Continuing developments in the taxation of insurance companies

Transcription

1 Continuing developments in the taxation of insurance companies 2013: The year in review

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3 Table of contents The year in review 1 Legislation 6 Federal 8 International 18 Multistate 25 Tax accounting 50 Appendix A 52 Appendix B 55

4 The heart of the matter The challenges faced by Congress in enacting tax reform divided government and competing legislative goals were prevalent in 2013 and will continue to increase in 2014 due to election year politics and an early change in tax writing committee leadership. Continuing developments in the taxation of insurance companies

5 The year in review As anticipated, the past year has seen Congress legislative agenda challenged by a divided government and competing legislative goals. These challenges to US tax reform and other tax legislation are expected to increase in the year to come as a result of election year politics and an early change in the Senate Finance Committee s leadership. Meanwhile, outside of the US, a global focus on tax avoidance has led to a push by G20 countries and the OECD to address the ability of business to erode countries tax bases. The enhanced focus on global tax avoidance could result in a wave of unilateral governmental action that could significantly increase the risk of double taxation and a proliferation of cross border disputes For the insurance industry, 2013 was especially significant as it marked the implementation of the US healthcare exchange system under the Affordable Care Act (ACA). The exchanges are now open to the public; however, many Republicans in the House and Senate have signaled their intention to remain focused on delaying or modifying implementation of the ACA in advance of the 2014 midterm elections. Although President Obama and Congressional leaders continue to call for tax reform to promote US economic growth and job creation, the prospects for tax reform and other significant tax legislation in the year to come will be greatly affected by how much time is devoted to controversial legislative issues such as the minimum wage, emergency unemployment benefits, immigration and climate change. Former Senate Finance Chairman Max Baucus (D-MT) released four Finance Committee staff discussion drafts in late 2013 as part of his efforts to enact tax reform legislation during the current Congress. Additionally House Ways and Means Committee Chairman Dave Camp (R-MI) completed committee work on a comprehensive tax reform bill in February 2014 and released a 979-page Tax Reform Act of 2014 discussion draft. Many have questioned whether House and Senate leaders will support holding votes on tax reform legislation during this election year. The likelihood for tax reform being enacted in 2014 further diminished after President Obama announced in December that he was nominating Finance Chairman Baucus to serve as US ambassador to China. After Senator Baucus confirmation, Senator Ron Wyden (D-OR), the third-ranking Democrat on the Finance Committee, took over the chairman s gavel. In the past, Senator Wyden has twice introduced tax reform bills with a Republican co-sponsor illustrating his support for tax reform. Meanwhile, with Committee focus on tax reform, the research credit and more than 50 other business and individual tax provisions expired on December 31, Senate Democrats made a late effort in December 2013 to extend all expiring provisions notably without any offsets but faced various objections. There appears to be broad support in the House and Senate for renewing these provisions retroactively, but tax extenders legislation has not recently been enacted as a standalone bill. Congress in 2014 will likely address the future of these expired provisions as part of tax reform or some other legislation. President Obama set forth his legislative goals for 2014 in his January 28 State of the Union address. During his speech, President Obama said that both parties agree that the tax code is riddled with wasteful, complicated loopholes that punish businesses investing here, and reward companies that keep profits abroad. Accordingly, the President urged Congress to work together to close those loopholes, end those incentives to ship jobs overseas, and lower tax rates for businesses that create jobs here at home. The next expression of President Obama s legislative goals came on March 4, 2014, in his Fiscal Year 2015 budget. The 2015 budget includes a number of international and insurance industry 'tax reform' proposals repeated from previous Administration budget proposals. Many of these proposals would affect the operations of both domestic and foreign insurance companies and closely resemble provisions in the recent tax reform discussion draft from Chairman Camp. Similar to the President s Fiscal Year 2014 budget, of specific interest to foreign-owned US insurance companies in the 2015 budget is a provision that limits deductions for reinsurance premiums paid by a US insurance company to its foreign affiliates. See Insurance Tax Bulletin: Budget proposal to disallow deduction for reinsurance premiums paid to affiliates; other insurance tax provisions, April 11, 2013, for more information. 2013: The year in review 1

6 President Obama begins 2014 with key tax policy advisors in place. Congress last year confirmed Jack Lew as Treasury Secretary, Mark Mazur as Treasury Assistant Secretary for Tax Policy, and John Koskinen as IRS Commissioner. Koskinen s term expires in November Bipartisan Budget Act The Bipartisan Budget Act (the Act) adjusted federal spending levels for the remainder of FY 2014 through September 30, and all of FY 2015, which begins October 1, Signed into law by President Obama on December 26, 2013, the Act amended the Budget Control Act of 2011 (BCA) to provide $63 billion in relief from current discretionary spending caps for FY 2014 and FY 2015, split evenly between defense and non-defense programs. The Act more than offset the cost of this additional spending through savings from mandatory spending programs and increases in non-tax revenues totaling approximately $85 billion, including $28 billion from extending BCA mandatory spending caps for two additional years; these caps include limits on Medicare service provider reimbursement levels. Increased non-tax revenue provisions include higher Pension Benefit Guaranty Corporation (PBGC) premiums, airline fee increases, and extended customs user fees. Overall, the agreement is estimated to reduce federal deficits by $23 billion. The agreement s primary goal was to help avoid the risk of another government shutdown. This goal was met when Congress passed an omnibus spending bill combining 12 separate measures to fund federal departments and agencies for the remainder of FY 2014, which runs through September 30. The Act also provides a temporary Medicare physician doc fix to avoid a scheduled January 1, 2014 reduction in physician reimbursement rates under the current law Medicare Sustainable Growth Rate (SGR) payment formula. This temporary measure is in effect through March 31, Congress is expected to continue work on a permanent replacement of the Medicare SGR formula. While providing a short-term compromise on FY 2014 and FY 2015 spending levels, some provisions in the budget agreement may be revisited this year. For example, a number of Democrats and Republicans have called for restoring military pension cost-of-living-adjustments (COLA) that were reduced by the Act for service members who retire before age 62. Senate Armed Services Committee Chairman Carl Levin (D-MI) promised to revisit the issue in early Senator Jeanne Shaheen (D-NH) and Rep. Dan Maffei (D-NY) have introduced legislation (S and H.R. 3794) that proposes to offset the $6 billion cost of restoring the military pension COLA by treating certain foreign companies managed and controlled in the United States as domestic companies for tax purposes. Senator Kelly Ayotte (R-NH) and Rep. Michael Fitzpatrick (R-PA) have introduced legislation (S and H.R. 3788) to offset the cost of repealing the military retiree COLA changes by requiring Social Security numbers to claim a refundable child tax credit. Current law calls for the House and Senate each year to agree on a new budget resolution by April 15, but it is unclear whether Congress will complete action on another budget agreement during the current election year. Congress must act on new spending bills for FY 2015, which begins on October 1, "A step in the right direction" House Budget Committee Chairman Paul Ryan (R-WI) and Senate Budget Committee Chairman Patty Murray (D-WA) both noted that the budget agreement they negotiated was narrow in scope. However, President Obama and many members of Congress from both parties welcomed passage of the legislation as a sign that the Republican-controlled House and the Democratic-led Senate could work together. During House floor debate, Chairman Ryan said that the Act reduces the deficit without raising taxes. And it does so by cutting spending in a smarter way. It doesn t go as far as I d like, but it s a firm step in the right direction. This agreement will stop Washington s lurch from crisis to crisis. It will bring stability to the budget process and show both parties can work together. This deal is a compromise, and it doesn t tackle every one of the challenges we face as a nation. But that was never our goal, Chairman Murray said during Senate floor Continuing developments in the taxation of insurance companies 2

7 debate. This bipartisan bill takes the first steps toward rebuilding our broken budget process, and, hopefully, toward rebuilding our broken Congress. While it appears unlikely that comprehensive tax reform can be enacted this year, the ability of a divided Congress to reach a limited budget deal provides hope for the House and Senate to approve tax extenders legislation. Debt ceiling extension The Bipartisan Budget Act did not address the need for an increase in the federal debt limit, which was suspended through February as part of legislation enacted last October to re-open the federal government. At that time, President Obama and Senate Democrats refused to negotiate over the federal debt limit, and also insisted that the Treasury Department retain its ability to use extraordinary measures to meet the federal government s fiscal obligations on a temporary basis when the federal debt limit has been reached. On February 12, 2014, Congress passed the Temporary Debt Limit Extension Act which further suspended the $ trillion federal statutory debt limit through March 15, At the end of the suspension period, the debt limit will increase automatically by the amount of new debt required during the suspension. The Act also preserves the ability of the Treasury Department to use extraordinary measures to extend US borrowing authority beyond March 15, The bill was signed into law by President Obama on February 15, 2014 Tax reform seen as pro-growth economic policy President Obama and members of both political parties on Capitol Hill generally have agreed that pro-growth tax reform is needed to make the United States more competitive globally. There is a consensus that US tax laws have not kept pace with shifting global economic power and the tax laws of other countries. With a 39.1-percent combined federal and state corporate tax rate, the United States has the highest corporate tax rate among industrialized countries, 14 percentage points greater than the average (25.1 percent) for the other Organization for Economic Co-operation and Development (OECD) countries. This disparity is seen as distorting business investment decisions and making American businesses less competitive than their foreign counterparts in both global markets and within the United States. The United States is expected to fall even more out of line with other countries in coming years if no action is taken to lower the US corporate tax rate. The United Kingdom this year will continue recent corporate rate reduction policies by lowering its rate to 21 percent effective April 1, 2014, with plans to lower the UK rate to 20 percent by April 1, Japan lowered its corporate rate by approximately 2.7 percentage points in April 2012 and has proposed advancing a scheduled additional 2.4-percentage point reduction from 2015 to April Canada, the largest bilateral US trading partner, reduced its federal corporate tax rate to 15 percent in 2012 and has a combined federal and provincial tax rate of approximately 26 percent. The United States also is one of the few developed countries to tax foreign earnings under a worldwide tax system. All other G8 countries and 28 of the 34 OECD countries use territorial tax systems, which generally exempt from tax 95 or 100 percent of qualified foreign subsidiary dividends. Many analysts believe the present US worldwide system reduces the ability of American companies to compete effectively in foreign markets. There also is a general recognition that present law discourages US companies from reinvesting foreign subsidiary earnings in the United States because repatriated earnings would be subject to the high US corporate tax rate (i.e., the so-called lock-out effect). Revenue remains the sticking point for tax reform The major issue dividing Congress on comprehensive tax reform is whether it should raise revenue or be revenueneutral. Some proponents see tax reform as an opportunity to improve the global competitiveness of American businesses, attract investment to the United States, and increase domestic job growth. Others eyeing projections 2013: The year in review 3

