An insurer's cross-border restructuring received favorable reorganization and insurance tax rulings

Plain-English summary

A domestic insurance group proposed moving its U.S. business to a new domestic subsidiary and its foreign branch business to a new foreign insurer. The foreign insurer would elect under section 953(d) to be treated as a domestic corporation for federal tax purposes. The IRS ruled that the transferees would become the tax owners of the respective businesses and that small amounts of formation capital, licenses, and retained assets would not prevent the foreign-business restructuring from qualifying as a potential F reorganization. The IRS also approved specified section 351 treatment and insurance accounting consequences, including the handling of reserves and unamortized policy acquisition expenses. The ruling was limited to the listed issues and did not decide whether the overall transaction qualified under sections 351, 355, and 368.

Ruling snapshot

• Question: Would the proposed transfers and reorganizations produce the requested tax ownership, F reorganization, section 351, and insurance accounting consequences?
• Outcome: Approved on 25 specified issues, subject to the stated assumptions and caveats.
• Key authorities: IRC §§ 351, 355, 367, 368(a)(1)(F), 381, 803, 805, 807, 848, 953(d); Treas. Reg. § 1.368-2(m)

Full text (IRS public release)

Internal Revenue Service                                      Department of the Treasury
                                                              Washington, DC 20224

Number: 201746022                                             Third Party Communication: None
Release Date: 11/17/2017                                      Date of Communication: Not Applicable
Index Number: 351.00-00, 367.00-00,
              368.00-00, 368.06-00,                           Person To Contact:
              807.00-00, 807.04-03,                           ------------------------, ID No. ------------
              848.00-00, 848.06-02,                           Telephone Number:
              953.00-00, 953.06-00                            --------------------
                                                              Refer Reply To:
---------------------------------------------                 CC:CORP:03
------------------------                                      PLR-118533-16
----------------------------------------                      Date:
--------------------------                                    December 01, 2016
----------------------------------


                                                   LEGEND

Parent            = -----------------------------------------------------------------------------------------------
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                    -----------------------

Sub 1             = -----------------------------------------------------------------------------------------------
                    -----------------------------------------------------------------------------------------------
                    -----------------------

Sub 2             = -----------------------------------------------------------------------------------------------
                    -----------------------------------------------------------------------------------------------
                    -----------------------

Country A         = -------

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

State B           = ------------

State C           = -----------

a                 = ---

b                 = ---

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

d                 = ------
PLR-118533-16                                2

e               = ----
f               = --------------

Currency A      = ------------------

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

This letter responds to your authorized representatives’ letter dated June 8, 2016,
requesting rulings on certain federal income tax consequences of a proposed
transaction (the “Proposed Transaction”). The material information provided in that
request and in subsequent correspondence is summarized below.

The rulings contained in this letter are based upon information 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 of the request for rulings. Such materials are subject to verification
on examination.

This letter is issued pursuant to section 6.03 of Rev. Proc. 2016-1, 2016-1 I.R.B. 18 and
section 3.01(50) of Rev. Proc. 2016-3, 2016-1 I.R.B. 130, regarding rulings on one or
more significant issues that are presented in a transaction described in section 332,
section 351, section 355, section 368, or section 1036 of the Internal Revenue Code
(the “Code”) or that address the tax consequences that result from the qualification of a
transaction under these sections. The rulings contained in this letter only address
discrete legal issues presented by the Proposed Transaction. This office expresses no
opinion as to the overall tax consequences of the Proposed Transaction, including
qualification of the Proposed Transaction under sections 351, 355, and 368 of the Code.
Except as expressly provided in the Rulings section 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.

                                         FACTS

Parent is a publicly traded domestic corporation and the parent of a worldwide group
(the “Worldwide Group”) that includes both domestic and foreign entities. The
Worldwide Group provides insurance products to customers in the United States and
Country A.

