Rev. Proc. 2015-13 — Internal Revenue Bulletin 2020-17

procedures for a taxpayer to obtain the advance (non-automatic) or automatic consent of the Commissioner to change a method of accounting. These proce dures generally require a taxpayer to file a Form 3115, “Application for Change in Accounting Method,” to change the tax payer’s method of accounting. Rev. Proc. 2019-10, 2019-02 I.R.B. 296, modified the list of automatic accounting method changes in Rev. Proc. 2018-31, 2018-22 I.R.B. 637, to add section 26.04, which provided procedures for an insurance company to obtain automatic consent of the Commissioner to change its method of accounting to comply with section 807(f) for taxable years beginning after Decem ber 31, 2017. In response to comments, section 26.04 of Rev. Proc. 2018-31 was modified and superseded by Rev. Proc. 2019-43. See section 26.04 of Rev. Proc. 2019-43 for the current procedures for an insurance company to obtain automatic consent of the Commissioner to change its method of accounting to comply with section 807(f). Rev. Proc. 2019-10 also modified Rev. Rul. 94-74 and Rev. Rul. 2002-6 to the extent their holdings are inconsistent with the general rules for changing a method of accounting under section 446(e) and §1.446-1(e). Rev. Proc. 2002-18 provides the IRS procedures for changes in method of accounting imposed by the IRS and other procedures for re solving accounting method issues.

E. Reporting of Reserves

Section 13517 of the TCJA added sec tion 807(e)(6), which provides that the Secretary shall require reporting (at such time and in such manner as the Secretary shall prescribe) with respect to the open ing and closing balance of reserves and with respect to the method of computing reserves for purposes of determining in come.

The Conference Report states that for this purpose the Secretary may require a life insurance company (including an af

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filiated group filing a consolidated return that includes a life insurance company) to report each of the line item elements of each separate account by combining them with such items from other separate accounts and the general account and re port the combined amounts on a line-byline basis. The Secretary may also provide that the reporting on a separate account by separate account basis is generally not permitted. The Conference Report further states that under existing regula tory authority, the Secretary may require e-filing or comparable filing of the returns and may require that the taxpayer provide its annual statement via a link, electronic copy, or other similar means. Conference Report at 478-79.

F. Annual Statements and Electronically Filed Forms 1120-L and 1120-PC

Section 6012(a)(2) generally requires that returns with respect to income taxes must be made by every corporation sub ject to taxation under subtitle A of the Code. Final regulations under section 6012 related to insurance companies were published in the Federal Register (72 FR 32794) on June 14, 2007 (T.D. 9329). Section 1.6012-2(c)(1) provides that a life insurance company must make a return on Form 1120-L, “U.S. Life Insurance Company Income Tax Return,” and, ex cept as provided in §1.6012-2(c)(4), file with its return a copy of its annual state ment. Similarly, §1.6012-2(c)(2) requires every domestic insurance company other than a life insurance company to make a return on Form 1120-PC, “U.S. Property and Casualty Insurance Company Income Tax Return,” and, except as provided in §1.6012-2(c)(4), file with its return a copy of its annual statement. For these purpos es, an annual statement means the annual statement, the form of which is approved by the NAIC, that is filed by an insurance company for the year with the applicable state regulators or, if the insurance compa ny is not required to file the NAIC annual statement, a pro forma annual statement. Section 1.6012-2(c)(3) generally provides that the requirements of §1.6012-2(c)(1) and (2) concerning returns and annual statements also apply to foreign insurance companies subject to tax under section 801 or section 831.

Section 1.6012-2(c)(4) provides that if an insurance company described in §1.6012-2(c)(1), (2), or (3) files its re turn electronically, it should not include its annual statement with such return but that such statement (or pro forma annual statement) must be available at all times to the IRS.

Explanation of Provisions

A. Computation of Life Insurance Reserves

Section 1.807-1(a) of the proposed regulations provides that no asset adequa cy reserve may be included in the deter mination of the amount of life insurance reserves under section 807(d). This pro posed regulation is consistent with the law both before and after the TCJA. The sub stantive rules in current §1.807-1 have no application for taxable years beginning af ter December 31, 2017, and therefore, are not included in §1.807-1 of the proposed regulations.

B. Reporting of Reserves

Section 1.807-3 of the proposed regu lations allows the IRS to require informa tion necessary for the proper reporting of items described in section 807(c), includ ing separate account items. This provision is consistent with section 807(e)(6), as added by the TCJA.

