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An Internal Revenue Service development this week will be
welcome news to many insurance companies.
After two years of negotiation between the IRS National Office
and insurance industry organizations, the IRS has issued a
nationwide directive to its examining agents not to challenge
partial bad-debt deductions under section 166(a)(2) of the Internal
Revenue Code by insurance company taxpayers (both life and property
and casualty), so long as the deduction is based on the loss in
value of certain types of securities that the company has recorded
on its Annual Statement filed with state insurance regulators, and
the charge-off complies with Statement of Statutory Accounting
Principle (SSAP) 43-R. In short, this is a "safe harbor"
rule that allows a tax deduction for the partial worthlessness of
certain investments as long as the governing Annual Statement
accounting method is followed. Real estate mortgage investment
conduit (REMIC) regular interests are the most common example of an
investment covered by the directive.
Many insurance companies invested in the housing and mortgage
markets in the form of REMIC interests, and because of the subprime
mortgage collapse and subsequent financial crisis of 2007
– 2009 (and continuing), many such investments lost
substantial value. However, the ability of insurance companies to
take tax deductions for the loss in value was very uncertain. This
IRS directive resolves a key uncertainty, and is good news for
insurance company taxpayers.
IMPORTANT NOTE: Insurance companies can take advantage of this
directive for tax years 2009 through 2012 if they are under audit
for any of those years — and companies also may file
amended returns and claim refunds if they did not previously adopt
this approach but are eligible for the safe harbor.
Copies of the IRS directive and an associated taxpayer
certification form are linked below.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