Parent also is the common parent of an affiliated group that files a life-nonlife
consolidated return. Sub 1, Parent’s wholly owned State A subsidiary, is treated as a
life insurance company under section 816 of the Code. The majority of the Worldwide
Group’s U.S. business is conducted directly by Sub 1 (Sub 1’s U.S. business is referred
to herein as the “U.S. Business”). Sub 1 also conducts the Country A business (the
“Country A Business”) through a branch (the “Country A Branch”). Sub 1 treats the
PLR-118533-16                                3

Country A Branch as a Currency A functional currency qualified business unit for
purposes of Subpart J of the Code and other provisions of the Code applicable to
foreign branches. About a% of Sub 1’s insurance activities are conducted in the United
States, and about b% are conducted through the Country A Branch. Sub 1 also wholly
owns Sub 2, a State B corporation.

Due to the desire to operate the Country A Business in Country A corporate form rather
than through the Country A Branch, the taxpayer proposes to reorganize its insurance
business in a manner that will preserve the current federal income taxation of the
Country A Branch without triggering significant costs in the United States and in
Country A.

                              PROPOSED TRANSACTION

The steps comprising the Proposed Transaction, which will be undertaken only after the
relevant regulatory approvals are obtained, are as follows.

   Reorganization of investment management functions

   (i)     Currently, Sub 1’s investment management functions for its U.S. and Country
           A assets are performed by unincorporated business units of Sub 1 in the
           United States and Country A. To minimize regulatory and licensing burdens
           that otherwise would arise in Country A upon completion of the Proposed
           Transaction, Sub 1 will create a State C LLC and a Country A corporation to
           manage assets owned by U.S. Sub and Newco (each as defined below), and
           Sub 1 will distribute these investment management entities to Parent.

   Formation of new subsidiaries; obtaining insurance licenses

   (ii)    Parent will form a new State A corporation (“U.S. Sub”).

   (iii)   Parent will contribute about c (the “Minimum Capital”) to a newly formed State
           A LLC (“LLC 1”) that will function as an insurance holding company and will
           not underwrite any insurance risks. LLC 1 will be disregarded as an entity
           separate from Parent for federal income tax purposes.

   (iv)    To comply with Country A minimum capital requirements for an insurance
           company, LLC 1 will contribute the Minimum Capital to a newly formed,
           wholly owned Country A corporation (“Newco”) in exchange for common
           stock. Newco will seek all relevant licenses to operate an insurance business
           in Country A. This step and step (iii) (collectively, the “Newco Formation”) are
           expected to occur in a taxable year preceding the remaining transaction
           steps.
PLR-118533-16                               4

  (v)    Sub 1 will form a new State A corporation (“Controlled”).

         Prior to step (vi) below, U.S. Sub will obtain insurance licenses in all relevant
         U.S. jurisdictions, and Controlled will obtain a State A license to conduct
         reinsurance. The public notice required for the Country A assumption
         transaction (described below in step (viii)) also will precede step (vi).

  Transfer of U.S. business

  (vi)   After U.S. Sub has obtained insurance licenses in all relevant jurisdictions,
         Sub 1 will transfer all U.S. insurance assets and liabilities, and all economic
         benefits and burdens of the U.S. Business, to Controlled through 100%
         permanent and irrevocable reinsurance (the “U.S. Reinsurance”). The U.S.
         Reinsurance will be unlimited in duration and may not be unilaterally canceled
         by Sub 1 or Controlled. Sub 1 will remain legally liable on the U.S. policies
         transferred to Controlled. However, Sub 1’s U.S. policyholders will have the
         right to pursue policy claims against, and recover benefit payments directly
         from, Controlled, with no conditions precedent to their exercise of this right.
         Consequently, Sub 1’s U.S. policyholders will have a direct right of action
         against Controlled as if the policies had been underwritten originally by, or
         had been fully assumed by and novated to, Controlled.

         Pursuant to a separate Asset Transfer Agreement (“ATA”), Sub 1 will transfer
         its U.S. non-insurance assets and liabilities (such as employees and offices)
         to Controlled in exchange for common stock. Sub 1 also will transfer all Sub
         2 stock to Controlled (together with the U.S. Reinsurance and the ATA, the
         “Contribution”).

         Additionally, Sub 1 and Controlled will execute a servicing agreement
         whereby Controlled will conduct all operational and administrative services
         associated with all U.S. policies (e.g., billing, collections, and handling policy
         claims and policy renewals) (the “Servicing Agreement”). The Servicing
         Agreement will be unlimited in duration and may not be unilaterally canceled
         by Sub 1 or Controlled.

         Lastly, Sub 1 will transfer all substantial rights in U.S. and foreign non-
         Country A intellectual property (“IP”) to Controlled.

         After the foregoing transfers, the economic benefits and burdens of the
         existing, renewal, and future U.S. Business will be completely assumed by
         Controlled. Sub 1 will retain no economic rights in the U.S. Business, and
         there will be no experience-related refunds or profit-sharing provisions in the
         U.S. Reinsurance. Sub 1 also will have no role in managing the U.S.
         insurance policies, will not write any new U.S. insurance policies, and will
PLR-118533-16                                  5

           retain no economic or legal rights to any IP used in the U.S. Business (the IP
           rights in Country A will be transferred to Newco as part of the transfer of the
           Country A Business, as described in step (viii) below).

           The State A Department of Insurance (“DOI”) will treat the U.S. Reinsurance
           as an assumption transaction for statutory accounting and risk-based capital
           purposes. Thus, DOI will treat Sub 1 as a licensed insurance corporation with
           no insurance risks underwritten, and all policyholder premiums and risks
           associated with the U.S. Business will be reflected on Controlled’s financial
           regulatory filings.

  (vii)    Sub 1 will distribute all of its shares of Controlled to Parent (the “Distribution”;
           together with the Contribution, the “U.S. Reorganization”).

  Transfer of Country A Business

  (viii)   After step (vii), Sub 1 will transfer to Newco through an assumption
           transaction (the “Country A Contribution”) (a) all of the Country A Business
           (including all substantial rights in the IP used in Country A), and (b) all of the
           Country A non-insurance assets and liabilities (such as employees and
           offices), solely in exchange for more than d% of Newco common stock (LLC 1
           will hold the remainder). An assumption transaction in Country A is
           accomplished via a business transfer agreement combined with a public
           notice for the transfer of insurance contracts.

           Thus, the economic benefits and burdens of all assets and liabilities held by
           Sub 1 in Country A will be transferred to Newco in the Country A Contribution.
           After the Country A Contribution, Sub 1’s Country A license will terminate,
           and Sub 1 will not hold any Country A policies or claim reserves. The public
           notice mentioned above, which will include individual notices and consents,
           will precede the commencement of step (vi) above. The notice will state that
           all assets and liabilities of the Country A Business will be transferred to
           Newco in the Country A Contribution.

           After the Country A Contribution, Newco also will have all of the assets and
           liabilities relating to payment obligations on cancelled or expired policies
           owed to missing Country A policyholders and beneficiaries (the “Missing
           Policyholders”) and will assume all related operational services (e.g., settling
           claims). Sub 1 will remain secondarily liable to the Missing Policyholders, but
           Controlled will indemnify Sub 1 under the U.S. Reinsurance. Newco’s
           Minimum Capital will be less than e% of the estimated net fair market value of
           the Country A business at this time.

  (ix)     Sub 1 will distribute the Newco stock to Parent (the “Country A Distribution”;
PLR-118533-16                                 6

          together with the Country A Contribution, the “Country A Reorganization”).

  (x)     Parent will contribute the Newco common stock to LLC 1.

          After the foregoing transaction steps, Sub 1 will economically own no assets
          or liabilities other than about $f (in securities and cash) of minimum capital
          (the “Retained Capital”), its corporate charter, its certificates of authority, and
          its U.S. insurance licenses (collectively, the “Retained Assets”). Sub 1 also
          will be entitled to indemnity claim payments from Controlled under the U.S.
          Reinsurance.

          Sub 1 must retain the Retained Capital to satisfy the minimum capital
          requirements for an insurance company (and to thereby remain in good
          standing) in all jurisdictions where Sub 1 currently conducts business even
          though Sub 1 no longer will be operating an insurance business after the
          Country A Reorganization. The Retained Capital will constitute less than e%
          of the estimated net fair market value of the Country A Business immediately
          after the Country A Distribution, and none of the Retained Capital will relate to
          insurance risk or business activities (i.e., this amount will not include
          insurance reserves). Sub 1 will permanently assign to Controlled all interest
          income from the $f of Retained Capital.

