Passive investment activities treated as an insurance business

Plain-English summary

The IRS ruled that a subsidiary's passive investment activities would be treated as an insurance business after a planned check-the-box election, allowing the related income and expenses to be included in tentative life insurance company taxable income. The assets would be held by a life insurance company to support its life insurance and annuity contracts. The IRS found that the activities were of a type traditionally carried on by life insurance companies for investment purposes and did not constitute the active conduct of a trade or business. The ruling means the income and expenses would not be subject to the noninsurance-business limitations described in IRC §§ 806(b)(3)(C) and 1503(c).

Ruling snapshot

• Question: Will the passive investment activities be treated as an insurance business after the check-the-box election?
• Outcome: Approved
• Key authorities: IRC §§ 801(a), 806(b)(3), 1503(c); Treas. Reg. § 301.7701-3

Full text (IRS public release)

FULL_TEXT
FULL_TEXT
Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201412001 Third Party Communication: None
Release Date: 3/21/2014 Date of Communication: Not Applicable
Index Number: 806.00-00
Person To Contact:
------------------------------------------------------ -----------------------, ID No. -------------------
------------------------------------------------------------ ---------------------------------------------------
---------------- Telephone Number:
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-------------------------------------------- Refer Reply To:
CC:FIP:B04
PLR-120698-13
Date:
December 26, 2013

Holding Company = ----------------------------------------------------------------------
State A = -------------
Parent = -----------------------------------------------
State B = -------------
Company = ---------------------------------------------------------------------
State C = -------------
Subsidiary = -----------------------------------------------------------------
State D = -------------
Passive Investment = --------------------------------------------------------------------------------
Activities ---------------------------------

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

This ruling is in response to your authorized representatives’ submission dated May 2,
2013, requesting a ruling under § 806(b)(3) of the Internal Revenue Code.

                                                 FACTS

Holding Company is a State A --------- insurance holding company. Through its direct and
indirect subsidiaries, Holding Company is engaged in a wide variety of insurance,
financial services and other investment-related businesses.

Holding Company is the parent company of Parent, a State B stock holding company.
Parent owns all of the stock of Company, a State C company. Company is a life
insurance company. Company and its affiliates’ business operations consist of life
insurance products, annuities, mutual funds, pension and institutional products.

Subsidiary is a State D corporation that Parent acquired. After receiving regulatory
approval, Holding Company directed Parent to contribute the stock of Subsidiary to

PLR-120698-13 2

Company. This restructuring was done for non-tax business reasons primarily related
to disruptions in the credit markets and the negative impact on Company’s ability to
borrow and meet regulatory capital requirements following the impact of the worldwide
financial crisis. Company owns all of the stock of Subsidiary. Subsidiary invests in
Passive Investment Activities and also performs consulting activities with respect to
similar Passive Investment Activities.

Holding Company files a life-nonlife consolidated federal income tax return with its
eligible members on a calendar year basis pursuant to an election under
§ 1504(c)(2)(A). Both Company and Subsidiary are eligible members included in
Holding Company’s life-nonlife consolidated return. Holding Company group has
treated Company as part of the life insurance subgroup. Holding Company group has
treated Subsidiary as part of the nonlife subgroup.

Proposed Transaction

Holding Company proposes that Subsidiary segregate the consulting activities in a
separate company owned by Holding Company or one of its non-life subsidiaries.
Holding Company will continue to treat the consulting activity as part of the non-life
subgroup. After segregation, Subsidiary will make an election in accordance with
Treas. Reg. § 301.7701-3 on Form 8832 to be disregarded as a separate entity (“check-
the-box election”). Following the check-the-box election, Company, for federal income
tax purposes, will hold the assets relating to the Passive Investment Activities and will
continue such investment activities to support life insurance and annuity contracts
issued by Company.

                             RULING REQUESTED

Subsidiary’s Passive Investment Activities are properly treated as an insurance
business following Subsidiary’s check-the-box election and therefore Subsidiary’s
income and expenses should be included in computing tentative LICTI and not limited
by §§ 806(b)(3)(C) or 1503(c).

