PLR 200852018: A reciprocal may deduct savings credited to subscriber accounts it pays out in stages

Plain-English summary

A reciprocal is an old and unusual form of insurer. Instead of a company selling policies to customers, a group of subscribers exchange insurance contracts with each other through an attorney-in-fact who runs the operation. Nobody owns it in the ordinary sense. Here the reciprocal is a captive risk retention group formed to write claims-made long-term care professional liability coverage for a large group of organizations, almost all of them section 501(c)(3) charities, and its board is made up of senior officers of the subscribers themselves.

Section 832(f) gives reciprocals a special deduction. Savings from the year's operations credited to individual subscriber accounts are deducted when credited, and treated as a dividend by the subscriber, with decreases in those accounts picked back up as income. The condition attached is strict and is the whole subject of this ruling: the deduction is allowed only if the subscriber has a legally enforceable right to the credited amount on withdrawing, and only where the reciprocal actually pays those balances out to subscribers who terminate. Savings that are credited on paper but not in fact returned do not support a deduction.

The tension in this arrangement is that long-term care liability claims take years to resolve, so a subscriber's true account balance is not known when it stops buying coverage. The reciprocal handled that with a staged payout. A subscriber that discontinues gets a stated fraction of its savings account balance within 90 days of a first milestone, a fraction of what remains at a second, and whatever is left at a third, and it is entitled to those payments even while its policy years remain open and its own claims are unresolved. Balances get reviewed at least annually, and any amount exceeding what could still be clawed back by adverse claims experience must be paid out. When all relevant years close, a true-up runs: the reciprocal pays any shortfall within 90 days, and the subscriber repays any overpayment, which the reciprocal may instead offset against the subscriber's other accounts. A subscriber that fully withdraws is paid its final balance within 90 days.

Two other features are kept clear of the savings account. Required capital contributions sit in a separate charter capital account, and voluntary contributions sit in a special surplus account. Subscribers may be asked from time to time to contribute back some of what they receive, but the letter states plainly that this is voluntary, that no one is obligated, and that membership does not depend on it. That matters, because a required round trip would undercut the claim that the savings are genuinely paid out.

The Service held the reciprocal is entitled to the section 832(f) deduction for the annual increase in savings credited to subscriber savings accounts, in light of the method and practice by which it actually distributes those savings to withdrawing subscribers.

Most of the letter's length is a careful walk through the law, which makes it useful reading well beyond its own facts. It confirms the entity is taxed as a corporation under subchapter L even though it is an unincorporated association, recites the four judicial characteristics of a mutual insurer, traces section 832(f) back to its 1962 origin as section 823(b)(2) so that the old regulations still govern, explains that the ceiling on the deduction is measured by statutory income reported on the NAIC annual statement rather than taxable income, and notes the notification requirement: every subscriber must be mailed written notice of the amount credited before the sixteenth day of the third month after year end. It also distinguishes these credits from policyholder dividends, which savings credited to subscriber accounts are not, though actual distributions of those balances are treated as policyholder dividends in the year paid.

This is a clean digital release rather than a scan, so no OCR correction was needed. A number of drafting slips are kept verbatim as released: "the gross income of the insurance Company As defined in § 832(b)(1)"; "their business is conducted by two entities rather one"; "Section 1.823-(6)(c)(2)(i)" with the parenthesis misplaced; a citation to "§ 1.832-6(c)(2)(v)" where the notification rule discussed elsewhere in the letter is section 1.823-6(c)(2)(v); "the deduction allowed by section former § 832 (b)(2)" where the redesignation history points to section 823(b)(2); "savings credit to its individual account"; "the date on which the subscriber's right to such amount first would be become fixed"; "such Distributing Subscribers Savings Accounts"; a stray quotation mark in a "true up" mechanism"; the sentence about discontinuing subscribers being entitled to distributions despite open policy years, which appears twice in consecutive paragraphs; and the closing reference to the Surplus Capital Account, which the facts define as the Special Surplus Account. In-text page markers are part of the released document and are left in place.

