2005 Insurance Tax Year Review: Part I -- Federal Tax Matters
by Richard J. Burness and Frederic J. Gelfond

In the first installment of a four-part report from Deloitte Tax LLP, Richard J. Burness and Rick Gelfond review some of the significant federal insurance taxation developments of 2005.

Date: Mar. 9, 2006

Full Text Published by Tax AnalystsTM

2005 Insurance Tax Year Review: Part I -- Federal Tax Matters

Copyright © 2006 by Deloitte Development LLC.
All rights reserved.

by Richard J. Burness and Frederic J. Gelfond


Frederick J. Gelfond (File Photo)Continuing a trend, the bulk of the insurance tax activity in 2005 centered around insurance product -- rather than insurance company -- tax matters. Perhaps the development from the past year that could have the most significant effect on tax practitioners, whether they work in the insurance industry or not, was an item that was not even released by a tax authority: The Financial Accounting Standards Board released a proposed interpretation of rules set forth under Financial Accounting Standard 1091 that could dramatically alter the way companies will be required to reflect the results of uncertain tax positions. FASB plans to release its final interpretation during the first quarter of 2006. In the meantime, practitioners are hopeful that FASB will heed the many concerns that have been publicly expressed regarding the proposed interpretation -- like it has already done in tentatively moving from a "probable" to a "more likely than not" standard for recognizing tax benefits. Of course, the new tax practice rules under Circular 230, the final ethics and independence rules issued by the Public Company Accounting Oversight Board, and the effect of Sarbanes-Oxley all promise to also have a dramatic effect on tax practice in the years to come.

Richard J. Burness (File Photo)That is not to say there were no meaningful insurance company-specific tax developments during the past year. Below are discussions of several of those events, including those dealing with the deductibility of abandonment losses and insurance contract valuations, the classification of certain regulated investment companies underlying segregated assets accounts, the treatment of participation fees paid to a state insurance fund, and additions to premium stabilization reserves.

Similar to previous years, the "2005 Insurance Tax Year in Review" consists of four separate articles: Federal Tax Matters (Part I), Product Tax Matters (Part II, p. 217), State and Local Tax Matters (Part III, p. 227), and International Tax Matters (Part IV, p. 235). Each article is divided into topical sections that highlight developments of lasting significance to insurance companies. Similar to the format used in previous years, we have provided only brief discussions of the selected developments. For your convenience, Tax Analysts' citations and headnotes are included in the areas designated "Citation" and "Overview," respectively. Also, Tax Analysts' headlines are used to introduce each development discussed. The "Discussion" sections contain the authors' analyses of the developments and the issues they raise. An appendix prepared by Tax Analysts includes a list of full text insurance tax pronouncements from 2005 available in The Insurance Tax Review.

General Administrative and Legislative Tax Matters

IRS, Treasury Release 2005-2006 Priority Guidance Plan

Citation: 2005-2006 Priority Guidance Plan (Aug. 8, 2005). For the 2005-2006 Priority Guidance Plan, see The Insurance Tax Review, Sept. 2005, p. 477, Doc 2005-16766 [PDF], or 2005 TNT 152-18 Database 'Tax Notes Today', View '(Number'.

Overview: The IRS and Treasury Department released their 2005-2006 priority guidance plan, listing the guidance projects the government expects to complete by June 2006; the plan contains 254 projects, several of which are needed to implement the AJCA.2

Discussion: Insurance-specific items in the 2005-2006 Priority Guidance Plan include:

1. final regulations regarding taxable asset acquisitions and dispositions of insurance companies;

2. final regulations under section 402 on the valuation of life insurance distributed from qualified plans;

3. guidance under 501(c)(15) on the calculation of gross receipts;

4. guidance on the taxation of certain annuity contracts under section 72;

5. guidance on the qualification of certain arrangements as insurance;

6. guidance on the taxation of variable contracts as described in section 817(d);

7. final regulations under section 7702 regarding the attained age of the insured for purposes of testing the qualification of a contract as a life insurance contract;

8. guidance under section 954(i) regarding insurance companies investing through partnerships; and

9. a revenue ruling providing a final determination under section 809 of the differential earnings rate for 2004 for use by mutual life insurance companies to compute their income tax liabilities for 2004.

The priority guidance plans that have been released in recent years have not been as bold as they used to be in terms of the number and types of projects listed. Then again, in years past, the plans repeated the same items year after year -- that is, items seemed to never get done. The current plans, therefore, typically give a more realistic picture of items the IRS and Treasury anticipate producing over the course of a given year. Diminishing the meaning of the more recent plans, however, is that many of the to-do's are items that were completed and released before the release of the priority guidance plan.

As they say, planning is 20-20.

Tax Reform Panel Issues Final Report

Citations: Report of the President's Advisory Panel on Federal Tax Reform (Nov. 1, 2005). For the panel's report, see Doc 2005-22112 [PDF] or 2005 TNT 211-14 Database 'Tax Notes Today', View '(Number'.

Summary: The President's Advisory Panel on Federal Tax Reform issued a final report that includes proposals for a simplified income tax plan and a plan to encourage growth and investment.

Discussion: The insurance industry has not responded favorably to many of the proposals set forth in the report, given the significant deleterious effect their adoption would likely have on both health and life insurance products. For example, in a joint release, four life insurance industry organizations (American Council of Life Insurers, Association for Advanced Life Underwriting, National Association of Life Underwriters, and National Association of Independent Life Brokerage Agencies) stated that while simplifying the tax code is laudable, they believe the proposals disregard the importance of financial planning. Their release also pointed out the significant contributions of the insurance industry through the magnitude of its investment in the economy.

Although the panel's final report will provide fodder for public commentary over the next few years, the practical -- and political -- reality is that the proposals set forth are a long way from being enacted. Indeed, just a month after the report was released, President Bush indicated that he would not make tax reform part of his 2006 agenda.

IRS Describes Limited-Time Settlement Initiative

Citations: Ann. 2005-80, 2005-46 IRB 967 (Oct. 27, 2005). For Ann. 2005-80, see Doc 2005-21864 [PDF] or 2005 TNT 208- 11 Database 'Tax Notes Today', View '(Number'.

Overview: The IRS launched a settlement initiative under which eligible taxpayers may resolve the tax treatment of any of 21 abusive transactions.

Discussion: Apparently the IRS believes that despite the harsh toll needed to obtain a settlement under this initiative, taxpayers that settle will fare better under the program than if they were to go to the IRS's Appeals Office or to court. It is not clear that taxpayers, in general, agree with that assessment. Perhaps it is telling that Congress found it necessary to include in the Gulf Opportunity Zone Act of 20053 some additional incentive to settle under the IRS's program through a provision that retroactively repeals the suspension of interest penalties for taxpayers engaging in listed and reportable transactions, except for those who settle under the program. Previously, the repeal of the interest suspension applied only on a go-forward basis from the 2004 date of enactment of the AJCA.

IRS Defers Schedule M-3 Reporting for Insurance Companies

Citation: IR-2005-106 (Sept. 13. 2005). For IR-2005-106, see Doc 2005-19143 [PDF] or 2005 TNT 180-18 Database 'Tax Notes Today', View '(Number'.

Overview: The IRS deferred the planned effective date of Schedule M-3 reporting for life and property and casualty insurance companies and now requires Schedule M-3 reporting for Forms 1120L and 1120PC filings for tax years ending on or after December 31, 2006.

Discussion: On December 13, 2005, the IRS released draft Schedule M-3, "Net Income (LOSS) Reconcilication for Corporations With Total Assets of $10 Million or More," and instructions for life and property and casualty insurance companies. The IRS believes that the more detailed information provided on the new forms will facilitate the identification of returns with greater compliance risks, and that this, in turn, will lead to decreased examination cycle time and reduced taxpayer burdens. Although C corporations have already begun filing Schedule M-3 with their tax returns, the effective date for insurance companies has been deferred, with the intent being that the additional time will assist insurance companies in complying with the new requirements.

The IRS gave taxpayers until February 10 to comment on the new forms.

Terrorism Risk Insurance Act of 2002 Extended

Citations: Terrorism Risk Insurance Revision Act of 2005 (P.L. 109-144).

Overview: President Bush on December 22 signed into law a bill that extends the Terrorism Risk Insurance Act (TRIA) of 2002 for another two years. TRIA was scheduled to expire at the end of 2005.

Discussion: TRIA was enacted following the September 11, 2001, terrorist attacks. TRIA requires insurance companies to offer terrorism insurance to businesses, especially businesses highly vulnerable to terrorist attacks. TRIA was enacted on a temporary basis, and it was due to expire at the end of 2005. Proponents argued that it was necessary to extend TRIA to ensure a thriving economic environment for cities at risk of terrorist attacks, such as New York and Washington, D.C.

As enacted, the Terrorism Risk Insurance Revision Act of 2005 increases the losses that insurers have to sustain before becoming eligible for federal coverage from $5 million to $50 million in 2006, and to $100 million in 2007. Further, it excludes coverage for certain damages (for example, commercial and theft). It also increases an insurer's deductible to 10 percent in 2006, and 15 percent in 2007.

Life Insurance Company Tax Matters

RICs Not Classified as Publicly Traded Partnerships After Sale

Citations: LTR 200544018 (Nov. 4, 2005). For LTR 200544018, see The Insurance Tax Review, Dec. 2005, p. 1025, Doc 2005-22568 [PDF], or 2005 TNT 214-46 Database 'Tax Notes Today', View '(Number'.

Overview: The IRS ruled that RICs supporting the variable contracts of a life insurance company will be classified as partnerships, but not publicly traded partnerships, after transferable units of interest in the RICs are sold to the segregated asset accounts of other domestic life insurance companies.

Discussion: Critical to reaching the desired result and the IRS's ruling that the RICs are to be taxed as partnerships was the fact that the RICs underlying the separate accounts were business trusts and never held themselves out as state-law corporations.

Aside from the technical question being directly addressed in the ruling, the pronouncement inherently accepts that Congress permitted tremendous flexibility in terms of the legal form that a fund underlying a separate account can take. Importantly, the specific rules governing the taxation of life insurance companies for separate account products under subchapter L are not contingent on the form that investment takes. It remains unclear, therefore, why the IRS has been so intent on following form regarding some of the positions it has articulated in recent years relative to separate account dividends received deduction calculations involving RICs versus those for which the underlying separate account investments are acquired directly by the insurance company.

In particular, regarding the treatment of short-term capital gains, the IRS has determined that the rules set forth under subchapter M governing RICs trump the rules specifically governing insurance companies under subchapter L. Not only does that result in accounting and economic anomalies, but it ignores basic concepts of how one would normally interpret the tax law. For example, see last year's decision in American Family Mutual Insurance,4 a property and casualty company case, in which the court found that the specific insurance tax rules under section 832(b)(4)(C) prevailed over the rules of general applicability set forth under section 481.

Timing Unclear on Rights to Insurance Premiums

Citation: Massachusetts Mutual Life Ins. Co. v. United States, No. 97-619T (Fed. Cl. June 30, 2005). For Massachusetts Mutual Life Insurance Company v. United States, see Doc 2005-14470 [PDF] or 2005 TNT 129-5 Database 'Tax Notes Today', View '(Number'.

Overview: The U.S. Court of Federal Claims has denied summary judgment over when an insurance company must accrue income from reduced premium group policies that require the plan sponsor to fund a share of the benefits, because it remains unclear when the insurer's right to the premiums becomes fixed.

Discussion: Although the court found that open questions of fact rendered summary judgment inappropriate, it is not likely that the ultimate decision that is reached even after a trial on the facts will be that dramatic from an insurance company tax perspective. The law is fairly clear once the factual issue has been resolved. To the extent that an opinion after trial goes into detail in analyzing the mechanics and rights set forth under a life insurance policy, however, the decision may be somewhat informative from a product tax perspective, particularly given the limited amount of existing judicial analysis regarding the mechanical operation of an insurance policy.

Insurer's Treatment of Reserves Was Unauthorized Change in
Accounting Method

Citations: ILM 200504030 (Oct. 15, 2004). For ILM 200504030, see The Insurance Tax Review, Mar. 2005, p. 528, Doc 2005-1800 [PDF], or 2005 TNT 19-16 Database 'Tax Notes Today', View '(Number'.

Overview: In a legal memorandum, the IRS concluded that an insurer's removal of obligations associated with deferred and uncollected premiums calculation of its tax reserves was an unauthorized change in its method of accounting.

Discussion: The issue of whether the IRS will treat a reserve adjustment in a given situation as a "change in basis" that is spread over a 10-year period continues to be an area in need of further specific guidance.

Mutual Insurer's Conversion to Stock Company Is

Citations: LTR 200544006 (Nov. 4, 2005). For LTR 200544006, see The Insurance Tax Review, Dec. 2005, p. 1016, Doc 2005-22556 [PDF], or 2005 TNT 214-22 Database 'Tax Notes Today', View '(Number'.

Summary: The IRS has ruled that a mutual insurance company's conversion to a stock company will be a recapitalization under sections 368(a)(1)(E) and 368(a)(1)(F).

Discussion: In an analogy that has probably never been made in an insurance tax context before, imagine the sound of a bag of popping corn in a microwave. The sound reaches a crescendo of exploding kernels about two or three minutes into the process. It then slows to an occasional pop of the last few kernels as you take the bag out of the oven. Perhaps not exactly what we have here, but it seemed that a few years back, tax news was full of rulings dealing with demutualizations and formations of mutual insurance holding companies. Now there are relatively few mutuals left, some of which might "pop" over time, such as in the present case, and others that will never change form.

Although the present case provided the opportunity to make a somewhat meaningless analogy, it does not provide much in the way of significant new developments.

An issue to watch for in the future, however, involves the allocation of basis on the issuance of stock or other interest to a current mutual company policyholder on a demutualization. Some commentators have discussed whether any basis should be allocated to the stock or other interest, and thus whether the sale of that interest for less than that amount could result in a loss transaction.

Property and Casualty Insurance Company Tax Matters

IRS Guidance Takes Aim at Single Insurer Arrangements

Citations: Rev. Rul. 2005-40, 2005-27 IRB 4. For Rev. Rul. 2005-40 see The Insurance Tax Review, Aug. 2005, p. 330, Doc 2005-13278 [PDF], or 2005 TNT 117-1 Database 'Tax Notes Today', View '(Number'.

Overview: The IRS issued Rev. Rul. 2005-40 to provide guidance regarding the issue of risk distribution for purposes of qualifying a transaction as an insurance transaction.

Discussion: Although we discuss this guidance in the products discussion (Part II), we believe it worth emphasizing here as well, because issues of risk distribution apply to all insurers.

The ruling provides four situations:

(1) Y insures X, a domestic corporation that conducts a courier transport business. X owns and operates a large fleet of automotive vehicles representing a "significant volume of independent, homogenous risks." Premiums are established at arm's-length rates and there are no retrospective rating provisions in the policy. X and Y are unrelated and Y has no other insureds.

(2) Same facts as situation (1) except that Y also insures Z, also a domestic corporation with a fleet of automotive vehicles used in a national courier transport business. Z's premium income represents 10 percent of Y's total earned income on both a gross and net basis and represents 10 percent of the total risk assumed by Y.

(3) Same facts as situation (1) except that X operates its courier business through 12 single-member limited liability companies. The LLCs are disregarded entities for federal tax purposes. The LLCs own and operate a large fleet of automotive vehicles, collectively representing a significant volume of independent, homogeneous risks. None of the LLCs account for less than 5 percent or more than 15 percent of the total risk assumed by Y under the agreements.

(4) Same facts as situation (3) except the single-member LLCs elect to be treated as separate corporations rather than as passthrough entities.

The ruling concludes that situation (1) is not insurance, because there is insufficient risk distribution when there is a single insured, regardless of how many independent, homogenous risks are in a "significant volume." As noted in the Products Tax Matters article, the IRS is seeking to establish a unique definition of risk distribution for federal tax purposes. In Helvering v. LeGierse, (312 U.S. 531 (1941)) the Supreme Court looked to the fundamental principles of what constitutes insurance in the context of life insurance and annuity contracts. It is unfortunate that the law regarding those principles has not developed in the same context, but rather in a captive insurance context. The government's long- standing aversion to captive insurance continues to create a helter- skelterish body of law with ever-increasing complexity in application.

The ruling further concludes that not even the addition of another insured is sufficient to create risk distribution when the second insured accounts for only 10 percent of the earned premiums and only 10 percent of the risk assumed, again when all parties are unrelated. Query: Is the magic number for risk distribution -- as the IRS defines the term -- two insureds with 50 percent each of the risk transferred or four with 25 percent each of the risk transferred? Also: Will the IRS begin to hold commercial insurance companies to the standards established for captive insurance? In any event, as explained in the Products Tax Matters article, the IRS's magic number of insureds, whatever it may be is irrelevant. It is the number of independent risks, not the number of insureds, that is determinative of the technical question of whether there is risk distribution.

In situation (3), the IRS concludes that single-member LLCs, as passthrough entities not separate from the parent entity for federal tax purposes, are not separate entities for any federal tax purposes, regardless of the juridical standing of those entities for state law purposes. In situation (4), the very same entities, having elected to be treated as separate corporations for federal tax purposes, will be respected for purposes of establishing risk distribution. That is an interesting form-over-substance position for the IRS to take in the insurance tax area. Nothing in substance has changed between the disregarded single-member LLCs and the regarded wholly owned subsidiaries, particularly if the subsidiaries file a consolidated return with the parent company. Nevertheless, for federal tax purposes, one form creates insurance while one form does not.

Although the IRS and Treasury are undoubtedly working valiantly to provide guidance and clarify the issues surrounding what constitutes insurance, this ruling is only one example of many in which good intentions are paving the road to even greater uncertainty.

As a further example, in the first paragraph of the analysis of the ruling, the IRS points out that there is no certainty regarding transactions that do not qualify as insurance and how those transactions should be treated for tax purposes -- "as a deposit arrangement, a loan, a contribution to capital (to the extent of net value, if any), an indemnity arrangement that is not an insurance contract, or otherwise, based on the substance of the arrangement between the parties. The proper characterization of the arrangement may determine whether the issuer qualifies as an insurance company and whether amounts paid under the arrangement may be deductible."

Undaunted, however, and good intentions to the fore, the IRS and Treasury have requested comments on captive insurance matters in Notice 2005-49. The notice acknowledges that further guidance is necessary and requests comments on four particular areas:

(1) the factors to be considered determining whether a cell captive arrangement constitutes insurance and, if so, the mechanics of any applicable federal tax elections;

(2) circumstances under which the qualification of an arrangement between related parties as insurance may be affected by a loan back of amounts paid as premiums;

(3) the relevance of homogeneity in determining whether risks are adequately distributed for an arrangement to qualify as insurance; and

(4) federal income tax issues raised by transactions involving finite risk.

The captive insurance industry responded to the call for comments on the taxation of cell captive arrangements. Several of the comments share thoughts on the impracticality of risk distribution standards (as defined by the IRS) applied to cell captive arrangements, suggesting that segregation of risk exposure is an underlying purpose for the creation of cell captives and, further, that cell captives do not insure unrelated persons. The comments advocate a need for sufficient capital reserves that are reviewed annually by professional actuaries. They also support the retention of assets and a lenient enforcement of the earnings and profits tax of section 531. (For the comments, see The Insurance Tax Review, Dec. 2005, p. 1043, Doc 2005-21257 [PDF], or 2005 TNT 203-32 Database 'Tax Notes Today', View '(Number'; The Insurance Tax Review, Dec. 2005, p. 1083, Doc 2005-21259 [PDF], or 2005 TNT 203-34 Database 'Tax Notes Today', View '(Number'; and The Insurance Tax Review, Dec. 2005, p. 1071, Doc 2005-21260 [PDF], or 2005 TNT 203-35 Database 'Tax Notes Today', View '(Number'.)

Insurer Granted Extension to Elect Domestic Corporation Status

Citation: LTR 200540009 (June 13, 2005). For LTR 200540009, see The Insurance Tax Review, Dec. 2005, p. 1021, Doc 2005-20489 [PDF], or 2005 TNT 195-36 Database 'Tax Notes Today', View '(Number'.

Overview: The IRS granted an insurance company an extension to make an election under section 953(d) to be treated as a domestic corporation for U.S. tax purposes.

Discussion: As noted in the Product Tax Matters article, this ruling touches on several issues related to the question of what is insurance.

Additions to Premium Stabilization Reserves Are Return

Citations: Rev. Rul. 2005-33, 2005-23 IRB 1155. For Rev. Rul. 2005-33, see The Insurance Tax Review, July 2005, p. 82, Doc 2005-10634 [PDF], or 2005 TNT 93-9 Database 'Tax Notes Today', View '(Number'.

Overview: The IRS concluded that an insurance company's additions to premium stabilization reserves are return premiums for purposes of determining the amount of premiums earned on insurance contracts in a tax year under section 832(b)(4).

Discussion: The ruling illustrates the mechanical operation of the rules for determining the amount of premiums written on a nonlife insurance contract. By the same token, it also illustrates the relevance of the insurance contract for determining the tax treatment of both the insurance company and the policyholder, and therefore, why the input of product tax professionals in the earliest stages of the policy design process is so important. In fact, it is a key element of a fully integrated product tax management system.

Insurer's Participation Fee in State Insurance Fund Is

Citation: TAM 200517030 (Jan. 31, 2005). For TAM 200517030, see The Insurance Tax Review, June 2005, p. 1078, Doc 2005-9050 [PDF], or 2005 TNT 83-17 Database 'Tax Notes Today', View '(Number'.

Overview: In technical advice, the IRS ruled that a fee paid by an insurer to participate in a state insurance fund is currently a deductible section 162 expense that should not be capitalized, because payment of the fee does not result in a distinct property interest or significant future benefit for the insurer.

Discussion: The ruling is useful in that it provides a road map for how the IRS will determine whether an item is deductible or must be capitalized. A potentially more meaningful aspect of the pronouncement, however, relates to the nature of the underlying coverage that is the subject of the ruling. That issue is discussed in the Product Tax Matters article.

Permission to Revoke Election Granted to Underwriter

Citation: LTR 200531001 (Apr. 27, 2005). For LTR 200531001, see The Insurance Tax Review, Sept. 2005, p. 507, Doc 2005-16672 [PDF], or 2005 TNT 151-44 Database 'Tax Notes Today', View '(Number'.

Overview: The IRS granted a reciprocal underwriter permission to revoke an election under section 835.