8 of significant future deficits believe comprehensive tax reform affecting businesses and individuals also could be an important element of an overall deficit reduction package in which spending cuts are combined with revenue increases. In his fiscal 2014 budget, President Obama called for revenue-neutral business tax reform, while proposing a substantial increase in revenue from upper-income individuals to be used for deficit reduction. Beginning with a July 2013 speech in Chattanooga, President Obama also has called for using one-time revenues from business tax reform to fund job-training initiatives and infrastructure programs. While Congressional Republicans have called for revenue-neutral individual and corporate tax reform, House and Senate Democrats generally insist that any tax reform effort should contribute to deficit reduction. Congressional Republicans have called for reforming mandatory spending programs to reduce the federal deficit. This disagreement was evident in the Senate in Majority Leader Reid last year said that tax reform can t be even close to neutral and suggested as a starting point the $975 billion 10-year revenue increase target in the FY 2014 Senate budget resolution passed on a party-line vote by all but four Senate Democrats. In response, Minority Leader McConnell said that any effort to increase revenues through tax reform would be a stumbling block to even getting started in the Senate. Former Senate Finance Committee Chairman Max Baucus has said that tax reform must raise significant revenue, although he opposed the Senate budget resolution proposal last year to raise almost $1 trillion in new revenues. Finance staff summaries accompanying the series of tax reform discussion drafts (discussed below) released in late 2013 stated that while the Chairman believes tax reform as a whole should raise significant revenue for deficit reduction, the package of business reforms in this and other staff discussion drafts is intended to be revenueneutral in the long-term (i.e., in a steady state), with corporate base broadeners paying for a significant reduction in the corporate tax rate. Allocating a portion of the revenue that otherwise could be raised from tax reform to deficit reduction would affect the extent to which tax rates could be lowered. At the same time, seeking to raise additional revenue from individuals could complicate the ability of Congress to agree on comprehensive tax reform in part because a large amount of business income is earned by unincorporated businesses and is taxed at individual tax rates. Obama Administration officials and Congressional Democrats also have expressed concerns about the outyear budget costs of using timing differences that accelerate revenue collection on a one-time basis to offset the cost of permanent rate reductions. Focus on base erosion In the debate surrounding tax reform in the United States, the Obama Administration has stated that income-shifting behavior by multinational corporations is a significant concern that should be addressed through tax reform. Recent international tax reform proposals, including those issued by Ways and Means Committee Chairman Camp and former Senate Finance Committee Chairman Baucus, have included proposals designed to prevent base erosion and profit shifting (BEPS), discussed below. Attention on base erosion also has been increased as a result of recent hearings by the Senate Permanent Subcommittee on Investigations (PSI). For all their differences in many areas, base erosion as an integral part of tax reform has emerged as an area of common concern among Republicans and Democrats. Global tax scrutiny The US focus on base erosion comes at a time of global tax scrutiny by G8 and G20 countries seeking to prevent aggressive tax avoidance. In response to these concerns, the OECD in 2013 issued a report on BEPS, followed by an action plan to address specific areas of concern. The OECD also has called for increased transparency and disclosure requirements. The OECD s project has no force of law on its own, but it may play a role in advancing legislative initiatives by the United States and other nations to reform their international tax rules. The level of activity and the accompanying political support for these endeavors suggest Continuing developments in the taxation of insurance companies 4

9 that the question is not if change will come, but rather how soon it will arrive and how extensive it will be. Laying the foundation for tax reform It appears that Congress faces considerable obstacles to enacting tax reform legislation in 2014, given ongoing political differences over federal revenues, competing legislative priorities, and a change of leadership at the Finance Committee. At a minimum, actions taken this year by the House Ways and Means and the Senate Finance Committees will undoubtedly shape efforts in future Congresses to provide the United States with a more competitive, growth-oriented tax system. How specific reform options are defined, and which existing tax provisions are proposed to be modified or repealed to offset the cost of lower tax rates, should be of great interest to business and individual taxpayers. The release of a comprehensive tax reform bill in 2014 by Chairman Camp, coupled with possible action by the Ways and Means Committee and the House of Representatives, would be a significant accomplishment in terms of defining a path forward for reducing corporate and individual tax rates, reforming US international tax rules, and simplifying the code. This will be a critical year for Chairman Camp, who is term-limited under House Republican Conference rules and is required to give up his gavel at the end of the 113th Congress. Ways and Means members Kevin Brady (R-TX) and Paul Ryan both have announced their candidacies to succeed Chairman Camp. Assuming Senator Wyden becomes Finance Committee Chairman as expected in 2014, it remains to be seen whether he and other Finance Committee members will build on the tax reform efforts of Chairman Baucus and his staff, or shift their focus to Senator Wyden s own previously introduced tax reform bill. 2013: The year in review 5

10 Legislation Enacted legislation H.R. 41 An Act to Temporarily Increase the Borrowing Authority of the Federal Emergency Management Agency for Carrying out the National Flood Insurance Program This law amended the National Flood Insurance Act of 1968 to increase from $ billion to $ billion the total amount of federal borrowing which the Administrator of the Federal Emergency Management Agency has the authority to issue, with the President s approval, for the National Flood Insurance program. Noteworthy legislation not enacted H.R and S.991 A Bill to Amend the Internal Revenue Code of 1986 to Prevent the Avoidance of Tax by Insurance Companies Through Reinsurance with Non-taxed Affiliates (the Neal Bill ) H.R and its companion bill introduced in the Senate would amend the Internal Revenue Code to exclude from the taxable income of a life insurance company or other insurance company: (1) any non-taxed reinsurance premium; (2) any additional amount paid by an insurance company with respect to the reinsurance for which such non-taxed reinsurance premium is paid; and (3) any return premium, ceding commission, reinsurance recovered, or other amount received by an insurance company with respect to the reinsurance for which such non-taxed reinsurance premium is paid. Similar bills have been introduced by Rep. Richard Neal (D-MA) in the past. See H.R (Oct. 12, 2011), H.R (Jul. 30, 2009), and H.R (Sep. 18, 2008). H.R. 505 Balancing Act Among other things, this bill, if passed, would amend the Internal Revenue Code to exclude from the taxable income of a life insurance company or other insurance company: (1) any non-taxed reinsurance premium; (2) any additional amount paid by an insurance company with respect to the reinsurance for which such non-taxed reinsurance premium is paid; and (3) any return premium, ceding commission, reinsurance recovered, or other amount received by an insurance company with respect to the reinsurance for which such non-taxed reinsurance premium is paid. H.R. 549 Homeowner Catastrophe Protection Act of 2013 H.R. 549 would amend the Internal Revenue Code to: (1) allow insurance companies (other than life insurance companies) to make tax deductible contributions to a tax-exempt policyholder disaster protection fund established by this Act for the payment of policyholders' claims arising from certain catastrophic events, such as windstorms, earthquakes, snowstorms, fires, tsunamis or floods, volcanic eruptions, or hail; (2) establish a tax-exempt Catastrophe Savings Account to help taxpayers pay for catastrophe expenses; and (3) allow a non-refundable tax credit for 25% of certain natural disaster mitigation property expenditures made to fortify a taxpayer's principal residence against catastrophes. H.R. 737 Homeowners and Taxpayers Protection Act of 2013 This Act would instruct the Secretary of the Treasury to establish the National Commission on Catastrophe Preparation and Protection to advise the Secretary regarding estimated loss costs associated with contracts for reinsurance coverage. It would have also required the Secretary to implement a program that utilizes premiums from eligible state or multi-state plans to pre-fund future natural catastrophe recovery by making available for purchase, only by such plans, contracts for reinsurance coverage. The Act would also establish in the Treasury, the Catastrophe Preparedness Fund, a post-catastrophe market stabilization program for liquidity loans to: (1) expedite payment of claims under state catastrophe insurance programs, (2) authorize the Secretary to issue loans to assist financial recovery from significant natural catastrophes, and (3) promote the availability of private capital to state catastrophe insurance programs in order to provide liquidity and capacity. The Act also would establish the National Readiness, Preparedness and Mitigation Committee to administer a Readiness, Preparedness, and Mitigation Grant Program of grants to state and local governments, nonprofit organizations, and other appropriate public and private entities to develop programs and initiatives to improve catastrophe response, citizen preparedness and protection, and prevention and mitigation of losses from natural catastrophes. Continuing developments in the taxation of insurance companies 6