Ruling snapshot

• Question: May a reciprocal risk retention group deduct the annual increase in savings credited to subscriber accounts when withdrawing subscribers are paid those balances in stages, before their policy years close?
• Outcome: approved. The deduction under section 832(f) is allowed for the increase for the taxable year in savings credited to subscriber savings accounts, given the method and practice by which the reciprocal actually distributes those savings to withdrawing subscribers.
• Key authorities: Code sections 501(c)(3), 831, 832(b)(1), 832(c), 832(c)(11), 832(f), 7701(a)(3); former sections 821 through 825, 822(c)(6), 822(f)(2), 823(b)(2); Treas. Reg. sections 301.7701-1(c), 1.822-12, 1.823-6(c)(2), 1.823-7, 1.832-5(a); Rev. Rul. 74-196, 1974-1 C.B. 140; Rev. Rul. 83-132, 1983-2 C.B. 270; S. Rep. No. 1881, 87th Cong., 2d Sess. 54 (1962), 1962-3 C.B. 707, 763; H.R. Conf. Rep. 2518, 87th Cong., 2d Sess. (1962), 1962-3 C.B. 401, 453.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury Washington, DC 20224

Number: 200852018 Third Party Communication: None
Release Date: 12/26/2008 Date of Communication: Not Applicable Index Number: 832.15-00 Person To Contact:
------------------------------------------------------------ ------------------------, ID No. -------------
---------------------- Telephone Number:
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-------------------------------------------------------- Refer Reply To:
-------------------------------------------------- CC:FIP:B04
----------------------------------- PLR-120765-08
Date:
September 15, 2008

LEGEND:

Company A = -------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
--------------------------------------------------

Agent = ---------------------------------------------------------

Company C = -------------------------------------------------------

Date A = -------------------

State A = --------------------------

Year X = ---------

Number D = ----

Number E = --

Number F = --

Type B = -----------------------------------------

T = ----------------------------
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U = ----------------------------

V = ----------------------------

W = ------

X = -----------

Dear ----------------:

This is in reply to your letter of Date A, in which you requested a ruling whether Company A is permitted a deduction pursuant to § 832(f) under Subchapter L of the Internal Revenue Code of 1986, in the proposed transaction described below.

FACTS

Company A and Subscribers

Company A is a State A domiciled captive reciprocal risk retention group that qualifies as an interinsurer (reciprocal) for Federal income tax purposes. As a reciprocal risk retention group, Company A operates as an unincorporated association of entities (“Subscribers”) who acting through Agent, an attorney-in-fact, exchange insurance contracts, thereby insuring each other. Company A files the National Association of Insurance Commissioners (“NAIC”) approved annual statement for property and casualty insurance companies with the Department of Insurance, Securities and Banking for State A.

Company A was formed in Year X for the primary purposes of providing claims-made long-term care professional liability insurance for over Number D, Type B organizations. Company C is owned 100% by Company A. Company A is governed by its Board of Directors, all of whom are senior officers of Subscribers of Company A. Pursuant to the Bylaws, Directors are appointed and elected by the subscribers so long as such subscribers remain Voting Subscribers under the Bylaws. Voting Subscribers are Participating Subscribers that have contributed capital to Company A, or exchanged shares of Company C for a Charter Capital Account and have been designated by the Board of Directors as Voting Subscribers. Pursuant to the Bylaws, Discontinuing and Withdrawn Subscribers are not eligible to vote. All Participating Subscribers are organizations described in § 501(c)(3) except one that is a reciprocal insurance company servicing other Type B organizations. The insurance contract among the Subscribers is the Subscriber’s Agreement. It is under this agreement the Subscribers agree to insure each other. All Subscribers must sign a Subscribers’ Agreement or be issued an indemnity, insurance or 3

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reinsurance contract whose terms state that such contract and the indemnitee, insured or reinsured are subject to the terms of the Subscribers’ Agreement.