Discussion: Here, the IRS acted reasonably in permitting the revocation under circumstances that would otherwise have left the taxpayer bound by an election that was causing an unfair result that was not intended to occur under section 835.

Insolvent Insurance Company Is Still Exempt

Citation: LTR 200528027 (Apr. 22, 2005). For LTR 200528027, see Doc 2005-15117 [PDF] or 2005 TNT 136-34 Database 'Tax Notes Today', View '(Number'.

Overview: The IRS ruled that an insolvent insurance company's tax-exempt status as an organization described in section 501(c)(15) will not be adversely affected when it distributes its remaining assets.

Discussion: The effect of this ruling is fairly narrow, because the provisions at issue will affect only certain section 501(c)(15) companies in receivership, through tax years ending by December 31, 2007, at the latest. It does serve as a reminder, however, of the recent amendments to section 501(c)(15) that changed the requirements to qualify for a tax exemption under that provision.5

Blue Cross and Blue Shield (BCBS) Tax Matters

Coordinated Issue Paper Addresses BCBS Abandonment Loss

Citation: Coordinated Issue Paper (May 27, 2005). For the coordinated issue paper, see The Insurance Tax Review, July 2005, p. 114, Doc 2005-12100 [PDF], or 2005 TNT 106-23 Database 'Tax Notes Today', View '(Number'.

Overview: In a coordinated issue paper for the health and life insurance industry, the IRS announced it will continue to challenge abandonment loss deductions under the legal theories of previously released guidance and in light of recent litigation involving taxpayer valuations.

Discussion: This coordinated issue paper affirmed the conclusions in Notice 2000-34 regarding abandonment losses. The paper concluded that the IRS would challenge such loss deductions brought forth by taxpayers, and that any deductions that were not previously examined would now be scrutinized based upon the Tax Court's decision in Capital Blue Cross v. Commissioner.6

Perhaps the IRS should have waited. As suggested in our "Halftime 2005" report,7 the boldness with which the Service staked out its position in this coordinated issue paper is extraordinary given the fact that even in the lower court decision in Capital Blue Cross, the case on which it relies most heavily, the IRS was soundly defeated on all of the legal issues. Moreover, that case was on appeal when the coordinated issue paper was released, and many observers of the oral arguments had noted the prospects of a reversal of the lower court decision or, at the least, a remand. Well, guess what . . .

Third Circuit Reverses Tax Court's Capital Blue Cross

Citation: Capital Blue Cross et al. v. Comm'r, No. 04-2645 (3d. Cir. Dec. 5, 2005). For the Third Circuit's decision in Capital Blue Cross, see the March 2006 issue of The Insurance Tax Review and Doc 2005-24488 [PDF] or 2005 TNT 233-8 Database 'Tax Notes Today', View '(Number'. (For the Tax Court's opinion in Capital Blue Cross 122 T.C. 224, see The Insurance Tax Review, May 2004, p. 769, Doc 2004-5382 [PDF], or 2004 TNT 50-18 Database 'Tax Notes Today 2004', View '(Number'.)

Overview: The Third Circuit has reversed a Tax Court decision denying Capital Blue Cross's request for a refund of overpayment of taxes, finding that the Tax Court erred because it discounted expert testimony and incorrectly determined Capital Blue Cross's basis at zero.

Discussion: In rendering its decision, the Third Circuit set forth the standard by which a valuation put forth by a taxpayer must be evaluated. The court indicated that to be respected, a taxpayer's valuation must be "essentially reasonable." Further, it stated that the mere identification of some problems in a valuation process does not justify a finding of a zero basis in the item being valued. Moreover, to rebut a taxpayer's valuation, any objections must be specific and quantified.

The decision also underscores a difference between performing a valuation of insurance contracts or businesses and valuation methods used for other assets or businesses. That is, for insurance-related valuations, insurance or actuarial principles must be used. In several instances, the IRS has put forth arguments that attempt to disregard notions of insurance and actuarial science that make the valuation of those items possible.

It will be interesting to observe the IRS's strategy when this case goes back to the Tax Court on remand. The IRS is currently challenging other taxpayers on the same theory it used to challenge Capital Blue Cross -- that is, declaring that the taxpayers in those cases also cannot claim any value on their contracts. As such, it may be put in a position in which it is telling some taxpayers at the administrative or early litigation stages that their contracts cannot be valued; yet it will likely need to follow the decision of the Third Circuit, which has indicated that that would not be an appropriate response on remand.

Finally, it is also hoped that the strong conclusion in this case at last puts to rest the IRS's attempts to use its "mass asset theory." If nothing else, certainly the IRS will need to reconsider the harsh stand it put forth in its coordinated issue paper.

BCBS Organization's Stock Issuance After Becoming For-Profit Is
Material Change

Citation: TAM 200528026 (Mar. 16, 2005). For TAM 200528026, see The Insurance Tax Review, Sept. 2005, p. 496, Doc 2005-15116 [PDF], or 2005 TNT 136-16 Database 'Tax Notes Today', View '(Number'.

Overview: In technical advice, the IRS concluded that a nonstock, nonprofit Blue Cross Blue Shield organization's issuance of stock as part of its conversion to a for-profit stock corporation is a material change under section 833(c)(2)(C) that results in the loss of federal tax benefits described in section 833 and section 1012.

Discussion: There are a lot of facts to analyze, but not a lot of law on which to base a conclusion. Hence, regardless of the conclusion that was reached in this case, the memorandum is meaningful in terms of how the IRS went about performing its analysis. The IRS spent a great deal of time discussing colloquies, committee reports, and other documents that it, in other forums, has suggested do not provide sufficient levels of authority.


The message from 2005? Although there were a few developments with broad impact, there has not been a great deal of change in the substantive tax law, or significant unexpected judicial or administrative interpretations. The world in which tax practitioners will be required to operate, however, has changed. As 2006 unfolds, we will see how well everyone can adapt.


1 "Proposed Interpretation of Statement 109, Accounting for Uncertain Tax Positions," Proposed Interpretation 1215-001 (July 14, 2005).

2 P.L. 108-357.

3 P.L. 109-135.

4 American Family Mutual Ins. Co. v. United States, No. 04-C-0764-C (W.D. Wis. July 11, 2005). See Doc 2005-17094 [PDF] or 2005 TNT 158-6 Database 'Tax Notes Today', View '(Number'. In that case, the court held that an insurance company cannot claim any additional adjustment under section 481, because section 832(b)(4)(C) provides explicit instructions for the transition adjustment governing the taxation of unearned premiums.

5 See the Pension Funding Equity Act, P.L. 108- 218.

6 See Capital Blue Cross et al. v. Comm'r, 122 T.C. No. 11, 122 T.C. 224 (2004). See also discussion of this ruling in "2004 Insurance Tax Review: Part I -- Federal Tax Matters," The Insurance Tax Review, Feb. 2005, p. 299.

7 See Frederic J. Gelfond "Halftime 2005 -- Selected Federal Insurance Tax Developments," The Insurance Tax Review, Aug. 2005, p. 253.


Comment on this story

Tax Analysts Information

Code Section: Section 801 -- Life Insurance Company Tax; Section 831 -- Tax on Other Insurance Companies
Geographic Identifier: United States
Subject Area: Insurance company taxation
Industry Group: Insurance
Author: Burness, Richard J.; Gelfond, Frederic J.
Institutional Author: Deloitte Tax LLP
Tax Analysts Document Number: Doc 2006-535 [PDF]
Tax Analysts Electronic Citation: 2006 TNT 46-44





2005 Insurance Tax Year in Review: Part II -- Product Tax Matters
by Frederic J. Gelfond

In the second installment of a four-part report from Deloitte Tax LLP, Rick Gelfond, who is based in the firm's Washington office, examines important developments affecting insurance tax products in 2005.

Date: Mar. 9, 2006

Full Text Published by Tax AnalystsTM

2005 Insurance Tax Year in Review: Part II -- Product Tax Matters

Copyright © 2006 by Deloitte Development LLC.
All rights reserved.

by Frederic J. Gelfond


Thanks mostly to New York State Attorney General -- and gubernatorial hopeful -- Eliot Spitzer, the question of what should qualify as insurance is now being asked by a much larger audience. From a tax perspective, notions of risk transfer and risk distribution have been fairly well developed over the years; although, similar to what is happening in the real -- that is, the nontax -- world, there will likely continue to be debates in certain situations over whether a given transaction possesses enough of these elements to be respected as insurance.

At the same time, taxpayers continue to cry out for further articulation by the IRS as to what it would agree constitutes an insurance risk. The courts have spoken to the issue, from both tax and nontax perspectives. Industry practitioners, academics, and actuaries, among others, have spoken as well. It has never been clear, however, exactly what standard the IRS will follow in making the determination. As discussed in the "What Is Insurance?" section below, it is hoped that taxpayers and the IRS will find common ground on the issue as (1) the number, types, and degree of exposures that businesses and individuals face continue to evolve, and (2) the need for greater certainty regarding the tax treatment of transactions becomes more important in an increasingly stringent regulatory environment.

Frederick J. Gelfond (File Photo)The following pages describe some of the more significant tax developments during 2005 regarding the "What is insurance?" question and provide updates to several items covered in the "Halftime 2005" report,1 including such things as corporate-owned life insurance, life insurance contract qualification, variable product diversification, the secondary market for life insurance, insurance policy fair market value, and basis.

Corporate-Owned Life Insurance

A Substantive Challenge?

The IRS has gone retro. In moves reminiscent of activity in the late 1900s, several corporate policyholders have been challenged by examining agents on their interest deductions relating to loans incurred in connection with life insurance policies covering the lives of multiple employees. In fact, there is at least one taxpayer -- Xcel Energy, Inc. -- that is currently slated to go to trial over the issue.

Although that might seem like old news, the headline on this item is that the contracts that are the subject of the current challenges were purchased on or before June 20, 1986 (pre-1986 contracts). Unlike the contracts purchased after June 20, 1986 (post- 1986 contracts), that continue to be the subject of highly publicized litigation, interest deductions relating to the pre-1986 contracts that are being challenged have been specifically protected through grandfathering language a fully informed Congress included in three major tax acts (1986, 1996, and 1997)2 that otherwise limited the deductibility of interest related to post-1986 contracts. These contracts involved the physical transfer of cash -- as opposed to an application of dividends or partial withdrawals -- to pay premiums in nonborrowing policy years. Further, they do not contain experience rating features that could arguably eliminate the transfer of mortality risk.

In the decided (that is, post-1986 contract) COLI cases, a finding of the presence or absence of the mortality risk was the essential factor for the courts in deciding whether the subject transactions possessed economic substance. That is, they ultimately recognized that an insurance arrangement that involves a transfer of risk is necessarily imbued with economic substance.

Can the IRS sustain an economic substance challenge under the types of facts involved in the pre-1986 contract cases, or is the IRS mistakenly going one case too far? Although it has had some recent success in challenging certain COLI transactions, the IRS has more recently suffered significant losses on the economic substance front. (See Black & Decker,3 Coltec,4 and TIFD-III-E.5) One is left to wonder whether challenging interest deductions related to pre-1986 COLI contracts will ultimately result in a further chipping away of the prior gains achieved by the IRS in the economic substance arena or whether there are going to be several more long rounds of COLI litigation.

As discussed below, the first round of litigation on that issue has not provided an answer, as the U.S. District Court in Minnesota, in the Xcel case, denied the taxpayer's motion for summary judgment.6 In denying the taxpayer's motion, the court honed in on two factual questions that remain to be resolved. The first question is whether the subject insurance policies "presented a real opportunity for risk-based gain or loss based upon the actual mortality of the insured employees." In other words, is risk really being transferred under the arrangement, so that the transaction is an insurance arrangement? If the answer to this question is yes, it would seem the second factual question is not meaningful. That question is whether, absent the interest deductions, the plan could generate a pretax profit for Xcel.

Insurable Interest and COLI

In an interesting side note to the Xcel case, the Department of Justice, on the heels of the recent decision under Oklahoma state law in Tillman v. Camelot Music,7 cross-moved for summary judgment, arguing that the taxpayer did not have an insurable interest in its covered employees. The court denied the motion and granted Xcel's cross-motion for summary judgment that it had an insurable interest in the employees it covered. The court reached that decision because it found that the company had a reasonable right to believe it would receive some pecuniary benefit from the continued employment of each individual, or fear a loss due to benefits to be paid out with each death; and under Colorado law, an insured may designate a beneficiary without limitation as to the class of the beneficiary. It was not relevant to the court that not every individual was classified as a key employee.

Although a finding either way on insurable interest, should have no bearing on a decision as to the economic substance of the transaction -- or the ability of a taxpayer to deduct policy loan interest -- the question of insurable interest is an issue that has captured the attention of many business owners of life insurance.

Although the question is a matter of state law, various members of Congress have sought to clearly identify ways in which businesses should be permitted to continue to purchase life insurance on their employees and still be able to exclude the associated death benefits from taxable income. As discussed previously in our "2003 Insurance Tax Year in Review,"8 Senate Finance Committee member Jeff Bingaman, D-N.M., initially sought to generally eliminate the exclusion for death benefits received by businesses on former employees who were not employed by the company during the year before death. As one might suspect, that provision was met with a groundswell of opposition from the insurance industry and resulted in an amendment proposed by Finance Committee member Kent Conrad, D-N.D. Conrad's amendment set forth conditions for businesses purchasing life insurance on employees, that if met, would enable those businesses to continue to exclude death benefits. Members of the insurance industry voiced their support for the Conrad amendment in the event that bill was ever put before the full Senate. This past May, a bill, the COLI Best Practices Act of 2005, containing language similar to the Conrad amendment, was introduced in the House by Ways and Means Committee member Thomas M. Reynolds, R-N.Y.9 In November a similar provision was included in the pension reform bill that passed in the Senate.10 The House version of that bill, which passed on December 15, 2005,11 did not contain the provision. It is anticipated that if the COLI provision doesn't make its way into the final pension bill negotiated by House and Senate conferees, it will be included in some future legislative proposal.

It would seem that the result on the question of insurable interest in Xcel and Dow Chemical,12 and in other places in which the IRS has unsuccessfully raised the issue, as well as the existence of the above pending legislation, will finally put to rest any further attempts by the IRS to continue to raise insurable interest as a means of challenging business-owned life insurance.

Life Insurance Contract Qualification

Sometimes the IRS really does deliver. It might not always deliver as much as taxpayers would like -- and might not always answer all the questions -- but a little something can be better than a whole lot of nothing. Case in point: the IRS released a few droplets of guidance during the first part of this year under section 7702, where the thirst for administrative direction has been well documented. For example:

IRS Rules Charges for Qualified Additional Benefits Should Be
Taken Into Account Under Expense Charge Rule

Citations: Rev. Rul. 2005-6, 2005-6 IRB 471. For Rev. Rul. 2005-6, see The Insurance Tax Review Mar. 2005, p. 511, Doc 2005-1201 [PDF], or 2005 TNT 13-14 Database 'Tax Notes Today', View '(Number'.

Overview: The IRS ruled that charges for qualified additional benefits (QABs) should be taken into account under the expense charge rule of section 7702(c)(3)(B)(ii) -- rather than under the mortality charge rule of section 7702(c)(3)(B)(i) -- to determine whether a contract qualifies as a life insurance contract under section 7702 or as a modified endowment contract under section 7702A.

Discussion: In certain instances, the application of this ruling will result in a guideline premium limitation for a given contract that may be lower than what might have been determined had an opposite conclusion been reached. The sole justification for the conclusion in the ruling, however, is an analogy it draws to the rules setting forth the treatment of QABs under the cash value accumulation test. Unlike the guideline premium rules that are silent on the issue, the rules setting forth the cash value accumulation test specifically provide for treatment of QABs under the expense charge rule. Although the result may be supportable, it is not completely certain that it is appropriate to infer that Congress necessarily intended similar treatment for QABs under both tests. Indeed, it could be argued that if the conclusion set forth in the ruling truly comported with congressional intent, Congress would have provided similar specific direction under both parts of section 7702.

That said, the ruling is very reasonable in terms of how it permits insurance companies that are currently accounting for QABs under the mortality charge rule to comply with its holding. Nevertheless, to the extent that changes will need to be made to a company's administration system -- a system that technically might not be "broken" depending on one's interpretation of the code on this issue -- costs will ultimately be incurred.

In a subsequent notice,13 the IRS responded to administrative concerns raised by insurance companies by permitting the identification of contracts under this revenue ruling to be provided in electronic format.

Insurers Granted Waivers for Life Insurance Contracts

Citations: LTR 200503021 (Oct. 6. 2004), LTR 200519025 (Jan. 27, 2005), LTR 200521009 (Feb. 22, 2005), LTR 200528018 (Apr. 25, 2005), and LTR 200525007 (Mar. 22, 2005).

For LTR 200503021, see The Insurance Tax Review, Mar. 2005, p. 533, Doc 2005-1311 [PDF], or 2005 TNT 14-28 Database 'Tax Notes Today', View '(Number'. For LTR200519025, see The Insurance Tax Review, July 2005, p. 139, Doc 2005-10485 [PDF], or 2005 TNT 93-56 Database 'Tax Notes Today', View '(Number'. For LTR 200521009, see The Insurance Tax Review, July 2005, p. 136, Doc 2005- 11719 [PDF], or 2005 TNT 103-51 Database 'Tax Notes Today', View '(Number'. For LTR 200528018, see The Insurance Tax Review, Sept. 2005, p. 504, Doc 2005-15108 [PDF], or 2005 TNT 136-50 Database 'Tax Notes Today', View '(Number'. For LTR 200525007, see The Insurance Tax Review, Aug. 2005, p. 338, Doc 2005-13757 [PDF], or 2005 TNT 122-7 Database 'Tax Notes Today', View '(Number'.

Overview: The IRS granted life insurance companies a waiver under sections 101(f)(3)(H) and 7702(f)(8) for life insurance contracts that inadvertently failed to satisfy the requirements of sections 101(f) and 7702.

Discussion: Although these may, at first blush, appear to be just further examples of waivable errors to add to the list, it is potentially very helpful for insurance company personnel with section 7702 compliance responsibilities to pay attention to the specific types of errors that are described in the handful of waiver rulings that seem to be released each year, as there are practical lessons to be learned. For example, in LTR 200503021, the company appears to have a fairly thoughtful compliance system in place. Nevertheless, the ruling demonstrates the importance of ensuring sufficient controls or compliance system checks are in place to ensure that the systems continue to operate as intended. LTR 200503021 also provides a good illustration of how different personnel from multiple departments in an insurance organization potentially play a role in ensuring section 7702 compliance -- whether they realize it or not. LTR 200519025 highlights the types of errors that could occur upon the conversion of an administration system -- one of the most common circumstances under which section 7702 and section 7702A errors are discovered.

For the past several years, this space has been used to compliment the IRS on its consistently reasonable application of the section 7702 waiver provision. This year is no different. In a footnote to LTR 200503021, however, there is a bold statement that a particular type of error is "not waivable." Yet it is questionable whether there might be circumstances where a failure of the type described in that footnote could not be the result of reasonable error. Is it appropriate to adopt such an advance position when in any given situation, regardless of the type of error, there may be mitigating facts and circumstances that might render the occurrence of that error reasonable?

IRS Proposes Regulations on Life Insurance Contact

Citations: REG-0168892-03, 70 F.R. 29617-29673 (May 24, 2005). For REG-0168892-03, see The Insurance Tax Review, July 2005, p. 71, Doc 2005-11240 [PDF] or 2005 TNT 98-34 Database 'Tax Notes Today', View '(Number'.

Overview: The IRS has issued proposed regulations explaining how to determine the attained age of an insured when testing whether a contact covering multiple lives qualifies as a life insurance contact for federal income tax purposes.

Discussion: The preamble states that the treatment provided under the proposed rules is consistent with what Treasury and the IRS believe to be industry practice. Although there may be several companies that operate in ways similar to what is called for in the proposed regulations, there are, in fact, differences in various assumptions or practices among insurance companies and their products that are not necessarily considered or otherwise adequately dealt with under the proposed regulations. Nevertheless, any certainty that is offered in this arena through regulations or otherwise is certainly welcome. Of course, one would hope that the proposed regulations do not pose the same concerns for the IRS and Treasury that have kept prior proposed regulations under section 7702 from being finalized.


IRS Issues Guidance on Application of Look-Through Rule

Ever wonder why the more you thrash about in a pile of quicksand trying to get yourself out, the further down you sink? (Probably not, but let's just pretend.) Well, many tax practitioners get that same feeling when they begin to play with the segregated asset account diversification rules. The rules seem straightforward. But just try to apply them, and you find yourself with more and more questions the deeper you get involved. Sometimes you think you know what the answer should be, but the words are not quite there in either the statute or the underlying regulations. Other times, the words are there, but you are not as up on your Sanskrit as you used to be. Over the past year or so, the IRS has appeared to be more willing to throw taxpayers a line by providing further guidance regarding open industry questions in this area.

In 2005 the IRS and Treasury provided public and private guidance regarding the application of the look-through rule. Rev. Rul. 2005-714 dealt with an investment in a regulated investment company that owned an interest in another RIC; LTR 20050800215 applied the rule in a scenario in which an insurer's subaccount invested in lower- and upper-tier RIC funds. Under the facts of both cases, it appeared that the IRS's primary concern in this area -- that is, that investment in the underlying funds not be available to the general public other than through the purchase of a variable contract -- was adequately addressed, and therefore, use of the look-through rule to satisfy the diversification requirements was permitted.

Treasury and the IRS provide an appropriate degree of flexibility regarding the mechanical application of the diversification requirements. The analyses in both rulings, however, similar to most pronouncements in this area, contain at least some passing reference to what the IRS refers to as the "investor control" doctrine, as though that theory would be a viable means for challenging a transaction in court. In fact, the investor control doctrine is little more than a watered-down version of the economic substance or substance over form doctrine that could never withstand serious scrutiny in light of both changes in the code governing insurance contracts, as well as the evolution of those more serious doctrines in the courts in the years since the investor control theory was initially put forth.

Yet another development this year relating to diversification and the look-through rule involved the issuance of final regulations16 that made the look-through rule unavailable for purposes of counting the assets of a nonregistered partnership to satisfy the diversification requirements. The fact that this change was finalized is not surprising. In doing so, the IRS acknowledged taxpayer comments that there may be other areas, or entities, to which it would be appropriate to make the look-through rules available, but it did not act on those suggestions.