11 S.1346 A bill to amend the Internal Revenue Code of 1986 to Increase the Alternative Tax Liability Limitation for Small Property and Casualty Insurance Companies This bill would amend the Internal Revenue Code to expand the eligibility of certain small insurance companies (other than life insurance companies) for the alternative corporate income tax by increasing the premium limitation used to determine such eligibility to $2.012 million (from $1.2 million), and begin indexing for inflation after S Homeowners Defense Act of 2013 This Act would establish the National Catastrophe Risk Consortium as a nonprofit, nonfederal entity to: (1) maintain an inventory of catastrophe risk obligations held by state reinsurance funds and state residual insurance market entities; (2) issue, on a conduit basis, securities and other financial instruments linked to catastrophe risks insured or reinsured through Consortium members; (3) coordinate reinsurance contracts; (4) act as a centralized repository of state risk information accessible by certain private-market participants; and (5) use a database to perform research and analysis that encourages standardization of the risk-linked securities market. It would also instruct the Secretary of the Treasury to implement a national homeowners' insurance stabilization program to make liquidity loans and catastrophic loans to qualified reinsurance programs to: (1) ensure their solvency; (2) improve the availability and affordability of homeowners' insurance; (3) provide incentive for risk transfer to the private capital and reinsurance markets; and (4) spread the risk of catastrophic financial loss resulting from natural disasters and catastrophic events. Significantly, the Act provides that the cost of such programs would be offset with a reasonable fee collected from qualified and precertified reinsurance programs. S Homeowner Flood Insurance Affordability Act of 2013 If passed, this act would, among other things, delay the implementation of certain provisions of the Biggert-Waters Flood Insurance Reform Act of This bill would also prohibit the Administrator of the Federal Emergency Management Agency (FEMA) from: (1) increasing flood insurance risk premium rates to reflect the current risk of flood for certain property located in specified areas subject to a certain mandatory premium adjustment, or (2) reducing such subsidies for any property not insured by the flood insurance program as of July 6, 2012, or any policy that has lapsed in coverage as a result of the policyholder's deliberate choice (Pre-Flood Insurance Rate Map or pre-firm properties). 2013: The year in review 7

12 Federal Life-nonlife consolidations Consolidated return election In PLR , the IRS ruled that following a merger of a consolidated group s common parent into a newly formed subsidiary, the group s election to file a life-nonlife consolidated return will remain in effect and the insurance companies that are part of the group will remain Eligible Entities for purposes of Treas. Reg. Section (d)(12). Corp 1 is the common parent of the Corp 1 consolidated group which has elected to file a life-nonlife consolidated return pursuant to Section 1504(c)(2)(A). As part of the proposed transaction, Corp 1 will form Newco 1 which then will form Newco 2. Following the formations, Newco 2 will merge with and into Corp 1 with Corp 1 surviving. All Corp 1 shareholders will exchange their Corp 1 stock for Newco 1 stock as part of the proposed transaction. The IRS ruled that the Corp 1 consolidated group, of which Corp 1 is the common parent immediately before the proposed transaction, should remain in existence with Newco 1 as the new common parent (see, Treas. Reg. Sections (d)(12)(vi) and (d)(2)(ii) and Rev. Rul ). The IRS also clarified that the consolidated group s election to file a life-nonlife consolidated return will remain in effect. The IRS held that any Life or Non-Life Eligible Entities will remain eligible members of the consolidated group immediately following the transaction. The IRS also ruled that to the extent an Ineligible Entity was held by Corp 1 before the transaction, that period will be taken into account in determining whether the Ineligible Entity has been a member of the affiliated group throughout every day of the base period for purposes of Treas. Reg. Section (d)(12). Policyholder dividends New York Life Insurance Co. v. United States In New York Life Insurance Co. v. United States, 724 F.3d 256 (2 nd Cir. 2013), the Second Circuit Court of Appeals affirmed a district court s decision that deductions for policyholder dividends did not satisfy the all-events test under the principles of Section 461. The taxpayer, New York Life Insurance Company, deducted two types of policyholder dividends: (1) an annual dividend mandated by state law that was credited but not paid until the policy s anniversary date; and (2) a voluntary termination dividend that was calculated and accrued but not paid until death, maturity, or surrender. For tax years 1990 to 1995, New York Life deducted these amounts on its federal income tax return. The IRS disallowed the deductions related to annual and termination dividends, limiting the deductions to policyholder dividends actually paid during the taxable year. New York Life paid the resulting deficiency but filed a claim for a refund. The IRS and district court disagreed with New York Life that it satisfied the all-events test. In its analysis, the court cited two Supreme Court cases, United States v. Hughes Props., Inc., 476 U.S. 593 (1986) and United States v. Gen. Dynamics Corp., 481 U.S. 239 (1987), in support of the position that the all-events test was not met. Similar to General Dynamics, the Second Circuit looked at the last link in the chain of events creating the liability to determine whether the all-events test had been met. New York Life asserted that the last event occurred when the January policyholders paid the final premium sufficient to keep their policies in force through their anniversary dates in January. However, the court viewed the last event to be the policyholder s decision to keep the policy in force through the anniversary date versus surrendering the policy for its cash value, which did not occur until January of the following year. As the court stated, New York Life could not know in December which course of action the policyholder would choose the following month. Additionally, New York Life was not obligated to pay an annual dividend if a policyholder chose to cash in the policy before the anniversary date. In Massachusetts Mutual Life Insurance Co. v. United States, 103 Fed. Cl. 111 (2012), a case with almost identical facts, the Court of Federal Claims allowed a deduction for the guaranteed minimum amount of policyholder dividends in advance of actual payment. Companies should consider the venue in which a challenge to claimed deductions for policyholder dividends would be litigated. Continuing developments in the taxation of insurance companies 8

13 Priority guidance plan The IRS/Treasury s Priority Guidance Plan (the business plan) included 324 guidance projects that the IRS has identified as priorities for the 12-month period July 2013 through June Among those, the IRS identified several plan projects related to insurance companies and products including the following: Final regulations under Section 72 on the exchange of property for an annuity contract. Proposed regulations were published on October 18, Guidance on annuity contracts with a long-term care insurance rider under Sections 72 and 7702B. Revenue Ruling under Section 801 addressing the application of Revenue Ruling or Revenue Ruling to health insurance arrangements that are sponsored by a single employer. Guidance to clarify which table to use for Section 807(d)(2) purposes when there is more than one applicable table in the 2001 CSO mortality table. Revenue Ruling on the determination of the company's share and policyholder's share of the net investment income of a life insurance company under Section 812. This item was published in February 2014 as Rev. Rul Guidance clarifying whether the Conditional Tail Expectation Amount computed under AG 43 should be taken into account for purposes of the Reserve Ratio Test under Section 816(a) and the Statutory Reserve Cap under Section 807(d)(6). Final regulations under Section 833 to establish the method to be used by Blue Cross Blue Shield entities in determining the medical loss ratio required by that section. Proposed regulations were published on May 13, The final regulations were published in January Regulations under Section 7702 defining cash surrender value. Regulations under Section 882 regarding insurance companies. The IRS and Treasury s priority guidance plan contains 10 projects related to insurance companies and products that are identified as priorities for the July 2013 June 2014 plan year. Life insurance products Variable Contracts In a recent Chief Counsel Advice (CCA) the IRS determined that the reserve and basis adjustment rules for variable life and annuity contracts under of Sections 817(a) and (b) apply not only to life insurance companies but also to nonlife companies. The Taxpayer in CCA was the common parent of a life-nonlife consolidated group that includes Subsidiary. Subsidiary, a nonlife subsidiary of Taxpayer, issued variable annuities that were supported by separate account assets. Taxpayer argued that Sections 817(a) and 817(b) did not apply because it was not a life insurance company According to Taxpayer, this meant it could deduct reserve increases attributable to appreciation in the Separate Account Assets, even though the corresponding income would not be reported until it was realized. The IRS disagreed with Taxpayer s position and determined that the reserve and basis adjustment rules of Section 817(a) and (b) apply equally to life and nonlife companies. The IRS determined that Taxpayer s position would result in disparate tax accounting treatment by life and nonlife companies for the same transaction. This result, the Service found, would be counter to Congress intent as reflected in both the statutory language and the legislative history of Sections 817(a) and 817(b). Guidance on exchanges under Section 1035 of annuities for long-term care insurance contracts. 2013: The year in review 9

14 Annuity contracts In PLR , the IRS concluded that the post-death beneficiary of five annuity contracts could exchange the value of those contracts tax-free pursuant to Section 1035(a)(3) for a new annuity contract offering higher payouts. The ruling represents the first time the IRS has considered the application of Section 1035 to a contract held by a post-death beneficiary who is currently receiving distributions required by Section 72(s). The taxpayer was the beneficiary of five annuity contracts that were originally issued by two different companies to her mother. Upon her mother s death, the taxpayer timely elected to receive the interest in the original contracts over her life expectancy, pursuant to provisions in those contracts that satisfied the requirements of Section 72(s). The taxpayer subsequently decided to exchange the value of the five original contracts for a single contract, issued by a third company that would provide higher payouts than the five original contracts. Although in form the new contract was a deferred variable annuity contract, the taxpayer completed an election form and distribution form requiring the third company to begin making payments immediately. The taxpayer would thus continue receiving the payouts that were being made by the original contracts, but in an amount pursuant to the new contract. In its analysis, the IRS cited the legislative history of Sections 72(s) and 1035, as well as a number of its own revenue rulings. In addition, the IRS focused on the fact that the new annuity contract continued the terms of the taxpayer s election to receive the entire interest in the original contracts over her life expectancy. The IRS stated that compliance with Section 72(s) is an essential inherent attribute of the original annuity contracts that is retained by the new contract. Additionally, the IRS determined that the taxpayer would ultimately recognize the income on the original annuity contracts under the new contract. Therefore, the IRS concluded that the transaction would qualify as an exchange of annuity contracts under Section 1035(a)(3). Section 1035 exchange In PLR , the IRS concluded that the exchange by an irrevocable trust of one life insurance policy for another qualifies as a like kind exchange under Section Old Issuer, a life insurance company, issued to Old Trust a joint and survivor policy on the lives of husband and wife (A and B). A subsequently died leaving B as the sole insured. After A s death, the policy was transferred to New Trust, which was created with the consent of all beneficiaries of the Old Trust. The trustee of New Trust then exchanged the Old Policy for a new life insurance contract covering only B s life. Under Section 1035(a)(1), no gain or loss is recognized on the exchange of one life insurance contract for another. To be considered a life insurance contract, a contract must satisfy the requirements of Section 7702(a). Additionally, the contract must satisfy the definition of that term in Section 1035(b)(3), which defines a contract of life insurance as a contract with an insurance company that depends in part on the life expectancy of the insured, but that is not ordinarily payable in full during the life of the insured. The legislative history of Section 1035 indicates that Congress viewed non-recognition treatment as appropriate for individuals who have merely exchanged one insurance policy for another better suited to their needs and who have not actually realized gain. According to the IRS, New Trust's assignment of Old Policy to New Issuer and receipt of New Policy qualifies as an exchange of one contract of life insurance for another contract of life insurance under Section 1035(a)(1). In concluding that the exchange qualified as a like kind exchange under Section 1035(a)(1), the IRS noted that at the time of the exchange, the sole remaining insured on Old Policy was B. The sole insured on New Policy was also B. Thus, the exchange did not involve a change of insured. A change of insured would have disqualified the transaction from non-recognition treatment under Section Continuing developments in the taxation of insurance companies 10

