Tax Update ∙ Midwest IASA ∙ Ankeny, IA ∙ September 17, 2015 Brandy Vannoy, CPA, Partner.

Tax Update

∙ Midwest IASA∙ Ankeny, IA∙ September 17, 2015

Brandy Vannoy, CPA, Partner

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Agenda

• New/Proposed Legislation

• Other Updates

• Recent Court Cases

• Tax Sharing Agreements

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New/Proposed Legislation

• Overview

• Review 2014 Camp Proposals

• Main provisions affecting insurance companies

- Reduce top corporate tax rate to 25%

- Repeal Alternative Minimum Tax (AMT) and revise Net Operating Loss (NOL) rules

- Eliminate exclusion of performance-based compensation under IRC 162(m)

- Life reserves – increase in discount rate to compute tax reserves

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New Proposed Legislation

• Main provisions affecting insurance companies (cont.)

- Non-life reserves – increase in rate, loss payment pattern lengthening, no company election

- Increase in DAC percentages

- Change in proration rules

- Remove benefits for small life and non-life insurers

- Limit Corporate-Owned Life Insurance (COLI) interest expense exception to 20% owners for new contracts

- Repeal IRC 847

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New Proposed Legislation

• Obama Administration FY 2016 budget proposal

- Submitted on February 2, 2015

- Reaffirmed support for reduction of top US corporate income tax rate

- Included a number of items aimed at insurance industry tax reform

- Would affect both foreign and domestic insurers

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New Proposed Legislation

• Foreign Insurers

- Limit deductions for reinsurance premiums paid to foreign affiliates

- Exclusion for ceding commissions received or reinsurance recovered in same proportion that premium deduction denied

- Election to treat premiums and associated investment income as Effectively Connected Income (ECI)

- Would be effective for tax years beginning after December 31, 2015

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New Proposed Legislation

• Domestic Insurers

- Tax on large (assets +$50B) financial institutions

- Carryback and carryforward periods

- Derivatives

- Proration

- COLI

- Sales of Life Insurance contracts

- Would be effective for tax years beginning after December 31, 2015

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Recent Court Cases

• Validus Reinsurance, Ltd. V. United States, No. 14081 (D.C. Cir. May 26, 2015)

- Cascading and Federal Excise Tax (FET) under IRC 4371

- Reinsurance vs. Retrocession

• Securitas Holdings, Inc. v. Commissioner, T.C. Memo 2014-225 (October 29, 2014)

- Allowed deduction for premiums paid to a captive insurance company

- Similar to Rent-A-Center v. Commissioner (January 14, 2014)

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Acuity Case

A Mutual Insurance Company, and Subsidiaries v. Commissioner (U.S. Tax Court, Dkt. No. 9421-11, TC Memo. 2013-209, September 4, 2013)

• Big win for taxpayers!!!!

• Facts of Acuity

• Court Ruling

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Acuity Case – Key Observations

NAIC and ASOP standards support “fair and reasonable”

Subsequent favorable development does not mean loss reserve estimate was unreasonable

Actuaries everywhere

• 5 different actuaries involved in the case

• After consideration of opining actuary and company’s independent actuaries, court stated “our inquiry ends” without consideration of IRS actuaries

Documentation key

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Loss Reserves

Documentation

IRS requests in exam

Support for method

Compliance with NAIC guidance and ASOP

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Other Updates

• FATCA reporting of US insurance premiums

• Accounting Method Changes and Procedures

- Rev. Proc. 2015-13 and Rev. Proc. 2015-14

- New procedural rules for filing method changes

‒ Taxpayers Under Examination

‒ Shortened IRC 481(a) adjustment periods

• Increase in IRS examinations of insurance companies

• Increase in investments in Master Limited Partnerships (MLPs) or other alternative investments

• State tax credits

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Tax Sharing Agreements

• Systematic, rational, and consistent

• Three Basic Reasons

- Earnings & Profits

- Stock Basis

- To determine how to split the actual liability and intercompany settlements

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Tax Sharing Agreements

• Earnings & Profits – IRC 1552(a)

1. Contribution to Consolidated Taxable Income

2. Separate Return Tax Liability

3. Allocation of Tax Increases from Consolidation

4. With Approval from the Secretary

• Tax Attribute Absorption Methods – Treas. Reg. 1.1502-33(d)

‒ “Wait and See”

‒ “Percentage Method”

‒ Other Approved Methods

• Stock Basis

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Contact Information

Brandy Vannoy, CPAPartner(919) [email protected]