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The transfer of business from a profitable domestic insurance company to a related foreign company could be disallowed under IRC Sec. 845(b) if the foreign company had made an election to be taxed as a domestic company under IRC Sec. 953(d) because it allowed the IRC Sec. 953(d) company to use its net operating losses to offset a significant amount of tax that would have been due absent the transfer. Field Attorney Advice 20092101F.
The field attorney advice does raise several interesting issues. The Service applied IRC Section 845(b) to the transaction even though the transaction was between related parties and also subject to IRC Section 845(a). As discussed below, the standard to recharacterize a reinsurance transaction between related parties under IRC Section 845(a) is lower and easier for the Service to meet than the standard under IRC Section 845(b) for reinsurance between unrelated parties. The Service may have applied IRC Section 845(b) because it believes that an adjustment is warranted under the higher standard of IRC Section 845(b). The Service may have also applied IRC Section 845(b) in anticipation of an argument from the taxpayer that IRC Section 845(b) cannot be applied as there are no regulations written under IRC Section 845(b).
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