Secondary Market for Life Insurance

There is a white elephant sitting over there in the corner, and it is beginning to stand up. Although not many folks within the life insurance industry seem to want to talk about it, a new market for life insurance contracts has begun to take root -- a secondary market in which investors seek to profit from changed underwriting assumptions relating to the subject insured since the time the contract was initially issued by the insurance company. Essentially, a growing number of well-financed buyers, who are willing to pay policyholders more for their contracts than the policyholders could achieve through a contract surrender, have stepped to the fore. There has been some debate between participants in the market and those who oppose its development as to whether the pricing dynamics of an evolving market are causing policyholders to dispose of their contracts at something less than their full value, despite the greater-than-cash-value lifetime payoffs that are now available.

While the societal benefits of this new industry will likely continue to be debated for some time, there are few on either side of the debate who are unwilling to express their concern over some of the practices that have begun to appear on the fringes of the secondary market. Those apprehensions include growing stories of investors seeking to rent "insurable interests" by convincing uninsured individuals to apply for insurance for the sole purpose of selling the policies to the investors, as well as the apparently growing practice of using charitable and other tax-favored organizations for the sole purpose of facilitating life insurance investments. The latter practice has resulted in proposed legislation intended to curb perceived abuses in that area. A bipartisan proposal in the Senate would apply a 100 percent excise tax and impose substantial reporting requirements for some life insurance contract acquisitions involving tax-exempt organizations.17

Life Insurance Contract Fair Market Value

IRS Modifies Guidance on Determining Fair Market Value of
Some Life Insurance Contracts

Citations: Rev. Proc. 2005-25, 2005-17 IRB 962 (Apr. 8, 2005). For Rev. Proc. 2005-25, see The Insurance Tax Review, June 2005, p. 1071, Doc 2005-7286 [PDF], or 2005 TNT 68-9 Database 'Tax Notes Today', View '(Number'.

Overview: The IRS explained how to determine the fair market value of contracts that provide life insurance protection for purposes of applying the rules of sections 79, 83, and 402.

Discussion: This revenue procedure referenced prior guidance related to fair market valuation, including Rev. Rul. 59- 195, Notice 89-25, and Rev. Proc. 2004-16. If nothing else, the ruling and the discussion contained therein illustrate not just the many tax purposes for which one would need to value a life insurance contract, but also the variety of ways that have evolved over the years for doing so. In light of the developing secondary market for life insurance contracts described above, it will be interesting to see if there will soon be an outcry to develop yet another way to determine the fair "market" value of a life insurance contract.

In other developments, the IRS issued final regulations (T.D. 9220),18 that reference Rev. Proc. 2005-25 in dealing with the tax consequences of converting a non-Roth IRA annuity to a Roth IRA, and clarifying that the fair market value of the annuity contract on the date of conversion is to be treated as if it were distributed. The IRS also issued T.D. 9223,19 which provides that life insurance contracts distributed from a qualified retirement plan to employees must be taxed at their full fair market value.

At the end of December 2005, the IRS released Rev. Proc. 2006- 13,20 which provides safe harbor methods that may be used in determining the fair market value of an annuity includible in income as a result of conversion to a Roth IRA.

Life Insurance Policy Basis

Class-Action Damages Not Income to Extent of Insurance Policy

Citations: ILM 200504001 (Oct. 12, 2004). For ILM 200504001, see The Insurance Tax Review, Mar. 2005, p. 530, Doc 2005-1813 [PDF], or 2005 TNT 19-14 Database 'Tax Notes Today', View '(Number'.

Overview: In a legal memorandum, the IRS advised that a class-action member's damages in a suit against an insurer are included in income to the extent they exceed the individual's basis in life insurance policies.

Discussion: Yet another question that might make its way into a louder public debate as the result of the evolution of the secondary market for life insurance is the proper means of measuring the basis of a life insurance contract. Taxpayers and the IRS have previously wrangled over whether both gains and losses (assuming for the moment it is proper to recognize a loss on a life insurance contract) relating to life insurance contracts are measurable based on the section 72 "investment in the contract" theory or the section 1001 notions of basis, as well as whether there is a difference between the two concepts. Among the major points of contention in this debate are whether basis should be reduced by the costs of insurance coverage that have been expended during the time the contract was in force, and whether the difference between the amount of premiums paid and the amount that can be achieved upon the surrender of a contract is the proper measure of the costs of insurance coverage, a theory based on decades-old, and perhaps outdated, judicial guidance.

What Is Insurance?

It is somewhat amazing that after so many years of asking this question, controversy over how to analyze the insurance nature of a given transaction rages on. There is a degree of acceptance that for a transaction to be respected as insurance for federal income tax purposes (at least by the IRS), there likely will need to be a demonstrable element of risk shifting and risk distribution. How those terms are defined is yet another matter. And, of course, infused in those debates are questions regarding the presence of -- or the need to demonstrate -- common notions of insurance, or whether there is even authority to challenge the nature of an otherwise accepted insurance transaction unless there is a compelling tax reason to do so (for example, because the transaction lacks economic substance). Perhaps part of the disconnect here is due to the IRS's failure, until recently, to even partially acknowledge in its pronouncements the existence of this latter standard, despite its appearance in Sears,21 one of the most significant modern appellate-level decisions dealing with the question of what is insurance, as well as the refusal by other appellate courts in the Sears line of cases to be limited by a strict three-prong test.22

The IRS's public divorce in Rev. Rul 2001-31 from its long-held "economic family" position has paved the way in recent years for it to open up a bit on its guidance on captive insurance arrangements, which have historically served as the backdrop to much of the existing guidance on the issue of what is insurance. See, for example, the safe harbor revenue rulings released in the last days of 2003, as well as the risk distribution revenue ruling described below. Although most of the ink that has been spilled to date has focused on the concepts of risk shifting and risk distribution, the prediction here continues to be that the real drama in the coming months and years in the "What is insurance?" area is going to revolve around the much more fundamental question of what is an insurance risk. There are many reasons for this, including the continuing product convergence of the various financial services industries; but perhaps an even more important driver is the ongoing innovation relating to the measurement and management of a growing variety of risk exposures.

Today, it is becoming more common that the commercial marketplace is either unwilling or unable to provide types of coverage for which there are important societal needs. Examples might include coverage for certain types of environmental exposures, terrorism risks, and various forms of liability. Among the responses of those facing such exposures have been increases in the formation of captive insurance companies, risk retention groups, and other risk sharing arrangements. As the developing needs and solutions created to deal with them continue to evolve, it is hoped that the IRS will be even more willing to work with taxpayers in forging a tax scheme that is able to identify, and appropriately respect as insurance, those vehicles that do, in fact, provide for the transfer and sharing of risks.

This is an issue that is growing in importance as the regulatory environment continues to fuel demands for greater certainty in the characterization of transactions for financial reporting and other purposes, much of which includes questions regarding how those transactions will be treated for federal income tax purposes.

IRS Guidance Targets at Single Insurer Arrangements

Citations: Rev. Rul. 2005-40, 2005-27 IRB 4. For Rev. Rul. 2005-40, see The Insurance Tax Review, Aug. 2005, p. 330, Doc 2005-13278 [PDF] or 2005 TNT 117-1 Database 'Tax Notes Today', View '(Number'.

Overview: The IRS has issued guidance reiterating that the elements of risk shifting and risk distribution must be present for an arrangement to be considered insurance for federal income tax purposes. The gist of the ruling, however, was that an arrangement involving an insurance company that had only a single policyholder could not involve risk distribution -- and hence, was not insurance -- despite the fact that the arrangement covered multiple homogeneous risks.

Discussion: There are many comments that can be made about this ruling. Immediately coming to mind are those that deal with the fundamental issue of how one determines whether an arrangement involves risk distribution, and the impact the tax classification of an entity should have on determining whether an arrangement in which that entity is a party can constitute insurance. Those issues are discussed below.

Perhaps the most extraordinary issue raised by this ruling, however, results from a subtle, almost unnoticeable change from previous public IRS rulings. This change appears in the boilerplate description of what is required to have an insurance arrangement that tax practitioners are used to reading in most "What is insurance?" pronouncements. Among other things -- risk shifting, risk distribution, and so forth -- the IRS boilerplate typically includes a reference to LeGierse23 in support of the proposition that the arrangement cannot provide coverage solely for investment risk. Rev. Rul. 2005-40, however, contains a dramatic expansion of this proposition, suggesting that the risk that is transferred "must not be merely an investment or business risk" (emphasis added). It provides no authority for its inclusion of a reference to business risk other than citations to LeGierse and Rev. Rul. 89-96 (commonly referred to as the MGM ruling). Those authorities are somewhat clear in their statements that insurance must involve something more than an investment risk. Neither one of those authorities, however, provides any reference to -- let alone any prohibition of -- coverage of business risks.

Despite the fact that this is the first time the IRS has set forth this standard in a public pronouncement (identical language first appeared last year in a private letter ruling), the IRS does not provide any discussion of what it means by the term "business risk." The term has previously appeared in IRS pronouncements proscribing insurance treatment of "coverage" provided by service providers -- such as certain HMOs -- in describing the risks borne by those entities. The use of that term in the present context, however, reflects a clear attempt on the part of the IRS to expand a limitation on what qualifies as an insurance risk. There is no existing authority, however, that supports the IRS's position. Moreover, given that it does not even provide a definition of what it means by the term "business risk," one could argue that the position of the IRS is that any insurance coverage purchased by a business cannot qualify as insurance. That clearly cannot be the case.

Now, back to the more mundane. The issue raised by Rev. Rul. 2005-40 that has so far captured the most attention deals with its application of the notion of risk distribution. The concept of risk distribution refers to an application of Bernoulli's Theorem, or the scientific notion of the law of large numbers. In an insurance context, that concept describes how the pooling of a sufficient number of independent risks makes the ultimate experience of the group as a whole somewhat predictable. Given the knowledge of the performance of the group as a whole, the insurance company can determine the premium amount it would need to collect from each insured to cover its aggregate expected loss. The amount each insured would need to pay, or its share of the expected loss, would be less than the amount it would need to set aside in the event its risk was not pooled with the other covered risks. The identity of the insureds is irrelevant to the notion of risk distribution. That is, the predictability of aggregate level of loss that comes from the pooling of risks would be the same regardless of whether the pooled risks are transferred to the insurance company by a single insured or by many insureds.

Namely, assume an insurance company provided flood insurance to several policyholders all located on the same flood plain. That arrangement would likely be deemed not to involve risk distribution because the arrangement involves only a single element of risk -- a flood on that plain. Assume next that each policyholder is instead located on a different flood plain. In the latter case, risk distribution is possible given the independent nature of each of the covered risks -- a flood on any of the plains. The only thing that changed in that case was the number of independent risks involved. Hence, the presence or absence of risk distribution was a function of the number of independent covered risks, not the identity or number of policyholders. That is, the theory would hold true regardless of whether the properties were owned by a single entity or several.

The revenue ruling nevertheless reaches its conclusion that a case involving multiple independent risks but only a single policyholder does not involve insurance as the result of a lack of risk distribution. That is inconsistent with above-established notions of insurance.

A possible retort to those comments is that even if the pooling of risks did operate to reduce the costs of each individual covered risk, the fact of the matter is that because there is only a single insured party, that party is not relieved of the burden of paying for the aggregate covered risks. Such a reply, however, is irrelevant, both for the reasons set forth above as well as because that point goes to whether there has been risk shifting, not whether there has been risk distribution. Further, as with any insurance arrangement, the premiums collected by the insurance company are intended to cover its aggregate expected loss, with the insurance company taking on the risk that actual losses will be greater than what was expected. This dynamic is present even when there is only a single policyholder, including the scenarios set forth in this revenue ruling.

Another significant issue highlighted by this ruling relates to Situation 3, in which the subject taxpayer's single member limited liability companies through which it operates its business are treated as disregarded entities for purposes of determining whether an insurance arrangement exists. The question, of course, is whether the classification of an entity for tax reporting purposes should be determinative in interpreting whether a transaction among legally separate entities that, in fact, economically shift and distribute risk should be respected as insurance. Whether the approach set forth in the ruling is appropriate will likely be the subject of continued public debate. In the interim, taxpayers who are considering checking the box should be cognizant of the impact the IRS's enforcement of its current position might have on the qualification of their arrangements.

Many of the same issues dealt with in Rev. Rul. 2005-40 are also addressed in LTR 200518010.24

IRS Seeks Comment on Single Insurer Arrangements

Citations: Notice 2005-49, 2005-27 IRB 14. For Notice 2005-49, see The Insurance Tax Review, Aug. 2005, p. 333, Doc 2005-13279 [PDF] or 2005 TNT 117-3 Database 'Tax Notes Today', View '(Number'.

Overview: The IRS has requested comments on newly released guidance that is intended to clarify the standards for determining whether an arrangement constitutes insurance for federal income tax purposes.

Discussion: The IRS's recognition of the fact that further guidance is needed in this area -- and its expressed willingness to obtain taxpayer input -- was welcome news. Many taxpayers provided comments on issues such as cell companies, the use of loans among the parties, and other general concerns relating to how the ruling interprets and applies the concept of risk distribution. Time will tell whether those comments will affect the future application of the law.

Insurer's Participation Fee in State Insurance Fund Is

Citation: TAM 200517030 (Jan. 31, 2005). For TAM 200517030, see The Insurance Tax Review, June 2005, p. 1078, Doc 2005-9050 [PDF], or 2005 TNT 83-17 Database 'Tax Notes Today', View '(Number'.

Overview: In technical advice, the IRS ruled that a fee paid by an insurer to participate in a state insurance fund is a currently deductible section 162 expense that should not be capitalized, because payment of the fee does not result in a distinct property interest or significant future benefit for the insurer.

Discussion: As noted in the Federal Tax Matters article, this ruling provides a useful road map for how the IRS will determine whether an item is deductible or must be capitalized. Another potentially interesting aspect of this ruling, however, relates to the nature of the underlying coverage that is the subject of the ruling. It is unclear from the facts set forth in the memorandum whether some or all of the coverage that is being purchased is for liabilities resulting from an event that has already occurred. It appears that is the case. If so, it is helpful to taxpayers in that the ruling clearly acknowledges acceptance by the IRS that insurance can be purchased that is limited to covering severity risks, regardless of whether an element of frequency risk is also present. It would also demonstrate the limits of the reach of Rev. Rul. 89-96 (the MGM ruling) in denying insurance tax treatment (that is, to transactions in which both the timing and amount of a loss are known in advance).

Further, it demonstrates the IRS's acknowledgment, as supported by the case law, of taxpayer arguments that coverage that provides for the reduction of a future expense is not the same as the creation of an asset with future benefit. As such, in a case like the present one, in which the coverage clearly does not create a future benefit apart from minimization of costs associated with past business activity, premiums paid for such coverage are currently deductible.

Issuer's Vehicle Service Contracts Are Insurance

Citations: LTR 200509005 (Nov. 17, 2004). For LTR 200509005, see The Insurance Tax Review, Apr. 2005, p. 697, Doc 2005-4435 [PDF], or 2005 TNT 43-32 Database 'Tax Notes Today', View '(Number'.

Overview: The IRS concluded that a company not recognized as an insurance company under state law that plans to only issue vehicle service agreements is an insurer for federal tax purposes because the agreements are insurance contracts that are "aleatory" and involve risk shifting and distribution.

Discussion: Aside from the fact that the taxpayer seeking the ruling here is not an insurance company under state law, this case involved a fairly noncontroversial fact pattern that falls squarely within prior favorable guidance that has been provided by the IRS. Although the taxpayer apparently got the result it was looking for, there are several concepts that are quickly glossed over in the ruling, including the manner in which it addresses the elements discussed above involving insurance risk, risk shifting, and risk distribution. At first, those concepts may seem straightforward; but in other factual circumstances, they may involve substantial complexity.

Other rulings in this area issued this year include LTR 20052500425 (addressing vehicle service contracts) and LTR 20053801226 (dealing with a workers' compensation arrangement).

Organization's Failure to Operate as Insurance Company Causes Loss
of Exempt Status

Citation: LTR 200520035 (Dec. 3, 2004). For LTR 200520035, see The Insurance Tax Review, July 2005, p. 123, Doc 2005-11165 [PDF], or 2005 TNT 98-67 Database 'Tax Notes Today', View '(Number'.

Overview: The IRS has revoked an organization's tax- exempt status as an organization described under section 501(c)(15), noting its failure to qualify as an insurance company as defined under that provision.

Discussion: There are several tax issues dealt with in this technical advice memorandum, many of which concern the complexities of section 953(d). Perhaps the least complex question was whether the subject organization was an insurance company for federal income tax purposes. The facts provided appeared to make it easy for the IRS to determine that, under the law applicable at the time, the primary and predominant activity of the entity was not providing insurance.


Taxpayers and the IRS will not always agree in their interpretation of the tax law. Nevertheless, it remains important to the effective administration of the tax laws -- and hence, our economy -- that taxpayers and the IRS continue to be able to work together toward identifying where the real issues are. In the insurance arena, it is that much more important given the industry's role in fulfilling essential societal needs.


1 See Frederic J. Gelfond. "Halftime 2005 -- Selected Federal Insurance Tax Developments." The Insurance Tax Review, Aug. 2005, p. 253.

2 Tax Reform Act of 1986, P.L. 99-514 (1986); Health Insurance Portability and Accountability Act of 1996, P.L. 104-191 (1996); Taxpayer Relief Act of 1997, P.L. 105-34 (1997).

3 Black & Decker Corp. v. United States, No. WDQ-02-2070 (D. Md. Oct. 2004). For Black & Decker, see Doc 2004-20637 [PDF] or 2004 TNT 205-6 Database 'Tax Notes Today 2004', View '(Number'.

4 Coltec Indus. v. United States, 62 Fed. Cl. 716, 738 (2004). For Coltec, see Doc 2004-21316 [PDF] or 2004 TNT 214-16 Database 'Tax Notes Today 2004', View '(Number'.

5 TIFD-III-E, Inc. v. United States, 342 F. Supp. 2d 94 (D. Conn. 2004).

6 For Xcel Energy Inc. v. United States, see Doc 2005-20816 [PDF] or 2005 TNT 199-13 Database 'Tax Notes Today', View '(Number'.

7 Betina L. Tillman v. Camelot Music Inc., No. 03-5172 (10th Cir. May 11, 2005). For Betina L. Tillman v. Camelot Music Inc., see The Insurance Tax Review, July. 2005, p. 49, Doc 2005-10398 [PDF], or 2005 TNT 92-11 Database 'Tax Notes Today', View '(Number'. See also, Scott Mayo v. Hartford Life Ins. Co., 354 F.3d 400 (5th Cir. 2004); reprinted in The Insurance Tax Review, Mar. 2004, p. 379, Doc 2004-648 [PDF], or 2004 TNT 8-11 Database 'Tax Notes Today 2004', View '(Number'.

8 See Frederic J. Gelfond, "2003 Insurance Tax Year in Review: Part II - Product Tax Matters," The Insurance Tax Review, Feb. 2004, p. 197.

9 H.R. 2251, COLI Best Practices Act of 2005 (May 1, 2005). For H.R. 2251, see The Insurance Tax Review, July 2005. p. 181, Doc 2005-10431 [PDF], or 2005 TNT 92-55 Database 'Tax Notes Today', View '(Number'.

10 S. 1783.

11 H.R. 2830.

12 Dow Chemical v. United States, No. 00-10331- BC (E.D. Mich. Aug. 12, 2003), Doc 2003-19615 [PDF] or 2003 TNT 172-10 Database 'Tax Notes Today 2003', View '(Number'; reprinted in The Insurance Tax Review, Oct. 2003, p. 595.

13 For Notice 2005-35, 2005-21 IRB 1087, see Doc 2005-9333 [PDF] or 2005 TNT 85-5 Database 'Tax Notes Today', View '(Number'.

14 Rev. Rul. 2005-7, 2005-6 IRB 464. For Rev. Rul. 2005-7, see The Insurance Tax Review, Mar. 2005, p. 514, Doc 2005-1202 [PDF], or 2005 TNT 13-12 Database 'Tax Notes Today', View '(Number'.

15 LTR 200508002 (Sep. 30, 2004). For LTR 200508002, see The Insurance Tax Review, Apr. 2005, p. 692, Doc 2005- 3802 [PDF], or 2005 TNT 38-35 Database 'Tax Notes Today', View '(Number'.

16 T.D. 9185, 70 F.R. 9869-9872 (Mar. 1, 2005). For T.D. 9185, 70 F.R. 9869-9872, see The Insurance Tax Review, Apr. 2005, p. 665, Doc 2005-4019 [PDF], or 2005 TNT 39-10 Database 'Tax Notes Today', View '(Number'.

17 Legislation introduced by Senate Finance Committee Chair Charles Grassley, R-Iowa, and ranking minority member Max Baucus, D-Mont. (May 1, 2005). For legislation, see The Insurance Tax Review, July. 2005, p. 184, Doc 2005-9363 [PDF], or 2005 TNT 85-21 Database 'Tax Notes Today', View '(Number'.

18 For T.D. 9220, 70 F.R. 48868-48871, see The Insurance Tax Review, Oct. 2005, p. 685, Doc 2005-17557 [PDF], or 2005 TNT 161-4 Database 'Tax Notes Today', View '(Number'.

19 For T.D. 9223, 70 F.R. 50967-50972, see The Insurance Tax Review, Oct. 2005, p. 677, Doc 2005-17913 [PDF], or 2005 TNT 166-4 Database 'Tax Notes Today', View '(Number'.

20 For Rev. Proc. 2006-13, 2006-3 IRB 315 (Dec. 27, 2005), see p. 309, Doc 2005-25907 [PDF] or 2005 TNT 248-3 Database 'Tax Notes Today', View '(Number'.

21 Sears Roebuck & Co. v. Comm'r, 96 T.C. 61 (1991), as modified, 96 T.C. 671 (1991).

22 The Harper Group v. Comm'r, 96 T.C. 45 (1991); AMERCO v. Comm'r, 96 T.C. 18 (1991).

23 Helvering v. Le Gierse, 312 U.S. 531 (1941).

24 LTR 200518010 (Jan. 21, 2005). For LTR 200518010, see The Insurance Tax Review, June 2005, p. 1091, Doc 2005- 9580 [PDF], or 2005 TNT 88-39 Database 'Tax Notes Today', View '(Number'. The Service ruled that arrangements between a tax-exempt parent, its domestic subsidiaries, and its foreign subsidiary, in which the foreign sub under a binder letter assumes from a domestic insurer the risks associated with the domestic group's provision of healthcare, are not insurance or reinsurance for federal tax purposes.

25 For LTR 200525004 (Nov. 9, 2004), see The Insurance Tax Review, Aug. 2005, p. 341, Doc 2005-13754 [PDF], or 2005 TNT 122-14 Database 'Tax Notes Today', View '(Number'.

26 For LTR 200538012 (June 20, 2005), see The Insurance Tax Review, Nov. 2005, p. 841, Doc 2005-19522 [PDF], or 2005 TNT 185-30 Database 'Tax Notes Today', View '(Number'.


Comment on this story

Tax Analysts Information

Code Section: Section 801 -- Life Insurance Company Tax; Section 831 -- Tax on Other Insurance Companies; Section 7702 -- Life Insurance Contract Defined; Section 7702A -- Modified Endowment Contracts; Section 79 -- Group Term Insurance; Section 83 -- Property Transferred for Services; Section 402 -- Trust Beneficiary's Tax; Section 162 -- Business Expenses
Geographic Identifier: United States
Subject Area: Insurance company taxation
Industry Group: Insurance
Author: Gelfond, Frederic J.
Institutional Author: Deloitte Tax LLP
Tax Analysts Document Number: Doc 2006-536 [PDF]
Tax Analysts Electronic Citation: 2006 TNT 46-45





2005 Insurance Tax Year in Review: Part III -- State and Local Tax Matters
by Fred von Rueden and Brett Whitcomb

In the third installment of a four-part report, Fred von Rueden and Brett Whitcomb of Deloitte Tax LLP, discuss some of the significant state and local tax developments in 2005 affecting the insurance industry.

Date: Mar. 9, 2006

Full Text Published by Tax AnalystsTM

2005 Insurance Tax Year in Review: Part III -- State and Local Tax

Copyright © 2006 by Deloitte Development LLC.
All rights reserved.

by Fred von Rueden and Brett Whitcomb


Friedrich von ReudenLong before evolutionary theory preoccupied discussions surrounding school curricula, social philosophers such as Herbert Spencer applied Charles Darwin's theories to the harsh tempest of 19th century capitalism. Unfortunately, Spencer and his contemporaries oversimplified Darwin's principles, focusing only on competition in its pejorative sense and championing the phrase "survival of the fittest." In turn, this misapplication of Darwin's principles led to the misconception that evolution, social or otherwise, proceeds solely through competition. However, as individuals and organizations realize today, finding the proper balance between competition and collaboration is the key to attaining sustainable growth and success now and into the future. As we will explore below, to achieve success from a state tax policy perspective, we will need to find this balance as well.

Brett Whitcomb (File Photo)In 2005, from a state tax policy perspective, the issue of how to achieve these goals was less a question of competition versus collaboration than it was a debate over the use of tax incentives versus tax increases. As the discussion that follows indicates, this is an area that has not yet become a victim of oversimplification.

Other significant state tax issues that made their way into the public spotlight this past year involved such matters as the Multistate Tax Commission draft regulation on unitary tax calculations, state tax nexus, the impediments of the federal ERISA to state regulation of certain employee benefit plans, state taxation of captive insurance companies, and Florida's salary tax credit. These issues are all discussed in detail below, to be followed by a survey of state legislative developments in 2005 and commentary on some of the year's more significant judicial and administrative premium tax and retaliatory tax pronouncements.

Headline State Insurance Tax Issues in 2005

Tax Incentives Versus Tax Increases

Although states did not subject insurers to any tempest during 2005, there are a number of storm clouds on the horizon that underscore the need for the insurance industry to remain vigilant in its quest to avoid becoming a lightning rod for state legislators seeking revenue targets for depleted coffers. In a recent article, Sarah Beth Coffey, a policy analyst with the Georgia Budget and Policy Institute in Atlanta, criticized the use of corporate tax incentives for economic development.1 Citing a study by economist Peter Fisher of the University of Iowa, which determined that 96 percent of location decisions made by subsidized companies are not actually influenced by those subsidies, Coffey observes that the quality of a business climate is not solely based on taxes; rather, it involves a complex set of factors, including the presence of skilled labor and needed infrastructure.

Among the more significant developments in 2005 involving the question of incentives were the Supreme Court's announcement that it would hear an appeal of Cuno2 and legislative activity in the state of Michigan.


On September 27, 2005, the U.S. Supreme Court announced that it would weigh in on the U.S. Court of Appeals for the Sixth Circuit's decision in Cuno v. DaimlerChrysler, which held that Ohio's investment tax credit violates the Commerce Clause of the U.S. Constitution. In granting the petitions for certiorari in the case, the Supreme Court requested that the litigants consider whether the plaintiffs had standing to challenge the subject tax credit.3

By way of background, it is normally within the purview of Congress, and not the courts, to determine what constitutes a burden on interstate commerce. Under the Dormant Commerce Clause, Congress may exercise its unquestioned power to regulate the state taxation of interstate commerce in one of two ways: (1) Congress may circumscribe a state's taxing authority; or (2) Congress may expand a state's taxing power.

With the enactment of the McCarran-Ferguson Act,4 Congress accomplished two objectives. First, Congress clarified that the Sherman Act5 did not apply to the business of insurance. Second, Congress expressly immunized state insurance taxes and regulations from Dormant Commerce Clause challenges.

A short time after its enactment, the validity of the McCarran- Ferguson Act came before the Supreme Court in Prudential.6 The law was upheld, including the ability it granted states to impose discriminatory insurance taxes. Ultimately, however, Congress's primary purpose in enacting the McCarran-Ferguson Act was to shield state laws from constitutional challenge, not to insulate the insurance industry from federal regulation.

This discussion of Cuno and McCarran-Ferguson raises a couple of considerations. First, even though the Supreme Court granted certiorari in Cuno, this does not mean the Court will be able to resolve all of the issues surrounding the legal viability of state tax incentives. The Court decides cases in a very narrow and circumspect manner, focusing only on the particular facts and issues briefed by the respective litigants. As noted above, in granting the petitions for certiorari in Cuno, the Supreme Court's sole focus was on the question of whether the plaintiffs had standing to challenge the subject tax credit. Second, what will Congress do, if anything, to address the issues identified in Cuno? If Congress does nothing, it will take years for the courts to address the legal standing of state tax incentives that are now a standard fixture in the statutes of virtually every state in this country. Importantly, before the Court's announcement regarding certiorari in Cuno, Sen. George V. Voinovich, R-Ohio, and Rep. Patrick J. Tiberi, R-Ohio, had introduced legislation seeking to protect a state's authority to grant investment tax credits.

Michigan Legislative Activity

Proponents of tax cuts claim that tax incentives create jobs, enhance the business climate, lower a heavy business tax burden, and help promote certain social and environmental welfare objectives. For example, there is now evidence that the federal brownfields program,7 along with tax incentives such as premium tax credits for new job creation at brownfields sites, is encouraging the redevelopment of brownfields, which may thereby decrease urban sprawl, job loss, loss of tax revenues, and environmental justice problems. Nevertheless, insurance companies can sometimes become easy targets for states seeking to expand their revenue base. Indeed, armed with the opinions of analysts and researchers such as Coffey and Fisher, state legislators and the general public are raising the stakes in the discussion surrounding the proper use of tax incentives to achieve certain social objectives, including economic development. Recent events in Michigan illustrate this trend.

To stimulate the economy in Michigan, Gov. Jennifer Granholm (D) had proposed a plan that involved reducing the single business tax (SBT) rate from 1.9 percent to 1.2 percent while simultaneously enacting a 2 percent tax on insurance company premiums. However, the plan became embroiled in a political tug-of-war as the Republican- controlled Legislature decided against supporting the governor's plan after a series of statewide hearings. House Republicans announced an alternative plan in July of last year and passed it on a straight party-line vote on August 31, 2005.8

Ultimately, on December 20, 2005, Granholm signed an eight-bill business tax relief plan that lawmakers had overwhelmingly approved on December 14. Key features of the plan are a 15 percent personal property tax credit for manufacturers beginning on January 1, 2006, and a 100 percent personal property tax credit over the next three years for companies that move into Michigan. In addition, the enacted package does not eliminate a sunset date of December 31, 2009, for the state's SBT.9

It is particularly important to the insurance industry that the enacted legislation will no longer be subsidized by its own members. Instead, the costs of the tax plan are expected to be covered by increased revenues the state is hoping for in fiscal 2006 and beyond.10

It appears that the business tax relief package adopted in December is only the first phase of an initiative to reform Michigan's business tax system. Republican leaders have already stated publicly that they plan to look at major reforms in the SBT during 2006, since a replacement for the tax is needed before it expires at the end of 2009. One proposal under consideration is a "fair tax," which would replace the SBT, the personal property tax, and the income tax with an 8.5 percent tax on consumption.

Multistate Tax Commission Draft Regulation on Unitary Tax

Another storm cloud the insurance industry is monitoring is an MTC draft regulation that would include insurance companies in state unitary calculations. In part, the impetus for this regulation is the expanded use of "captive" insurance companies, some of which are being used to trap income that would otherwise be subject to state income tax. During 2005 the MTC conducted hearings and solicited public comments on the matter before transmitting the draft regulation to its member states. Of course, even if the MTC formally approves the regulation, each state would have an opportunity to scrutinize the regulation before it was subjected to a separate adoption process under state law. The industry is strongly opposed to the MTC draft regulation and to the principle that insurance company and non-insurance company activities should be combined when determining the total amount of unitary income subject to tax in an individual state.


Apart from the legality of state tax incentives, 2005 also witnessed congressional action concerning state tax nexus. In April, Reps. Bob Goodlatte, R-Va., and Rick Boucher, D-Va., introduced legislation11 adopting a federal physical presence standard that states would use in determining when to impose a business activity tax (BAT). The bill cleared the House Judiciary Subcommittee on Commercial and Administrative Law on December 13. However, because the legislation had no Senate counterpart, it went no further during the past year. That was the third consecutive time Congress attempted to establish bright lines for state BAT nexus. The proposed legislation targeted taxes on gross receipts, gross income, or gross profits; taxes imposed on vendors for the privilege of doing business at retail; taxes on receipts of public utilities; and taxes imposed in lieu of net income taxes and similar types of taxes. Taxes on insurance gross premiums, however, were not on the probable list of state taxes that would have been preempted by the legislation. The MTC legal staff concluded that those taxes were protected by the McCarran-Ferguson Act.12

ERISA's Impediment to State Regulation

One area of continuing disappointment for congressional observers is healthcare, and 2005 was no exception. For example, many political pundits remain hopeful that Congress will one day amend ERISA13 to provide equal legal treatment for employees in insured and self-insured employer healthcare benefits plans (EBPs). Since its enactment in 1974, ERISA has served as a major impediment to advocates of increased regulation of health insurance benefits in the era of "managed care." As enacted, ERISA applies to all fringe benefits provided by private employers to their employees. From a state perspective, the statute shields benefit plans from state regulation in two ways: (1) a "preemption clause" prohibits state laws that "relate to" employee benefit plans; and (2) a "savings clause" exempts state laws that "regulate insurance" from the statute's preemptive force. The latter exception is further limited by the "deemer clause," which prevents state insurance regulations from reaching EBPs that are self-insured, as opposed to EBPs that purchase insurance coverage from a third party. Therefore, ERISA partially shields all EBPs from state regulation. Ultimately, because this partial shield engenders a two-tiered regulatory system in which employees in "insured" plans enjoy the protections of state law denied to their counterparts in "self-insured" plans, ERISA has elicited sharp criticism.14

Within the past four years, the U.S. Supreme Court decisions in Rush Prudential HMO15 and Kentucky Ass'n of Health16 have only exacerbated the disparity between insured and self-insured plans, as both cases afforded states greater latitude to regulate managed care. Further, because self-insured EBPs can avoid premium taxes along with other state regulatory requirements, employers seeking to avoid those costs have a greater incentive to establish self-insured EBPs, making the need for congressional action that much more urgent.

State Taxation of Captive Insurance Companies

The manner in which states tax captive insurance companies and address surplus lines and self-procurement tax considerations also continued to be the subject of increasing scrutiny during 2005. Three examples include: (1) the first major revision of Delaware's captive insurance company statute, which was initially enacted in 1984, to enhance Delaware's appeal as a domicile for captive insurance companies;17 (2) the institution of a cap on the amount of aggregate taxes that can be paid by a captive insurance company in Montana to $100,000 per year;18 and (3) clarification in California that surplus line brokers are subject to those same lien provisions that apply to other insurers.19

Florida Salary Tax Credit

Finally, although states did not subject insurers to any tempest during 2005, lightning did strike in the form of an alternative method Florida offered certain groups of affiliated corporations to calculate the state's salary tax credit. After Gov. Jeb Bush (R) signed the applicable legislation on June 20, 2005, the new provision specified that corporations choosing the alternative calculation method would have to make an irrevocable election on or before August 1, 2005. Nevertheless, at the time Bush approved the alternative calculation method, he also vetoed a $2.6 million portion of the bill that would have funded a salary tax credit for employees of mutual insurance holding companies in existence before January 1, 2000. Gov. Bush's veto, along with certain features of the alternative calculation method, including its roughly one-month gestation period, lead some observers to believe Florida would be revisiting its salary tax credit in the very near future.20

Legislative and Regulatory Developments

Over the past several years, state legislatures were on the hunt for revenue. In 2004, states increased revenue through good old- fashioned taxation, whether through increasing rates or eliminating incentives. This year, states became more creative in their solutions to raising revenue, maybe because of surprisingly positive economic reports that indicate increased tax bases. In any event, 13 states continued to search for revenue through general corporate tax increases and other states simply extended their reach to places that used to be untouched by the legislative branch.

Revenue raisers from the insurance industry in 2005 consisted primarily of expansions in existing tax programs. For example, New Jersey began subjecting all health service corporations to the premium tax and took away the 12.5 percent cap;21 Minnesota crafted legislation to overturn the 2003 Minnesota Supreme Court decision in Blue Cross Blue Shield of Minnesota;22 and in New Mexico, the 1 percent health insurance premium surtax will now apply to disability insurance.23 As a result of the changes in Minnesota, stop-loss insurance purchased in connection with self-insurance plans will now be subject to the premium tax.24 Lastly, Maryland's state legislature overrode a veto from Gov. Robert Ehrlich (R) in order to eliminate a 30-year exemption HMOs had received from insurance premium taxes.25 Maryland projects that the new tax will generate $64.4 million in additional revenue for the state.

In some cases, the expansions in existing tax programs extended to captive insurance companies. For example, the District of Columbia started assessing a premium tax on captives with a minimum tax of either $7,500 or $10,000, if the captive is a member of a risk retention group.26 Utah took a different approach, eliminating the premium tax for captive insurance company direct premiums altogether and replacing it with an annual fee.27 It remains to be seen whether Utah's approach, while administratively simpler, accomplishes its revenue-raising goals.

While Connecticut joins the league of states applying a retaliatory tax to foreign companies domiciled in states with higher tax rates,28 Arkansas implemented a retaliatory tax credit for premium tax payments of foreign and alien insurers. Furthermore, Arkansas eliminated the retaliatory tax on insurance agents or producer fees.29

Lawmakers in Montana and Minnesota provided some good news for their insurance company residents. As noted above, Montana imposed a premium tax cap of $100,000 per year for captive insurance companies.30 By 2009, Minnesota will reduce the premium tax it levies on life insurance premiums from 2 percent to 1.5 percent.31

From an incentive perspective, Texas adopted the certified capital company (CAPCO) credit that may be used to offset the premium tax liability32 and passed legislation that allows title insurance companies who pay a premium tax to participate in the CAPCO investment program.33 Colorado now offers a premium tax credit to taxpayers who contribute to economic development in the Rocky Mountain state.34 Modifications that enhance some of the already existing state tax incentives include changes to the Iowa capital seed fund credit, making it easier for companies doing business in Iowa to take advantage of the credit,35 and Connecticut's changes to the urban and industrial credit. Connecticut has now enabled insurance companies to benefit from the urban and industrial site reinvestment credit by reducing the required investment amount from $20 million to $5 million.36 Finally, Arizona extended the terms of the military "reuse" zone and associated tax incentives from 5 to 10 years,37 thereby allowing more businesses in the reuse zone to qualify for reduced insurance premium taxes.

Some of the more interesting credits include Oklahoma's wind turbine credit38 that can now be used to offset insurance premium taxes, and Louisiana's automobile liability credit.39 Insurers in Louisiana that extend a 12.5 percent discount on automobile liability insurance policies until July 1, 2006, and a 25 percent discount thereafter to military personnel on active duty will receive a tax credit in an amount equal to the discount provided.

Premium Tax Issues

New Jersey Appellate Division Rules Application of Premium Tax
Cap Statute Unconstitutional

Citations: American Fire and Casualty Co. et al. v. Division of Taxation, Docket Nos. A-2708-03 T2 et al. (Mar. 9, 2005). See The Insurance Tax Review, May 2005, p. 826, Doc 2005-5086 [PDF] or 2005 STT 51-16 Database 'State Tax Today', View '(Number'.

Overview: The New Jersey Superior Court, Appellate Division, has held that the director of taxation improperly applied the premium tax and retaliatory tax statutes in a manner that unconstitutionally discriminated against foreign insurance companies.

Discussion: New Jersey's Superior Court decision is a victory for foreign insurers conducting business in New Jersey. Judges Fall, Payne, and Fisher found the director of taxation's approach to the application of the premium tax cap and retaliatory tax serves as an example of an unjustifiable domestic preference. As such, the application is discriminatory, violating the Equal Protection Clause of the U.S. Constitution. Consequently, the premium tax cap was deemed unconstitutional. This strongly written decision clearly highlights a problem with any state that purports to provide a benefit to domestic and foreign insurers to attract foreign business, but, through mechanical application, is only beneficial to domestic companies. Although the court was quick to point out that the premium tax cap in New Jersey is "one of a kind," there have been other cases in which courts have determined that similar statutes intended to attract foreign business were also unconstitutional. It is a small comfort that some courts have been able to see through this old "bait and switch" routine.

Texas Comptroller: Insurance Company Not Qualified for Lower
Premium Tax Rate

Citations: Hearing No. 44,425. See The Insurance Tax Review, June 2005, p. 1166, Doc 2005-6304 [PDF], or 2005 STT 72-24 Database 'State Tax Today', View '(Number'.

Overview: The Texas comptroller of public accounts has ruled that a Pennsylvania insurance company that sells property and casualty insurance in Texas and in other states does not qualify for a lower insurance premium tax rate and is responsible for all assessed taxes, penalties, and interest.

Discussion: During 1998 and 1999 the premium tax rate for an insurance company in Texas could have been as low as 1.6 percent. Texas applied different tax rates on insurance premiums as long as the company provided clear and convincing evidence that its ratio of Texas investments to investments in a comparison state was greater than 90 percent. The Pennsylvania insurance company applied the 1.6 percent rate; however, the comptroller determined that the Pennsylvania company's investments in Texas were less than 85 percent. Therefore, the applicable tax rate should have been 3.5 percent.

Whether the Pennsylvania insurer actually had 90 percent of its investments in Texas could not be proved with internal summary schedules and a partial cash accounting schedule prepared by an investment advisor. The insurer needed to provide bank statements that the examining auditor requested to verify conclusively that its investments, and cash in particular, were on deposit in the relevant comparison state. Because the company could not, it was required to pay the additional tax with penalties and interest. This is another example that should drive home the importance of maintaining appropriate documentation -- not to mention the need to ensure that tax considerations are properly understood throughout several departments within an insurance organization.

Maine Court Vacates Insurance Premium Tax Assessment

Citations: Stewart Title Guaranty Co. v. State Tax Assessor, Ken. Cty. Superior Ct., No. AP-04-17 (May 5, 2005). For news coverage, see The Insurance Tax Review, Nov. 2005, p. 807, Doc 2005-19312 [PDF], or 2005 STT 189-13 Database 'State Tax Today', View '(Number'.

Overview: Maine's Kennebec County Superior Court recently held that the term "gross direct premium" in the Maine insurance premium tax statute means the amount paid to a company as consideration for insurance, finding that only amounts for the actual insurance of risks are subject to premiums tax.

Discussion: After 15 years of paying premium taxes based on the actual insurance of risks rather than the full amount of direct premiums reported on the Annual Statement's Schedule T without objection from the Maine Revenue Service, the taxpayer found itself subject to a challenge from the state that was resolved May 5, 2005. The taxpayer, a title insurance company, had excluded payments for administrative services to third parties from its premium tax calculation. The Maine Kennebec County Superior Court ruled in favor of the taxpayer. The Schedule T instructions specify that the "direct premiums amount" is not intended to be used for the calculation of the amount of premium tax due to states. The Revenue Service applied for appeal from the Superior Court's decision to the Maine Supreme Judicial Court. Therefore, this is likely not the last we have heard about this case.

It would be interesting to see whether there are a large number of taxpayers that change the manner in which they are calculating their premium taxes based on this decision (that is, because they have previously been doing so in a manner consistent with what the state argued was appropriate). It also would be interesting to know if there are any other states in which this might be an issue.

Texas Comptroller Explains Allocation, Taxation of Premiums for
Bond Issuers

Citations: Texas State Letter Ruling 200507208L. See The Insurance Tax Review, Dec. 2005, p. 1116, Doc 2005- 20211 [PDF], or 2005 STT 196-23 Database 'State Tax Today', View '(Number'.

Overview: The Texas comptroller of public accounts has issued a letter ruling explaining the allocation and taxation of premiums for insurers dealing with asset-backed securities and municipal bonds.

Discussion: The Texas state comptroller has changed its approach on independently procured insurance, focusing now on only the primary market (where the bond issuers obtain the insurance on themselves) and not taxing the secondary market (where the underwriters who act as the bond dealer or an institutional investor purchase the insurance). In this letter ruling, the comptroller indicated that premiums in the primary market should be allocated to, and taxed in, the state where the bond issuer is located. In the secondary market, unless there is specific activity or a claim is adjusted in the state, the state is prevented under the principles of Dow Chemical v. Rylander (03-00-00354-CV) from enforcement of the state's insurance tax provisions against the insurer.

The court found in Dow Chemical v. Rylander that no independently procured insurance tax was owed to Texas as none of the business was transacted in Texas, all decisions were made outside of Texas, and all losses and premiums were paid outside of Texas.

A third issue addressed in the letter ruling, also relating to the secondary market, involved a trustee for a unit investment trust who purchased the bonds and procured the insurance. Although the risk originated with the Texas issuer of the bonds, no independently procured insurance tax was due in this case because no insurance activity occurred in the state and no claim was adjusted in the state.

