New captive life insurer may join the consolidated life subgroup

Plain-English summary

A parent of a life-nonlife consolidated group formed a captive life insurance subsidiary under an existing life insurance company. Another life subsidiary distributed funds to the owner, which contributed them to the new company before the new company entered into an indemnity reinsurance agreement with the distributing subsidiary. The group used a sourcing methodology to determine how much of the new company's assets traced to external assets received during the five-year base period and represented that at least 80 percent met the regulatory tacking rule. The companies also made detailed representations about continuous group membership, active businesses, life insurance status, asset acquisitions, capitalization, and bona fide reinsurance. Based on those facts and representations, the IRS ruled that the new company will be an eligible corporation includible as a life member of the consolidated group's life subgroup beginning with the specified tax year. The IRS gave no opinion on the transaction's treatment under the life insurance provisions of subchapter L.

Ruling snapshot

• Question: May the newly formed captive life insurer join the parent's consolidated life subgroup?
• Outcome: Approved beginning with the specified consolidated return year
• Key authorities: IRC §§ 351(a), 801(a), 816(a), 1504(c)(2); Treas. Reg. § 1.1502-47(b)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202445003 Third Party Communication: None
Release Date: 11/8/2024 Date of Communication: Not Applicable
Index Number: 1502.00-00, 1502.50-00
Person To Contact:
-------------------- ---------------------, ID No. -----------------
-------------------------------------- Telephone Number:
------------------------------ --------------------
----------------------- Refer Reply To:
----------------------------- CC:CORP:B04
PLR-102387-24
Date:
August 2, 2024

Legend:

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

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

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

New Sub = ---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
-----------------------

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

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

Date a = ---------------------

Date b = -----------------------

Date c = -----------------------

PLR-102387-24 2

Date d = --------------------------

Regulator = ----------------------------------------------------------------------------

Year 1 = -----------------------------------------------------

Amount A = ---------------------

Amount B = ---------------------

Amount C = ---------------------

Amount D = ------------------------

Amount E = ---------------------

Amount F = ---------------------

Base = ---------------------------------------------------------------------------------------------
Period ---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
-------

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

   This letter responds to a letter dated February 6, 2024, and subsequent

correspondence submitted on behalf of the taxpayer, requesting a ruling under the
Internal Revenue Code of 1986 (the “Code”), as amended, and related Treasury
regulations, with respect to the matters described below

  The ruling contained in this letter is based upon information and representations

submitted by the taxpayer and accompanied by a penalties 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 a ruling, it is subject to verification on
examination.

   This letter is issued pursuant to Rev. Proc. 2024-1, 2024-1 I.R.B. 1, and Rev.

Proc. 2023-26, 2023-33 I.R.B. 486. No opinion is expressed as to any issue not
specifically addressed by the ruling below.

PLR-102387-24 3

                                      Facts

  Parent is a corporation organized under the laws of State A that primarily

operates as a holding company. Parent is the common parent of an affiliated group of
corporations that has chosen to file a life-nonlife consolidated return for U.S. federal
income tax purposes in accordance with the provisions of sections 1501, 1502, and
1504(c)(2) and the Treasury regulations promulgated thereunder (the “Parent
Consolidated Group”).

   Parent and the members of the Parent Consolidated Group use a calendar year

tax year.

   Life Sub 1 is a stock insurance company organized under the laws of State B that

operates as a life insurance company. Life Sub 1 is an indirect, wholly owned
subsidiary of Parent. Life Sub 1 qualifies as a life insurance company (within the
meaning of section 816(a)) that is subject to tax under section 801(a). Life Sub 1
constitutes a life member (as defined in Treas. Reg. § 1.1502-47(b)(6)) of the life
subgroup (as defined in Treas. Reg. § 1.1502-47(b)(8)) of the Parent Consolidated
Group.

   Life Sub 2 is a stock insurance company organized under the laws of State B that

operates as a life insurance company. Life Sub 2 is an indirect, wholly owned
subsidiary of Parent. Life Sub 2 qualifies as a life insurance company (within the
meaning of section 816(a)) that is subject to tax under section 801(a). Life Sub 2
constitutes a life member (as defined in Treas. Reg. § 1.1502-47(b)(6)) of the life
subgroup (as defined in Treas. Reg. § 1.1502-47(b)(8)) of the Parent Consolidated
Group.

   New Sub is a stock insurance company organized under the laws of State B that

operates as a pure captive insurance company. New Sub is a direct, wholly owned
subsidiary of Life Sub 1. New Sub was organized on Date a and commenced business
on Date c. New Sub is regulated by Regulator and is licensed to transact business in
State B.

    On Date b, prior to the completion of the reinsurance transaction described in the

Reinsurance Agreement (as defined below), New Sub issued shares of common stock
to Life Sub 1 in exchange for an initial capital contribution from Life Sub 1 totaling
Amount A (the “Capital Contribution”). To provide Life Sub 1 sufficient funds to
complete the Capital Contribution, Life Sub 2 obtained consent from Regulator to make
an Amount B distribution to Life Sub 1 on Date b (the “Distribution”) and did so on Date
b immediately before the Capital Contribution. Life Sub 1 used the proceeds of the
Distribution to make the Capital Contribution.