Subscriber Status

Under Company A’s Subscriber Agreement there are four classes of subscribers: Participating, Discontinuing, Withdrawn and Non-participating.

A Participating Subscriber is one that has signed a Subscribers Agreement or has been issued an indemnity, insurance or reinsurance contract and has been designated a Participating Subscriber by Company A Board of Directors. A Participating Subscriber also has contributed capital in an amount determined by the Board of Directors, or exchanged all of its Class A voting or Class B non-voting common stock of Company C for a Charter Capital Account in Company A, or is a risk purchasing group or association composed entirely of entities that are capital contributors to or shareholders of a Participating Subscriber.

A Discontinuing Subscriber is so when it is no longer insured under a then current policy year insurance policy and remains so during the time such policies are still subject to adjustment.

A Withdrawn Subscriber occurs when a Discontinuing Subscriber is no longer insured under a then current year in force insurance policy which was subject to adjustment has been declared final and closed by Company A Board of Directors.

A Non-participating Subscriber is a subscriber designated as such by the Company Board of Directors. Non-participating Subscribers do not have a Subscriber Savings Account. A Non-participating Subscriber which makes a capital contribution to Company A, and later becomes a Withdrawn Subscriber, will have its contributed capital returned to such Subscriber pursuant to the Subscribers’ Agreement.

Capital Accounts

There are three types of subscriber accounts. The first account is the Subscriber Savings Account. This account is the tax account, required by the Code in order for Company A to take the tax deduction allowable under § 832(f). The Subscriber Savings Account is comprised of calendar year savings of Company A that is credited to each Participating Subscriber. These savings are statutory savings.

The second account is the Charter Capital Account which is equal to each Subscriber’s required capital contributions paid to Company A and the amount the Subscriber originally paid for Company C shares exchanged by such subscriber for the Charter Capital Accounts in Company A. 4

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The third account is the Special Surplus Account which will be comprised of any capital voluntarily contributed to Company A by Subscribers other than capital contributed to a Charter Capital Account and other credits made to the Special Surplus Accounts by the Board of Company A.

Subscribers Agreement

Under the Subscribers Agreement, each Subscriber agrees that the savings of Company may be credited to its Subscriber Savings Account in such amounts and such times as determined by the Company’s Board of Directors. The amounts to be credited are calculated in accordance with the Subscriber Equity Allocation Plan as adopted and amended by the Board of Directors. Except for the Non-participating Subscriber, a Subscriber Savings Account is maintained for each Subscriber and as such is entitled to payments made from the Subscriber Savings Accounts to Subscribers. Company A notifies its Subscribers of amounts credited to their Subscriber Savings Account between January 1 and March 15 following each tax year in which credits of statutory income are made. Notification of amounts credited to the Subscribers’ Savings Account is sent to each Subscriber in accordance with
§ 1.823-6(c)(2)(v).

Company A expects the majority of claims from a given policy will be resolved within Number E years. Most if not all claims will be resolved within Number F years. Discontinuing Subscribers will be paid the amount reflected in their Subscribers Savings Accounts as follows:

(a) within 90 days of T after having become a Discontinuing Subscriber, such Discontinuing Subscriber will receive W of the balance of its Subscriber Savings Account;

(b) within 90 days of U after having become a Discontinuing Subscriber, such Discontinuing Subscriber shall receive X of the remaining balance of its Subscriber Savings Account; and

(c) within 90 days of V after having become a Discontinuing Subscriber, such discontinuing Subscriber will receive the remaining balance, if any, of its Subscriber Savings Account. Subscribers are entitled to these distributions even if policy years for which they are responsible are still open and even if the Subscriber itself has open claims.