It appears that Texas has really taken Todd Shipyards40 to heart. Indeed, the state is no longer trying to tax self-procurement transactions in which the risk resides and is instead properly looking at taxing only those transactions in the state where management (bond issuers) resides. The self-procurement (unauthorized insurance) tax, while not as well known as its premium and surplus lines tax brethren, has recently become a focus for those states that have such laws. It would not be surprising to see an increase in the number of citations in this column in the ensuing years relating to this tax.

Texas Appeals Court Upholds Insurance Premium, Retaliatory Tax

Citations: First American Title Ins. Co. et al. v. Strayhorn, No. 03-04-00342-CV. See The Insurance Tax Review, Aug. 2005, p. 317, Doc 2005-12327 [PDF], or 2005 STT 110-26 Database 'State Tax Today', View '(Number'.

Overview: The Texas Court of Appeals, Third District, has upheld the comptroller of public accounts' interpretation of the insurance premium tax and retaliatory tax statutes, which permit foreign title insurance companies to include only 15 percent of the premium tax in their calculation for determining whether a retaliatory tax is due.

Discussion: The out-of-state taxpayers contended that the comptroller's new interpretation of the 15 percent limitation was wrong and unconstitutional. The court found that the comptroller was correct in the new interpretation. In the 1990s the comptroller had taken the position that the premium tax statute required insurance agents to pay a portion of the premium, and payment of title insurance premiums was not solely the obligation of the insurance company. Agents were entitled to retain 85 percent of the total premium collected from policyholders and the remaining 15 percent was remitted to the insurers. The insurance company received the premium tax due on the agent's portion and remitted it to the state. The comptroller's new interpretation allowed a retaliatory tax reduction of only the insurers' 15 percent portion. The court found there was no constitutional violation when the comptroller uniformly enforced the statute until a specific date before it changed and uniformly enforced the statute in a different manner. The court further held that taxpayers do not acquire a right to pay less tax simply because they have paid less tax in the past or because a tax policy has been incorrectly limited.

It seems somewhat arbitrary behavior on the part of the comptroller that, after 15 years of interpreting a statute one way, it would seek to apply it differently despite the fact there has been no change in the statute. Whether or not it now takes the position that the statute should be interpreted differently, at some point in time, taxpayers should be able to take comfort in the fact that they are properly following a statute in a manner that is consistent with a previous, uniformly expressed position of the state.

New York Tax Department Explains Taxation of Health Insurance

Citations: Advisory Opinion TSB-A-04(18)C (Dec. 13, 2004). See Doc 2005-83 [PDF] or 2005 STT 2-15 Database 'State Tax Today', View '(Number'.

Overview: The New York Department of Taxation and Finance has explained that when an insurance corporation includes in its premiums the amount of tax it is charged as an insurer under section 1502-a, a tax-exempt organization is required to pay that amount because the incidence of tax is imposed on the insurer, not the insured.

Discussion: The New York Department of Taxation and Finance received a petition for an advisory opinion from a tax-exempt school district in New York City. The school district was paying premiums to an insurance carrier, and the premium as calculated included the impact of premium taxes to be paid by the carrier. The school district, as a tax-exempt entity, determined it should not have to pay the portion of the premium representing premium taxes. The advisory opinion concluded that the inclusion of the premium tax paid by the insurer in the premium bill was not the equivalent of directly taxing the insured; rather, it represented a recovery of operating expenses incurred by the insurer. This opinion was further supported by cases and opinions such as New York Telephone Company v. County of Nassau, 122 A.D.2d 124 and Sempra Energy Trading Corp., Adv Op Comm T&F, Dec. 18, 2002, TSB-A-02(23) C, in which taxable service providers imposed "surcharges upon the defendant to recover . . . additional operating expenses." The subject of this case appears to be more a matter of negotiation among the insurer and the policyowner than it is a question of whether the state is properly levying a tax.

Retaliatory Taxes

Pennsylvania Commonwealth Court Upholds Retaliatory Tax

Citations: Home Ins. Co. v. Pennsylvania, Nos. 256 F.R. 2002, 257 F.R. 2002, 259 F.R. 2002 (May 13, 2005). See Doc 2005-11283 [PDF] or 2005 STT 101-21 Database 'State Tax Today', View '(Number'.

Overview: The Pennsylvania Commonwealth Court has upheld a retaliatory tax calculation against an insurance company and agreed with the Department of Revenue that the company should have included payments to New Jersey's Second Injury Fund, which protects disabled workers, in its tax calculations.

Discussion: The court based its decision on the premise that the purpose of the Pennsylvania retaliatory tax statute41 is to bring about equality in treatment between foreign and domestic insurers. Therefore, the court held that if a Pennsylvania insurer conducting business in New Jersey must pay an amount to New Jersey's Second Injury Fund, then a New Jersey insurer conducting business in Pennsylvania must pay a retaliatory tax that includes an amount for the Second Injury Fund in its calculation to even the playing field. The court found unpersuasive the fact that New Jersey does not include the fund assessment in the New Jersey retaliatory tax calculation and concluded that the fund assessment is in the nature of a license "fee" imposed for the privilege of pursuing the worker's compensation business in New Jersey and should be included in the Pennsylvania retaliatory calculation. This latter conclusion of the court is disturbing in that it broadens the definition of what constitutes a fee for purposes of the Pennsylvania retaliatory tax calculation.


As we begin 2006, it is clear from the debate surrounding incentives that all of us in the tax policy arena face the daunting task of forging a Hegelian synthesis from the twin forces of social competition and collaboration in our quest to appropriately balance tax incentives and tax increases. At the end of the day, it is imperative that the tax policy debate navigate away from a tooth and claw "survival of the fittest" struggle between competing factions (for example, states versus corporations, states versus other states, and so forth.) and find a collaborative middle ground that will ensure each faction achieves its goals, including sustained economic growth. Collaboration is indeed a hopeful thought to carry into the New Year.


1 Sarah Beth Coffey, "The Questionable Link Between State Corporate Income Taxes and Economic Development," State Tax Notes, Oct. 10, 2005, p. 207, Doc 2005-17290 [PDF], or 2005 STT 195-2 Database 'State Tax Today', View '(Number'. After noting that in Georgia's 2005 legislative session, the "corporate income tax was weakened by a sizable tax cut to multistate corporations" and projecting that the 2006 session could lead to further evisceration of the corporate income tax, as legislators consider H.B. 24 -- a bill to abolish the corporate income tax by 2011 -- Coffey maintains that Georgia should use nontax policy and direct appropriations to strengthen its corporations.

2 Cuno v. DaimlerChrysler. The Sixth Circuit's original decision in Cuno may be found at Doc 2004- 17647 [PDF] or 2004 STT 173-28 Database 'State Tax Today 2004', View '(Number'.

3 For additional information regarding Cuno, see Doc 2005-25303 [PDF] or 2005 STT 241-1 Database 'State Tax Today', View '(Number'. "CRS Reports on Investment Tax Credits in Light of Cuno Proceedings." The Congressional Research Service updated a report on state investment tax credits to reflect judicial and legislative developments, including the Supreme Court's grant of certiorari in Cuno and the introduction of federal legislation designed to give states the authority to offer investment incentives.

4 Act of Mar. 9, 1945 (McCarran-Ferguson Act), ch. 20, 59 Stat. 33 [codified as amended at 15 U.S.C. §§ 1011-1015 (2000)]. When Congress enacted the Gramm-Leach-Bliley Act of 1999 [Gramm-Leach-Bliley Act, Pub. L. No. 106-102, 113 Stat. 1338 (1999), codified as amended in scattered sections of 12 and 15 U.S.C.], it specified in section 104(a) of the Act that the McCarran-Ferguson Act remains the law of the United States; however, at the same time, it also undercut or limited a number of state regulatory powers over insurance activities.

5 Act of July 2, 1890 (Sherman Act), ch. 647, 26 Stat. 209 (codified as amended at 15 U.S.C. §§ 1-7).

6 Prudential Ins. Co. v. Benjamin, 328 U.S. 408 (1946).

7 "[T]he term brownfield site means real property, the expansion, redevelopment, or reuse of which may be complicated by the presence or potential presence of a hazardous substance, pollutant, or contaminant." Farah Rodenberger, "Brownfields Programs and Tax Incentives Are Stimulating the Redevelopment of Brownfields Properties in North Carolina and South Carolina," 13 Southeastern Envtl. L.J. 119 (Spring 2005).

8 See Robert Klein, "As Fall Arrives, Michigan Business Reform Becomes Political Football," State Tax Notes, Oct. 3, 2005, p. 115, Doc 2005-19698 [PDF], or 2005 STT 187-15 Database 'State Tax Today', View '(Number'.

9 See Robert Klein, "Michigan Governor Signs Business Tax Relief Package," State Tax Notes, Dec. 26, 2005, p. 1054, Doc 2005-25613 [PDF], or 2005 STT 244-20 Database 'State Tax Today', View '(Number'.

10 For additional background regarding the new Michigan legislation, see Robert Klein, "Michigan Lawmakers Approve Business Tax Relief Package," State Tax Notes, Dec. 19, 2005, p. 983, Doc 2005-25165 [PDF], or 2005 STT 241-20 Database 'State Tax Today', View '(Number'. For information addressing changes in Michigan law involving the use tax, please refer to Doc 2005-24539 [PDF] or 2005 STT 239-22 Database 'State Tax Today', View '(Number', "Michigan Final H.B. 5098 Subjects Insurance Companies to Use Tax; Eliminates Apprenticeship Credit." Michigan H.B. 5098, signed into law as Public Act 229, eliminates insurance companies' exemption from the use tax and eliminates the apprenticeship tax credit for all companies except construction contractors -- approved by the governor on Nov. 21, 2005; filed with the secretary of state on Nov. 21, 2005; no effective date: Tie-barred to bill that was vetoed.

11 H.R. 1956.

12 For a state perspective on H.R. 1956, see National Governors Association, "Impact of H.R. 1956, Business Activity Tax Simplification Act of 2005, on States," State Tax Notes, Nov. 7, 2005, p. 557, Doc 2005-21107 [PDF], or 2005 STT 214-5 Database 'State Tax Today', View '(Number'. The National Governors Association criticized H.R. 1956, saying it would upset existing state business activity taxation.

13 Employee Retirement Income Security Act of 1974, Pub. L. No. 93-406, 88 Stat. 829 (codified as amended at 29 U.S.C. §§ 1001-1461 (2000)).

14 For additional background on this issue, see Russell Korobkin, "The Battle Over Self-Insured Health Plans," or "One Good Loophole Deserves Another," 5 Yale J. Health Pol'y L. & Ethics 89 (Winter 2005).

15 Rush Prudential HMO v. Moran, 536 U.S. 355 (2002).

16 Kentucky Ass'n of Health Plans v. Miller, 123 S. Ct. 1471 (2003).

17 "Delaware Final H.B. 218 Amends Provisions Regarding Captive Insurance Companies," Doc 2005-25600 [PDF] or 2005 STT 250-3 Database 'State Tax Today', View '(Number'. Delaware H.B. 218, signed into law as Chapter 150, amends provisions regarding the tax on premiums collected by captive insurance companies.

18 "Montana Final S.B. 134 Limits Amount of Aggregate Taxes Paid by Insurance Company," Doc 2005-22513 [PDF] or 2005 STT 217-18 Database 'State Tax Today', View '(Number'. Montana S.B. 134, signed into law as Chapter 205, limits the amount of aggregate taxes that can be paid by a captive insurance company to $100,000 per year.

19 "California Final A.B. 1424 Clarifies Gross Premiums Taxation for Surplus Line Brokers," Doc 2005- 18900 [PDF] or 2005 STT 181-4 Database 'State Tax Today', View '(Number'. California A.B. 1424, signed into law as Chapter 231, subjects surplus line brokers to the same gross premium tax collection provisions as other insurers.

20 "Florida Final H.B. 1813 Clarifies Estate, Sale, Income Taxes and Credits," Doc 2005-13585 [PDF] or 2005 STT 122-8 Database 'State Tax Today', View '(Number'. Florida H.B. 1813, signed into law as Chapter 280, clarifies the exemption from sales tax on boats and yachts imported into Florida for the purpose of being sold at retail, clarifies estate tax filing, and provides various tax credits; and "Florida Governor Vetoes Salary Credit for Insurance Companies," Doc 2005-13551 [PDF] or 2005 STT 120-7 Database 'State Tax Today', View '(Number'. Florida Gov. Jeb Bush (R) vetoed a $2.6 million portion of an omnibus tax bill (H.B. 1813), saying that it was approved with insufficient study and appeared to benefit just one company; the provision would have allowed a salary credit for employees of mutual insurance holding companies in existence before January 1, 2000.

21 N.J. Rev. Stat. Section 54:18A-6 (2005); revised by Act 128 (A.B. 4401).

22 In June 2003 the Minnesota Supreme Court ruled that premiums received by an insurer on stop-loss policies are not subject to the state's premium tax (Blue Cross Blue Shield of Minnesota v. Comm'r of Revenue, No. C8-02-1647, (Minn. June 12, 2003)). (For the full text of the Minnesota Supreme Court's decision, see Doc 2003-14491 [PDF] or 2003 STT 116-16 Database 'State Tax Today 2003', View '(Number'.)

23 N.M. Stat. Ann. § 59A-6-2 (2005); revised by Ch. 132 (H.B. 444).

24 Minn. Stat. § 2970.01 (2005); revised by H.F. No. 138.

25 Md. Ins. Code Ann., § 6-101 (2005); revised by Ch. 5 (H.B. 2), Laws 2004, 1st. Sp. Sess.

26 D.C. Code Ann. § 13 (2005); Act 15-638.

27 Utah Code Ann. § 31A-3-304 (2005); Ch. 122 (H.B. 191).

28 Conn. Gen. Stat. § 12-211 (2005); Act 100 (S.B. 1351).

29 Ark. Code Ann. § 23-61-102 (2005); Act 1965 (H.B. 2900).

30 Mont. Code Ann. § 33-28-105 (2005); Ch. 205 (S.B. 134).

31 Minn. Stat. § 2970.01 (2005); H.F. No. 138.

32 Tex. Code. Ann. § 4.51 (2005); H.B. No. 532.

33 Tex. Ins. Code Ann. § 2551.151 (2005); H.B. No. 532.

34 Colo. Rev. Stat § 10-8-534 (2005); Ch. 98 Insurance (H.B. 05-1060).

35 Iowa Code § 15E.43 (2005); Ch. 1148 (H.F. 831).

36 Conn. Gen. Stat. § 32-9t (2005); Act 276 (H.B. 6727).

37 Ariz. Rev. Stat. §§ 41-1531, 41-1532, and 42- 5075 (2005); Ch. 249 (H.B. 2626).

38 Okla. Stat. tit. 68 § 2357.32B (Supp. 2004); Okla. Stat. tit. 36 § 624 (Supp. 2004); H.B. 1605

39 La. Rev. Stat. Ann. § 22:1425 (2005); Act 408 (H.B. 69).

40 State Board of Ins. v. Todd Shipyards, 370 U.S. 451 (1962). In Todd Shipyards, the U.S. Supreme Court dealt with a case in which the Texas Supreme Court invalidated a self-procurement tax levied by Texas on insurance premiums paid by Todd Shipyards for coverage on its property located in Texas. Todd Shipyards was a New York corporation that did business in Texas and owned property there. All transactions regarding the insurance on the Texas property took place outside of Texas; the insurance was purchased, the premiums were paid, and any claims were to be adjusted and paid in New York. The insurers were located in London, were not licensed in Texas, had no agents in Texas, and did no business in Texas. The broad Texas self-procurement statute contained no limitations requiring actions in the state to give rise to the tax. Ultimately, the Supreme Court affirmed the decision of the Texas Supreme Court.

41 PA Stat. 40 P.S. § 50 (2005).


Comment on this story

Tax Analysts Information

Code Section: Section 801 -- Life Insurance Company Tax; Section 831 -- Tax on Other Insurance Companies
Geographic Identifier: United States
Subject Area: Insurance company taxation
Industry Group: Insurance
Author: von Rueden, Fred; Whitcomb, Brett
Institutional Author: Deloitte Tax LLP
Tax Analysts Document Number: Doc 2006-537 [PDF]
Tax Analysts Electronic Citation: 2006 TNT 46-46





2005 Insurance Tax Year in Review: Part IV -- International Tax Matters
by Richard Safranek, Mary Gillmarten, and Jim Cohen

In the fourth installment of a four-part report, Richard Safranek, Mary Gillmarten, and Jim Cohen of Deloitte Tax LLP discuss international tax events from 2005 affecting the insurance industry.

Date: Mar. 9, 2006

Full Text Published by Tax AnalystsTM

2005 Insurance Tax Year in Review: Part IV -- International Tax

Copyright © 2006 by Deloitte Development LLC.
All rights reserved.

by Richard Safranek, Mary Gillmarten, and Jim Cohen


2005 has been the year of the hurricane. Hurricanes in the United States last year dominated not only the hearts and minds of its people and the media, but dominated the legislative process itself and kept Congress working well past Thanksgiving! Of course the Atlantic hurricane season begins about the time baseball season is winding down and this year, for the first time in many years, Washington had baseball again! Some of us, well, OK, one of us, can still remember the thrill and excitement of going to RFK Stadium to see the Senators play as a reward for successful completion of kindergarten! So where else to begin this year's international tax matters section than with baseball and its obvious connection to insurance?

A game of great charm in the adoption of mathematical measurements to the timing of human movements, the exactitudes and adjustments of physical ability to hazardous chance. The speed of the legs, the dexterity of the body, the grace of the swing, the elusiveness of the slide -- these are the features that make Americans everywhere forget the last syllable of a man's last name or the pigmentation of his skin.

-- Branch Rickey, May 1960

Richard Safranek (File Photo)Described thus, baseball is clearly an insurance practitioner's sport! It has something for everyone: mathematical measurements, the exactitudes of adjustments and hazardous chance for actuaries and risk managers; dexterity and grace for accountants; and, for tax lawyers and accountants, the elusiveness of a simple key to understanding how the IRS interprets the Internal Revenue Code, which Rep. Steny Hoyer, D-Md., described in 2004 as that "Kafkaesque maze of complexity."

Mary Gillmarten (File Photo)The Nationals made a strong showing their first year in Washington, and were dubbed the "One Run Wonders" by The Washington Post for their often thrilling, late inning, one-run victories. Despite the lack of a pennant, that's not bad for a team playing without an owner in a stadium designed for another time. Oh, does that sound like the tax provisions applicable to the insurance industry! This year, the efforts by Treasury and the IRS seemed to focus on making guidance useful to insurance practitioners. That effort however, was demonstrated more by the repeated requests for comment than the release of actual guidance; but just as baseball fans are preparing for the first truly international "World Series" this spring, hope remains that we will see more conclusive -- rather than elusive -- guidance in the coming year.

Jim Cohen (File Photo)The pages that follow provide a commentary on the significant developments in international tax and domestic tax guidance in 2005 that may affect the international operations of both domestic insurance companies and non-U.S. insurers alike. That includes a discussion of the long-awaited discussion draft of the Organization for Economic Cooperation and Development's (OECD's) Report on the Attribution of Profits to a Permanent Establishment (Insurance). Also, we set forth the significant developments in legislation (Section I); foreign operations of U.S. insurance companies (Section II); U.S. operations of foreign insurance companies (Section III); tax treaties (Section IV); and other developments affecting international insurance companies (Section V).

Section I -- Legislation

Unlike 2004, which brought us the American Jobs Creation Act (AJCA, P.L. 108-357) -- the most comprehensive corporate tax reform legislation since the Tax Reform Act of 1986 -- this year has been relatively quiet on the legislative front. Although several bills were considered, few passed both houses to reach the Oval Office. The greatest motivator for Congress this year was the need to provide some relief to those affected by the major hurricanes that hit the United States. The legislation that did pass provided such relief and included a few technical corrections as well.

The Gulf Opportunity Zone Act of 2005

Citations: For the Joint Committee on Taxation's technical explanation of H.R. 4440, see Doc 2005-25442 [PDF] or 2005 TNT 242-8 Database 'Tax Notes Today', View '(Number'.

Overview: On December 21, 2005, President Bush signed into law the Gulf Opportunity Zone Act of 2005 (the act). Although the purpose of the act is to provide business and individual tax incentives to aid in the recovery and rebuilding of areas in the Gulf Coast affected by the widespread devastation of hurricanes Katrina, Rita, and Wilma, the act does include technical corrections to international tax provisions of the AJCA and the Taxpayer Relief Act of 1997.

Discussion: Perhaps the most significant international tax aspect of the act is found in the technical explanation prepared by the Joint Committee on Taxation staff. The technical explanation contains significant new guidance for the application of section 965. The act gives Treasury authority to issue regulations to prevent avoidance of the purposes of section 965(b)(3), including regulations that would provide that "cash dividends" are not to be taken into account under section 965(a) "to the extent such dividends are attributable to the direct or indirect transfer of cash or other property from a related person to a controlled foreign corporation." The technical explanation provides that "if a related person transfers cash to a [CFC] in a sale of assets by the [CFC] to the related person for non-tax business purposes, such transfer will not be considered to have a principal purpose of avoiding [section 965(b)(3)]." Although the opportunity to use the one-time dividends received deduction (DRD) under section 965 has already expired, and Treasury has not issued regulations under section 965, pursuant to the technical explanation, it is expected that generally applicable tax principles would be invoked to reach results consistent with the principles espoused in the legislative history.

The act enacted technical corrections to the international provisions of the AJCA, including: (1) permitting taxpayers to elect to avoid the general retroactivity of the repeal of the separate foreign tax credit limitation for dividends from noncontrolled section 902 corporations (10/50 companies); and (2) clarifying the interaction of the corporate inversion rules of section 7874(a) and (b) of the code so that the taxable income floor in section 7874(a)(1) does not apply to an entity that is an expatriated entity pertaining to a corporation treated as domestic under section 7874(b).

The act also provides a technical correction to section 961(c) (enacted in the Taxpayer Relief Act of 1997). Section 961(c) permits a CFC to avoid subpart F income from gain on the sale of stock of a lower-tier CFC, by providing a limited-purpose basis step-up to the extent of the lower-tier CFC's prior subpart F income. The technical correction extends the basis step-up to stock of higher-tier CFCs in the same chain of ownership.

