Federal Income Taxation of Life Insurance Companies

Federal Income Taxation of Life Insurance Companies

Recent guidance on Life Insurance Settlement Taxation, Failed Life Insurance Contracts, Tax-Free Reorg Carryovers, Insuror Operations Loss Carrybacks...

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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).

Further analysis and and updated discussions:

  • Comprehensive discussion of the taxation of life insurance settlements.
  • Discussion of failed life insurance contracts, including corrections of errors, waivers, and closing agreements.
  • Carryovers in tax-free reorganization with supplementary legislative and regulatory history of IRC Sec. 381(c)(22)
  • Discussion of election to extend the carryback period for a life insurance company's loss from operations.

All discussions and more are available online through the LexisNexis® Tax Center and in print at the LexisNexis® Store.