15 Blue cross blue shield Final MLR regulations In May 2013, the IRS released proposed regulations (REG ) providing guidance to Blue Cross and Blue Shield organizations on computing and applying the medical loss ratio under Section 833(c)(5). Subsequently, in January 2014, the IRS issued final regulations (TD 9651), which adopt the proposed regulations in their entirety with certain modifications. Under Section 833, special rules apply to Blue Cross and Blue Shield (BCBS) and certain other organizations, including (1) treatment as stock insurance companies; (2) a special deduction; and (3) computation of unearned premium reserves based on 100 percent, and not 80 percent, of unearned premiums. The Patient Protection and Affordable Care Act (ACA) provides that these special rules will not apply if the organization s medical loss ratio (MLR) is not at least 85%. Like the proposed regulations, the final regulations clarify the calculation of MLR for these organizations, and provide in general that the meaning of terms and the methodology used in the MLR computation for BCBC organizations, will be consistent with the definition of those same terms and the methodology of the Public Health Services Act as amended by the ACA, under regulations promulgated by Health and Human Services (HHS). However, as with the proposed regulations, the final regulations would not include 'costs for activities that improve health care quality' in the MLR numerator for BCBS organizations. The final regulations provide that an organization that fails to satisfy the MLR requirement will lose all the benefits of Section 833 for the taxable year or years for which the organization's MLR is insufficient. In response to the proposed regulations released in May, the Treasury and the IRS received four written comments in response to the notice of proposed rulemaking and notice of public hearing. After considering all comments, the final regulations adopt the provisions of the proposed regulations with two of the modifications suggested by commenters. First, two commenters suggested that each organization described in Section 833(c) be permitted a one-time, permanent election to compute its MLR over either the three-year period provided in the proposed regulations or over a one-year period based on the taxable year. The commenters further suggested that if a three-year period is used, transition relief should be provided to phase in the three-year period. In light of the comments received, the Treasury Department and the IRS declined to make the three-year period for computing the MLR elective, but provided transition rules to phase in the three-year period. Accordingly, the final regulations provide that for the first taxable year beginning after December 31, 2013, an organization s MLR will be computed on a one-year basis. For the first taxable year beginning after December 31, 2014, the organization's MLR will be computed on a twoyear basis. And for subsequent taxable years, the MLR will be computed on a three-year basis. Second, commenters also requested clarification that an organization s loss of eligibility for treatment under Section 833 by reason of Section 833(c)(5) will not be treated as a material change in the operations of such organization or in its structure for purposes of Section 833(c)(2)(C). The final regulations adopt this suggestion. The final regulations are effective for taxable years beginning after December 31, Reserves Acuity Mutual Ins. Co. v. Commissioner 1 In Acuity, the Tax Court held that the amount of carried loss reserves claimed by an insurance company under Section 832 was fair and reasonable because it was actuarially computed in accordance with the rules of the National Association of Insurance Commissioners (NAIC) and Actuarial Standards of Practice (ASOPs) and fell within a range of reasonable estimates determined by the company s appointed outside actuary. 1 Acuity Mutual Ins. Co. v. Commissioner, T.C. Memo : The year in review 11

16 The case sheds light on the standards a company must meet to establish that its reserves are fair and reasonable, and calls into the question the IRS practice of asserting there is an implicit margin solely because the IRS s own actuaries determine that reserves should be lower. Acuity is a mutual property and casualty insurance company and the common parent of a consolidated group of corporations. Acuity used an in-house actuary to compute the company s loss reserves for 2006 (and other years) both on a quarterly basis and at year-end. The inhouse actuary produced approximately 900 pages of actuarial analysis in performing the loss reserve computations, in which he used eight separate actuarial methods to compute his estimate. In addition, the company used an outside consulting actuary, appointed by its board of directors, to independently review the company s loss reserves each year and prepare a statement of actuarial opinion, as required by NAIC. The independent actuary determined that Acuity s carried loss reserves of $660 million were reasonable and signed a statement of actuarial opinion stating so. Acuity filed its Annual Statement for 2006 and reported its carried loss reserves at $660 million. On its 2006 Form 1120-PC, U.S. Property and Casualty Insurance Company Income Tax Return, Acuity reported discounted unpaid losses of $622 million, which represents Acuity s carried loss reserves of $660 million discounted pursuant to Section 846. In 2011, the IRS issued a notice of deficiency for the 2006 tax year, arguing that Acuity s carried loss reserves of $660 million were overstated by $96 million. In its analysis, the Tax Court relied on Seventh Circuit case law to the effect that the NAIC-approved annual statement is starting point for computing unpaid losses (see Sears, Roebuck & Co. v. Commissioner, 972 F.2d 858, 866 (7th Cir. 1992)). The IRS argued that the annual statement controls only what is includible in the loss reserve, not the amount of the loss reserve itself. The court, however, disagreed, holding that the annual statement should be used as the source of unpaid losses for federal tax purposes. The court rejected the IRS s argument that the independent actuary was not allowed to provide a range, because ASOP 36 specifically authorizes the computation of a range of reasonable reserve estimates. The fact that the carried loss reserves fell within the range of both the independent actuary and two expert opinions strongly supported Acuity s position. Therefore, the court held that Acuity produced substantial evidence in support of its position that its carried loss reserves for 2006 are fair and reasonable. In contrast, according to the court, the IRS did not produce any persuasive evidence to the contrary. The Acuity decision is only a Memorandum Decision of the Tax Court, which means that its precedential value is limited. Nevertheless, the case is helpful because it demonstrates clearly the kind of process and documentation that are needed in order to prevail when the IRS asserts that the amount of a non-life insurer s unpaid loss reserves is not fair and reasonable. The case also makes it more difficult for the IRS to assert that a company s unpaid loss reserves include an implicit margin solely because they exceed the amount that the IRS s own actuaries would have determined independently. Statutory reserve cap The IRS issued Notice , which clarifies that deficiency reserves are taken into consideration in computing the statutory reserve cap under Section 807(d)(1). This guidance is important to note, as it clarifies an issue raised by some IRS agents in the past. To determine the decrease or increase in life insurance reserves for a contract under Section 807, Section 807(d)(1) provides that the life insurance reserve for any such contract is the greater of: (i) the contract s net surrender value; or (ii) the federally prescribed reserve for the contract under Section 807(d)(2). The amount taken into account may not, however, exceed the amount that would be taken into account with regard to the contract in computing statutory reserves. Section 807(d)(2) provides that the tax method applicable to the contract is used to determine the federally prescribed reserve. Section 807(d)(3) sets forth the applicable tax reserve method and provides a rule that disallows any additional reserve deduction for deficiency reserves. In general, deficiency reserves arise because the net premium taken into account in computing reserves exceeds the Continuing developments in the taxation of insurance companies 12

17 actual premiums or other consideration charged for the benefits under the contract. The Notice explains that the term statutory reserve under Section 807(d)(6) means the aggregate amount set forth in the annual statement with respect to items described in Section 807(c), which includes life insurance reserves. The Notice cites the legislative history as well as the Joint Committee on Taxation's general explanation of the revenue provisions of the Tax Reform Act of The Notice concludes that Congress intended that deficiency reserves would be taken into consideration when applying the statutory reserve cap under Section 807(d)(1) with respect to a life insurance. Some IRS agents had asserted that the statutory reserve cap does not include deficiency reserves, despite contrary guidance in the Internal Revenue Manual. Prevailing interest rates for reserves The IRS issued Rev. Rul , which provides stateassumed interest rates and applicable federal rates for the determination of reserves under Section 807(d) for insurance products issued in 2012 and Revenue Ruling should be used by insurance companies in computing their reserves for: 1. life insurance and supplementary total and permanent disability benefits, 2. individual annuities and pure endowments, and 3. group annuities and pure endowments. For purposes of Section 807(d), for taxable years beginning after December 31, 2011, the ruling supplements the schedules of prevailing state assumed interest rates set forth in Revenue Ruling Specifically, the ruling supplements Schedules A, B, C and D -- under Part III of Rev. Rul , by providing prevailing state-assumed interest rates for certain insurance products issued in 2012 and The ruling also supplements Part IV of Revenue Ruling by providing the applicable federal interest rates for computing reserves for 2012 and Loss discount factors As it does annually, the IRS released loss payment patterns and discount factors (Rev. Proc ) and salvage discount factors (Rev. Proc ) applicable to accident year Property and casualty insurance companies use these factors to discount unpaid losses, and to compute discounted estimated salvage recoverable. Rev. Proc sets forth for purposes of Section 846 the loss payment patterns and discount factors for each property and casualty line of business for the 2013 accident year. Rev. Proc sets forth for purposes of Section 832 the salvage discount factors for the 2013 accident year that must be used for each line of business to compute discounted estimated salvage recoverable. The discount factors were determined using the applicable interest rate under Section 846(c), which is 2.16%. Rev. Proc and also contain applicable discount factors for entities using the composite method of Notice for unpaid losses in prior years. Property and casualty insurance companies should use the updated percentages provided in Rev. Proc and for accident year Small insurance company election Extension of time to file In PLR , the IRS granted an insurance company an extension of time to file an election to be subject to the alternative tax under Section 831(b). The taxpayer is an insurance company that properly filed an election under Section 953(d) to be treated as a domestic corporation for Federal income tax purposes. The taxpayer retained an accountant to prepare its tax returns. The accountant subsequently filed a Form PC, U.S. Property and Casualty Insurance Company Income Tax Return on behalf of the taxpayer, for the first tax year after its formation. The accountant, however, failed to make the election under Section 831(b) in a timely manner, and the taxpayer requested an extension of time to file under Treas. Reg. Section The election is due by the due date of the tax return for which the election would have been effective (taking into account any extensions). 2013: The year in review 13