For purposes of determining whether a CFC is a 25 percent owner regarding a partnership under section 954(c)(4), the CFC will be treated as the owner of a partnership interest under rules similar to section 958(b). That conforms the code to the legislative history of the AJCA and potentially expands the number of cases in which the code would provide that CFC gains on disposition of interests in partnerships are excluded from passive and subpart F income.

Section II -- Foreign Operations of U.S. Insurance Companies

Section 965: Repatriation of Foreign Earnings

Citations: For Notice 2005-10, 2005-6 IRB 474, see Doc 2005-887 [PDF] or 2005 WTD 10-13 Database 'Worldwide Tax Daily', View '(Number'. For Notice 2005-38, 2005-22 IRB 1100, see The Insurance Tax Review, July 2005, p. 87, Doc 2005-10171 [PDF], or 2005 WTD 90-7 Database 'Worldwide Tax Daily', View '(Number'. For Notice 2005-64, 2005-36 IRB 471, see The Insurance Tax Review, Oct. 2005, p. 700, Doc 2005-17558 [PDF], or 2005 WTD 161-9 Database 'Worldwide Tax Daily', View '(Number'.

Overview: Section 965 offers a one-year tax benefit in the form of an 85 percent DRD for some extraordinary cash dividends received by U.S. corporations from a CFC.

Discussion: Section 965 continues to stir up much excitement and, frankly, some confusion for domestic companies with non-U.S. operations in low-tax jurisdictions seeking to efficiently repatriate funds back to the United States. Eligibility for the DRD requires the following: (1) the dividend must exceed a base period average so that only extraordinary dividends are eligible for the DRD (subject to a limitation of the greater of $500 million, or the amount shown in the corporation's financial statements as permanently reinvested outside the United States); and (2) the corporation must adopt a domestic reinvestment plan to further the provision's objective of creating a temporary economic stimulus (for example, to fund U.S. infrastructure, research and development, capital investments, debt repayment, and so forth). It is significant to note that a domestic corporation does not receive a foreign tax credit regarding the 85 percent deductible portion of the dividend. Therefore, a prudent candidate should measure the trade-off between the foreign tax credit benefit and the DRD. This past year, Treasury released a series of notices detailing the eligibility criteria discussed above. (See Notice 2005-10, Notice 2005-38, and Notice 2005-64.) Important concepts in the notices include discussions on the base period amount, the APB 23 amount, the $500 million limitation, and the disallowance of foreign tax credits on the deductible portion of the section 965 dividend. Insurance companies still seeking benefits under section 965 are urged to carefully read through the discussion and examples in the notices, as the notices are helpful in identifying available cash dividends eligible for the DRD.

Final Regulations on Subpart F

Citations: For T.D. 9222, 70 F.R. 49864-49869, see The Insurance Tax Review, Oct. 2005, p. 692, Doc 2005-17748 [PDF] or 2005 WTD 164-10 Database 'Worldwide Tax Daily', View '(Number'.

Overview: Treasury finalized the proposed subpart F regulations under section 951.

Discussion: The new regulations set forth special pro rata share rules that apply to U.S. shareholders of CFCs. The finalized regulations differ slightly from the proposed regulations. Treasury issued the following changes regarding the proposed subpart F regulations: (1) deleted all references to section 956 (investments in U.S. property) from the regulations; (2) provided that if a CFC has only one class of stock outstanding, each U.S. shareholder's pro rata share of the CFC's subpart F income must be determined by allocating the CFC's earnings and profits for that year on a per share basis; (3) created a special rule for the allocation of E&P to some preferred stock held by U.S. shareholders; and (4) provided a transitional effective date for cases in which the application of the pro rata share rules, for purposes of applying related code sections, would result in the allocation to the CFC stock of E&P that had already been allocated to the stock in a previous year.

The regulations are basically a clarification of the general income inclusion rules, an example of Treasury and the IRS trying to bring their outdated "stadium" into modern times.

Proposed Regulations on Dual Consolidated Losses

Citations: For REG-102144-04, 70 F.R. 29868-29907, see Doc 2005-11119 [PDF] or 2005 WTD 98-23 Database 'Worldwide Tax Daily', View '(Number'.

Overview: Treasury issued proposed dual consolidated loss (DCL) regulations under section 1503(d) of the code that also cover section 953(d) electing companies.

Discussion: The purpose of the DCL provisions is to prevent U.S. corporations from using the same economic loss on separate streams of income in two jurisdictions. The DCL provisions generally preclude recognition of a loss in the United States if the same loss reduces taxable income in another jurisdiction. Taxpayers may elect to use the loss in the United States if they agree not to use the loss in another jurisdiction (the domestic use election). Section 953(d)(3) specifically provides that a foreign insurance company that elects to be treated as a U.S. corporation for federal tax purposes must treat any losses as DCLs and that such companies may not apply the domestic use election.

The newly proposed regulations do not change the DCL rules applicable to foreign insurance companies, but they do clarify the application of the rules under section 953(d). Specifically, prop. reg. section 1.1503-(d)(1) expands the class of dual resident corporations (DRC) (those subject to the loss limitation rule) to include foreign insurance companies that make an election to be treated as domestic corporations under section 953(d) and are members of an affiliated group, regardless of how the entities are taxed by the foreign country. Furthermore, prop. reg. section 1.1503(d)(4) provides that a foreign insurance company that elects to be treated as a domestic corporation under section 953(d) may not make a domestic use election. That rule is consistent with section 953(d)(3), which limits the losses of foreign insurance companies that elect to be treated as domestic corporations. Promulgating that guidance under section 1503(d) could create a trap for the unwary as, in a given situation, it may not be intuitive for a taxpayer reviewing the DCL rules applicable to domestic electing foreign insurers to look to the 1503(d) regulations for additional guidance.

Final Regulations on Entity Classification

Citations: For T.D. 9235, 70 F.R. 74658, see p. 307 Doc 2005-25257 [PDF], or 2005 WTD 241-12 Database 'Worldwide Tax Daily', View '(Number'.

Overview: Treasury and the IRS have finalized regulations under section 7701 to add several additional entities to the list of per se corporations under the check-the-box regulations.

Discussion: The European Societas Europaea (SE) is the newest sibling in the family of per se corporations under Treas. reg. section 301.7701-2(b)(8). The preamble to the temporary regulations states that the status and treatment of an SE may be relevant to the application of various federal income tax provisions (for example, the subpart F provisions), and it invites further comment from the industry and practitioners. Other new additions to the per se corporation family include the Estonian Aktsiaselts, the Latvian Akciju Sabiedriba, the Lithuanian Akcine Bendroves, the Slovenian Delniska Druzba, and the Liechtenstein Aktiengesellschaft.

Revenue Ruling on Entity Classification

Citation: For Rev. Rul 2006-3, 2006-2 IRB 276, see Doc 2005-25490 [PDF] or 2005 TNT 243-9 Database 'Tax Notes Today', View '(Number'.

Overview: Effective July 26, 2005, Yugen Kaisha business entities (YKs) are abolished under Japanese corporate law, and those entities are automatically converted to a special type of Kabushiki Kaisha (KK) called Tokurei Yugen Kaisha business entities (TYKs) under the Company Law and Coordination Law (as promulgated by the Japanese Diet on June 29, 2005).

Discussion: TYKs are not per se corporations under the check-the-box regulations. However, Rev. Rul. 2006-3 operates to treat TYKs in the same manner as YKs before the effective date of the Japanese change of law. Therefore, a YK that becomes a TYK will remain an eligible entity for purposes of Treas. reg. section 301.7701-1 through -3.

Section III -- U.S. Operations of Foreign Insurance Companies

Section 842(b) Amounts

Citations: For Rev. Proc. 2005-64, 2005-36 IRB 492, see The Insurance Tax Review, Nov. 2005, p. 837, Doc 2005- 18253 [PDF], or 2005 TNT 171-12 Database 'Tax Notes Today', View '(Number'.

Overview: Treasury released the domestic asset/liability percentages and domestic investment yields needed by foreign life insurance companies and foreign property and liability insurance companies to compute their minimum effectively connected net investment income under section 842(b) on their U.S. tax return.

Effectively Connected Income of Foreign Insurance Companies

Citations: For T.D. 9226, 70 F.R. 57509-57510, see The Insurance Tax Review, Nov. 2005, p. 835, Doc 2005-20108 [PDF], or 2005 TNT 190-10 Database 'Tax Notes Today', View '(Number'.

Overview: Treasury finalized, without change, proposed regulations on the determination of effectively connected U.S. income for foreign insurance companies.

Discussion: As discussed in last year's article, section 864 generally provides rules to determine whether fixed or determinable, annual, or periodic income from U.S. sources is effectively connected with a U.S. trade or business of a foreign company. One test used in making that determination is whether the income is derived from assets used in, or held for use in, a U.S. trade or business. The general rule promulgated in final regulations in 1996 provides that stock is not considered an asset used in, or held for use in, the conduct of a trade or business in the United States, although the final regulations reserved on the applicability of that rule to foreign insurance companies. The final regulations extend the general rule to foreign insurance companies unless the foreign insurer owns (directly, indirectly, or constructively) less than 10 percent of the vote or value of the company's stock. The 10 percent threshold distinguishes portfolio stock investments, commonly held by insurance companies, from direct investments.

As noted last year, section 805(a)(4)(E) contemplates that a foreign life insurance company could receive a DRD for dividends from its wholly owned U.S. subsidiary. It is still unclear how the newly finalized regulations will mesh, in application, with that statutory provision.

Foreign Tax Credit Disallowance Under Sections 901(k), 901(l), and
Variable Contracts

Citations: For Notice 2005-90, 2005-51 IRB 1163, see The Insurance Tax Review, Jan. 2006, p. 81, Doc 2005- 24196 [PDF], or 2005 TNT 230-4 Database 'Tax Notes Today', View '(Number'.

Overview: The notice provides guidance regarding the application of section 901(l), which disallows a foreign tax credit for some withholding taxes on items of income or gain to the extent the recipient of the item is under an obligation to make related payments regarding positions in substantially similar or related property.

Discussion: Notice 2005-90 reiterates the Treasury and IRS concern about transactions that involve trafficking in foreign tax credits, specifically the separation of the foreign taxes from the related foreign-source income. Section 901(l) disallows a foreign tax credit for some withholding taxes on items of nondividend income or gain to the extent the recipient is under an obligation to make related payments regarding positions in substantially similar or related property (emphasis added). Section 901(k) disallows a foreign tax credit for some withholding taxes on dividends to the extent the recipient of the dividend is under an obligation to make related payments regarding positions in substantially similar or related property dividends (emphasis added). Although the notice only addresses an exception under the former subsection (relating to nondividends), it requests comments under both subsections.

The notice states that both statutory language and legislative history to section 901(l) make it clear that Treasury has regulatory authority to provide exceptions to the general foreign tax credit disallowance rule in appropriate circumstances. The notice describes a back-to-back computer program licensing arrangement in the ordinary course of the licensor's and licensee's respective trades or businesses as an example of a transaction to which the disallowance rule of section 901(l) need not apply to further the purposes of section 901(l). The notice defines, for purposes of the notice, a back-to-back computer program licensing arrangement, and what constitutes use in the ordinary course of the licensor's and licensee's respective trades or businesses.

The notice then suggests there may be other types of arrangements or transactions that are not within the purposes of section 901(l), and it requests comments on which arrangements or transactions would qualify and why they should qualify, as well as comments on the definitions of "related payments" and "positions in substantially similar or related property" for purposes of both 901(k) and 901(l). The IRS notes that "[i]n particular, comments are requested on the application of section 901(k) where the recipient of a dividend is obligated to make payments under an arrangement where such payments reflect not only the amount of the dividend but also other factors, such as changes in the value of the dividend-paying stock, dividend performance or changes in the value of a portfolio of stocks, or obligations under a debt instrument, annuity, or insurance contract."

Clearly, Treasury and the IRS are concerned about the appropriate disallowance of foreign tax credits and are attempting to ensure that appropriate exceptions are made for some transactions. Insurance companies do not have offsetting obligations to pay out investment income, but under some variable life and annuity products, there is a contractual obligation to credit variable accounts with a net return tied to various items of investment income. It is possible that without a clear definition of a "position in substantially similar or related property," some confusion could arise, resulting in an inappropriate disallowance of foreign tax credits to insurance companies.

Section IV -- Other Developments Affecting International Insurance

The OECD Released a Discussion Draft on the Attribution of Profits
to a Permanent Establishment of an Insurance Company.

Overview: The OECD released the discussion draft (Part IV Insurance) of the "Report of the Attribution of Profits to a Permanent Establishment" (the draft). The purpose of the draft is to establish common interpretation and consistent application of the taxation of insurance company PEs. The issue of the attribution of profits to PEs is an issue of significant importance to the insurance industry. Below, we summarize the OECD's approach for determining the profits attributable to a PE of an insurance enterprise, including highlights of some of the comments that have been filed with the OECD from insurers, reinsurers, and practitioners at large.

Discussion: The draft's primary aim is to attribute profits to a PE in accordance with article 7(2) of the OECD Model Tax Convention (model treaty). Article 7(2) determines "the profits which [the PE] might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions." The draft treats a PE as a distinct and separate enterprise under the functional and factual analysis method. The functional and factual analysis method identifies the significant risks of the insurance business, as well as the functions that give rise to those risks. Specifically, the analysis tests the key entrepreneurial risk-taking (KERT) functions of the enterprise and the extent to which the PE performs or manages those functions. The KERT functions of the enterprise are those that require active decisionmaking regarding the taking on and day-to-day management of the individual risks and portfolio of risks that have been identified as the most important under the functional and factual analysis method. Applying the functional and factual analysis method is one of several critical steps in determining the profits attributable to a PE. The other steps include: (1) the attribution of surplus based on the attribution of risks and the subsequent attribution of the income from the assets arising from the investment of the surplus; (2) the pricing on an arm's-length basis of dealings that can appropriately be recognized; (3) the recognition of transactions between the enterprise and associated enterprises and independent third parties that are attributed to the PE; and (4) the determination of comparability between dealings and uncontrolled transactions.

Subsequent to the release of the draft, the OECD invited comments from the insurance industry on the proposed steps. The OECD requested comments on the following:

  • the factual accuracy of the analysis of the most important functions of the modern insurance industry;
  • the impact of regulation, and in particular host country regulation, on the conduct of the insurance business;
  • the commercial rationale for internal reinsurance within a single enterprise;
  • the use of alternative risk transfer mechanisms, such as catastrophe bonds;
  • the types of risk that require surplus and how to determine the quantum of surplus and its location within a single enterprise; and
  • other issues as identified within the draft.

A number of insurers, reinsurers, and practitioners submitted comments in response to that request. Some notable commentary and viewpoints include:

  • The hypothetical distinct and separate enterprise approach is generally an appropriate method; however, there are considerable difficulties in applying that approach to the insurance industry because of the lack of a global framework for insurance capital requirements and regulation. Thus, further guidance is needed.
  • The draft describes the operational functions of insurance, but it fails to identify the strategic functions performed, such as the creation and implementation of business strategy. That is important because the creation and implementation of a business strategy for a multinational insurance enterprise extends cross-border and ensures the entire operation is as profitable as possible.
  • There is inadequate recognition that underwriting and reinsurance can be loss-making activities.
  • Greater recognition should be given to the fact that the insurance industry, like other industries, faces business cycles that may affect an insurer's surplus and the attribution of income over time.
  • A new section should be included to address risk prioritization and capital allocation. Insurance companies are subject to regulatory controls. Those controls are quite significant, and they cover both the asset and liability sides of an insurer's balance sheet. They also deal with the calculation of reserves, determination of capitalization thresholds, and limitation of portfolio investments. That information is typically disclosed in regulatory returns filed in accordance with the rules of a company's host jurisdiction. It is the position of several business commentaries that conducting a separate factual and functional analysis is administratively burdensome for insurance companies when duplicate information is recorded in the regulatory return.
  • Further clarification and guidance should be issued regarding dependent agent PEs.
  • The KERT model focuses on managing risk on a day-to-day basis. Such a model may not be suitable for a long-lived insurance business in which risk cannot be so micro-managed.
  • The creditworthiness of a PE should not be the same as the enterprise as a whole because no two PEs are ever likely to have identical risk portfolios and/or the same level of local capital (as required by local regulations).
  • The method of allocating capital to a PE should result in a total allocation no greater than the capital of the entire enterprise.

The OECD is in receipt of those and other comments, and a decision is pending whether it would be useful to have a face-to-face discussion with industry commentators. It should also be noted that the OECD is still processing a substantial number of comments regarding Part I of the draft, which may have an impact upon the finalization of Part IV.

Proposed Regulations on Cost-Sharing

Citations: For REG-144615-02, see Doc 2005-17678 [PDF] or 2005 WTD 162-8 Database 'Worldwide Tax Daily', View '(Number'.

Overview: Treasury and the IRS on August 22, 2005, issued long-awaited proposed regulations governing the application of section 482 to intercompany cost-sharing agreements (CSAs). The proposed regulations, over 200 pages long, adopt sweeping changes to the conceptual framework for determining so-called buy-ins, now referred to as preliminary or contemporaneous transactions (PCTs). The proposed regulations also provide new guidance on the application of periodic adjustments to buy-ins.

Discussion: In the new framework, taxpayers are now required to base their valuations of PCTs on a hypothetically constructed "Reference Transaction," in which the contributor grants perpetual and exclusive territorial rights in the covered intangibles under a CSA to the CSA participants. Several new valuation methods are specified, and the IRS is given broader powers to impose periodic adjustments when results are considered to diverge from predicted outcomes.

In what amounts to a philosophical shift, the proposed regulations adopt the theoretical "investor model" rather than relying on the empirical arm's-length standard. The proposed rules are very prescriptive and, unlike the current regulations, generally require taxpayers to adopt inflexible prescribed contractual and economic arrangements to which taxpayers can make only limited ex post adjustments. To that end, the proposed regulations impose four administrative requirements: (1) contractual requirements; (2) documentation requirements; (3) accounting requirements; and (4) reporting requirements. The administrative requirements appear to be fundamentally designed to enforce the emphasis in the proposed rules on CSAs being a reflection of a deal that has been struck between the participants at a particular point in time, thereby limiting taxpayers' ability to take a "wait and see" approach to CSAs.

Excise Taxes

As a result of Rev. Proc. 2003-78, which provides guidance to foreign insurance companies for obtaining a closing agreement with the IRS ensuring exemption from the federal excise tax imposed on premiums paid to foreign insurers, we have seen far less public activity in this area. Private letter rulings are no longer required, so the IRS no longer makes public closing agreements reached with individual insureds.

However, despite Rev. Proc. 2003-78, there was some confusion within the transatlantic insurance market regarding the applicability of the closing agreement process in Rev. Proc. 2003-78 to premiums paid to insurance companies resident in the United Kingdom. The confusion arose from the different wording in the U.K.-U.S. treaty regarding the limitations on the excise tax exemption. In June 2005 an official of the IRS sought to erase the confusion by stating in a public forum that the procedures are intended to implement, rather than change, the "conduit" provisions of the U.K.-U.S. treaty.

Section V Tax Treaties

The following developments in the treaty arena may affect insurance company business and tax operations.

New Zealand Treaty Changes

Citations: For IRS news release IR-2005-15, see Doc 2005-2796 [PDF] or 2005 WTD 28-14 Database 'Worldwide Tax Daily', View '(Number'.

Overview: The United States and New Zealand entered into a mutual agreement clarifying the entitlement of members of some fiscally transparent entities to benefits under the countries' convention on double taxation relief.

Discussion: The competent authorities of the United States and New Zealand sought to clarify their limitation on benefits provision regarding some fiscally transparent entities under the New Zealand-U.S. income tax treaty. Specifically, they agreed that income paid to or through some fiscally transparent entities is considered derived by a resident of a contracting state to the extent of the share the resident has in the income. That income sourced in either contracting state is eligible for treaty benefits.

Mexico Treaty Changes

Citations: For IRS news release IR-2005-107, see Doc 2005-19183 [PDF] or 2005 WTD 182-24 Database 'Worldwide Tax Daily', View '(Number'.

Overview: The competent authorities of the United States and Mexico have entered a mutual agreement specifying the cases in which fiscally transparent entities are eligible for Mexico-U.S. treaty benefits and clarifying the procedure for claiming treaty benefits from Mexico.

Discussion: The competent authorities of the United States and Mexico also sought to extend treaty benefits to fiscally transparent entities under the Mexico-U.S. income tax treaty. Paragraph 2(b) of the protocol specifies that some fiscally transparent entities (that is, partnerships, estates, and trusts) are residents of a contracting state only to the extent that the income they derive is taxable in that state as the income of a resident. Any income derived by that entity is entitled to treaty benefits. It is significant to note that a limited liability company or other entity that is treated as a partnership for U.S. federal income tax purposes or is disregarded as a separate entity from its owner for U.S. federal income tax purposes may claim treaty benefits by filing Form 8802, "Application for U.S. Residency Certification," and requesting Form 6166, or a certificate of residency.

Sweden Treaty Changes

Citations: For the Protocol Amending the Convention Between the Government of the United States of America and the Government of Sweden for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion With Respect to Taxes on Income, see Doc 2005-20178 [PDF] or 2005 WTD 191-13 Database 'Worldwide Tax Daily', View '(Number'.

Overview: The competent authorities of the United States and Sweden signed the first protocol to amend the convention between the two countries on September 30, 2005. The Swedish Riksdag (parliament) ratified the pending protocol on November 23. According to the Swedish Ministry of Finance, the protocol "may" enter into force in the spring of 2006. Both countries must exchange instruments of ratification before the treaty enters into force. The United States has not yet ratified the treaty.

Discussion: The competent authorities of the United States and Sweden signed a protocol that provides for a zero rate of withholding on dividends paid between parties of either contracting state, provided that the beneficial owner is a company that is a resident of the other contracting state that has owned, directly or indirectly, 80 percent or more of the voting shares of the payer for a 12-month period ending on the date on which the entitlement to the dividends is determined. If the payee is a publicly traded company, then that payment may qualify for a zero rate of withholding provided that the company's principal class of shares is either primarily traded on a recognized stock exchange in the contracting state where the company is resident, or the company's primary place of management and control is in that state. If the payee owns at least 10 percent of the voting shares of the payer, then a 5 percent withholding rate applies. In all other cases, a 15 percent withholding rate applies. Also, the competent authorities extended the limitation on benefits provision to include some fiscally transparent entities under the laws of either contracting state.