C. Change in Basis of Computing Reserves

1. Proposed Section 1.807-4

Section 1.807-4 of the proposed reg ulations provides guidance relating to both the change in basis of computing reserves of a life insurance company and the change in basis of computing life in surance reserves of a nonlife insurance company. Section 1.807-4(a) of the pro posed regulations requires an insurance company to follow administrative proce dures prescribed by the Commissioner to change the basis of computing reserves. This requirement is consistent with the Conference Report relating to section 13513 of the TCJA, which provides that a taxpayer is required to follow IRS proce

dures. Conference Report at 467; see also Bluebook at 228 (a company is required to comply with procedures for automat ic method changes and to report and file statements and other information as the Secretary requires).

Section 1.807-4(b) of the proposed reg ulations provides that, to avoid the double counting of income or a deduction, a tax payer that changes its basis of computing reserves is required to take into account under section 481(a) an adjustment at tributable to the change in basis. The pro posed regulations provide that if a taxpay er loses its insurance company status, then any remaining balance of a section 481(a) adjustment must be taken into account in the last taxable year the taxpayer was an insurance company. This proposed rule, however, would not require an insurance company to accelerate the accounting for such adjustment if it changes from a life insurance company to a nonlife insurance company or vice versa.

Section 1.807-4(c) of the proposed regulations provides that for purposes of determining any increase or decrease in items described in section 807(c) (for a life insurance company) or the amount of life insurance reserves (for a nonlife insurance company), the determination should be made for the year of change using the old basis of computing reserves and should be made in the following tax able year using the new basis of comput ing reserves.

Certain revenue rulings are inconsis tent with section 807(f), as amended by the TCJA. Accordingly, these revenue rul ings are proposed to be obsoleted for tax able years beginning on or after the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register . See Effect on Other Documents.

Procedure for Obtaining Automatic Consent

Section 26.04 of Rev. Proc. 2019-43 provides the current procedures for an insurance company to obtain automatic consent of the Commissioner to change its method of accounting to comply with section 807(f). In response to comments, the Treasury Department and the IRS in tend to revise section 26.04 of Rev. Proc.

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2019-43 as described in the following paragraphs.

First, section 26.04(2)(b)(ii) of Rev. Proc. 2019-43 provides that multiple changes during the same taxable year for the same type of contract are considered a single change in basis and the effects of such changes are netted and treated as a single section 481(a) adjustment. Section 807(f)(1), however, provides that the sec tion 481(a) adjustment is the difference between the amount of any item referred to in section 807(c) computed on the new basis and the amount of such item computed on the old basis. Accordingly, the Treasury Department and the IRS in tend to revise section 26.04 of Rev. Proc. 2019-43 to require netting of the section 481(a) adjustments at the level of each item referred to in section 807(c) so there is a single section 481(a) adjustment for each of the items referred to in section 807(c). Second, section 26.04(1) of Rev. Proc. 2019-43 provides that the automatic change procedures apply to a nonlife in surance company. The Treasury Depart ment and the IRS intend to revise section 26.04 of Rev. Proc. 2019-43 to clarify the manner in which nonlife insurance com panies implement changes to the basis of computing life insurance reserves (as de fined in section 816(b)) during a taxable year (year of change). Specifically, the clarification would provide that, if a non life insurance company changes the basis of computing its life insurance reserves, then for purposes of applying section 832(b)(4), (i) for the year of change, life insurance reserves at the end of the year of change with respect to contracts issued before the year of change are determined on the old basis and (ii) for the year fol lowing the year of change, life insurance reserves at the end of the preceding tax able year with respect to contracts issued before the year of change are determined on the new basis. Life insurance reserves attributable to contracts issued during the year of change and thereafter must be computed on the new basis.

D. Definition of Life Insurance Reserves

The TCJA modified section 807(d) to provide that, for purposes of part I of subchapter L (other than section 816), the

amount of life insurance reserves for any contract (other than a variable contract) is the greater of the net surrender value of such contract or 92.81 percent of the reserve determined under the applica ble tax reserve method. For any variable contract, the amount of the life insurance reserve is the sum of (i) the greater of the net surrender value of such contract or the portion of the reserve that is separate ly accounted for under section 817 and (ii) 92.81 percent of the excess (if any) of the reserve determined under the applica ble tax reserve method over the amount in clause (i).

