Excess assets transferred with reinsurance may qualify under section 351

Plain-English summary

A life insurance company proposed transferring part of the insurance risk, assets, and liabilities associated with a closed block of policies to a wholly owned insurance subsidiary. The assets transferred would exceed the amount required in an arm’s-length indemnity reinsurance transaction, and the parent insurer retained rights to recapture the coverage. The IRS ruled that the arm’s-length reinsurance portion would be governed by the indemnity-reinsurance provisions of subchapter L. It also ruled that this treatment did not prevent the excess asset transfer from qualifying under section 351. The ruling did not decide the precise subchapter L valuation, premium, consideration, or reserve consequences, or the transaction’s overall tax treatment.

Ruling snapshot

• Question: How would a transfer combining indemnity reinsurance with excess assets be treated, and could the excess portion qualify under section 351?
• Outcome: Approved
• Key authorities: IRC § 351; subchapter L; Rev. Proc. 2014-1, section 6.03

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201511015 Third Party Communication: None
Release Date: 3/13/2015 Date of Communication: Not Applicable
Index Number: 351.00-00
Person To Contact:
-------------------- -------------------, ID No. ------------------
----------------------------------------------------- Telephone Number:
---------------------------------------------------------- ----------------------
--------------------------------------------- Refer Reply To:
-------------------------------------- [CC:CORP:B2]
PLR-124414-14
Date:
November 14, 2014

Legend

Parent = -----------------------------------------------------------------------------------------------------
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LifeCo = -----------------------------------------------------------------------------------------------------
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Date 1 = ---------------------------

a = --------------

b = -------------

c = ----------------

d = ----

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

This letter responds to your June 20, 2014 letter requesting a ruling as to the federal
income tax consequences of the proposed transaction. The material information
submitted in that letter and subsequent correspondence is summarized below.

The ruling contained in this letter is based upon facts and representations submitted by
the taxpayer and accompanied by a penalties of perjury statement executed by an
appropriate party. This office has not verified any of the materials submitted in support
PLR-124414-14 2

of the request for rulings. Verification of the information, representations, and other
data may be required as part of the audit process.

This letter is issued pursuant to section 6.03 of Rev. Proc. 2014-1, 2014-1 I.R.B. 15,
regarding one or more significant issues under sections 332, 351, 355, 368, or 1036.
The rulings contained in this letter only addresses one or more discrete legal issues
involved in the transaction. This Office expresses no opinion as to the overall tax
consequences of the transactions described in this letter or as to any issue not
specifically addressed by the rulings below.

                                      FACTS

Parent corporation (the “Parent”) is a domestic corporation and the common parent of
an affiliated group of corporations that file a consolidated federal income tax return. The
consolidated group includes both life insurance companies and corporations other than
life insurance companies.

During a prior year, on Date 1, LifeCo demutualized and became a stock company
owned by Parent. Currently, Parent indirectly owns LifeCo, which is a member of the
Parent consolidated group. LifeCo is a domestic corporation that is taxed as a life
insurance company under subchapter L of the Code.

Certain LifeCo policies in force at the time of its demutualization became a closed block
of contracts. The closed block of contracts are entitled to receive policyholder dividends
declared by the LifeCo board at the board’s discretion. Additionally, LifeCo designated
certain assets to support the regulatory closed block of policies (the “RCB”). The
designated RCB assets are not kept in an account separate from LifeCo’s other assets.

                          PROPOSED TRANSACTION

For what are represented as valid business reasons, the taxpayer proposed the
following transaction (the “Proposed Transaction”):

(1) LifeCo and a subsidiary (the “Sub”) will enter into a Reinsurance Agreement (the
“Agreement”). Sub will either be a newly-formed wholly-owned corporation of
LifeCo or an existing wholly-owned corporation of LifeCo that is part of the life
insurance company subgroup of the Parent consolidated group.

(2) LifeCo will transfer capital and surplus of $a as well as assets and liabilities related
to the RCB to the Sub.
PLR-124414-14 3

The fair market value of the assets that will be transferred to the Sub will exceed the
amount of assets that LifeCo would be required to pay in an arm’s-length indemnity
reinsurance transaction. Additionally, on the effective date of the Agreement (the
“Effective Date”), the book value of the RCB assets transferred will be approximately $b
and the total amount of tax reserves transferred will be approximately $c.
Pursuant to the Agreement, LifeCo will cede and Sub will assume certain specified
liabilities. LifeCo will transfer approximately d percent, which is less than 100 percent,
of the insurance risk on the RCB business to Sub by conventional coinsurance on the
Effective Date. Moreover, the Agreement provides LifeCo with recapture rights. At any
time, LifeCo may elect to recapture, in full or in part, the reinsurance coverage provided
by the Sub. If LifeCo elects to exercise such rights, the Sub is obligated to return any
remaining RCB assets to LifeCo.

                                    RULINGS

Based solely on the information submitted and the representations set forth above, we
rule as follows:

1. The tax treatment of the transfer of assets and liabilities in the arm’s-length
   reinsurance portion of the Proposed Transaction will be determined in accordance
   with the provisions of subchapter L applicable to indemnity reinsurance.

2. Ruling 1 does not preclude the transfer of other assets in excess of the arm’s-length
   reinsurance portion of the Proposed Transaction from qualifying under § 351.

                                   CAVEATS
   

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax treatment of the proposed transaction under any provision of the Code and
regulations or the tax treatment of any condition existing at the time of, or effects
resulting from the proposed transaction that is not specifically covered by the above
rulings. In particular, no opinion is expressed on the precise application of the
provisions of Subchapter L to this transaction (i.e., the valuation and the determination
of the amount of premiums and other consideration arising out of indemnity reinsurance
and the valuation of LifeCo’s decrease and Sub’s increase in reserves.)

                         PROCEDURAL STATEMENTS

This letter is directed only to the taxpayer who requested it. Section 6110(k)(3) of the
Code provides that this letter may not be used or cited as precedent.
PLR-124414-14 4

A copy of this letter must be attached to any income tax return to which it is relevant.
Alternatively, taxpayers filing their returns electronically may satisfy this requirement by
attaching a statement to their return that provides the date and control number of the
letter ruling.

Pursuant to the power of attorney on file with this office, a copy of this letter is being
sent to your authorized representatives.

                                    Sincerely,


                                    GERALD B. FLEMING
                                    Senior Technician Reviewer, Branch 2
                                    (Corporate)



                                By:_________________________
                                   Gerald B. Fleming
                                   Senior Technician Reviewer, Branch 2
                                   Office of Associate Chief Counsel (Corporate)