Canada Treaty Changes

Citations: For the Memorandum of Understanding Between the Competent Authorities of Canada and the United States Regarding the Mutual Agreement Procedure, see Doc 2005-12243 [PDF] or 2005 WTD 107-13 Database 'Worldwide Tax Daily', View '(Number'.

Overview: The competent authorities of the United States and Canada have issued a memorandum of understanding (MOU) in which they agree to establish principled, reasonable, and consistent guidelines to improve the performance and efficiency of the mutual agreement procedure (MAP).

Discussion: Under the MOU, the competent authorities also agreed to follow the OECD's transfer pricing guidelines for multinational enterprises and tax administrations to resolve substantive issues in cases involving transactions between related parties. The competent authorities highlighted the following issues that have, or may, result in a failure to resolve taxation or taxation adverse to the Canada-U.S. treaty: (1) an arm's-length compensation for consignment manufacturing operations; (2) whether a business is integrated to the point when a profit-split method is appropriate; (3) the presence of nonroutine intangible assets and the determination of an arm's-length value; (4) whether a PE exists and the amount of profit attributable to the PE; (5) whether a transaction is properly characterized as a service versus a license of intangibles; (6) the amount of compensation, if any, on either the closer of relocation of a business or the allocation of associated closing costs; and (7) appropriate relief when source and residence country's laws are in conflict.



More than any other American sport, baseball creates the magnetic, addictive illusion that it can almost be understood.

-- Thomas Boswell, in Inside Sports

Another year of tax legislation, Treasury and IRS guidance, and Treasury treaty negotiation has come and gone. Your authors have done their best to provide you the highlights and lowlights alike of the year just past and to provide a hint of what we expect in the coming year.

Baseball is a singularly arbitrary sport: Why three strikes and you're out? Why not four strikes? You get four balls! Similarly, sometimes the IRS and Treasury can be arbitrary and code mystifying; but, like baseball fans, we insurance tax practitioners keep lit the eternal flame of hope that more than any other area of tax law, insurance creates the magnetic, addictive illusion that it can almost be understood. Like baseball fans, we keep coming back, sure that this year, it will all become clear.

Comment on this story

Tax Analysts Information

Code Section: Section 801 -- Life Insurance Company Tax; Section 831 -- Tax on Other Insurance Companies
Geographic Identifier: United States
Subject Area: Insurance company taxation
Industry Group: Insurance
Author: Safranek, Richard; Gillmarten, Mary; Cohen, Jim
Institutional Author: Deloitte Tax LLP
Tax Analysts Document Number: Doc 2006-538 [PDF]
Tax Analysts Electronic Citation: 2006 TNT 46-47





2005 Insurance Tax Review Year in Review Appendix
by J. Christine Harris

The following chart, prepared by Tax Analysts, includes a listing of insurance tax pronouncements reported in The Insurance Tax Review during 2005.

Date: Mar. 9, 2006

Full Text Published by Tax AnalystsTM

2005 Insurance Tax Review Year in Review Appendix

            Tax Analysts'
 Code Sec.  Headline                Case/Ruling

 1(h)       IRS Addresses           LTR 200543002
            Effect of Repeal        (July 22, 2005)
            of FPHC Provisions
            on Foreign LLC's
 61         Dependent Group Life    TAM 200502040 (Jan. 14, 2005)
            Insurance Is Taxable
            to Employees
 61         Class-Action Damages    ILM 200504001 (Oct. 12, 2004)
            Not Income to Extent
            of Insurance Policy
 72         S. 3029 Would Provide   Retirement Security for Life
            Exclusion for Lifetime  Act of 2004 (S. 3029 Dec. 7, 2004)
            Annuity Payments
 72         Service Describes Tax   LTR 200537043 (June 23, 2005)
            Treatment of Annuity
 101        Insurer Granted Waiver  LTR 200503021 (Oct. 6, 2004)
            for Life Insurance
 101        Policy Transfers        LTR 2005-14001 (Dec. 13, 2004)
            Disregarded for Tax
 101        Insurance Company       LTR 200519025 (Jan. 27, 2005)
            Granted Waiver for
            Flawed Contracts
 108        IRS Publishes Final     T.D. 9192, 70 F.R. 14395-14411
            Regs on DOI Income of
            Consolidated Group
 115        Association's Income    LTR 200504008 (Oct. 8, 2004)
            Is Tax-Exempt
 115        Association's Income    LTR 200453009 (Sept. 24, 2004)
            Is Tax-Exempt
 162        Insurer's Participation TAM 200517030 (Jan. 31, 2005)
            Fee in State Insurance
            Fund Is Deductible
 162        IRS Issues LMSB         (May 20, 2005)
            Directive on
            Examination of
            Business Acquisition
            Transaction Costs
 163        Company Didn't Have     Tillman v. Camelot Music Inc.,
            Insurable Interest in   No. 03-5172 (10th Cir. May 10, 2005)
            Employee's Life Under
            COLI Policy
 163        Company Had Insurable   Xcel Energy Inc. et al. v.
            Interest in Employees'  United States, No. 04-1449
            Lives                   (D. Minn. Oct. 12, 2005)
 165        Coordinated Issue Paper (May 27, 2005)
            Addresses Blue Cross
            Blue Shield
            Abandonment Loss
 165        No Losses for           Claymont Invs. Inc. et al. v.
            Terminated              Comm'r, T.C. Memo.  2005-254
            Relationships; Foreign  (Oct. 31, 2005)
            Exchange Deferral
 165(i)     CRS Analyzes            RL33060 (Sept. 2, 2005)
            Catastrophic Risk
            Insurance Reserves
 264        Payments to VEBA to     TAM 200511015 (Dec. 8, 2004)
            Buy Insurance to Fund
            Benefits Plan Are
 351        Foreign Corporations'   LTR 200546005 (Aug. 5, 2005)
            Stock Exchange to
            Create New Parent
            Is Tax-Free
 355        IRS Corrects Final      Ann. 2005-41, 2005-23 IRB 1212
            Anti-Morris Trust
 355        Mutual Insurer's        LTR 200444406 (July 28, 2005)
            Conversion to Stock
            Company Is
 355        IRS Publishes Final     T.D. 9198; 70 F.R. 20279-20291
            Anti-Morris Trust Regs
 355        Proposed Reorganization LTR 200532036 (Apr. 26, 2005)
            Will Be Tax-Free
 367(a)     IRS Publishes Proposed  REG-127740-04; 70 F.R.
            Regs on Cross-Border    30036-30040
            Stock Transfers
 368(a)     Acquisition of          LTR 200546007 (July 8, 2005)
 (1)(C)     Regulated Investment
            Company Is Tax-Free
 401        CRS Summarizes NESTEG   RS22221 (Aug. 12, 2005)
            Act of 2005
 402        IRS Modifies Guidance   Rev. Proc. 2005-25,
            on Determining Fair     2005-17 IRB 962
            Market Value of Some
            Life Insurance
 402        Final Regs Crack Down   T.D. 9223; 70 F.R. 50967-50972
            on Abusive Life
            Insurance Valuations
 402        IRS Corrects Final      T.D. 9223; 70 F.R. 57750
            Regs on Life Insurance
 403        Investors Insist        Petition for Writ of Certiorari,
            Failure to Disclose     Jay Henderson et ux. et al. v.
            Lack of Tax Benefit     American Skandia Life Assurance Corp.
            Was SEC Violation       et al., (U.S. Oct. 28,  2004)
                                    (No. 04-599)
 408        Insurer Can't Challenge The Equitable Life Assurance Soc'y
            IRS's Levy on           of the U.S., No. S 03-2362 MCE GGH
            Annuitants' IRAs        (E.D. Cal. Feb. 14, 2005)
 408A       IRS Publishes Temporary T.D. 9220; 70 F.R. 48868-48871
            Regs on Annuity
            Contract Valuation in
            Roth Conversions
 408A       IRS Publishes Proposed  REG-122857-05;
            Regs on Annuity         70 F.R. 48924-48925
            Contract Valuation in
            Roth Conversions
 409A       IRS Issues First in     Notice 2005-1,
            Series of Guidance on   2005-02 IRB 274
            Deferred Compensation
            Plan Rules
 412        IRS Announces Weighted  Notice 2005-9,
            Average Interest Rates  2005-4 IRB 369
            for January
 412        IRS Announces Weighted  Notice 2005-19,
            Average Interest Rates  2005-9 IRB 634
            for February
 412        IRS Announces Weighted  Notice 2005-26,
            Average Interest Rates  2005-12 IRB 758
            for March
 412        IRS Announces Weighted  Notice 2005-34,
            Average Interest Rates  2005-17 IRB 960
            for April
 412        IRS Announces Weighted  Notice 2005-39,
            Average Interest Rates  2005-21 IRB 1087
            for May
 412        IRS Announces Weighted  Notice 2005-46,
            Average Interest Rates  2005-26 IRB 1372
            for June
 412        IRS Announces Weighted  Notice 2005-54,
            Average Interest Rates  2005-30 IRB 27
            for July
 412        IRS Announces Weighted  Notice 2005-63,
            Average Interest Rates  2005-35 IRB 448
            for August
 412        IRS Announces Weighted  Notice 2005-67,
            Average Interest Rates  2005-40 IRB 621
            for September
 412        IRS Announces Weighted  Notice 2005-72,
            Average Interest Rates  2005-47 IRB 976
            for November
 415        IRS Announces Pension   IR-2005-120 (Oct. 14, 2005)
            Plan Limitations for
 461(i)     Levin Introduces Tax    The Tax Shelter and Tax Haven
            Shelter and Tax Haven   Reform Act of 2005 (S. 1565
            Reform Act of 2005      Aug.  1, 2005)
 501        Nussle Introduces Bill  H.R. 3360 (July 20, 2005)
            to Enhance Incentives
            for Small Property and
            Casualty Insurance
 501(c)15   Organization's Exempt   LTR 200545051 (Aug. 18, 2005)
            Status as Insurance
            Company Is Revoked
 501(c)(15) Organization's Failure  LTR 200520035 (Dec. 3, 2004)
            to Operate as Insurance
            Company Causes Loss of
            Exempt Status
 501(c)(15) Organization's Exempt   LTR 200531019 (Nov. 18, 2004)
            Status as Insurance
            Company Is Revoked
 501(c)(15) Organization Denied     LTR 200529008 (Apr. 28, 2005)
            Exempt Status as
            Insurance Company
 501(c)(15) S. 1553 Would Enhance   S.1553 (July 29, 2005)
            Incentives for
            Property, Insurance
 801        Reynolds Introduces     H.R. 2251, COLI Best Practices
            COLI Best Practices     Act of 2005 (May 1, 2005)
            Act of 2005
 807        IRS Supplements         Rev. Rul. 2005-29,
            Interest Rate           2005-21 IRB 1080
            Schedules for
            Insurance Reserve
 807        Insurer's Treatment     ILM 200504030 (Oct. 15, 2004)
            of Reserves Was
            Unauthorized Change
            in Accounting Method
 809        IRS Releases            Notice 2005-18,
            Differential Earnings   2005-9 IRB 634
 809        IRS Releases Final      Rev. Rul. 2005-58,
            Differential Earnings   2005-36 IRB 465
            Rate for 2004
 816        Issuer's Vehicle        LTR 200509005 (Nov. 17, 2004)
            Service Contracts Are
 817        IRS Publishes Final     T.D. 9185; 70 F.R. 9869-9872
            Regs on Look-Through
            for Nonregistered
 817        Look-Through Rules      LTR 200508002 (Sept. 30, 2004)
            Apply to Subaccounts
            in Diversification Test
 817        IRS Issues Guidance on  Rev. Rul. 2005-7,
            Application of Look-    2005-6 IRB 464
            Through Rule to RICs
 817        H.R. 2180 Would Provide H.R. 2180 (May 5, 2005)
            for Taxation of Puerto
            Rico Life Insurance
 831        IRS Guidance Takes Aim  Rev. Rul. 2005-40,
            at Single Insurer       2005-27 IRB 4
 831        Insurer Is Taxable as   LTR 200538012 (June 20, 2005)
            Insurance Company Other
            Than a Life Insurance
 832        Additions to Premium    Rev. Rul. 2005-33,
            Stabilization Reserves  2005-23 IRB 1155
            Are Return Premiums
 832        H.R. 2668 Would Create  H.R. 2668, Policyholder Disaster
            Disaster Protection     Protection Act of 2005 (May 26, 2005)
 832        Vehicle Service         LTR 200525004 (Nov. 9, 2004)
            Contracts Qualify as
 832        Arrangement Not Shams   TAM 200453012 (Dec. 29, 2004)
            for Federal Income Tax
 832        IRS Publishes Salvage   Rev. Proc. 2005-73,
            Discount Factors for    2005-49 IRB 1090
 832        Insurer Not Entitled to American Family Mutual Ins. Co.
            Additional Adjustment   v. United States, No. 04-C-0764-C
            for Unearned Premiums   (W.D. Wis. (July 11, 2005))
 833        Loss of License,        TAM 200453014 (Aug. 13, 2004)
            Changes in BCBS
 833        BCBS Org's Stock        TAM 200528026 (Mar. 16, 2005)
            Issuance After Becoming
            For-Profit Is Material
 835        Permission to Revoke    LTR 200531001 (Apr. 27, 2005)
            Election Granted to
 842        IRS Releases Domestic   Rev. Proc. 2005-64,
            Asset/Liability         2005-36 IRB 492
            Percentages for
            Foreign  Life
            Insurance Companies
 846        IRS Publishes Loss      Rev. Proc. 2005-72,
            Payment Patterns,       2005-49 IRB 1078
            Discount Factors for
 847        IRS Error, Marginal     ILM 200512017 (Feb. 18, 2005)
            Rate Increase Result
            in Restoration of SETPs
 855        Mutual Fund's Late      LTR 200516013 (Jan. 3, 2005)
            Elections Treated as
            Timely Filed
 863        Foreign Companies'      FAA 20051001F (Jan. 28, 2005)
            Income Allocation
            Method Is Rejected
            as Improper
 864        IRS Publishes Final     T.D. 9226, 70 F.R. 57509-57510
            Regs on Stock Held
            by Foreign Insurers
 894        Financing Company Was   LTR 200525002 (Mar. 25, 2005)
            Not Engaged in Business
            in Foreign Country
 901        Foreign Tax Credit      Guardian Indus. Corp. et al.
            Allowed for Tax Paid    v. United States, No. 02-1936
            by Disregarded Entity   T (Fed. Cl. Mar. 31, 2005)
 901        IRS Limits Application  Notice 2005-90,
            of Foreign Tax Credit   2005-51 IRB 1163
            Disallowance Rules
            for Back-to-Back
            Licensing Deals
 901        Dual-Resident Company   ILM 200532044 (May 5, 2005)
            Must Request Competent
            Authorities to Resolve
            Its Country of
 951        IRS Publishes Final     T.D. 9222; 70 F.R. 49864-49869
            Regs on CFC Earnings
 953        Insurer Granted         LTR 200540009 (June 30, 2005)
            Extension to Elect
            Domestic Corporation
 954        McCrery Bill Would      H.R. 1417 (Mar. 17, 2005)
            Permanently Extend
            Subpart F Exemption
 965        IRS Issues Additional   Notice 2005-38,
            Guidance on Foreign     2005-22 IRB 1100
            Earnings Repatriation
 965        Treasury Fact Sheet     (May 10, 2005)
            Explains New Section
            965 Guidance
 965        IRS Issues Additional   Notice 2005-64,
            Guidance on Foreign     2005-36 IRB 471
            Earnings Repatriation
 1092       Contingent Debt Creates TAM 200509022 (Oct. 6, 2004)
            Straddle Positions
 1274A      IRS Announces OID       Rev. Rul. 2005-76,
            Inflation-Adjusted      2005-49 IRB 1072
            Dollar Amounts for
 1502       IRS Issues Proposed     REG-131128-04;
            Regs on Intercompany    70 F.R. 8552-8556
            Transaction Rules
 1502       Distributing Can't      TAM 200514019 (Apr. 5, 2005)
            Amend to Take Spun
            Sub's Carryback Net
            Operating Loss
 1502       Legal Advice Issued on  FAA 20051801F (Mar. 30, 2005)
            Application of Step
            Transaction Doctrine
 1503       IRS Corrects Proposed   Ann. 2005-56,
            Regs on Dual            2005-33 IRB 318
            Consolidated Losses
 6043A      IRS Publishes Final     T.D. 9230;
            Regs on Inversion       70 F.R. 72376-72381
            Transaction Reporting
 6511       Policyholder Claims     Brief for the Appellee, Greene v.
            Should Have Priority    United States (Fed. Cir. June 3,
            Over Tax Claims,        2005) (No. 05-5032)
            Insurer Argues
 6511       Tax Claim Against       Greene v. United States
            Insolvent Insurance     (Fed. Cir. Mar. 24, 2005)(No. 05-5032)
            Company Had Priority
 6664       IRS Corrects Temporary  T.D. 9186;
            Regs on Qualified       70 F.R. 36345
            Amended Returns
 6664       IRS Corrects Temporary  Ann. 2005-53,
            Regs on Qualified       2005-31 IRB 258
            Amended Returns
 6664       IRS Corrects Temporary  T.D. 9186;
            Regs on Qualified       70 F.R. 36344-36345
            Amended Returns
 7402       Court Details Findings  United States v. Guess et al.,
            to Support Denial of    No. 04-CV-2184-LAB(AJB)(S.D. Cal.
            Preliminary Injunction  filed Dec. 15, 2004)
            in Xélan
 7520       IRS Releases            Pub. 1458
            Publication With
            Updated Actuarial
 7701       RICs Not Classified as  LTR 200544018 (June 1, 2005)
            Publicly Traded
            Partnerships After
 7702       Payment That Company    TAM 200452033 (Sept. 27, 2004)
            Receives From COLI
            Termination Is
            Ordinary Income
 7702       IRS Rules Charges for   Rev. Rul. 2005-6,
            QABs Should Be Taken    2005-6 IRB 471
            Into Account Under
            Expense Charge Rule
 7702       IRS Publishes Proposed  REG-168892-03;
            Regs on Life Insurance  70 F.R. 29671-29673
            Contract Qualifications
 7702       Amounts Payable Under   LTR 200521009 (Feb. 22, 2005)
            Insurance Contracts Are
            Part of Cash Surrender
 7702       Remittance Is Part of   LTR 200528018 (Apr. 12, 2005)
            Cash Surrender Value
 7702       Insurer Granted Waiver  LTR 200525007 (Mar. 22, 2005)
            for Life Insurance
 Misc.      S. 993 Would Impose     S. 993 (May 10, 2005)
            Excise Tax on Exempt
            Insurance Investments
 Ark.       Arkansas Final H.B.     H.B. 2642 (Apr. 13, 2005)
            2642 Deposits Insurance
            Premium Taxes in
            Medicaid Program
      Arkansas Final H.B.     H.B. 2900 (Apr. 11, 2005)

            2900 Provides Credit
            for Foreign Insurers'
            Premium Tax Payments
 Ark.       Arkansas Final S.B.     S.B. 368 (Mar. 2, 2005)
            368 Amends Workers'
            Administrative Tax
 Calif.     California Final A.B.   A.B. 791 (Sept. 22, 2005)
            729 Amends Various
            Insurance Code
 Calif.     California Final AB     A.B. 1424 (Sept. 6, 2005)
            1424 Clarifies Gross
            Premium Taxation for
            Surplus Line Brokers
 Colo.      Colorado Final H.B.     H.B. 1060 (Apr. 22, 2005)
            1060 Credits Insurance
            Companies for
 Conn.      Connecticut Final S.B.  S.B. 1351 (June 7, 2005)
            1351 Imposes
            Retaliatory Law
            Against Foreign,
            Out-of-State Insurers
 Fla.       Florida DOR Adopts      12B-8.003; 12C-1.051
            Rules Changing Forms    (June 20, 2005)
            Used for Insurance
            Premium, Corporate Tax
      Florida DOR Proposes    12B-8.003; 12C-1.051

            Rules Changing Forms    (Feb. 11, 2005)
            Used for Insurance
            Premium, Corporate Tax
 Idaho      Idaho Final H.B. 116    H.B. 116 (Mar. 21. 2005)
            Repeals Requirement
            That Insurers Provide
            Compliance Affidavits
 Ky.        Kentucky Final H.B. 18  H.B. 18 (Mar. 8, 2005)
            Amends Provisions for
            License Tax on
            Insurance Companies
 Mich.      Michigan Final S.B.     S.B. 1449 (Dec. 21, 2004)
            1449 Clarifies
            Provisions Relating
            to Insurance Liens
 Mont.      Montana Final S.B. 134  S.B. 134 (Apr. 8, 2005)
            Limits Amount of
            Aggregate Taxes Paid
            by Insurance Company
 N.J.       New Jersey Appellate    American Fire and Cas. Co. et al.
            Division Rules          v. Div. of Taxation, Docket Nos.
            Application of Premium  A-2708-03T2 et al. (N.J. Super. Ct.
            Tax Cap Statute         App. Div. Mar. 9, 2005)
 Okla.      Oklahoma Final H.B.     H.B. 1535 (May 2, 2005)
            1535 Extends Deadline
            for Estimating Premium
            Tax Remittances
 Texas      Texas Comptroller       200507208L (July 25, 2005)
            Explains Allocation,
            Taxation of Premiums
            for Bond Issuers
 Texas      Texas Final H.B. 532    H.B. 532 (May 20, 2005)
            Allows Title Insurance
            Companies to
            Participate in CAPCO
 Texas      Texas Appeals Court     First American Title Insurance Co.
            Upholds Insurance       et al. v. Strayhorn et al., No.
            Premium, Retaliatory    03-04-00342-CV (Tex. App. June 3, 2005)
            Tax Scheme
 Texas      Texas Comptroller:      Hearing No. 44,425
            Insurance Company Not   (Jan. 13, 2005)
            Qualified for Lower
            Premium Tax Rate
 Texas      Texas Comptroller       34 TAC section 3.809
            Adopts Insurance Tax    (Apr. 11, 2005)
 Texas      Texas Comptroller       34 TAC section 3.809
            Proposes Regulations    (Jan. 24, 2005)
            Regarding Amusement
            Machines, Insurance
 Texas      Texas Comptroller       34 T.A.C. 3.833 (Jan. 3, 2005)
            Adopts Certified
            Capital Companies Rule
 W.Va.      West Virginia Final     S.B. 666 (May 4, 2005)
            S.B. 666 Limits Tax
            Exemptions of Insurance
 W.Va.      West Virginia Final     S.B. 253 (Apr. 21, 2005)
            S.B. 253 Allows Waiver
            of Late Filing Penalty
 EU         EU Asks France to End   IP/05/243 (Mar. 2, 2005)
            Tax Exemption
 EU         ECJ Holds Outsourced    Staatssecretaris van Financien v.
            Insurance Company       Arthur Andersen & Co. Accountants
            Services Are Not        c.s., C-472/03 (ECJ Mar. 3, 2005)
 U.K.       U.K. Amends Friendly    2005 S.I. No. 2005 (July 21, 2005)
            Society Regs
 U.K.       U.K. Explanatory Memo   2005 No. 2005
            Explains Amended
            Friendly Society Regs
 U.K.       U.K. Publishes New      2005 S.I. No. 2014 (July 21, 2005)
            Friendly Society Regs
 U.K.       U.K. Explanatory Memo   2005 No. 2014 (July 21, 2005)
            Explains New Friendly
            Society Regs
 U.K.       U.K. Publishes VAT      BB-15/05 (July 27, 2005)
 U.K.       U.K. Special            Legal & General Assurance Soc'y Ltd.
            Commissioners Allow     v. Thomas (HM Inspector of Taxes),
            Foreign Tax Credit for  SPC00461 (Jan. 28, 2005)
            Full Foreign Tax Paid
 U.K.       U.K. to Update VAT      BB 11/05 May 18, 2005)
            Guidance for Insurance
 U.K.       U.K. Publishes Capital  (Mar. 3, 2005)
            Redemption Bond
 U.K.       U.K. Publishes          2004 S.I. No. 3266
            Insurance Companies     (Dec. 10, 2004)
            Income Tax Order
 U.K.       U.K. Amends Insurance   2004 S.I. No. 3260
            Companies Reserves      (Dec. 10, 2004)
 U.K.       U.K. Amends Overseas    2004 S.I. No. 3272
            Insurers Tax            (Dec. 10, 2004)
            Representatives Regs
 U.K.       U.K. Amends Overseas    2004 S.I. No. 3273
            Life Assurance          (Dec. 10, 2004)
            Business Regs
 U.K.       U.K. Amends Overseas    2004 S.I. No. 3274
            Life Assurance Business (Dec. 10, 2004)