Section 807(d)(3) provides that the ap plicable tax reserve method is CRVM in the case of a contract covered by CRVM and CARVM in the case of a contract covered by CARVM. The CRVM and CARVM may be PBR methods, which may be gross premium reserves and may take into account certain expenses and other factors. Congress understood that for this purpose life insurance reserves could be determined using PBR methods. The Joint Committee on Taxation described the purpose of the TCJA’s amendments to section 807(d) as “accomodat[ing] the NAIC-prescribed principle-based reserve methodology.” Bluebook at 235.

Section 807(c)(1), however, provides that the reserves referred to in sections 807(a) and (b), which are the reserves tak en into account in determining the gross income or deductions of a life insurance company, are “life insurance reserves (as defined in section 816(b)).”

Section 816(b) generally defines life insurance reserves to be amounts that are (i) computed or estimated on the basis of recognized mortality or morbidity tables and assumed rates of interest, (ii) set aside to mature or liquidate, either by payment or reinsurance, future unaccrued claims arising from life insurance, annuity, and noncancellable accident and health insur ance contracts involving, at the time with respect to which the reserves are comput ed, life, accident, or health contingencies, and (iii) with some exceptions, required by law. Section 816(b) (and its prede cessor provisions) have been interpreted as describing a net premium reserve that does not take into account expenses or certain other factors. See, e.g., Rev. Rul. 77-451, 1977-2 C.B. 224; Maryland Ca-

sualty Co. v. United States, 251 U.S. 342 (1920).

Thus, although Congress intended that the tax reserve method used to com pute life insurance reserves under section 807(d), as amended by the TCJA, could include PBR methods, section 816(b) (by virtue of the reference in section 807(c) (1)) could be interpreted to preclude re serves determined under PBR methods from qualifying as life insurance reserves for purposes of section 807. To clarify the interaction between sections 807 and 816, §1.816-1 of the proposed regulations provides that a reserve that meets the re quirements in sections 816(b)(1) and (2) will not be disqualified as a life insurance reserve if it is determined using a meth od that takes into account other factors, provided that the method used to compute the reserves is a “tax reserve method” as defined in section 807(d)(3). This defini tion would apply to life insurance reserves taken into account by nonlife insurance companies under section 832(b)(4) and for purposes of determining an insurance company’s qualification as a life insurance company under section 816.

E. Electronic Filing of Annual Statements

The Conference Report contemplates requiring the electronic filing of annual statements to improve reporting of in surance reserves, as necessary to carry out and enforce section 807. Conference Report at 478-79. The Treasury Depart ment and the IRS believe that requiring an insurance company to file its annual statement electronically (if the company’s Form 1120-L or Form 1120-PC is also filed electronically) is necessary to allow the IRS to better and more efficiently exam ine the return. Accordingly, §1.6012-2(c) is proposed to be amended to remove the rule that prohibits an insurance company that files its Form 1120-L or Form 1120PC electronically from filing its annual statement (or pro forma annual statement) electronically. The Treasury Department and the IRS request comments regarding potential issues that may arise in filing the annual statement (or pro forma annual statements) electronically (for example, if the size of the annual statement(s) may exceed or cause the filed return to exceed the size limits in section 2.1.2 (Submis

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sion Size) of IRS Publication 4164, Mod- ernized e-File (MeF) Guide for Software Developers and Transmitters, Processing Year 2020 .)

F. Proposed Removal or Revision of Regulations with No Future Application.

In general

This notice of proposed rulemaking proposes to remove §§1.801-7, 1.801-8(e), 1.806-4, 1.809-2, 1.810-3, 1.818-2(c), and 1.818-4 because these provisions provide guidance under law that has been repealed or substantially changed and will have no application after the adoption of the pro posed regulations as final. Section 1.8015(c) is proposed to be removed because its requirement that a taxpayer file certain information when it changes the basis of computing life insurance reserve is obvi ated by the requirement in §1.807-4(b) of the proposed regulations that a taxpayer changing the basis of computing any item referred to in section 807(c) follow the ad ministrative procedures prescribed by the Commissioner.

This notice of proposed rulemaking proposes to revise §301.9100-6T to re move provisions related to elections under law that has been repealed or elections that may no longer be made.

Section 1.381(c)(22)-1

This notice of proposed rulemaking proposes to remove §1.381(c)(22)-1(b) (6) because its requirement that an acquir ing corporation take into account any net increases or net decreases in reserves of the distributor or transferor corporation under section 810(d)(1) is no longer ap plicable. The principle in §1.381(c)(22)1(b)(6), however, applies to transactions in which the distributor or transferor cor poration has any remaining portion of an adjustment that was required to be taken into account over 10 years under prior sec tion 807(f). See section 2.08 of Rev. Proc. 2019-10. After the amendment of section 807(f) by the TCJA, an acquiring corpora tion must take into account any remaining section 481(a) adjustment of the transferor or distributor corporation pursuant to the IRS’s administrative procedures. See sec tion 7.03 of Rev. Proc. 2015-13.