Discontinuing Subscribers are entitled to these distributions even if relevant policy years are still open and even if the Subscriber itself has open claims. Discontinuing Subscribers shall share in the results of all policy years in which a policy was issued to such Discontinuing Subscriber and such Distributing Subscribers Savings Accounts shall be subject to further adjustment for such policy years. 5

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Notwithstanding the above method and time parameters for returning a Discontinuing Subscriber’s Subscriber Savings Account balance, a Discontinuing Subscriber shall receive the entire amount reflected in its Subscriber Savings Account upon the earlier of (i) the above time parameters, or (ii) within (90) ninety days after becoming a Withdrawn Subscriber, that is when all relevant policy years are closed. A Withdrawn Subscriber’s sole right as a Subscriber is to be promptly paid (within 90 days of becoming a Withdrawn Subscriber) the final and true balance, if any due, remaining in the Withdrawn Subscriber’s Savings Account subject to approval of the State A Department of Insurance, Securities and Banking, if required.

If at any time a Discontinuing Subscriber’s Savings Account balance is greater than the amount by which its Subscriber’s Savings Account could be adjusted downward based on the results of claims from policy years still subject to adjustment such Discontinuing Subscriber shall receive one or more payments from its Subscriber Savings Account balance so that at no time does a Discontinuing Subscribers Savings Account balance remain greater than the amount by which such balance could be subject to adjustment. Company A shall review a Discontinuing Subscribers Savings Account at least annually to determine if any payments shall be made under this provision and shall annually pay such Discontinuing Subscriber such excess amount.

Additionally, the Subscribers Agreement contains a “true up” mechanism” so that Subscribers receive the true balance of their Subscribers Savings Accounts once all policy periods in which they were a Subscriber are closed. Once a Discontinuing Subscriber becomes a Withdrawn Subscriber, the final true balance shall be determined. If the Withdrawn Subscriber’s true Subscribers Savings Account balance is greater than the amounts that were paid to such Subscriber, then Company A shall pay to such Withdrawn Subscriber the difference within 90 days following the Discontinuing Subscriber becoming a Withdrawn Subscriber. If a Discontinuing Subscriber or a Withdrawn Subscriber’s true Subscribers Savings Account balance is less than the amounts that were paid to such Subscriber pursuant to Company A’s Subscriber Savings Account return policy, then such Subscriber shall promptly repay Company A the difference upon written notice by Company A. If a Discontinuing Subscriber or a Withdrawn Subscriber has balances or credits reflected in any other equity accounts with Company A or otherwise, Company A may, at its option, require the Subscriber to repay the amount of overpayment to Company A or deduct or offset such amounts against the other balances or credits.

The Agreement also provides that in order to remain financially strong by protecting the Subscribers and Company A from the unpredictable vicissitudes of this type of market, from time to time Subscribers may be requested to voluntarily contribute as capital to Company A, some or all of amounts distributed to the Subscribers from their Subscriber Savings Accounts. These capital contributions are entirely voluntary. Subscribers are under no obligation to make a capital contribution. 6

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To the extent that they are made, they will be accounted for in the Surplus Capital Account.

LAW

Mutual insurance company as reciprocal

Section 7701 (a)(3) of the Internal Revenue Code defines the term "corporation" to include insurance companies.

Section 301.7701-1 (c) of the Income Tax Regulations provides that for purposes of taxation the classification of an organization is determined under the Internal Revenue Code rather than under state law. The term "corporation" is not limited to the artificial entity usually known as a corporation, but also includes an insurance company.

Rev. Rul. 83-132, 1983-2 C.B. 270 holds that a noncorporate business entity that is primarily engaged in the business of issuing insurance contracts is an insurance company, and therefore a corporation within the meaning of section 7701 (a)(3) of the Code, and thus is taxable as a corporation under the provisions of subchapter L.

Prior to 1987, mutual insurance companies were taxed under the provisions of §§ 821-825. The Tax Reform Act of 1986 repealed these provisions and mutual insurance companies are now taxed under § 831 of the Code.

Section 831 of the Code provides that an insurance company other than a life insurance company is subject to tax at normal corporate rates on its insurance company taxable income.

Section 832 defines insurance company taxable income for purposes of the tax imposed by § 831 as the gross income of the insurance Company As defined in § 832(b)(1), less the deductions allowed by § 832(c).