  The mergers

  (xi)    Shortly after step (x), Sub 1 will merge under state law with and into U.S. Sub,
          with U.S. Sub surviving (the “Sub 1 Merger”). After this step (xi), U.S. Sub will
          be authorized to write new U.S. insurance policies. For federal income tax
          purposes, the taxpayer will report the Retained Assets as deemed distributed
          to Parent in a taxable distribution.

          The Sub 1 Merger will be undertaken to reduce the complexity of regulatory
          approvals and to substantially minimize the time needed to execute the
          Proposed Transaction, and to thereby minimize the business disruption
          associated with the Proposed Transaction.

  (xii)   Immediately after the Sub 1 Merger, Controlled will merge with and into U.S.
          Sub (with U.S. Sub surviving) in a transaction intended to qualify as a
          reorganization under section 368(a) (the “Controlled Merger”). After the
          Controlled Merger, U.S. Sub will succeed to both Sub 1’s and Controlled’s
          obligations under the U.S. Reinsurance.

          The taxpayer intends the Sub 1 Merger and the Controlled Merger to occur
          within approximately two weeks after the U.S. Reorganization.
PLR-118533-16                                7



  Election to be treated as a U.S. corporation

  (xiii)   Newco will elect under section 953(d) to be treated as a U.S. corporation for
           federal tax purposes, effective for the calendar year in which the Country A
           Contribution occurs.

  (xiv)    After the Proposed Transaction is completed, LLC 1 may elect to be treated
           as a corporation for federal tax purposes if LLC 1’s status as a disregarded
           entity results in a disallowance of benefits under the U.S. - Country A treaty.

                                  REPRESENTATIONS

  (a)      All of Sub 1’s economic rights and obligations under all U.S. insurance
           contracts will be transferred to Controlled as a result of the U.S. Reinsurance.
           Sub 1 will neither manage the U.S. insurance contracts nor write any new
           U.S. insurance policies after the Contribution. The U.S. Reinsurance will be
           irrevocable and of unlimited duration, and it will provide Sub 1’s U.S.
           policyholders the right to pursue policy claims against, and recover benefit
           payments directly from, Controlled, with no conditions precedent to the
           exercise of this right. The U.S. Reinsurance will neither provide Sub 1 with
           any right or obligation to recapture any U.S. business ceded to Controlled nor
           contain any experience-related refunds or profit-sharing provisions.

  (b)      The Contribution and the Servicing Agreement will transfer the benefits and
           burdens of ownership of all assets and liabilities of the U.S. Business, other
           than the Retained Assets, to Controlled.

  (c)      The Minimum Capital is necessary for Newco to satisfy the legal requirements
           for a Country A insurance corporation. The Minimum Capital will constitute
           less than e% of the net fair market value of Newco’s assets immediately after
           the Country A Contribution.

  (d)      Immediately prior to the Country A Contribution, Newco will have no business
           activity and will have no property or tax attributes other than the Country A
           licenses to be obtained, the Minimum Capital, any interest earned thereupon,
           and any related tax attributes.

  (e)      The Country A Contribution will transfer the benefits and burdens of
           ownership of all of Sub 1’s remaining assets and liabilities, other than the
           Retained Assets, to Newco. Immediately after the Country A Contribution,
           the only assets that Newco will own that were not received in the Country A
           Contribution will be the Country A licenses, the Minimum Capital received in
PLR-118533-16                              8

        the Newco Formation, and interest, if any, earned thereupon.

  (f)   Immediately following the Country A Distribution, Sub 1 will neither
        economically own any assets other than the Retained Assets nor have any
        liabilities or other obligations other than being the nominal party to U.S.
        insurance contracts and being secondarily liable to the Missing Policyholders.
        The Retained Assets will constitute less than e% of the estimated net fair
        market value of the Country A Business immediately after the Country A
        Distribution.