18 Treas. Reg. Section (a) provides that the Commissioner will grant a reasonable extension of time to make a regulatory election if the taxpayer is determined to have acted reasonably and in good faith, and if the grant of relief will not prejudice the interests of the government. In the case of PLR , the taxpayer submitted its request for relief before the IRS discovered that there was a failure to file the election. Additionally, the taxpayer reasonably relied on a qualified tax professional, its accountant, who failed to make the election. Further, the taxpayer represented that the granting of relief by the IRS would not result in a lower tax liability than the taxpayer would have had if the election was timely made. As a result, the IRS concluded that the requirements of Treas. Reg. Section and -3 were met, and granted an extension of 60 days from the date of the letter ruling to file an election under Section 831(b). Demutualization Dorrance et ux. v. United States 2 In Dorrance, the US District Court for the District of Arizona concluded that a life insurance policyholder had basis in the shares of stock received in connection with the demutualization of five life insurance companies, but that a trial was required to determine the amount of that basis. A trial was subsequently held, and recently the court allocated basis consistently with the demutualizing company s allocation of shares to the policyholder in connection with the demutualization. In 1995, the taxpayers formed a trust that purchased five life insurance policies in 1996 from five different mutual insurance companies in anticipation that the benefits to be received would provide cash to pay for estate taxes upon death of the plaintiffs. All five companies demutualized beginning in 1998 through As part of the demutualization transactions, the taxpayers received stock of the companies in exchange for mutual rights. The taxpayers sold the stock in 2003, paid taxes on the gross receipts ($2,248,806), and filed a claim for relief in the amount of $337,321, which the IRS denied. 2 Dorrance v. U.S., No. CV , 2013 WL (D. Ariz. Apr. 19, 2013). In its earlier order, the court analyzed Treas. Reg. Section (a), which addresses basis allocations where only a part of a piece of property is sold. According to the court, there is no single appropriate method for basis allocation. The court concluded that neither the government nor the taxpayers provided sufficient evidence for the court to resolve the case without a trial. At trial, the court examined how the companies allocated shares to the taxpayers upon the demutualization. Specifically, the companies allocated the shares based on (1) the value of the voting rights, (2) past contributions to surplus, and (3) projected future contributions to surplus. Applying Treas. Reg. Section (a), the court determined the basis of the shares using a similar methodology. The court concluded that projected future contributions to surplus could not be taken into consideration to determine the basis because they are a portion of premiums for which the taxpayers had not paid before receiving the shares. As a result, the court held that the stock basis was equal to a combination of the IPO value of the shares allocated to the taxpayers for (1) the fixed component, which represented the compensation for relinquished voting rights, and (2) 60% of the variable component, which represented past contributions to surplus. Under this formula, the total basis in the shares amounted to $1,078,128. Therefore, the court concluded that the taxpayers were entitled to a refund in the amount of $161,719 instead of the $337,321. The court's approach in Dorrance is different from the approach that other courts have taken. For example, in Fisher v. US, 82 Fed. Cl. 780 (Fed. Cl. 2008), the Court of Federal Claims applied the open transaction doctrine. In Reuben v. US, No. CV , 2013 WL , the US District Court for the Central District of California held that the open transaction doctrine did not apply and that the individual had zero basis in the shares. In Dorrance, the Court took an approach different from that of both Fisher and Reuben and allocated basis to the stock. The Dorrance case demonstrates that there is not a consistent approach to determining whether stock acquired in a demutualization transaction has basis and, if so, how that basis should be allocated. Continuing developments in the taxation of insurance companies 14

19 Reuben v. United States 3 In January 2013, the US District Court for the Central District of California, ruled in Reuben v. U.S. that the open transaction doctrine did not apply to the sale of shares received in a life insurance company demutualization. The court concluded that the taxpayer s insurance premium payments were not for membership rights and that the taxpayer had a zero basis in the shares it received. In 1989, the Don H. and Jeannette H. Reuben Children's Irrevocable Trust (the Reuben Trust) purchased an insurance policy from a mutual life insurance company, Manulife. In 1999, Manulife converted from a mutual insurance company to a stock corporation and hence, demutualized. As part of the demutualization, the Reuben Trust received 40,307 shares of stock to compensate for the value of the mutual rights it had lost. Timothy D. Reuben (Plaintiff) received 5,001 Manulife shares as a distribution from the Reuben Trust. Plaintiff sold his shares in 2005 and reported a short term gain on his 2005 tax return. Plaintiff also reported zero basis on his 2005 tax return in connection with the Manulife shares. In 2008, Plaintiff claimed a tax refund by filing a 2005 amended federal tax return, claiming that he inaccurately characterized long-term capital gain as short-term gain and that the basis of his Manulife shares should have been $41.13 per share and not zero. The IRS allowed the Plaintiff's tax refund related to the inaccurate characterization of long-term gain as short-term gain, but denied the Plaintiff's claim for any basis in the Manulife shares. The Plaintiff based his argument on a decision by the Court of Federal Claims, Fisher v. United States, 82 Fed. Cl. 780 (2008). In Fisher, the court decided that the plaintiff had cost basis in the stock received in connection with the demutualization and was entitled to a refund. The government argued that the Reuben Trust paid nothing for the membership rights in Manulife and thus the Plaintiff's basis in the shares was zero. In addition, the government argued that the Plaintiff had not satisfied his burden of 3 Reuben v. U.S., No. CV , 2013 WL (C.D. Cal. Jan. 15, 2013). establishing the basis for the Manulife shares and requested summary judgment. The Court first discussed the application of Fisher to the Plaintiff's case. In addition to noting that the decision of the Court of Federal Claims in Fisher was not controlling, the Court pointed out that the decision in Fisher was affirmed in an unpublished opinion with no precedential effect. The Court also stated that the Plaintiff failed to show that allocating basis between the mutual rights and the stock is so 'difficult' that the open transaction doctrine would be appropriate. The open transaction doctrine permits a delay in gain recognition and taxation of property until the value is made certain. In general, courts have stated that the open transaction doctrine should be used only in "rare and exceptional" circumstances when it is not possible to discern the value of the property. The Plaintiff argued that the premiums paid by the Reuben Trust were for membership interests in Manulife as opposed to the underlying insurance policy. The Court disagreed, stating that the premiums paid for the Manulife insurance policies were identical before and after Manulife demutualized. As a result, the Court granted the government's motion for summary judgment and concluded that the stock had a zero basis. Investments Mixed straddles In August 2013 the IRS issued temporary and proposed Treasury regulations 4 addressing identified mixed straddle transactions. The temporary regulations modify the treatment of identified mixed straddles that have been in effect for nearly 30 years. The regulations prospectively preclude an investment strategy used by taxpayers to recognize built-in capital gains in order to offset capital loss carryforwards. Under the identified mixed straddle provisions previously in effect, the taxpayer was required to mark any built-in gain or loss on the identified bonds that were held prior to the date that the mixed straddle transaction was executed 4 T.D. 9627; 78 F.R : The year in review 15

20 (for example, upon a taxpayer entering into offsetting Treasury futures). The new temporary regulations (promulgated as Treasury regulation Section (b)- 6T), which are effective for identified mixed straddle transactions entered into after August 1, 2013, provide that the built-in gain or loss is not recognized. Instead, the taxpayer must determine the amount of the built-in gain or loss at the time the transaction is executed for purposes of applying the remaining provisions of the identified mixed straddle rules, but the built-in gain or loss is recognized in accordance with general tax principles (that is, generally, under realization-based accounting). The legislative history to the straddle rules indicates that Congress intended a mark upon entering into a mixed straddle transaction. The new regime eliminates the mark in favor of realization-based accounting for the built-in gain or loss. Interestingly, in its 2014 budget proposal, the Obama Administration expanded the application of the mixed straddle provisions and advocated a mark of built-in gain but not loss upon entering into a mixed straddle. It is not clear whether the new temporary regulations represent a reversal in Treasury s view of the merits of a mark of built-in gain as proposed in the President s 2014 budget. The temporary regulations are prospective on their face, implying that, assuming the taxpayer complied with the identified mixed straddle provisions for previous transactions, the mark would not be challenged. Finally, the temporary regulations do not address the Section 171 bond premium issue that often accompanies the identified mixed straddle transactions. This is not surprising because the Section 171 bond premium issue becomes moot for future identified mixed straddle transactions if gain is not recognized. Exempt status Section 501(c)(15) PLR The IRS revoked the tax-exempt status of a small insurance company because it did not meet the requirements of Section 501(c)(15). In general, under Section 501(c)(15), a nonlife insurance company is exempt from tax if its gross receipts do not exceed $600,000, and more than 50% of its receipts consist of premiums. The test must be satisfied annually. In this case, the company's premium income did not exceed 50% of gross receipts for the years in question. Even though the company was tax exempt in prior years, the IRS revoked the company's tax-exempt status under Section 501(c)(15), and the company was required to file an income tax return for the relevant tax years. PLR The IRS revoked the tax-exempt status of a reinsurance company that engaged in the reinsurance of credit insurance contracts, vehicle service contracts, and certain other service contracts. The IRS concluded that the reinsurance company failed to operate in accordance with the provisions of Section 501(c)(15). According to the facts of this ruling, the company had two shareholders, Director and his wife. Director and his wife were also sole or partial shareholders of 4 other organizations. The IRS determined that the gross receipts from the other companies must be included for purposes of applying the gross receipts computation to determine whether the company qualifies for tax-exempt status under Section 501(c)(15). Based on the aggregate gross receipts of all of the organizations involved, the gross receipts for the company exceeded the $600,000 limitation under Section 501(c)(15). Therefore, for the relevant years, the company no longer qualified for tax exemption under Section 501(c)(15). Continuing developments in the taxation of insurance companies 16