A distinguishing factor between a mutual insurer and a stock insurer is that the mutual insurer is controlled by and is operated for the benefit of policyholders. Neither the Code nor the regulations define mutual insurance company. The courts have determined that the characteristics of a mutual insurance company generally are 1) the right of policyholders to be members to the exclusion of others and the right of such members to choose the management; 2) the sole business purpose is to supply insurance substantially at cost; 3) the right of members to the return of premiums in excess of those amounts needed to cover losses and expenses; and 4) common equitable ownership of the assets by the members. See Rev. Rul. 74-196, 1974-1 C.B. 140. 7

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Current § 832(f) is a redesignation of § 823(b)(2) which was originally enacted by the Revenue Act of 1962. Revenue Act of 1962, Pub. L. 87-834, section 8(c), 1962-3 C.B. 111, 140. In considering the provisions of the Revenue Act of 1962, the Senate Finance Committee described an interinsurer or reciprocal underwriter as:

Reciprocal underwriters and interinsurers differ from ordinary mutual insurance companies in that their business is conducted by two entities rather one. An ordinary mutual insurance company receives all of the premium income from insurance and not only pays losses but conducts directly the operation and management of the insurance activities. The reciprocal underwriter or interinsurer, on the other hand, pays its insurance losses, but an "attorney-in-fact" performs all, or most, of the insurance functions-writing policies, collecting premiums, settling claims, keeping records, etc.-and pays the related expenses, for a portion of the premium income of the reciprocal.

S. Rep. No. 1881, 87th Cong., 2d Sess. 54 (1962), 1962-3 C.B. 707, 763.

Company A is an unincorporated association through which Subscribers, acting through Agent, will exchange insurance contracts, thereby insuring each other. Company A’s only business is providing risk coverage substantially at cost. Subscriber membership terminates when Subscriber is no longer insured under a then current policy year issued in force insurance policy and becomes a Withdrawn Subscriber. Subscribers, through their right to vote, appoint members of the Board of Directors and address other matters such as elect members to various Committees and modification of the Subscriber’s Agreement. Participating Subscribers also have the right to receive policyholder dividends to the extent declared and paid by Company A. Company A has the financial responsibility to pay the insurance losses. Agent will perform the day-to-day management and insurance functions. Upon dissolution of Company A, subject to laws of State A, each Subscriber then insured retains the right to share in the assets of Company A.

Subscriber savings account (SSA)

Section 832(f) provides that in computing the taxable income of an insurance company which is an interinsurer or reciprocal underwriter, the increase for the taxable year in savings credited to subscriber’s accounts is allowed as a deduction, and the decrease for the taxable year in savings credited to subscriber accounts is includable as an item of gross income. 8

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Section 832(f) defines the terms "savings credited to subscribers accounts " as the portion of the surplus for the taxable year that is credited to the individual accounts of subscribers before the 16th day of the third month following the end of the taxable year, but only if the reciprocal would be obligated to pay this amount promptly to the subscriber if he terminated his contract at the close of the Company A's taxable year.

Section 832(f) was originally enacted as § 823(b)(2) by the Revenue Act of 1962. In 1986, this provision was redesignated § 832(f) as part of the consolidation of Parts II and III of subchapter L effected by the Tax Reform Act of 1986, Pub. L. 99- 514, section 1024, 1986-3 C.B. (Vol. 1) 324. Because § 832(f) represents a redesignation of former § 823(b)(2), the provisions of the Income Tax Regulations issued with respect to prior § 823(b)(2) continue to provide guidance on the proper treatment of amounts credited to subscriber savings accounts for Federal income tax purposes.

Deduction for the increase in SSA and an increase in income for the decrease in SSA

Section 1.823-(6)(c)(2)(i) of the regulations provides that with respect to interinsurers and reciprocal underwriters, a deduction is allowed for the increase for the taxable year in savings credited to subscriber accounts, or there is an inclusion as an item of gross income the decrease for the taxable year in savings credited to subscriber accounts.