Section 1.817A-1

This notice of proposed rulemaking proposes to revise §1.817A-1 to remove the requirement that the current market rate of interest prescribed in §1.817A-1(a) (5) be used to determine both the life in surance reserve and the required interest (as provided in prior section 812(b)(2) (A)) during the temporary guarantee peri od of a non-equity indexed modified guar anteed contract (MGC).

Prior to its amendment by the TCJA, section 807(d) generally provided that life insurance reserves for a contract were determined using a rate of interest appli cable when the contract was issued. Prior section 807(d)(2)(B) provided that the rate of interest to be used was the greater of the applicable Federal interest rate or the prevailing State assumed interest rate. The TCJA amended section 807(d), however, to provide that life insurance reserves for a contract are generally computed using a method applicable to the contract and in effect as of the date the reserve is de termined. Section 807(d), as amended, does not prescribe a particular interest rate to be used in determining life insur ance reserves. Thus, the requirement in §1.817A-1(b)(2) that the applicable inter est rate to be used under section 807(d) (2)(B) to compute life insurance reserves for an MGC is a prescribed current mar ket interest rate is now inapplicable. Ad ditionally, the need for §1.817A-1(b)(1) to prescribe a current market interest rate to determine life insurance reserves for MGCs (as opposed to an interest rate ap plicable when the contract was issued) is no longer present because section 807(d), as amended, requires the use of a method in effect as of the date the reserve is de termined.

Prior to its amendment by the TCJA, section 812 determined “company’s share” and “policyholder’s share,” in part, by reference to required interest on cer tain reserves under section 807(c). Prior section 812(b)(2)(A) provided that the re quired interest was computed at the greater of the prevailing State assumed rate or the applicable Federal interest rate. The TCJA amended section 812 to provide that the “company’s share” means 70% and the “policyholder’s share” means 30%. Ac cordingly, after the TCJA’s amendment

of section 812, a particular interest rate is no longer needed to determine the “com pany’s share” and the “policyholder’s share.”

Section 1.817A-1 also requires that the current market rate of interest prescribed in §1.817A-1(a)(5) be used to determine reserves under section 807(c)(3) for an MGC during any temporary guarantee period. Prior to amendment of section 807(c), the “appropriate rate of interest” that was otherwise required to determine reserves for MGCs under section 807(c) (3) (the highest of the applicable Federal interest rate, the prevailing State assumed interest rate, or the interest rate assumed by the company in determining the guar anteed benefit) was determined when the obligation first did not involve life, ac cident, or health contingencies, and was thus not necessarily a current interest rate. The TCJA, however, modified the flush language in section 807(c)(3) to provide that the “appropriate rate of interest” is the highest rate or rates permitted to be used to discount the obligations by the NAIC as of the date the reserve is determined. Be cause the interest rate now required to be used to determine reserves under section 807(c)(3) (in the absence of the application of §1.817A-1) is a current market interest rate, §1.817A-1 may no longer be need ed to provide a current interest rate. The Treasury Department and the IRS request comments on whether the current market rate of interest prescribed by §1.817A-1 should continue to apply to reserves under section 807(c)(3) for an MGC during any temporary guarantee period.

Section 1.338-11

This notice of proposed rulemaking proposes to revise §1.338-11(d)(2) to re flect the change in section 807(f) made by the TCJA. Section 1.338-11(d) gen erally provides that when a section 338 election is made for an insurance compa ny, new target must effectively capitalize its subsequent increase in reserves for any acquired contracts in the deemed as set sale to the extent the fair market value of certain assets acquired by new target in the deemed asset sale exceeds the ad justed grossed-up basis (AGUB) allocat ed to those assets (that is, to the extent of a “bargain purchase”). In the absence of

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this rule, new target could obtain a better tax result if it acquired understated re serves and subsequently increased them rather than acquiring adequately stated reserves.

