioners’ Reserve Valuation Method or Commissioners’ Annuity Reserve Valuation Method),
A description of the change in basis,
A description of the reason for the change in basis, including (i) whether the change results from a change in the method prescribed by the National Association of Insurance Commissioners or from another change (such as a change in assumption for mortality, morbidity, or interest rate), regardless of whether the change is reflected on an annual statement and (ii) whether the change results from a prior incorrect application of federal income tax law and the nature of such incorrect application.
- Part IV. (The taxpayer may indicate that the § 481(a) adjustment is an estimate or is to be determined.) (e) Concurrent automatic changes . A taxpayer that makes multiple changes in basis under this section 26.04 may file a single Form 3115 that includes all the changes in basis for the year of change. Likewise, a single Form 3115 may be filed for all changes in basis for members of a

group filing a consolidated return. The information required by section 26.04(2) (d)(ii) of this revenue procedure is required for each separate change for each member of the group.

(3) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under this section 26.04 is “240.” (4) Contact information . For further information regarding a change under this section, contact Dan Phillips at (202) 3176995 (not a toll-free call).