Section 1.823-6(c)(2)(ii) provides that the deduction for savings credited to subscriber accounts may be claimed by a reciprocal only to the extent that the subscriber has a legally enforceable right to receive the amount credited to his account if he withdraws from the exchange, and where the amounts credited by the reciprocal to the individual accounts of its subscribers are actually paid to subscribers who terminate their insurance contracts during the taxable year. Thus, no deduction is allowed for savings credited to subscriber accounts if the savings are not in fact promptly returned to subscribers when they terminate their contracts.

Section 1.823-6(c)(2)(iii) provides that a reciprocal claiming a deduction under
§ 823(b)(2)(now § 832(f)) must establish and maintain an account for savings credited to subscriber accounts. The opening balance in such account for the first taxable year for which a deduction is claimed shall be zero and in each taxable year there shall be added to such account the total amount of savings credited to subscriber accounts for the taxable year (and there shall be subtracted from such account the total amount of savings subtracted from subscriber accounts for the taxable years). However, in no case may the amount added to the account exceed the total amount of "savings to subscribers for the taxable year", irrespective of the amount of savings credited to subscriber accounts by the reciprocal for that taxable year. 9

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The regulations do not, however, define the term "savings to subscribers for the taxable year." According to the legislative history underlying § 823(b)(2), the special deduction for savings credited to subscribers accounts was intended to benefit "pure" or "classical" reciprocals which, as a matter of business practice, credited any savings from insurance operations to the individual accounts of their subscribers on a yearly basis and which were, in fact, obligated to pay these savings to a subscriber if the subscriber was to terminate his insurance contract and withdraw from the exchange at the end of such year. See H.R. Conf. Rep. 2518, 87th Cong. 2d Sess. (1962), 1962-3 C.B. 401, 453.

Accordingly, the term "savings to subscribers for the taxable year" as used in
§ 1.823-6(c)(2)(iii) means that the portion of the company's surplus credited to subscribers which is attributable to current operating income, rather than amounts included in surplus for which the source of the funds was the individual subscriber (such as subscriber contributions to join the reciprocal) or prior earnings. See also
§ 1.823-6(c)(2)(ii) (amounts contractually required to be returned to policyholders due to policy cancellations or erroneously computed premiums are not "savings credited to subscribers" within the meaning of former § 823(b)(2)). Moreover, since the portion of surplus that a "pure" or "classical" reciprocal could properly allocate to its individual subscribers would be based on the company's statutory income rather than taxable income, the term "savings to subscribers for the taxable year" refers to the statutory income as reported on company's NAIC annual statement, including net underwriting gain or loss, net investment gain or loss, other income, dividends to policyholders, and federal and state taxes.

Section 1.823-6(c)(2)(iii) provides that the increase, if any, in savings credited to subscriber accounts for the taxable year is generally the amount by which the balance in the account for savings credited to subscribers at the close of the current taxable year exceed the balance of such account at the close of the preceding taxable year; and the decrease, if any, for the taxable year in savings credited to subscriber is generally the amount by which the balance in the account for savings credited to subscriber accounts for the preceding taxable year exceed the balance of such account as of the close of the current taxable year.

Section 1.823-6(c)(2)(v) requires every reciprocal claiming a deduction under
§ 823(b)(2) (current § 832(f)) to mail to each subscriber written notification of the amount credited to his account for the taxable year, the date on which such amount was credited, and the date on which the subscriber's right to such amount first would be become fixed if such subscriber had terminated his contract at the close of the company's taxable year. This written notification must be mailed to every subscriber before the 16th day of the third month following the close of the reciprocal's taxable year. 10

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Subscribers are not required to contribute distributions from their Subscriber’s Savings Accounts in order to become members of the Company A. No financial instrument is offered by Company A to Subscribers in conjunction with the voluntary contribution of capital from Subscriber to Company. Under the terms of the Subscribers Agreement, Company A is obligated to pay the Subscribers Savings Account balance promptly to its Subscribers upon termination of the Subscriber’s Agreement.

