IRS Chief Counsel rules favorably on life company DRD

IRS Chief Counsel rules favorably on life company DRD

The IRS publicly released an Office of Chief Counsel memorandum* concerning how to calculate, under the proration rules of section 812, an insurance company’s share of the dividends received deduction (DRD) for separate account assets invested in partnership funds.

Related content

The memorandum is: 201603023 (release date January 15, 2016, and dated July 17, 2015). Read 201603023 [PDF 72 KB]


*The memorandum is legal advice, signed by executives in the National Office of the Office of Chief Counsel and issued to IRS personnel who are national program executives and managers. The memo is issued to assist IRS personnel in administering their programs by providing authoritative legal opinions on certain matters, such as industry-wide issues. It is not to be used or cited as precedent.


The taxpayer is a life insurance company that is a member of a group of corporations that files consolidated returns. The taxpayer issues variable annuity contracts (VA contracts) that are supported by separate accounts. VA contract holders pay contract-related charges, such as mortality and expense charges, to the taxpayer to maintain the VA contracts. These amounts are paid from the contract holders’ separate accounts into the taxpayer’s general account. The separate accounts invest in funds, some of which are organized as partnerships. The taxpayer pays investment expenses to its nonlife affiliate with regard to these investment funds. 

The issues addressed in the Chief Counsel memo are:

  • Whether the section 812 proration calculation rules require the taxpayer to compute its “gross investment income” for separate accounts invested in partnership funds net of investment expenses? 
  • Whether including the partnership fund investment fees in “amount retained” is consistent with Reg. section 1.801-8(e)? 
  • Whether section 811(c)(3) precludes the taxpayer from deducting the investment fees because it paid them with funds derived from dividend income for which it received a DRD?

IRS Chief Counsel memo

The IRS Chief Counsel memo provides the following findings.

  • Citing the partnership distributive share rule in section 702(a)(5), the Chief Counsel memo concludes that for the proration calculation under section 812,  the taxpayer does not reduce its gross investment income for separate accounts invested in partnership funds by investment expenses when computing its gross investment income under section 812(d). 
  • Based on examples in Reg. section 1.801-8(e) the Chief Counsel memo concludes that the “amount retained includes any amount of gross investment income not credited to reserves,” and that including the partnership fund investment fees in the amount retained is consistent with the regulations.
  • Concerning whether section 811(c)(3) precludes the taxpayer from deducting the investment fees paid to its nonlife affiliate—because it paid them with funds derived from dividend income for which it received a DRD—the memo reasons that given the dividend for which taxpayer received the DRD is an income item (subject to tax at a lower effective tax rate) and investment expenses are a general deduction, they are not the same item. The memo concludes that once a life insurance company determines its company’s share of the separate account DRD, the company can use the resulting dividend income to pay deductible expenses or fund its reserves just as it could with any other income. Therefore, section 811(c)(3) does not preclude the taxpayer from deducting investment expenses even if it paid them from dividend income for which it received a DRD.

KPMG observation

The separate account DRD for life insurance companies has been a contentious issue for years. The result in the Chief Counsel memorandum comes as welcome news for many life insurance companies that issue separate account products. The discussion in the memorandum is based on the language of the statute and relevant regulations, and the result clearly dismisses various LB&I concerns about double deductions. 

Additionally, two recent private letter rulings—PLR 201527039 (March 19, 2015) and PLR 201514003 (November 24, 2014)—concluded that partnership structures for separate account investments are not publically traded partnerships and that each portfolio would be properly classified as a partnership for federal tax purposes.

The IRS Chief Counsel has indicated "no ruling" will be allowed for any future requests. Thus, even though a partnership arrangement allows a taxpayer to include investment expenses for DRD computations, the IRS is no longer issuing rulings on the conversion of existing separate account investments that are structured as RICs to partnership structure.


For more information, contact a KPMG tax professional:

Sheryl Flum | +1 (202) 533 3394 |

Teresa Fitzgerald | +1 (614) 249 2387 |

Tal Kaissar | +1 (212) 872 3880 |

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