Section 1.338-11(d) was intended to minimize incentives for sellers to defer increases in reserves. See T.D. 9257 (71 FR 17990). An exception to §1.338-11(d), however, is provided if new target is re quired by section 807(f) to spread the re serve increase over the 10 succeeding tax able years. See §1.338-11(d)(2)(ii). There was limited incentive for sellers to defer increases in reserves when new target was required to spread the deduction resulting from the reserve increase over 10 years, as was the case under section 807(f) pri or to its amendment by the TCJA. The amendment to section 807(f) by the TCJA together with the applicable adminis trative procedures require a deduction resulting from a reserve increase under section 807(f) to be taken into account in one year. As a result, there is greater in centive for a seller to defer increases in reserves if new target would be allowed to take the deduction into account in one year, and the reason for providing the ex ception currently in §1.338-11(d)(2)(ii) no longer exists. Accordingly, this notice of proposed rulemaking proposes to remove the exception for reserve increases under section 807(f) that is currently provided in §1.338-11(d)(2)(ii).

A new §1.338-11(d)(3)(iii) is also pro posed to be added so the standard used for determining when there is an addi tional premium under §1.338-11(d)(3) for a change in items referenced in sec tion 807(c) is the same as that used under section 807(f). Changes in PBRs that are contemplated by the applicable method, for example, may not constitute changes in the basis of computing reserves under section 807(f) and should not result in an amount of additional premium under §1.338-11(d)(3).

G. Proposed Conforming Changes to Regulations.

This notice of proposed rulemaking proposes to revise §§1.801-2, 1.809-5, and 1.848-1 to correct references to Code provisions or regulations that have been changed, removed, or are proposed to

be removed by this notice of proposed rulemaking.

Determination of Life Insurance or Annuity Contract Status for Certain Foreign-Issued Contracts

The Code contains a statutory defi nition of a life insurance contract under section 7702, rules applicable to certain flexible premium contracts under section 101(f), distribution on death requirements under section 72(s), and diversification requirements under section 817(h). These requirements, which reflect Congress’s concern that the tax-favored treatment generally accorded life insurance and an nuity contracts was available to contracts that were too investment oriented or pro vided for undue tax deferral, are relevant to the tax treatment of a policyholder, an nuitant, or beneficiary as well as the entity that issues or reinsures a life insurance or annuity contract.

The Treasury Department and IRS re ceived a request to promulgate regulations under section 807 that generally would provide, for purposes of subchapter L, that the determination of whether a con tract issued by a non-United States insur ance company and reinsured by a United States insurance company is a life insur ance or annuity contract is made without regard to these statutory requirements, provided that (i) no policyholder, insured, annuitant, or beneficiary with respect to the contract is a United States person and (ii) such contract is regulated as a life in surance or annuity contract by a foreign regulator. Under the requested approach, a United States insurance company may be able to establish additional life insurance or other tax reserves for such a contract that is reinsured by a United States insur ance company even if the contract does not meet these statutory requirements.

The Treasury Department and the IRS are evaluating this request, includ ing whether to address it as part of this rulemaking. Comments are requested gen erally in respect of the requested change, including in respect of statutory interpre tation and implications in various contexts and provisions outside of subchapter L, such as, for example, the interaction with policies underlying the Federal withhold ing tax provisions that could apply to re

insurance payments from a United States reinsurer to a non-United States insurer as well as the administrability of requiring a United States reinsurance company to track the residence of direct and indirect beneficial owners of any interest in the contract, policyholder, insured, annuitant, or beneficiary of a contract issued by a non-United States insurance company that it may not administer.

Proposed Applicability Dates

The rules in this notice of proposed rulemaking are proposed to apply to tax able years beginning on or after the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register .

A taxpayer may choose to apply §§1.807-4, 1.816-1, and 1.817A-1(b) of the final regulations to taxable years be ginning after December 31, 2017, the ef fective date of the revision of section 807 made by the TCJA, and ending before the first taxable year that begins on or after the date of publication of the Treasury de cision adopting these rules as final in the Federal Register . See section 7805(b) (7). Alternatively, a taxpayer may rely on §§1.807-4 and 1.816-1 of the proposed regulations for taxable years beginning af ter December 31, 2017, and ending before the first taxable year that begins on or after the date of publication of the Treasury de cision adopting these rules as final in the Federal Register .

Under proposed §1.6012-2(l), taxpay ers may choose to apply §1.6012-2(c) of the final regulations to any original Fed eral income tax return (including any amended return filed on or before the due date (including extensions) of such origi nal return) timely filed on or after the date of publication of the Treasury decision adopting these rules as final in the Feder- al Register .

Effect on Other Documents

The following revenue rulings are pro posed to be obsoleted for taxable years be ginning on or after the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register : Rev. Rul. 2002-6, Rev. Rul. 9474, Rev. Rul. 80-117, Rev. Rul. 80-116,

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