  (g)   Immediately following the Country A Reorganization, Parent will own all
        outstanding stock of Newco and will own such stock solely by reason of
        Parent’s ownership of Sub 1 stock immediately prior to the Country A
        Contribution, except to the extent that Newco stock is owned by Parent
        (through LLC 1) by reason of the Newco Formation.

  (h)   Newco will timely file a valid election under section 953(d)(1), effective for the
        taxable year in which the Country A Contribution occurs, to be treated as a
        domestic corporation for federal tax purposes. As of the date of issuance of
        this letter ruling, the taxpayer has no plan to revoke the section 953(d)
        election.

  (i)   Newco will have the calendar year as its U.S. taxable year.

  (j)   In the Proposed Transaction, Newco will not succeed to the items described
        in section 381(c) of any corporation other than Sub 1.

  (k)   The insurance contracts issued by the Country A Branch are qualified foreign
        contracts within the meaning of section 807(e)(4)(B).

                                      RULINGS

    1.    For federal income tax purposes, after the Contribution and the execution of
        the Servicing Agreement, Controlled will be the tax owner of all of Sub 1’s
        U.S. assets and liabilities and the U.S. Business, other than the Retained
        Assets.

    2.    For federal income tax purposes, the Country A Contribution will result in a
        transfer of tax ownership of all of Sub 1’s Country A assets and liabilities and
        the Country A Business, other than the Retained Assets, to Newco.

    3.    For purposes of Treas. Reg. § 1.368-2(m)(1)(i), the Newco stock issued in the
        Newco Formation will be treated as de minimis.
PLR-118533-16                             9

    4.    The potential F reorganization (within the meaning of § 1.368-2(m)(1)) of Sub
        1 into Newco will begin with the Country A Contribution.

    5.    For purposes of § 1.368-2(m)(1)(iii), Newco’s Minimum Capital and its
        licenses to operate an insurance business in Country A will be treated as a de
        minimis amount of assets to facilitate Newco’s organization or maintain its
        legal existence.

    6.    For federal income tax purposes, the Country A Reorganization will result in
        the complete liquidation of Sub 1 within the meaning of § 1.368-2(m)(1)(iv).

    7.    For purposes of § 1.368-2(m)(1)(iv), the Retained Assets will be treated as a
        de minimis amount of assets retained for the sole purpose of preserving Sub
        1’s legal existence.

    8.    The deemed liquidation of Sub 1 in the potential F reorganization will not
        result in Parent succeeding to the attributes of Sub 1 described in section
        381(c) and will not prevent the Country A Reorganization from satisfying
        § 1.368-2(m)(1)(v).

    9.    The Sub 1 Merger will not result in U.S. Sub succeeding to the attributes of
        Sub 1 described in section 381(c) and will not prevent the Country A
        Reorganization from satisfying § 1.368-2(m)(1)(v).

    10.   The fact that the Country A Reorganization might be viewed as part of a split-
        up of Sub 1 under section 355 that is preceded by a transfer of assets by Sub
        1 to Controlled and Newco under section 351 or section 368(a)(1)(D) will not
        prevent the Country A Reorganization from qualifying as a reorganization
        under section 368(a)(1)(F).

    11.   The election under section 953(d) will not prevent the Country A
        Reorganization from satisfying § 1.368-2(m)(1)(iii) or § 1.368-2(m)(1)(vi).

    12.   Section 1.368-2(m)(3)(iv)(A) will not prevent the Country A Reorganization
        from qualifying as a reorganization under section 368(a)(1)(F).

    13.   The qualification of the Distribution under section 355 will not be affected by
        the subsequent Sub 1 Merger and the Controlled Merger. Cf. Rev. Rul. 2003-
        79, 2003-2 C.B. 80; Rev. Rul. 98-27, 1998-1 C.B. 1159.

    14.   Assuming that the Country A Reorganization qualifies as a reorganization
        under section 368(a)(1)(F), section 367 will not apply to the Country A
        Contribution because, as a result of the section 953(d) election, Newco will be
PLR-118533-16                              10

        a domestic corporation before the Country A Contribution and continuously
        thereafter so long as its section 953(d) election is in effect.