                                      LAW

Section 801(a) imposes a tax for each taxable year on the life insurance company
taxable income (“LICTI”) of every life insurance company. In computing LICTI, any loss
from a noninsurance business is limited under the principles of § 1503(c). Section
806(b)(3)(C). Section 806(b)(3)(A) defines “noninsurance business” as “any activity
which is not an insurance business.” Section 806(b)(3)(B) further provides that any
activity which is not an insurance business is treated as an insurance business if it is of
the type traditionally carried on by life insurance companies for investment purposes but
only if the carrying on of such activity (other than in the case of real estate) does not
constitute the active conduct of a trade or business.
The legislative history to § 806 provides the following:

For these purposes, noninsurance business means any business which is not an
insurance business. Generally, insurance business refers to the business activity of
issuing insurance and annuity contracts and the reinsuring of risks
underwritten by insurance companies, together with investment activities and
administrative services that are required to support or are substantially related to
contracts issued or reinsured by the taxpayer. Thus, for example, if a life
insurance company ran a manufacturing business directly (rather than owning
stock in the company), any income or deduction items attributable to the
manufacturing business would not be taken into account in computing tentative
LICTI. . . .

The concept of noninsurance business is further modified by a provision that any
business that is not insurance business but is of a type traditionally carried on by
life insurance companies for investment purposes is to be treated as insurance
business. This modification recognizes that insurance companies have
traditionally engaged in certain types of income-producing activities as
investments, whether directly or through partnership interests, that could be
viewed as noninsurance business activities. Examples would be the ownership
and rental of real estate and the development and sale of real estate.

H.R. Rep. No. 432, 98th Cong., 2nd Sess. 1407-1408 (1984). To the extent a life
insurance company has losses from a noninsurance business, §§ 803(b)(3)(C) and
1503(c) limit the use of nonlife losses against life income to the lesser of 35 percent of
the nonlife losses or 35 percent of the life income, and also limit the carryover of unused
losses to 35 percent.

                                    ANALYSIS

Under § 806(b)(3)(A), a “noninsurance business” is “any activity which is not an
insurance business.” Thus, the initial question is whether the activity qualifies as an
“insurance business.” The legislative history provides that insurance business includes
issuing insurance and annuity contracts, reinsuring risks underwritten by insurance
companies, as well as investment activities and administrative services that are required
to support or are substantially related to contracts issued or reinsured by the taxpayer.
H.R. Rep. No. 432, 98th Cong., 2nd Sess., pt. 2, pp. 1407-1408 (1984).

If the activity is not an “insurance business,” it is treated as an insurance business if
(1) it is of the type traditionally carried on by life insurance companies for investment
purposes, and (2) the carrying on of such activity (other than in the case of real estate)
does not constitute the active conduct of a trade or business. Section 806(b)(3)(B). If
the activity meets this two-prong test, it is treated as an insurance business.

Following Subsidiary’s check-the-box election, the assets relating to the Passive
Investment Activities will be held by Company. Company will hold the passive

PLR-120698-13 4

investment assets to support life insurance and annuity contracts issued by Company.
Moreover, it is an activity of the type traditionally carried on by life insurance companies
for investment purposes and the carrying on of such activity does not constitute the
active conduct of a trade or business. Accordingly, the Passive Investment Activities
will not be considered a noninsurance business under § 806(b)(3).

                                   CONCLUSION

Based on the representations and facts presented by the taxpayer, Subsidiary’s Passive
Investment Activities are properly treated as an insurance business following
Subsidiary’s check-the-box election and therefore Subsidiary’s income and expenses
should be included in computing tentative LICTI and not limited by §§ 806(b)(3)(C) or
1503(c).

                                     CAVEATS

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this ruling letter.

This ruling is directed only to the taxpayers requesting it. Section 6110(k)(3) of the Code
provides that it may not be used or cited as precedent.

In accordance with the authorization on file with this office, copies of this letter are being
sent to your authorized representatives.

The rulings contained in this letter are based upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by an appropriate party. While this office has not verified any of the material submitted
in support of the request for rulings, it is subject to verification on examination.

                                               Sincerely,




                                               SHERYL B. FLUM
                                               Chief, Branch 4
                                               Office of the Associate Chief Counsel
                                               (Financial Institutions & Products)

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