 [table continued]

                    Electronic Citation

 Code Sec.        TA Doc #       TA Cite                 ITR Citation

 1(h)           2005-21902    2005 TNT 209-29 Database 'Tax Notes Today', View '(Number'          Dec. 2005, p. 1023
 61             2005-1010     2005 TNT 11-7 Database 'Tax Notes Today', View '(Number'            Mar. 2005, p. 520
 61             2005-1813     2005 TNT 19-14 Database 'Tax Notes Today', View '(Number'           Mar. 2005, p. 530
 72             2004-23560    2004 TNT 242-48 Database 'Tax Notes Today 2004', View '(Number'          Feb. 2005, p. 421
 72             2005-19093    2005 TNT 180-38 Database 'Tax Notes Today', View '(Number'          Nov. 2005, p. 844
 101            2005-1311     2005 TNT 14-28 Database 'Tax Notes Today', View '(Number'           Mar. 2005, p. 533
 101            2005-7251     2005 TNT 68-27 Database 'Tax Notes Today', View '(Number'           June 2005, p. 1106
 101            2005-10485    2005 TNT 93-56 Database 'Tax Notes Today', View '(Number'           July 2005, p. 139
 108            2005-5846     2005 TNT 54-8 Database 'Tax Notes Today', View '(Number'            May 2005, p. 851
 115            2005-1778     2005 TNT 19-22 Database 'Tax Notes Today', View '(Number'           Mar. 2005, p. 536
 115            2005-129      2004 TNT 251-11 Database 'Tax Notes Today 2004', View '(Number'          Feb. 2005, p. 384
 162            2005-9050     2005 TNT 83-17 Database 'Tax Notes Today', View '(Number'           June 2005, p. 1078
 162            2005-11243    2005 TNT 100-19 Database 'Tax Notes Today', View '(Number'          July 2005, p. 121
 163            2005-10398    2005 TNT 92-11 Database 'Tax Notes Today', View '(Number'           July 2005, p. 49
 163            2005-20816    2005 TNT 199-13 Database 'Tax Notes Today', View '(Number'          Dec. 2005, p. 1008
 165            2005-12100    2005 TNT 106-23 Database 'Tax Notes Today', View '(Number'          July 2005, p. 114
 165            2005-22071    2005 TNT 210-18 Database 'Tax Notes Today', View '(Number'          Dec. 2005, p. 1001
 165(i)         2005-18349    2005 TNT 172-13 Database 'Tax Notes Today', View '(Number'          Nov. 2005, p. 899
 264            2005-5665     2005 TNT 53-11 Database 'Tax Notes Today', View '(Number'           May 2005, p. 875
 351            2005-23523    2005 TNT 223-26 Database 'Tax Notes Today', View '(Number'          Jan. 2006, p. 89
 355            2005-12200    2005 TNT 107-11 Database 'Tax Notes Today', View '(Number'          July 2005, p. 86
 355            2005-22556    2005 TNT 214-22 Database 'Tax Notes Today', View '(Number'          Dec. 2005, p. 1016
 355            2005-8069     2005 TNT 74-8 Database 'Tax Notes Today', View '(Number'            June 2005, p. 1053
 355            2005-17156    2005 TNT 156-22 Database 'Tax Notes Today', View '(Number'          Oct. 2005, p. 734
 367(a)         2005-11340    2005 TNT 99-16 Database 'Tax Notes Today', View '(Number'           July 2005, p. 77
 368(a)         2005-23525    2005 TNT 223-28 Database 'Tax Notes Today', View '(Number'          Jan. 2006, p. 97
 401            2005-17351    2005 TNT 158-24 Database 'Tax Notes Today', View '(Number'          Oct. 2005, p. 759
 402            2005-7286     2005 TNT 68-9 Database 'Tax Notes Today', View '(Number'            June 2005, p. 1071
 402            2005-17913    2005 TNT 166-4 Database 'Tax Notes Today', View '(Number'           Oct. 2005, p. 677
 402            2005-20190    2005 TNT 191-10 Database 'Tax Notes Today', View '(Number'          Dec. 2005, p. 1013
 403            2005-4071     2005 TNT 53-58 Database 'Tax Notes Today', View '(Number'           May 2005, p. 837
 408            2005-4516     2005 TNT 46-6 Database 'Tax Notes Today', View '(Number'            May 2005, p. 821
 408A           2005-17557    2005 TNT 161-4 Database 'Tax Notes Today', View '(Number'           Oct. 2005, p. 685
 408A           2005-17559    2005 TNT 161-3 Database 'Tax Notes Today', View '(Number'           Oct. 2005, p. 690
 409A           2004-24026    2004 TNT 245-10 Database 'Tax Notes Today 2004', View '(Number'          Feb. 2005, p. 341
 412            2005-389      2005 TNT 4-8 Database 'Tax Notes Today', View '(Number'             Feb. 2005, p. 361
 412            2005-2334     2005 TNT 24-1 Database 'Tax Notes Today', View '(Number'            Mar. 2005, p. 518
 412            2005-4507     2005 TNT 43-8 Database 'Tax Notes Today', View '(Number'            Apr. 2005, p. 677
 412            2005-7294     2005-TNT 68-6            June 2005, p. 1076
 412            2005-9493     2005 TNT 87-6 Database 'Tax Notes Today', View '(Number'            July 2005, p. 112
 412            2005-12434    2005 TNT 109-10 Database 'Tax Notes Today', View '(Number'          Aug. 2005, p. 334
 412            2005-14759    2005 TNT 132-6 Database 'Tax Notes Today', View '(Number'           Sept. 2005, p. 492
 412            2005-16687    2005 TNT 151-5 Database 'Tax Notes Today', View '(Number'           Sept. 2005, p. 494
 412            2005-18524    2005 TNT 174-7 Database 'Tax Notes Today', View '(Number'           Nov. 2005, p. 839
 412            2005-22713    2005 TNT 215-6 Database 'Tax Notes Today', View '(Number'           Jan. 2006, p. 85
 415            2005-20966    2005 TNT 199-10 Database 'Tax Notes Today', View '(Number'          Dec. 2005, p. 1014
 461(i)         2005-16509    2005 TNT 148-19 Database 'Tax Notes Today', View '(Number'          Sept. 2005, p. 577
 501            2005-15655    2005 TNT 141-44 Database 'Tax Notes Today', View '(Number'          Sept. 2005, p. 575
 501(c)15       2005-22975    2005 TNT 218-69 Database 'Tax Notes Today', View '(Number'          Jan. 2006, p. 87
 501(c)(15)     2005-11165    2005 TNT 98-67 Database 'Tax Notes Today', View '(Number'           July 2005, p. 123
 501(c)(15)     2005-16659    2005 TNT 151-35 Database 'Tax Notes Today', View '(Number'          Sept. 2005, p. 509
 501(c)(15)     2005-15614    2005 TNT 141-39 Database 'Tax Notes Today', View '(Number'          Sept. 2005, p. 511
 501(c)(15)     2005-16862    2005 TNT 156-83 Database 'Tax Notes Today', View '(Number'          Oct. 2005, p. 757
 801            2005-10431    2005 TNT 92-55 Database 'Tax Notes Today', View '(Number'           July 2005, p. 181
 802            2005-10407    2005 TNT 92-10 Database 'Tax Notes Today', View '(Number'           July 2005, p. 84
 807            2005-1800     2005 TNT 19-16 Database 'Tax Notes Today', View '(Number'           Mar. 2005, p. 528
 809            2005-2307     2005 TNT 24-2 Database 'Tax Notes Today', View '(Number'            Mar. 2005, p. 517
 809            2005-17023    2005 TNT 154-5 Database 'Tax Notes Today', View '(Number'           Oct. 2005, p. 728
 816            2005-4435     2005 TNT 43-32 Database 'Tax Notes Today', View '(Number'           Apr. 2005, p. 697
 817            2005-4019     2005 TNT 39-10 Database 'Tax Notes Today', View '(Number'           Apr. 2005, p. 665
 817            2005-3802     2005 TNT 38-35 Database 'Tax Notes Today', View '(Number'           Apr. 2005, p. 692
 817            2005-1202     2005 TNT 13-12 Database 'Tax Notes Today', View '(Number'           Mar. 2005, p. 514
 817            2005-10692    2005 TNT 96-66 Database 'Tax Notes Today', View '(Number'           July 2005, p. 188
 831            2005-13278    2005 TNT 117-1 Database 'Tax Notes Today', View '(Number'           Aug. 2005, p. 330
 831            2005-19522    2005 TNT 185-30 Database 'Tax Notes Today', View '(Number'          Nov. 2005, p. 841
 832            2005-10634    2005 TNT 93-9 Database 'Tax Notes Today', View '(Number'            July 2005, p. 82
 832            2005-12294    2005 TNT 111-52 Database 'Tax Notes Today', View '(Number'          Aug. 2005, p. 365
 832            2005-13754    2005 TNT 122-14 Database 'Tax Notes Today', View '(Number'          Aug. 2005, p. 341
 832            2005-132      2004 TNT 251-8 Database 'Tax Notes Today 2004', View '(Number'           Feb. 2005, p. 366
 832            2005-23174    2005 TNT 219-14 Database 'Tax Notes Today', View '(Number'          Jan. 2006, p. 71
 832            2005-17094    2005 TNT 158-6 Database 'Tax Notes Today', View '(Number'           Oct. 2005, p. 671
 833            2005-134      2004 TNT 251-10 Database 'Tax Notes Today 2004', View '(Number'          Feb. 2005, p. 377
 833            2005-15116    2005 TNT 136-16 Database 'Tax Notes Today', View '(Number'          Sept. 2005, p. 496
 835            2005-16672    2005 TNT 151-44 Database 'Tax Notes Today', View '(Number'          Sept. 2005, p. 507
 842            2005-18253    2005 TNT 171-12 Database 'Tax Notes Today', View '(Number'          Nov. 2005, p. 837
 846            2005-23185    2005 TNT 219-13 Database 'Tax Notes Today', View '(Number'          Jan. 2006, p. 59
 847            2005-6117     2005 TNT 58-14 Database 'Tax Notes Today', View '(Number'           May 2005, p. 885
 855            2005-8463     2005 TNT 78-20 Database 'Tax Notes Today', View '(Number'           June 2005, p. 1103
 863            2005-5081     2005 TNT 48-15 Database 'Tax Notes Today', View '(Number'           May 2005, p. 890
 864            2005-20108    2005 TNT 190-10 Database 'Tax Notes Today', View '(Number'          Nov. 2005, p. 835
 894            2005-13752    2005 TNT 122-17 Database 'Tax Notes Today', View '(Number'          Aug. 2005, p. 344
 901            2005-6900     2005 TNT 64-15 Database 'Tax Notes Today', View '(Number'           June 2005, p. 1027
 901            2005-24196    2005 TNT 230-4 Database 'Tax Notes Today', View '(Number'           Jan. 2006, p. 81
 901            2005-17164    2005 TNT 156-9 Database 'Tax Notes Today', View '(Number'           Oct. 2005, p. 730
 951            2005-17748    2005 TNT 164-4 Database 'Tax Notes Today', View '(Number'           Oct. 2005, p. 692
 953            2005-20489    2005 TNT 195-36 Database 'Tax Notes Today', View '(Number'          Dec. 2005, p. 1021
 954            2005-5715     2005 TNT 53-50 Database 'Tax Notes Today', View '(Number'           May 2005, p. 941
 965            2005-10170    2005 TNT 90-11 Database 'Tax Notes Today', View '(Number'           July 2005, p. 87
 965            2005-10176    2005 TNT 90-49 Database 'Tax Notes Today', View '(Number'           July 2005, p. 119
 965            2005-17558    2005 TNT 161-1 Database 'Tax Notes Today', View '(Number'           Oct. 2005, p. 700
 1092           2005-4452     2005 TNT 43-17 Database 'Tax Notes Today', View '(Number'           Apr. 2005, p. 679
 1274A          2005-23350    2005 TNT 221-8 Database 'Tax Notes Today', View '(Number'          Jan. 2006, p. 77
 1502           2005-3420     2005 TNT 34-3 Database 'Tax Notes Today', View '(Number'           Apr. 2005, p. 670
 1502           2005-7269     2005 TNT 68-14 Database 'Tax Notes Today', View '(Number'          June 2005, p. 1083
 1502           2005-9985     2005 TNT 89-11 Database 'Tax Notes Today', View '(Number'          July 2005, p. 144
 1503           2005-17189    2005 TNT 156-5 Database 'Tax Notes Today', View '(Number'          Oct. 2005, p. 729
 6043A          2005-24392    2005 TNT 232-7 Database 'Tax Notes Today', View '(Number'          Jan. 2006, p. 51
 6511           2005-15199    2005 TNT 140-51 Database 'Tax Notes Today', View '(Number'         Sept. 2005, p. 457
 6511           2005-7152     2005 TNT 68-53 Database 'Tax Notes Today', View '(Number'          June 2005, p. 1033
 6664           2005-13606    2005 TNT 120-10 Database 'Tax Notes Today', View '(Number'         Aug. 2005, p. 329
 6664           2005-16276    2005 TNT 146-7 Database 'Tax Notes Today', View '(Number'          Sept. 2005, p. 490
 6664           2005-13590    2005 TNT 120-11 Database 'Tax Notes Today', View '(Number'         Aug. 2005, p. 327
 7402           2004-23966    2004 TNT 244-12 Database 'Tax Notes Today 2004', View '(Number'         Feb. 2005, p. 333
 7520           2005-21994    2005 TNT 223-94 Database 'Tax Notes Today', View '(Number'         Jan. 2006, p. 79
 7701           2005-22568    2005 TNT 214-46 Database 'Tax Notes Today', View '(Number'         Dec. 2005, p. 1025
 7702           2004-24263    2004 TNT 248-9 Database 'Tax Notes Today 2004', View '(Number'          Feb. 2005, p. 363
 7702           2005-1201     2005 TNT 13-14 Database 'Tax Notes Today', View '(Number'          Mar. 2005, p. 511
 7702           2005-11240    2005 TNT 98-34 Database 'Tax Notes Today', View '(Number'          July 2005, p. 71
 7702           2005-11719    2005 TNT 103-51 Database 'Tax Notes Today', View '(Number'         July 2005, p. 136
 7702           2005-15108    2005 TNT 136-50 Database 'Tax Notes Today', View '(Number'         Sept. 2005, p. 504
 7702           2005-13757    2005 TNT 122-7 Database 'Tax Notes Today', View '(Number'          Aug. 2005, p. 33
 Misc.          2005-11049    2005 TNT 101-45 Database 'Tax Notes Today', View '(Number'         July 2005, p. 184
 Ark.           2005-9454     2005 STT 90-4 Database 'State Tax Today', View '(Number'           July 2005, p. 189
 Ark.           2005-7898     2005 STT 77-4 Database 'State Tax Today', View '(Number'           June 2005, p. 1161
 Ark.           2005-4497     2005 STT 45-3 Database 'State Tax Today', View '(Number'           May 2005, p. 943
 Calif.         2005-20312    2005 STT 194-12 Database 'State Tax Today', View '(Number'         Dec. 2005, p. 1105
 Calif.         2005-18900    2005 STT 181-4 Database 'State Tax Today', View '(Number'          Nov. 2005, p. 909
 Colo.          2005-9508     2005 STT 91-5 Database 'State Tax Today', View '(Number'           July 2005, p. 191
 Conn.          2005-21064    2005 STT 204-10 Database 'State Tax Today', View '(Number'         Dec. 2005, p. 1114
 Fla.           2005-15858    2005 STT 145-5 Database 'State Tax Today', View '(Number'          Sept. 2005, p. 593
 Fla.           2005-3106     2005 STT 35-7 Database 'State Tax Today', View '(Number'           Apr. 2005, p. 731
 Idaho          2005-6026     2005 STT 59-6 Database 'State Tax Today', View '(Number'           May 2005, p. 946
 Ky.            2005-5348     2005 STT 57-9 Database 'State Tax Today', View '(Number'           May 2005, p. 948
 Mich.          2005-574      2005 STT 8-14 Database 'State Tax Today', View '(Number'           Mar. 2005, p. 56
 Mont.          2005-22513    2005 STT 217-18 Database 'State Tax Today', View '(Number'         Jan. 2006, p. 137
 N.J.           2005-5086     2005 STT 51-16 Database 'State Tax Today', View '(Number'          May 2005, p. 826
 Okla.          2005-22532    2005 STT 216-28 Database 'State Tax Today', View '(Number'         Jan. 2006, p. 141
 Texas          2005-20211    2005 STT 196-23 Database 'State Tax Today', View '(Number'         Dec. 2005, p. 1116
 Texas          2005-20828    2005 STT 202-33 Database 'State Tax Today', View '(Number'         Dec. 2005, p. 1115
 Texas          2005-12327    2005 STT 110-26 Database 'State Tax Today', View '(Number'         Aug. 2005, p. 317
 Texas          2005-6304     2005 STT 72-24 Database 'State Tax Today', View '(Number'          June 2005, p. 1166
 Texas          2005-8774     2005 STT 82-23 Database 'State Tax Today', View '(Number'          June 2005, p. 1163
 Texas          2005-2770     2005 STT 30-26 Database 'State Tax Today', View '(Number'          Apr. 2005, p. 734
 Texas          2005-1113     2005 STT 14-37 Database 'State Tax Today', View '(Number'          Mar. 2005, p. 569
 W. Va.         2005-22718    2005 STT 219-49 Database 'State Tax Today', View '(Number'         Jan. 2006, p. 159
 W. Va.         2005-22790    2005 STT 219-52 Database 'State Tax Today', View '(Number'         Jan. 2006, p. 161
 EU             2005-4181     2005 WTD 41-11 Database 'Worldwide Tax Daily', View '(Number'          Apr. 2005, p. 737
 EU             2005-4329     2005 WTD 42-9 Database 'Worldwide Tax Daily', View '(Number'           Apr. 2005, p. 659
 U.K.           2005-16071    2005 WTD 145-11 Database 'Worldwide Tax Daily', View '(Number'         Sept. 2005, p. 612
 U.K.           2005-16072    2005 WTD 145-13 Database 'Worldwide Tax Daily', View '(Number'         Sept. 2005, p. 614
 U.K.           2005-16073    2005 WTD 145-10 Database 'Worldwide Tax Daily', View '(Number'         Sept. 2005, p. 595
 U.K.           2005-16074    2005 WTD 145-12 Database 'Worldwide Tax Daily', View '(Number'         Sept. 2005, p. 610
 U.K.           2005-16174    2005 WTD 145-9 Database 'Worldwide Tax Daily', View '(Number'          Sept. 2005, p. 616
 U.K.           2005-9977     2005 WTD 89-10 Database 'Worldwide Tax Daily', View '(Number'          July 2005, p. 55
 U.K.           2005-11023    2005 WTD 98-15 Database 'Worldwide Tax Daily', View '(Number'          July 2005, p. 195
 U.K.           2005-4711     2005 WTD 45-20 Database 'Worldwide Tax Daily', View '(Number'          May 2005, p. 968
 U.K.           2004-23667    2004 WTD 243-14 Database 'Worldwide Tax Daily 2004', View '(Number'         Feb. 2005, p. 425
 U.K.           2004-23668    2004 WTD 244-9 Database 'Worldwide Tax Daily 2004', View '(Number'          Feb. 2005, p. 427
 U.K.           2004-23669    2004 WTD 244-10 Database 'Worldwide Tax Daily 2004', View '(Number'         Feb. 2005, p. 428
 U.K.           2004-23670    2004 WTD 244-11 Database 'Worldwide Tax Daily 2004', View '(Number'         Feb. 2005, p. 429
 U.K.           2004-23671    2004 WTD 245-15 Database 'Worldwide Tax Daily 2004', View '(Number'         Feb. 2005, p. 433

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Tax Analysts Information

Code Section: Section 801 -- Life Insurance Company Tax; Section 831 -- Tax on Other Insurance Companies
Geographic Identifier: United States
Subject Area: Insurance company taxation
Industry Group: Insurance
Author: Harris, J. Christine
Institutional Author: Tax Analysts
Tax Analysts Document Number: Doc 2006-539 [PDF]
Tax Analysts Electronic Citation: 2006 TNT 46-48