21 PLR In this ruling, the IRS revoked the tax-exempt status of an unincorporated association created to provide property and casualty insurance on a nonprofit basis for its members, because the organization did not provide insurance to any policyholders, and also failed to meet other requirements of Section 501(c)(15). According to the ruling, the company issued only two policies for the years in question. As a result, the IRS found that there was inadequate risk distribution for the policies to qualify as insurance contracts. Because the contracts the company issued were not insurance contracts, the IRS determined that the company was not an insurance company. Because the company was not an insurance company, the company did not qualify for exemption under Section 501(c)(15). 2013: The year in review 17

22 International Cascading FET Validus v. United States 5 On March 7, 2008, the IRS released Revenue Ruling (Ruling), which formally adopted the position that the federal excise tax (FET) will be enforced on a cascading basis pursuant to Section Specifically, the Ruling stated that premiums paid by a foreign insurer or reinsurer to another foreign reinsurer are subject to the 1 percent excise tax imposed by Section 4371(3). At the same time as the release of the Ruling, the IRS also issued a voluntary compliance initiative in Announcement encouraging foreign persons who failed to pay the cascading excise taxes due, or failed to disclose exemptions pursuant to an income tax treaty, to become compliant via the filing of FET tax forms along with any amounts due as of the fourth quarter of Section 4371 imposes an FET on each policy of insurance or reinsurance covering US risks issued by any foreign insurer or reinsurer. Section 4371 imposes such excise tax on the gross premiums on contracts covering US risks paid to a foreign insurer or reinsurer at the rate of 4 percent on direct property and casualty insurance business, 1 percent on policies covering life insurance, sickness, or accident insurance, or annuities and 1 percent on reinsurance policies. In Validus v. U.S., Validus Reinsurance, an insurance company domiciled in Bermuda, filed a complaint with the US District Court for the District of Columbia challenging the application of the 'cascading' FET to retrocessions, or reinsurance transactions between two reinsurance companies. In its holding, the District Court ruled in favor of Validus Reinsurance noting that the plain language of the statute does not impose an excise tax on retrocessions. Interestingly, the court did not limit the exemption from FET for retrocessions to the cascading FET, thus this 5 Validus Reinsurance, Ltd. v. U.S., 113 A.F.T.R.2d (D.D.C. 2014). exemption can be read broadly. The court did not address whether premiums covering US risks paid by a foreign insurer to another foreign reinsurer are subject to FET. As the DC District Court decided Validus, this decision should be precedential for most reinsurance companies that do not have places of business in the US. Consequently, foreign reinsurance companies that have paid the cascading FET on retrocessions should evaluate the statute of limitations with respect to filing refund claims and consider filing such claims where critically necessary to extend the statute. Those who have filed refund claims should generally await further development. Taxpayers should consider the Validus decision to determine whether they should continue to pay the tax on retrocessions. FATCA Final FATCA regulations The final regulations relating to the provisions of the Foreign Account Tax Compliance Act (FATCA) were issued on January 17, As it relates to the insurance industry, these final regulations contain a number of significant differences from the proposed regulations. In addition, on February 20, 2014, the US Department of the Treasury and the IRS released two sets of final and temporary regulations for FATCA. The first set contains modifications to the final FATCA regulations. The second set of regulations coordinate the documentation standards, reporting and withholding rules relating to payments made to non-us and US persons (Chapters 3 and 61 and Section 3406 of the Code), with the FATCA regulations. The regulations contain many changes with the impact varying depending on the products or services and whether a company's activities are on shore or offshore. Broadly speaking, the guidance is a compilation of many smaller changes and clarifications. Insurance company definition The final regulations have defined an insurance company as an entity that: (1) is a company regulated as an insurance company in its country of operation, (2) has gross income arising from insurance, reinsurance, and Continuing developments in the taxation of insurance companies 18

23 annuity contracts that exceeds 50 percent of gross income, or (3) has assets associated with insurance, reinsurance, and annuity contracts that exceeds 50 percent of gross assets. In addition to the definition of an insurance company, the definition of a financial institution was expanded to include a specified insurance company. A specified insurance company is defined as an insurance company or a holding company (as described in the final regulations) that is a member of an expanded affiliated group (EAG) that includes an insurance company, and the insurance company or holding company issues, or is obligated to make payments with respect to, a cash value insurance or annuity contract." Definition of financial account The definition of a financial account was modified to include cash value insurance contracts with a cash value greater than $50,000. However, the $50,000 value exclusion does not apply to annuity contracts. This differs from the prior definition, which included all cash value insurance and annuity contracts without a limitation to the contract's value. Alignment with local law for certain definitions In response to industry comments, the final regulations do not reference US tax law in the definition of insurance company, "annuity contract," or "life insurance contract," instead the definitions rely upon local law. This change is certainly beneficial for global insurance companies; it permits reliance on local law designations when considering whether their products are an "annuity" or "life insurance" contract, or whether their companies qualify as an "insurance company." Valuation of insurance contracts The proposed regulations did not provide a methodology to address cash value or annuity contracts. The final regulations prescribe the account value or balance of the contract to be determined based upon either the year-end balance or at each contract anniversary date. In instances where there is no reporting of a value to the account holder, the final regulations indicate that the value is determined by using the discount interest rate and mortality tables that are either (1) the rates and tables prescribed under Internal Revenue Code Section 7520 and the regulations thereunder, or (2) those used by the FFI to determine the amounts payable under the contract." IRC Section 953(d) election Under the definition of a US person in the final FATCA regulations, foreign insurance companies that make an IRC Section 953(d) election to be taxed as a US company will continue to be treated as a foreign insurance company unless such company is licensed to do business in a particular state within the US. However, it should be noted that this definition is inconsistent with the language contained in IRC Section 953(d), causing an apparent conflict between the definitions. 6 Defining grandfathered obligations The final regulations provide some additional guidance on the types of insurance contracts that can be considered an obligation as well as those that are excluded. Whether the contract is grandfathered remains an issue of when the contract was originated: Insurance contracts that can be considered an obligation - A life insurance contract payable no later than upon the death of the insured individual may qualify as an obligation or immediate annuity contract payable for a certain period or for the life of the annuitant. This final definition alters the proposed regulations, which was simply a life insurance contract payable no later than the death of the insured, or a term certain annuity. Insurance contracts that cannot be considered an obligation - Consistent with the proposed regulations, the final regulations note that a legal agreement or instrument without a stated expiration or term will not be considered an obligation. Consequently, the following types of agreements would not seem to be an obligation: a deferred annuity contract, variable life or annuity contracts, or a life insurance or annuity contract that 6 Under Section 953(d), a foreign insurance company, that is a controlled foreign corporation for US tax purposes can make an election to be treated as a US corporation for tax purposes. 2013: The year in review 19

24 permits substitution of a new individual as the insured or as the annuitant under the contract. Material modifications of grandfathered obligations No additional clarity was provided for material modifications of grandfathered obligations beyond what was provided in the proposed regulations. As a result, for all obligations outside of debt, the determination of whether there has been a material modification will be a facts-and-circumstances test. Insurance and reinsurance premiums as withholdable payments As expected, insurance and reinsurance premiums remained in scope and are included in the definition of withholdable payment. This provision will have a significant impact on insurance brokers because premium payments are common within insurance brokers. It will also impact insurance companies broadly (beyond life insurance companies) who pay reinsurance premiums on US risks to foreign reinsurance companies. As a result, all insurance companies and insurance brokers that pay reinsurance premiums will have new documentation and reporting requirements as of January 1, It is also important to highlight that the regulations focus on insurance and reinsurance premiums in the context of withholdable payments, foreign insurance companies will be impacted by this provision and should consider their FATCA status. If they (including members of the EAG) are determined to be a FFI, they should consider becoming a participating FFI to avoid being subject to FATCA withholding on their reinsurance premium payments. Premium prepayments The final regulations clarify that a depository account does not include an advance premium or premium deposit received by an insurance company. In order to be excluded, such premium must be payable annually and the amount of the advance premium or premium deposit must not exceed the annual premium required under the contract. Indemnity reinsurance An indemnity reinsurance contract between two or more insurance companies is excluded from treatment as a financial account based on the definition of a cash value insurance contract. In these types of contracts, the ceding company maintains contractual relationship and liability with each insured (account holder). Although indemnity reinsurance was explicitly excluded by the final regulations, it is notable that assumption reinsurance, which the industry specifically requested to be removed, was not removed from scope. Assumption reinsurance is an arrangement where a ceding insurance company transfers permanently a block of policies, along with all related responsibilities. In an assumption reinsurance arrangement covering cash value insurance or annuity contracts, the assuming insurance company is expected to become the withholding agent, and thus, subject to FATCA requirements. Term life insurance The final regulations provide additional guidance regarding term life insurance contracts to prevent the front-loading of premiums. To be excluded, the final regulations require that the premium on a term life insurance contract be payable annually during the term of the contract or until the insured attains age 90, and that the premiums cannot decrease over time. Reserves There was some concern raised that a foreign insurance company's reserve activities could cause the insurance company to be considered a custodial or investment entity financial institution. The final regulations explicitly state that reserving activities of an insurance company will not cause such insurance company to be considered a depository institution, custodial institution, or investment entity. Applying FATCA to captive insurance arrangements While final regulations released in January 2013 provided additional clarity and details regarding the impact of FATCA, the definition of a financial institution still remains broad and includes a number of entities not normally considered as vehicles for tax evasion. Continuing developments in the taxation of insurance companies 20

