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.
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:
The IRS Chief Counsel memo provides the following findings.
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.
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