The IRS publicly released a private letter ruling* concluding that indemnity reinsurance of a closed block of life insurance policies ceded from one life insurance company to a subsidiary life insurer constitutes both regular indemnity reinsurance—up to the fair market value of assets that would have been transferred in an arm’s length reinsurance transaction—and a potential section 351 transaction (with the potential section 351 contribution being the amount of the “excess” assets transferred to the reinsuring subsidiary). PLR 201511015 (release date March 13, 2015 and dated November 14, 2014)
Read PLR 201511015 [PDF 46 KB]
*Private letter rulings are taxpayer-specific rulings furnished by the IRS National Office in response to requests made by taxpayers and can only be relied upon by the taxpayer to whom issued. It is important to note that, pursuant to section 6110(k)(3), such items cannot be used or cited as precedent. Nonetheless, such rulings can provide useful information about how the IRS may view certain issues.
P is the parent company of a life-nonlife consolidated group.
P’s indirect subsidiary (LifeCo) plans to cede a regulatory closed block (RCB) of participating life insurance policies to either an existing or newly created life insurance company subsidiary (Sub) using indemnity reinsurance—specifically, less-than-100% coinsurance.
LifeCo plans to cede to Sub the capital and surplus and assets and liabilities attributable to the RCB.
The reinsurance agreement between LifeCo and Sub includes a recapture provision which, if exercised, would require Sub to return the assets that were transferred to it by LifeCo. The fair market value (FMV) of the assets transferred from LifeCo to Sub pursuant to the reinsurance agreement were in excess of the amount LifeCo “would be required to pay in an arm’s length indemnity reinsurance” transaction.
Without significant analysis, the PLR concludes that:
This PLR was issued shortly after PLR 201506008 (Oct. 21, 2014) that concludes that an indemnity reinsurance transaction qualified as a section 351 nonrecognition transaction.
Like the prior ruling, this PLR seems to focus on the “permanence” of the transfer of the contractual rights and obligations associated with the indemnity reinsurance relationship, as opposed to the permanence of the transfer of the value of the future expected profit stream of the business. In the first ruling, the reinsurance agreement did not provide the ceding company an explicit recapture right, which the reinsurance agreement in this PLR did.
In allowing bifurcation of the transaction(s), the ruling appears inconsistent with Rev. Rul. 68-55, 1968-1 CB 140, which was interpreted to require aggregation in such cases.
The PLR does not require section 351 treatment of the “excess” assets but merely allows for this treatment.
For more information, contact a tax professional with KPMG’s Washington National Tax:
Craig Pichette | +1 (312) 665-5267 | firstname.lastname@example.org
Sheryl Flum | +1 (202) 533-3394 | email@example.com
Jean Baxley | +1 (202) 533-3008 | firstname.lastname@example.org
© 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.