    15.   Assuming that the Country A Reorganization qualifies as a reorganization
        under section 368(a)(1)(F), the insurance contracts Newco has issued or will
        issue prior to, on, or after the date of the Country A Reorganization will
        continue to be “qualified foreign contracts” for purposes of sections 807(e)(4)
        and 848(e).

    16.   The transfer by Sub 1, including the insurance contracts and service
        agreements, in exchange for Controlled stock will constitute a transfer of
        property to a controlled corporation meeting the requirements of section 351.
        Section 351; Rev. Rul. 94-45, 1994-2 C.B. 39.

    17.   Because the transfer by Sub 1 to Controlled effectuates the transfer of
        insurance or annuity contracts as part of a section 351 exchange, the transfer
        is not subject to the provisions of sections 803 and 805 and §§ 1.817-4(d) and
        1.848-2.

    18.   For the taxable year in which Sub 1 transfers the insurance and annuity
        contracts to Controlled, Sub 1 will include in its reserves as of the close of
        that year, for purposes of section 807(a) and (b), the ending balances of the
        reserves described in section 807(c) that Sub 1 held for the contracts
        immediately before the transfer, and Sub 1 is not entitled to a deduction under
        section 805(a)(6) for transferring assets to Controlled in consideration of the
        assumption by Controlled of the liabilities under the insurance and annuity
        contracts.

    19.   For the first taxable year beginning after the transfer of the insurance and
        annuity contracts to Controlled, Sub 1 will not include in its reserves as of the
        beginning of that year, for purposes of section 807(a) and (b), the ending
        balances of the reserves described in section 807(c) that Sub 1 held for the
        contracts immediately before the transfer.

    20.   For the taxable year in which Sub 1 transfers the insurance and annuity
        contracts to Controlled, Controlled will include in its reserves at the beginning
        of such year, for purposes of section 807(a) and (b), the ending balances of
        the reserves described in section 807(c) that Sub 1 held for the contracts
        immediately before the transfer.

    21.   Controlled will not take into premium income under section 803(a)(1) any
        amount with respect to the assets transferred to Controlled in consideration
        for the assumption of liabilities under the insurance and annuity contracts.
PLR-118533-16                                11

        22.    Sub 1 and Controlled will not include in net premiums under section 848(d)(1)
          any amount with respect to Sub 1’s assets transferred to Controlled in
          consideration of the assumption by Controlled of liabilities under Sub 1’s
          “specified insurance contracts” (within the meaning of section 848(e)).

        23.    The unamortized specified policy acquisition expenses of Sub 1 attributable to
          the insurance and annuity contracts transferred to Controlled will continue to
          be amortized by Controlled over the remaining period as the amounts would
          have been deductible by Sub 1.

        24.    The unamortized balance of any section 807(f) adjustment of Sub 1
          attributable to the insurance and annuity contracts transferred to Controlled
          will be treated as transferred to Controlled and will continue to be amortized
          by Controlled over the remaining period as the amounts would have been
          amortized by Sub 1.

        25.    The transfer to Controlled of liabilities pursuant to the U.S. Reinsurance and
          the Servicing Agreement will have no effect on the date that each U.S. life
          insurance contract of Sub 1 is issued, entered into, purchased, or came into
          existence for purposes of sections 72(e)(4), 72(e)(5), 72(e)(10), 72(e)(11),
          72(v), 101(f), 264(a)(3), 264(a)(4), 7702, and 7702A. Also, the transfer of
          liabilities will not require retesting or the starting of new test periods for the
          U.S. contracts under sections 264(d)(1), 7702(f)(7)(B) - (E), and
          7702A(c)(3)(A).

                                        CAVEATS

Except as expressly provided in the Rulings section 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.

                             PROCEDURAL STATEMENTS

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 this
letter ruling (PLR-118533-16).
PLR-118533-16                                12




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

                                      Sincerely,




                                      _Russell G. Jones_____________________
                                      Russell G. Jones
                                      Senior Counsel, Branch 3
                                      Office of Associate Chief Counsel (Corporate)