   On Date c, Life Sub 2, as cedant, and New Sub, as reinsurer, executed and

undertook an indemnity reinsurance agreement (the “Reinsurance Agreement”) for
certain business written by Life Sub 2. As set forth in the Reinsurance Agreement, New

PLR-102387-24 4

Sub paid a ceding commission to Life Sub 2 equal to Amount C on Date c. New Sub
invested (or has otherwise maintained) the remainder of the proceeds from the Capital
Contribution.

   Unrelated to the formation of New Sub, during the five calendar years before

Date a, Life Sub 1 and Life Sub 2 received assets from outside the Parent Consolidated
Group in transactions not conducted in the ordinary course of their trades or businesses
(“External Assets”). The receipt of the External Assets was before the formation of New
Sub was contemplated. Consistent with their normal business practices, Life Sub 1 and
Life Sub2 did not segregate the External Assets and were not required to do so by
Regulator.

   For purposes of considering whether the tacking rule of Treas. Reg. § 1.1502-

47(b)(12)(v) applies to New Sub in this instance, Parent determined the portion of the
assets comprising the Distribution and the Capital Contribution that may be sourced to
External Assets, as contemplated by the last sentence of Treas. Reg. § 1.1502-
47(b)(12)(v)(A). In so doing, Parent identified inflows and outflows of assets with
respect to each of Life Sub 1 and Life Sub 2 during the five calendar years before
Date b, and used that information to determine the proportionate amount of the
Distribution and the Capital Contribution that may be sourced to External Assets (the
“Sourcing Methodology”).

                                Representations

1. Each of Life Sub 1 and Life Sub 2 was in existence and a member of the group
   (as defined in Treas. Reg. § 1.1502-47(b)(4)) of which Parent is the common
   parent (determined without the exclusion in section 1504(b)(2)) throughout every
   day of the Base Period.

2. Each of Life Sub 1 and Life Sub 2 was engaged in the active conduct of a trade
   or business throughout every day of the Base Period.

3. Neither Life Sub 1 nor Life Sub 2 experienced a change in tax character (as
   described in Treas. Reg. § 1.1502-47(b)(12)(v)(B)) during the Base Period.
   Specifically, each of Life Sub 1 and Life Sub 2 qualified as a life insurance
   company (as defined in section 816(a)) that is subject to tax under section 801(a)
   throughout every day of the Base Period.

4. Neither Life Sub 1 nor Life Sub 2 underwent a disproportionate asset acquisition
   under Treas. Reg. § 1.1502-47(b)(12)(viii) during the Base Period.

5. Under the Sourcing Methodology, at least 80 percent of New Sub’s assets
   immediately after the Capital Contribution (based on fair market values on Date b
   and without regard to liabilities) were acquired by New Sub from Life Sub 1 other
   than in the ordinary course of New Sub’s trade or business.

PLR-102387-24 5

6. The Capital Contribution qualified as a transaction described in section 351(a).

7. With the approval of Regulator, Parent determined that the amount of the Capital
   Contribution was sufficient and appropriate to maximize New Sub’s future self-
   sufficiency and enhance New Sub’s overall financial strength and long-term
   stability.

8. Each of Life Sub 1, Life Sub 2, and New Sub will qualify as a life insurance
   company (as defined in section 816(a)) that is subject to tax under section 801(a)
   for Year 1.

9. The terms of the Reinsurance Agreement were determined at arm’s length with
   the assistance of third-party advisors and were approved by Regulator. Further,
   Life Sub 2’s cession of business to New Sub pursuant to the Reinsurance
   Agreement constitutes bona fide reinsurance for U.S. federal income tax
   purposes.

10. New Sub will not undergo a disproportionate asset acquisition under Treas. Reg.
    § 1.1502-47(b)(12)(viii) during Year 1.

11. As of Date b, as determined immediately before the Distribution, the total fair
    market value of Life Sub 2’s assets was equal to Amount D.

12. As of Date b, as determined immediately after the Distribution and immediately
    before the Capital Contribution, the total fair market value of Life Sub 1’s assets
    was equal to Amount E.

13. As of Date b, as determined immediately after the Distribution and immediately
    before the Capital Contribution, the fair market value of Life Sub 2’s stock was
    equal to Amount F.

14. As of Date b, as determined immediately after the Capital Contribution, the total
    fair market value of New Sub’s assets was equal to Amount A.

                                   Ruling
    

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

    Beginning with the tax year of the Parent Consolidated Group ending Date d,
    New Sub will qualify as an eligible corporation (as defined in Treas. Reg. § 1.1502-
    47(b)(12)) that is includible under section 1504(c)(2) as a life member (as defined in
    Treas. Reg. § 1.1502-47(b)(6)) of the life subgroup (as defined in Treas. Reg. § 1.1502-
    47(b)(8)) of the Parent Consolidated Group.

PLR-102387-24 6

                                  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 letter. No opinion is expressed or implied concerning the tax
treatment of the subject transaction under subchapter L of the Code and regulations
thereunder.

                              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.

    In accordance with the Power of Attorney on file with this office, copies of this

letter are being sent to your authorized representatives.

   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,



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

cc: