Insurer could revoke its election to recompute the federal interest rate

Plain-English summary

A life insurance company had elected under § 807(d)(4)(A)(ii) to recompute every five years the applicable federal interest rate used to calculate its life insurance reserves. Because that election continued to apply to later contracts unless the IRS consented to revocation, the company asked to end it prospectively for contracts issued after a redacted year. The company represented that it would not make a new election for at least ten taxable years after the revocation took effect. The IRS granted consent and noted that the revocation would not produce reserve adjustments subject to § 807(f).

Ruling snapshot

• Question: Could the life insurance company revoke its election to recompute the applicable federal interest rate every five years?
• Outcome: approved
• Key authorities: IRC §§ 807(d), 816(a), and 846(c)(2)

Full text (IRS public release)

Internal Revenue Service                                      Department of the Treasury
                                                              Washington, DC 20224

Number: 201645010                                             Third Party Communication: None
Release Date: 11/4/2016                                       Date of Communication: Not Applicable
Index Number: 807.03-03
                                                              Person To Contact:
---------------------------------------------------           --------------------------, ID No. ----------------
-----------------------------------------------------         -----------------
-----------------------------                                 Telephone Number:
------------------------------                                ----------------------
                                                              Refer Reply To:
                                                              CC:FIP:B04
                                                              PLR-110269-16
                                                              Date:
                                                              August 05, 2016




Taxpayer       =     -----------------------------------------------------------------------------------------------
                     -------------------------------
X              =     -----------------------------------------------------------------------------------------------
                     -------------------
State Z        =     -------
Year A         =     -------
Year B         =     -------
Year C         =     -------
Year D         =     -------
Year E         =     -------

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

This letter is in response to Taxpayer’s request for consent to revoke its election under
§ 807(d)(4)(A)(ii) of the Internal Revenue Code to recompute every five years the
applicable Federal interest rate used in the computation of its life insurance reserves
under § 807.

FACTS

Taxpayer is organized under the laws of State Z and is a life insurance company within
the meaning of § 816(a). In Year A, Taxpayer joined an affiliated group of corporations
which files a consolidated federal income tax return on a calendar year basis with X.

In Year B, prior to joining the X affiliated group, Taxpayer elected under
§ 807(d)(4)(A)(ii) to recompute the applicable Federal interest rate (as defined in
§ 807(d)(4)(A)(i)) (AFIR) every five years.

Under § 807(d)(4)(A)(ii)(III), an election to recompute the AFIR applies not only to
contracts with respect to which the election is made but also to all contracts issued

PLR-110269-16                                 2

during any subsequent calendar year unless the election is revoked with the Secretary’s
consent. Accordingly, on each of its federal income tax returns for the Year C and
years thereafter, Taxpayer has continued to recompute the AFIR on the federal income
tax return for the fifth taxable year subsequent to the year in which the rate was first
used.

Taxpayer requests permission to revoke its election under § 807(d)(4)(A)(ii) so that
contracts with respect to which there has not yet been a recomputation of the AFIR will
not be required to undergo a recomputation of the AFIR (i.e., contracts issued after Year
D). Taxpayer’s proposed revocation of the election with respect to contracts issued
after Year D will not affect the computation of reserves with respect to contracts issued
before Year E. Taxpayer represents that it will not make a new election under
§ 807(d)(4)(A)(ii) for at least ten taxable years following the taxable year in which the
revocation takes effect.

LAW AND ANALYSIS

For taxable years after 1987, § 807(d)(2)(B) provides that the interest rate used in the
computation of life insurance reserves is the greater of (i) the AFIR or (ii) the prevailing
State assumed interest rate (PSAIR). Section 807(d)(4)(A) defines the AFIR as the
interest rate prescribed under § 846(c)(2) for the calendar year in which a contract is
issued. However, a taxpayer may elect under § 807(d)(4)(A)(ii) to recompute every five
years the AFIR to be used in the computation of life insurance reserves.

Section 807(d)(4)(A)(ii) provides:

       (I) IN GENERAL.—In computing the amount of the reserve with respect to
       any contract to which the election under this clause applies for periods
       during any recomputation period, the applicable Federal interest rate shall
       be the annual rate determined by the Secretary under section 846(c)(2) for
       the 1st year of such period. No change in the applicable Federal interest
       rate shall be made under the preceding sentence unless such language
       would equal or exceed 1/2 of 1 percentage point.

       (II) RECOMPUTATION PERIOD.—For purposes of subclause (I), the term
       “recomputation period” means, with respect to any contract, the 5 calendar
       year period beginning with the 5th calendar year beginning after the
       calendar year in which the contract was issued (and each subsequent 5
       calendar year period).

       (III) ELECTION.—An election under this clause shall apply to all contracts
       issued during the calendar year for which the election was made or during
       any subsequent calendar year unless such election is revoked with the
       consent of the Secretary.

PLR-110269-16                                 3


Section 807(d)(4)(A)(ii)(IV) provides that the 10-year spread that applies under § 807(f)
to adjustments resulting from changes in the basis of calculating reserves does not
apply to any adjustment required as a result of the use of a recomputed AFIR. Thus, in
Taxpayer’s situation the granting of the Service’s consent, will not result in any amounts
that would be subject to adjustment under § 807(f).

CONCLUSION

Consent is hereby granted to revoke Taxpayer’s election to recompute the AFIR,
effective for contracts issued after Year D.

The ruling contained in this letter is based upon information and a representation
submitted by Taxpayer and accompanied by a penalty of perjury statement executed by
appropriate parties. While this office has not verified any of the material submitted in
support of the ruling request, it is subject to verification on examination.

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 letter.

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

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.


                                       Sincerely,



                                       Rebecca L. Baxter
                                       Senior Technician Reviewer, Branch 4
                                       (Financial Institutions & Products)