The IRS has provided insurance companies with simplified procedures to obtain automatic consent to accounting method changes for life insurance reserves, amounts computed under Code Sec. 807(c)(3), and specified policy acquisition expenses under Code Sec. 848, when the changes are necessary to comply with Code Sec. 807 and Code Sec. 848 as amended by the Tax Cuts and Jobs Act (TCJA, PL 115-97). The procedures apply to an insurance company’s first tax year after December 31, 2017.
Background. Section 13517 of the TCJA amended Code Sec. 807(d) to provide a new method for computing life insurance reserves. The amendment is effective for tax years beginning after December 31, 2017.
Section 13517(c)(2) of the TCJA provides that the reserve for any contract at the end of the preceding tax year is determined as if the amendments made by Section 13517 applied to such reserve in the preceding year.
Section 13517(c)(3) of the TCJA requires an insurance company to take into account the difference between
- The amount of life insurance reserves for any contract at the close of the tax year preceding the tax year beginning after December 31, 2017, computed using the method prescribed by the TCJA, and
- The amount of such reserves computed using the method prior to the TCJA amendments (TCJA Transition Adjustment).
The TCJA Transition Adjustment must be taken into account ratably over the eight tax years following that preceding tax year under Code Sec. 803(a)(2) or Code Sec. 832(b)(1)(C) if positive and under Code Sec. 805(a)(2) or Code Sec. 832(c)(4) if negative.
Section 13517(a)(1) of the TCJA amended Code Sec. 807(c) to provide that the appropriate rate of interest to discount reserves computed under Code Sec. 807(c)(3) is the highest rate or rates permitted to be used to discount the obligations by the National Association of Insurance commissioners as of the date the reserve is determined.
Section 13519 of the TCJA amended Code Sec. 848 by extending the general amortization period from 120 months to 180 months and changing the percentage of net premiums that are determined to be specified policy acquisition expenses.
Changes in the method of computing life insurance reserves under Code Sec. 807(c)(3), the method of calculating the amount of policy acquisition expenses to be capitalized, or a change in the period over which those expense is amortized to comply with the TCJA amendments are changes in accounting method under Code Sec. 446(e) and Reg. §1.446-1.
Under Code Sec. 446(e) and Reg. §1.446-1(e)(2)(i) a taxpayer must secure the consent of the IRS before changing an accounting method for any item for federal income tax purposes. Generally, a taxpayer must file a form 3115, Application for Change in Accounting Method, during the tax year for which the taxpayer desires to make the proposed accounting method change.
Code Sec. 481 provides that in computing a taxpayer’s taxable income for any tax year, if such computation is under an accounting method different from the method the taxpayer used in the preceding tax year, those adjustments that are determined to be necessary solely by reason of the change to prevent amounts from being duplicated or omitted must be taken into account. The Code Sec. 481(a) adjustment is taken into account over the Code Sec. 481(a) adjustment period.
Automatic consent procedures. The IRS has provided automatic consent procedures for an insurance company to obtain the consent of the IRS to:
- Change its method of computing life insurance reserves to comply with the amendments to Code Sec. 807 made by the TCJA,
- Change its methods of computing amounts under Code Sec. 807(c)(3) to comply with the amendments to Code Sec. 807 made by the TCJA, and
- Change its methods of capitalizing and amortizing specified policy acquisition expenses to comply with amendments to Code Sec. 848 made by the TCJA.
The insurance company must comply with sections 6 and 7 of the revenue procedure. (Rev Proc 2019-35, sec. 3)
Terms and conditions of change. An insurance company making a life insurance accounting method change must make the change in the first tax year beginning after December 31, 2017, and the Code Sec. 481 adjustment is the sum of the TCJA Transition Adjustments. (Rev Proc 2019-35, sec. 6.01(1))
An insurance company making a Code Sec. 807(c)(3) accounting change, must also make the change in the first tax year after December 31, 2017, and the Code Sec. 481(a) adjustment is the difference between the
- Amount determined under Code sec. 807(c)(3) as of the close of the tax year preceding the first tax year beginning after December 31, 2017, determined using the appropriate rate of interest required by the TCJA amendments to Code Sec. 807(c) and
- Such amount determined at such time using the appropriate rate of interest required prior to the TCJA amendments. Rev Proc 2019-35, sec. 6.01(2)
For an insurance company changing its method of capitalizing specified policy acquisition expenses, the change in accounting method is made by using a cut-off method because the TCJA amendments to Code Sec. 848 apply to net premiums for tax years beginning after December 31, 2017. No Code Sec. 481 adjustment is needed or allowed. (Rev Proc 2019-35, sec. 6.01(3))
Changing accounting method. The requirement to file Form 3115 is waived, provided the insurance company satisfies all the applicable terms and conditions in section 6, properly reports any Code Sec. 481 adjustment on its federal income tax returns and satisfies all other applicable terms and conditions noted in the procedure. (Rev Proc 2019-35, sec. 7)
Audit protection. The procedure does not provide audit protection for accounting method changes for life insurance reserves. However, the procedure does provide audit protection for accounting method changes for Code Sec. 807(c)(3) amounts and for accounting method changes for specified acquisition expenses. (Rev Proc 2019-35, sec. 8)
Transition rule. The procedure provides a transition rule for insurance companies that, before August 26, 2019, properly file a Form 3115 under the nonautomatic change procedures requesting consent for an accounting method change. (Rev Proc 2019-35, sec. 10)
For more information on these IRS procedures, contact Greg Denning at gdenning@larsco.com.
Source: Thompson Reuters 8-7-2019
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