Savings credited to SSA treated as dividends paid or declared

Section 832(f) provides that the subscriber must treat the amounts representing savings credited to his account for a taxable year as a dividend paid or declared for purposes of computing the subscriber's taxable income.

Section 1.823-7 provides that a subscriber of a reciprocal underwriter or interinsurer entitled to the deduction allowed by section former § 832 (b)(2) and paragraph (c)(2) of § 1.823-6 shall treat amounts representing savings credit to its individual account for the taxable year as a dividend paid or declared for purposes of computing his taxable income.

Section 1.823-7 further provides that to the extent the insurance premium constituted a deductible expense when paid or accrued, the subscriber's taxable income for the taxable year will be increased and any loss for the taxable year will be decreased, by the amount credited to his account.

Deduction for policyholder dividends

Section 832(c)(11) provides a deduction for dividends and similar distributions paid or declared to policyholders, in their capacity as such, in computing the taxable income of an insurance company, other than a mutual fire insurance company, subject to tax under § 831. The term "paid or declared" is construed according to the method of accounting regularly employed in keeping the books of the insurance company.

Section 1.832-5(a) of the regulations allows a deduction for policyholder dividends under § 832(c)(11). This section further provides that the deduction is the same as that allowed under former § 822(c)(6) to mutual insurance companies subject to the tax imposed by (now repealed) § 821. (Now § 831).

According to § 1.822-12, the term "dividends to policyholders" means dividends and similar distributions paid or declared to policyholders in their capacity as such, and includes amounts returned to policyholders where the amount is not fixed in the insurance contract but depends upon the experience of the company or 11

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the discretion of the management. This regulation also provides that savings credited to the individual accounts of the subscribers of a reciprocal are not considered policyholder dividends paid or declared within the meaning of the former § 822(f)(2). However, this regulation provides that actual distributions made by a reciprocal with respect to its subscriber account balances are treated as policyholder dividends under former § 822(c)(6) for the year paid.

Credits are made to Subscriber Savings Accounts in amounts as determined by the Board of Directors and are calculated in accordance with the Subscriber Equity Allocation Plan. Company A will notify its Subscribers of amounts credited to their Subscriber Savings Accounts on or before March 15 following each tax year in which credits of statutory income are made. Notification of amounts credited to the Subscriber Savings Account will be sent to each Subscriber receiving credit in accordance with § 1.832-6(c)(2)(v). Company A’s legal obligation to pay amounts credited to the Subscribers Savings Accounts becomes fixed as of the close of the calendar year even though the actual crediting and notification to the Subscribers may take place after the close of the calendar year yet prior to March 15 of the following year. The portion of Company A’s income credited to Subscribers Savings Accounts will not exceed Company A’s NAIC net income for the year. In the event of termination of a Subscriber’s insurance contract and becoming a Withdrawn Subscriber, the balance in its Subscribers Savings Account, will be paid promptly to the Subscriber in accordance with terms of the Subscriber’s Agreement. Holding:

Accordingly, based on the information submitted and representations made, it is held that:

Company A is allowed a deduction pursuant to § 832(f) of the Code and corresponding regulations for the increase for the taxable year in savings credited to Subscriber Savings Accounts in light of the method and practice by which Company A distributes the savings credited to its Subscriber Savings Accounts to subscribers that withdraw from Company A.

A copy of this ruling should be attached to Company A's federal income tax return for the taxable year of the proposed transaction.

No opinion is expressed as to the tax treatment of the proposed transaction under any other provisions of the Code and regulations which may be applicable thereto, or the tax treatment of any effects resulting from the proposed transaction, which are not specifically set forth in this ruling letter.

This ruling letter is directed only to the Taxpayer who requested it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent. 12

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In accordance with the Power of Attorney on file with this office, a copy of this letter is being sent to your authorized representative.

Sincerely yours,

/S/

Sheryl B. Flum
Chief, Branch 4
Office of Associate Chief Counsel
(Financial Institutions & Products)