25 A captive insurance company is an example of an entity that can produce surprising results when the FATCA rules are applied - affecting both the captive and other entities involved in the arrangement. This may occur notwithstanding that captive insurance companies provide a variety of financial and business benefits relating to insuring risks for many multinational enterprises. One surprising result is that some captives may fall under the definition of an FFI, thereby triggering various reporting and withholding obligations. Other foreign asset reporting requirements of the US owners of captive insurance companies may also arise. Domestic or foreign entity Enterprises may choose to insure their US business risk with a captive insurance company that is incorporated in either the United States or a foreign jurisdiction. Could this captive insurance entity constitute an FFI and therefore be subject to various obligations under FATCA? An important first step is determining whether such entity is foreign or domestic for FATCA purposes. Foreign captive insurance companies often make an election under Internal Revenue Code Section 953(d) to be treated as domestic entities for US federal tax purposes. But the final FATCA regulations have specific definitions - the term 'US person' under Treasury Regulation Section (b)(132) explicitly excludes a company that makes a Section 953(d) election, unless such entity is licensed to do business in a particular state. Definition of financial institution A foreign captive insurance company must also meet the definition of a 'financial institution' under the final regulations (or an intergovernmental agreement or IGA if applicable) in order to qualify as an FFI. The term FFI includes a specified insurance company that issues or is obligated to make payments with respect to certain cash value insurance or annuity contracts. Status as an NFFE Since many captives will not be considered to be FFIs under FATCA, they will be NFFEs. As an NFFE, any US source insurance or reinsurance premiums (premiums attributable to US business risk) should be considered withholdable payments under FATCA and subject to 30% withholding absent a valid withholding certificate (such as Form W-8BEN-E). As a result, US withholding agents still need to collect certain tax documentation from the captive and will now have to report such premium payments on Form 1042 and Form 1042-S. If the withholding agent does not withhold as required, it will be liable for the tax, interest, and penalties that were not withheld. Form Foreign asset reporting New Section 6038D, which was also enacted as part of FATCA, requires certain US taxpayers holding specified foreign financial assets (SFFAs) to report those assets to the IRS using Form 8938, Statement of Specified Foreign Financial Accounts, with their annual income tax return if certain thresholds are met. SFFAs generally include: financial accounts maintained by an FFI (that is not a US payor) the following SFFAs if they are held for investment and not held in an account maintained by a financial institution: stock or securities issued by a non-us person any interest in a foreign entity any financial instrument or contract that has an issuer or counterparty that is not a US person. A 'foreign entity' is defined as an entity that is not a US person. The term 'US person' under Section 6038D refers to the definition in the FATCA regulations and includes those captive insurance entities that have made a Section 953(d) election, provided such captive is not licensed to do business within a particular state. Although Section 6038D imposes requirements to disclose on US individuals and specified domestic entities, only individuals are currently required to file. Filing obligations for specific domestic entities will arise when the IRS issues additional regulations. Notice also provides that certain domestic entities will not need to report for years prior to those beginning after December 31, : The year in review 21

26 FATCA registration and reporting forms The IRS released draft Form 8957, Foreign Account Tax Compliance Act (FATCA) Registration, for public review and comment on April 5, The final Form 8957 was released on August 8, This form may be used by foreign financial institutions (FFIs) to register for FATCA purposes. In addition to Form 8957, the IRS has released a number of related forms over the past year. The table below lists the status of FATCA-related forms and instructions. Links are included when available. Purpose Form w/link Title Status Reporting 2014 Form 1042 Draft Instructions Reporting 2014 Form 1042-S Draft Instructions Reporting 2013 Form 1042-S Instructions Reporting 2014 Form 8966 Instructions Registration Form 8957 Instructions Documentary Evidence Withholding Certificate Withholding Certificate Withholding Certificate Withholding Certificate Withholding Certificate Withholding Certificate Form W-8BEN Instructions Form W-8BEN-E Instructions not released Form W-8ECI Instructions Form W-8EXP Instructions not released W-8IMY Instructions not released Form W-9 Instructions Form W-9 (SP) Instructions Annual Withholding Tax Return for U.S. Source Income of Foreign Persons Foreign Person s U.S. Source Income Subject to Withholding Foreign Person s U.S. Source Income Subject to Withholding Foreign Account Tax Compliance Act (FATCA) Report Foreign Account Tax Compliance Act (FATCA) Registration Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals) Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting (Entities) Certificate of Foreign Person s Claim That Income Is Effectively Connected With the Conduct of a Trade or Business in the United States Certificate of Foreign Government or Other Foreign Organization for United States Tax Withholding Certificate of Foreign Intermediary, Foreign Flow- Through Entity, or Certain U.S. Branches for United States Tax Withholding Request for Taxpayer Identification Number and Certification Solicitud y Certificacion del Numero de Identificacion del Contribuyente Final Final Final Final Final Final Final Final Draft Draft Final Final Continuing developments in the taxation of insurance companies 22

27 Section 953 and 831 elections Extension to file In PLR , the IRS granted a foreign insurance company an extension of time to file an election to be treated as a domestic corporation for US tax purposes, and to be subject to the alternative tax under Section 831(b). Insurance companies, other than life insurance companies, are generally taxed on their taxable income under Section 831(a). However, companies that meet certain requirements may elect to pay an alternative tax provided in Section 831(b) based on the company's taxable investment income. The taxpayer is a foreign insurance company that intended on making elections to be treated as a domestic corporation under Section 953(d) and to be subject to the alternative tax provide to certain insurance companies under Section 831(b). Both elections are due by the due date of the tax return for which the elections would have been effective (taking into account any extensions). The taxpayer, however, failed to make these elections in a timely manner and requested an extension of time to file under Treas. Reg. Section (a)(3). The taxpayer represented that the intention to make both elections had always existed. The taxpayer also noted that the request for relief was submitted before the IRS discovered that there was a failure to file the elections. Lastly, the taxpayer represented that it was not seeking to alter a return position for which an accuracy-related penalty has been or could be imposed under Section 6662 at the time it requested relief. Based on the taxpayer s representations, the IRS concluded that the taxpayer acted reasonably and in good faith and that the grant of relief would not prejudice the interests of the Government. As a result, the IRS determined that the necessary requirements were met to satisfy Treas. Reg. Section and granted an extension to file both elections. The IRS granted an extension of 60 days from the date of the letter ruling to file elections under Sections 831(b) and 953(d). UK multilateral tax information exchange On April 9, the Government of the United Kingdom (UK) announced an agreement with France, Germany, Italy and Spain to develop and pilot multilateral tax information exchange arrangements. Under the agreement, a wide range of financial information will be automatically exchanged between the five countries. The agreement is to help catch and deter tax evaders as well as to provide a template for wider multilateral automatic tax information exchange. The pilot will be based on the Model Intergovernmental Agreement (IGAs) developed between the five countries and the United States for purposes of the provisions of the US Foreign Account Tax Compliance Act. The intention is to help ensure that international tax evasion is tackled in a way that minimizes costs for both businesses and governments. In addition, the five countries jointly submitted a letter to the European Commission, stating the importance of its Action Plan in combating tax fraud and inviting other EU Member States to join in the pilot while also encouraging further legislative efforts to implement mandatory tax information exchange between EU Member States. The letter also cites specific actions that should be taken within the EU to strengthen this cooperation, including: (1) implementation of Article 8 of the Administrative Cooperation and Mutual Assistance Directive of 2011; (2) the effective implementation of the 'most favored nation' provision of article 19 of the same Directive; and, (3) agreeing on the amending proposal of the Savings Tax Directive of 2003 in order to extend its scope to relevant third countries. German draft PE regulations For financial years commencing on or after 1 January 2013, the German Ministry of Finance has amended Article 1 of its Foreign Tax Act to introduce the Authorized OECD Approach (AOA) for attributing profits to permanent establishments (PEs). On 5 August 2013, the German Ministry of Finance released for public comment draft 2013: The year in review 23

28 Regulations (PE Regulations) on how the AOA will apply in practice. Once passed, the PE Regulations will be retroactively effective from January They describe among other things how German and foreign insurance companies will be required to determine and document the profit that is allocable to foreign PEs of German insurers or German PEs of foreign insurers. Some of the rules in the PE Regulations codify concepts and principles from Part IV of the 2013 OECD Report on the Attribution of Profits to Permanent Establishments (PE Report) into German law. However, other rules significantly deviate from international consensus and raise concerns about their acceptability to Germany's tax treaty partners in cases of double taxation. Such deviation is likely to have a material impact on those multinational insurers with PE profit attribution systems that follow Part IV of the PE Report. Finally, the PE Regulations will impose a significant compliance obligation on insurance companies, requiring certain auxiliary and shadow calculations to be prepared on an annual basis for profits, assets, liabilities and equity attributable to PEs. Domestic assets & liability percentages In Rev. Proc , the IRS provided domestic asset/liability percentages and domestic investment yields needed by foreign life insurance companies and foreign property and liability insurance companies to compute their minimum effectively connected net investment income under Section 842(b), for taxable years beginning after December 31, For the 2012 tax year, the relevant domestic asset/liability percentages are: percent for foreign life insurance companies, and percent for foreign property and liability insurance companies. For the 2012 tax year, the relevant domestic investment yields are: 3.5 percent for foreign life insurance companies, and 3.7 percent for foreign property and liability insurance companies. Continuing developments in the taxation of insurance companies 24

