[Federal Register Volume 62, Number 1 (Thursday, January 2, 1997)]
[Proposed Rules]
[Pages 71-72]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-32855]
[[Page 71]]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-246018-96]
RIN 1545-AU49
Recomputation of Life Insurance Reserves
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
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SUMMARY: This document contains proposed regulations relating to the
definition of life insurance reserves. The proposed regulations permit
the taxpayer or the IRS to recompute certain reserves if those reserves
were initially computed or estimated on other than an actuarial basis.
The proposed regulations affect both life insurance companies and
property and casualty insurance companies. This document also contains
a notice of a public hearing on the proposed regulations.
DATES: Written comments must be received by April 2, 1997. Requests to
speak and outlines of oral comments to be discussed at the public
hearing scheduled for Thursday, April 17, 1997, at 10 a.m. must be
received by Thursday, March 27, 1997.
ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG-246018-96), room
5226, Internal Revenue Service, POB 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand delivered between the
hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (REG-246018-96), Courier's
Desk, Internal Revenue Service, 1111 Constitution Avenue NW,
Washington, DC. Alternatively, taxpayers may submit comments
electronically via the Internet by selecting the ``Tax Regs'' option on
the IRS Home Page, or by submitting comments directly to the IRS
Internet site at http://www.irs.ustreas.gov/prod/tax__regs/
comments.html. The public hearing will be held in the Commissioner's
conference room, room 3313, Internal Revenue Service Building, 1111
Constitution Avenue, N.W. Washington, D.C.
FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Ann
Cammack, (202) 622-3970; concerning submissions and the hearing,
Evangelista Lee, (202) 622-7190 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
To qualify as a life insurance reserve for purposes of Part I of
subchapter L of the Internal Revenue Code, a reserve must satisfy
various requirements, including the requirement in section 816(b)(1)(A)
and Sec. 1.801-4(a)(1) that it be ``computed or estimated on the basis
of recognized mortality or morbidity tables and assumed rates of
interest.'' Qualifying as a life reserve under section 816(b) has
various consequences. Life reserves are included in the numerator and
denominator of the reserve ratio test of section 816(a), which is used
to determine when an insurance company is taxed as a life insurance
company under Part I of subchapter L. Increases in life reserves as
defined in section 816(b) are taken into account under section
807(c)(1). In addition, life reserves as defined in section 816(b) are
considered part of a nonlife company's unearned premiums under section
832(b)(4).
Two circuits have construed former section 801(b)(1)(A), which was
recodified as section 816(b)(1)(A) in 1984, to prevent reserves held
with respect to life, annuity or noncancellable accident and health
policies but not computed or estimated using actuarial tables from
qualifying as life reserves. The IRS also has held that life reserves
must be computed or estimated using actuarial tables under former
section 801(b)(1)(A). See, e.g., Rev. Rul. 69-302 (1969-2 C.B. 186).
The Claims Court, in contrast, has concluded that the statute and
regulation do not necessarily require the insurance company to compute
its life reserves using actuarial tables, when a different method
results in reserves that ``reasonably approximate'' actuarial reserves.
Rev. Rul. 69-302 held that not only were life reserves required to
be computed or estimated on the basis of recognized mortality or
morbidity tables and assumed rates of interest, but that reserves for
credit life insurance contracts could not be retroactively recomputed
in a manner that would enable them to qualify as life reserves. Neither
of the cases cited in Rev. Rul. 69-302, however, addressed the question
of whether taxpayers or the Commissioner could recompute reserves based
on information that was available at the end of the applicable taxable
year. Two subsequent cases came to opposite conclusions on this issue.
The reserve ratio test of section 816(a) was intended to
distinguish between life and nonlife insurance companies based on the
nature of each company's business, as measured by its reserves. This
purpose is not achieved, however, if a company that only issues life
insurance, annuity or noncancellable accident and health contracts can
elect to be taxed as a nonlife company by failing to use mortality and
morbidity tables and assumed rates of interest in computing or
estimating its reserves for some of those contracts.
Explanation of Provisions
Proposed Sec. 1.801-4(g)(1) provides that if an insurance company
does not compute or estimate its reserves for certain contracts on the
basis of mortality or morbidity tables and assumed rates of interest,
then the taxpayer or the Commissioner may recompute those reserves on
the basis of mortality or morbidity tables and assumed rates of
interest. This regulation will apply to reserves for contracts
involving, at the time with respect to which the reserves are computed,
life, accident or health contingencies, if such reserves were not
initially computed in accordance with the requirements of section
816(b)(1)(A).
Proposed Sec. 1.801-4(g)(2) provides that if the taxpayer or the
Commissioner recomputes reserves pursuant to Sec. 1.801-4(g)(1), the
reserves satisfy the section 816(b)(1)(A) requirement that a life
reserve be computed or estimated using actuarial tables and assumed
rates of interest. Assuming that these amounts satisfy the other
requirements of section 816(b), the recomputed amounts will be
considered life insurance reserves under section 816(b), and the
recomputed reserves will be included in both the numerator and the
denominator of the reserve ratio test under section 816(a). In
addition, the reserves for such contracts will be taken into account
under section 807(c)(1) and will be used to compute a nonlife company's
unearned premiums under section 832(b)(4).
Proposed Sec. 1.801-4(g)(3) provides that for purposes of section
816(b)(4) and Sec. 1.801-3(i), which provide that the mean of the
beginning and end of year reserves will be used for purposes of section
816 (a), (b) and (c), the reserves on a life insurance, annuity or
noncancellable accident and health contract must be recomputed for both
the beginning and the end of the year.
Proposed Sec. 1.801-4(g)(4) requires that no information acquired
after the date as of which the beginning of year reserves were
initially computed or estimated may be taken into account in
recomputing those reserves under paragraph (g)(1). It also requires
that no information acquired after the date as of
[[Page 72]]
which the end of year reserves were initially computed or estimated may
be taken into account in recomputing those reserves under paragraph
(g)(1).
The IRS is considering whether to issue guidance under section 816,
including regulations regarding the definition of ``total reserves''
under section 816(c) as well as redesignating and revising the
regulations issued under prior law section 801. The IRS invites
comments on this matter.
Proposed Effective Date
Proposed Sec. 1.801-4(g) would be effective with respect to returns
filed for taxable years beginning after the publication of the final
regulations.
Effect on Other Documents
The IRS will modify, clarify, or obsolete publications as necessary
to conform with this regulation as of the date of publication in the
Federal Register of the final regulations. See e.g., Rev. Rul. 69-302
(1969-2 C.B. 186). The IRS solicits comments as to whether other
publications should be modified or obsoleted.
Special Analyses
It has been determined that this notice of proposed rulemaking is
not a significant regulatory action as defined in EO 12866. Therefore,
a regulatory assessment is not required. It also has been determined
that section 553(b) of the Administrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regulations, and because the
regulations do not impose a collection of information on small
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not
apply. Pursuant to section 7805(f) of the Internal Revenue Code, this
notice of proposed rulemaking will be submitted to the Chief Counsel
for Advocacy of the Small Business Administration for comment on its
impact on small business.
Comments and Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any written comments (a signed original
and 8 copies) that are submitted timely to the IRS. All comments will
be available for public inspection and copying.
A public hearing has been scheduled for Thursday, April 17, 1997 in
the Commissioner's conference room, room 3313, Internal Revenue Service
Building at 10:00 a.m. Because of access restrictions, visitors will
not be admitted beyond the Internal Revenue Building lobby more than 15
minutes before the hearing starts.
The rules of 26 CFR 601.601(a)(3) apply to the hearing.
Persons that wish to present oral comments at the hearing must
submit written comments by March 27, 1997 and submit an outline of the
topics to be discussed and the time to be devoted to each topic (a
signed original and 8 copies) by March 27, 1997.
A period of 10 minutes will be allotted to each person for making
comments.
An agenda showing the scheduling of the speakers will be prepared
after the deadline for receiving outlines has passed. Copies of the
agenda will be available free of charge at the hearing.
Drafting Information
The principal author of this regulation is Ann B. Cammack, Office
of Assistant Chief Counsel (Financial Institutions and Products).
However, other personnel from the IRS and Treasury Department
participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.801-4 is amended by adding a new paragraph (g) to
read as follows:
Sec. 1.801-4 Life insurance reserves.
* * * * *
(g) Recomputation of life insurance reserves--(1) General. If an
insurance company does not compute or estimate its reserves for
contracts involving, at the time with respect to which the reserves are
computed, life, accident or health contingencies, on the basis of
mortality or morbidity tables and assumed rates of interest, then the
taxpayer or the Commissioner may recompute reserves for those contracts
on the basis of mortality or morbidity tables and assumed rates of
interest.
(2) Effect of recomputation. If reserves are recomputed pursuant to
paragraph (g)(1) of this section, the recomputed reserves satisfy the
requirements of section 816(b)(1)(A).
(3) Mean reserve. For purposes of section 816(b)(4) and Sec. 1.801-
3(i), if reserves are recomputed pursuant to paragraph (g)(1) of this
section for a taxable year, the reserves must be recomputed for both
the beginning and the end of the taxable year.
(4) Subsequently acquired information. No information acquired
after the date as of which a reserve was initially computed or
estimated may be taken into account in recomputing that reserve under
paragraph (g)(1) of this section.
(5) Effective date. This section is applicable with respect to
returns filed for taxable years beginning after the date final
regulations are filed with the Office of the Federal Register.
Michael P. Dolan,
Acting Commissioner of Internal Revenue.
[FR Doc. 96-32855 Filed 12-31-96; 8:45 am]
BILLING CODE 4830-01-U