29 Multistate Multistate Tax Commission (MTC) The MTC terminated the project regarding taxation of LLCs and partnerships owned by entities not subject to income tax. The long-standing project had resulted in a draft model statute, which would have imposed state income tax on flow-through entities owned 50% or more by entities not subject to that state s income tax. Ultimately, the insurance industry and trade groups, including Property Casualty Insurers Association of America, were able to convince the MTC Executive Committee that insurance companies were paying their fair share of state taxes. It is anticipated that the MTC will compile the project s proceedings in a white paper. Arizona H.B. 2546, effective 06/19/2013, provides for various definitions and clarifications for the life and disability insurance guaranty fund. S.B. 1179, retroactively effective from 06/30/2011, provides that taxpayers who filed the certification required for the first-year tax credit for employees hired in a qualified employment position pursuant to an Enterprise Zone are not required to file a certification for second- or third-year tax credits under the current statute. S.B. 1243, effective 05/02/2013, exempts certain nonprofit military mutual aid associations from all Arizona insurance laws, including the insurance premium tax laws. The exemption applies to nonprofit military mutual aid associations whose principal purpose is to provide life insurance and annuities to members of the U.S. Armed Forces or sea services (including officers or members who are enlisted, regular, reserve, active, retired, or honorably discharged) and their dependents or beneficiaries. Arkansas H.B. 1832, effective 04/22/2013, creates a new market premium tax credit. The credit is 0% for the first two credit allowance dates, 12% for the next three credit allowance dates, and 11% for the next two credit allowance dates of the investment. Credit is only permitted to the extent of the tax liability, but may be carried forward nine years. Credits may not be sold, but may be allocated to owners if direct investment is through a pass-through entity. S.B. 206, effective 08/05/2013, clarifies that a broker who obtains surplus lines insurance from a domestic surplus lines insurer is subject to the 4% surplus lines tax. The bill also clarifies that the insurance laws of this state regarding financial and solvency requirements apply to a domestic surplus lines insurer, unless the insurer is specifically exempt. S.B. 339, effective 08/05/2013, eliminates the requirement for foreign and alien surplus lines insurers on the Department of Insurance's approved list to file an annual statement of the insurer's financial condition, transactions and affairs. However, they must furnish information regarding the insurer's transactions and affairs on receipt of a written request from the Department of Insurance. The bill also provides that the annual statement convention blank be verified by the oath of the insurer's president or vice president and treasurer, secretary, or actuary; previously the treasurer was not an authorized individual. S.B. 362, effective 09/17/2013, provides an exemption for health care sharing ministries from gross premiums tax; previously, only burial associations were exempt. S.B. 789, effective 03/21/2013, reduces the premium tax rates for captive insurance companies to 0.25% on the first $20 million, 0.15% on the next $20 million, and 0.05% on each dollar thereafter. Previously, the rates were 0.4% on the first $20 million, 0.3% on the next $20 million, 0.2% on the next $20 million, and 0.075% on each dollar thereafter. The total tax paid by captive insurance companies is capped at $100,000 per year; previously, the tax did not have a cap. 2013: The year in review 25

30 California A. 32, effective 10/07/2013, but applicable to taxable years beginning on or after January 1, 2013, increases the aggregate amount of qualified investments per calendar year for which Community Development Financial Institution (CDFI) investment credits may be claimed by all taxpayers against California franchise and income, personal income, and insurance gross premium tax, from $10 million to $50 million. However, the total amount of qualified investments certified by the California Organized Investment Network (COIN) in any calendar year to any one CDFI, together with its affiliates, is limited to 30% of the annual aggregate amount of qualified investments certified. If, after October 1, COIN determines that the availability of tax credits exceeds the demand for the credits, then a CDFI that has been allocated 30% of the annual aggregate amount of qualified investments may apply to be certified for any remaining credits in that calendar year. COIN must also reserve 10% of the annual aggregate amount of qualified investments for investment amounts of less than or equal to $200,000. If, after October 1, there remains an unallocated portion of that reserved amount, then qualified investments in excess of $200,000 may be eligible for the remaining unallocated portion. COIN is now authorized to certify credits until January 1, 2017; previously, the date was January 1, A. 98, effective 06/27/2013, creates the Seismic Safety Account and imposes an assessment of $0.15 per property exposure on each person who owns real, commercial, or residential property covered under a property insurance policy. Either the insurance company must collect the assessment from the policyholder, or the policyholder may remit the assessment on the insurer's behalf. The Department of Insurance is authorized to charge a late fee of 1.5% per month. A. 952, effective 10/12/2013, permits a credit against the income, franchise and premium tax for buildings located in designated difficult development areas or qualified census tracts allocated in the specified amounts, provided that the amount of credit allocated under the IRC Section 42 is computed on 100% of the qualified basis of the building. Additionally, the California Tax Credit Allocation Committee may allocate a credit for buildings located in designated difficult development areas or qualified census tracts that are restricted to having 50% of its occupants be special needs households provided the credit allowed under this section does not exceed 30% of the eligible basis of that building. Also, the California Tax Credit Allocation Committee may exchange federal low-income housing credits for state low-income housing credits. S.B. 476, effective 09/24/2013, decreases the special purpose vehicle assessment to $0.25 per vehicle until January 1, 2016 (currently $0.30 until January 1, 2015), not to exceed $0.25 per vehicle thereafter. Additionally, the legislation deletes the January 1, 2015 repeal date for the $0.50 per vehicle assessment to fund the fraud fund. Colorado H.B. 1245, effective 05/23/2013, creates a credit in the amount equal to the quarterly premium taxes paid by the insurance company for the July 31 st tax payment against the gross premium tax for donations to the Colorado Health Benefit Exchange. The credit is capped at $5 million. A qualified taxpayer claiming this credit is not required to pay any additional retaliatory tax as a result of claiming the credit. DOI Bulletin No. B-2.6: When filing quarterly premium tax payment, Colorado is requesting to include with payments a statement of intent declaring a contribution to the Colorado Health Benefit Exchange, which must be filed by July 31. (Effective 06/28/2013) Connecticut H.B. 6704, creates a tax amnesty running from September 16, 2013 to November 15, 2013 for all state taxes other than motor carrier road taxes that should have been paid during any taxable period ending on or before November 30, All penalties and 75% of the otherwise applicable interest will be waived during the amnesty period. A 25% penalty will be assessed for any taxpayer that does not come forward during the established amnesty period. Additionally, a moratorium for fiscal years 2014 and 2015 is established on the film Continuing developments in the taxation of insurance companies 26

31 production credit; the Economic and Community Development Commissioner may offer payments to replace urban and industrial sites reinvestment tax credits; and the temporary cap on the maximum insurance premium tax credits is extended until calendar year H.B. 6705, effective 07/01/2013, provides for reporting and certification requirements for the credit against the corporation business tax, insurance premiums tax, and certain taxes on public utilities for converting a listed historic commercial or industrial structure to mixed residential and nonresidential use. Generally, if a taxpayer's mixed-use rehabilitation plan is certified, then the taxpayer may receive a tax credit equal to 25% of the projected qualified rehabilitation expenditures or 25% of actual qualified rehabilitation expenditures. However, if the rehabilitation results in a specified number of affordable housing units for either rent or purchase, which remain available and affordable for at least a 10- year period, then the credit is equal to 30% of the qualified rehabilitation expenditures. Additionally, the responsibility for certifying that a rehabilitation project complies with affordable housing requirements is transferred from the Department of Economic and Community Development to the Department of Housing. H.B. 6706, effective 07/01/2013, establishes a moratorium for fiscal years 2014 and 2015 on the film production tax credit eligible against the premium tax. For fiscal year 2015, an exception to the moratorium exists for a motion picture that conducts at least 25% of its principal photography days in a Connecticut facility that receives at least $25 million in private investment and opens for business on or after July 1, S.B. 1052, effective 06/25/2013, provides for the ordering of tax credits for purposes of the insurance premium tax. Credits shall be claimed in the following order: 1) credits that can be carried back to a preceding calendar year or years by (a) first, claiming any credit carry-back that will expire first prior to any credit carrybacks that will expire in the future or will not expire at all, and (b) then credit carry-backs that expire at the same time in the order in which the company receives the maximum benefit; 2) credits that cannot be carried backward to a preceding calendar year or years and that may not be carried forward to a succeeding calendar year or years in the order in which the company may receive the maximum benefit; and 3) credits that may be carried forward to a succeeding calendar year or years by (a) claiming any credit carry-forward that will expire first prior to any credit carry-forward that will expire later or will not expire at all, and (b) then credit carry-forwards that will expire at the same time in the order in which the company may receive the maximum benefit. S.B. 1131, effective July 1, 2015, expands the historic homes rehabilitation credit by: making the credit available statewide, not just in statutorily designated target areas; reducing the minimum amount of money that must be spent rehabilitating a historic home from $25,000 to $15,000; and increasing the maximum amount of credit businesses can claim from $30,000 to $50,000 per unit when contributing funds to nonprofit corporations rehabilitating historic homes. Additionally, the legislation updates state law to conform with the 2011 elimination of the Connecticut Commission on Culture and Tourism and the transfer of its powers, duties, and offices to the Department of Economic and Community Development, including the transfer of the State Historic Preservation Office and its role in certifying rehabilitated historic homes for the tax credits. DOR Announcement 2013(1): The DRS announced Connecticut Insurance Guaranty Association insurer members must repay to the DRS, on or before February 14, 2013, a portion of the December 20, 2012 refunded assessments with respect to Mission Insurance Company (2004 base year), LMI Insurance Company, Legion Insurance Company, and Security Indemnity Insurance Company. (01/14/2013) Policy Statement 2013(5): The Connecticut DRS has issued a new policy statement concerning requests for waivers of civil penalties. The publication supersedes PS 2010(1). (09/20/2013) Delaware H.B. 99, effective 07/03/2013, increases the rate changes/deviations fee, filing form fee, advertising and/or rule filings fee for each insurance policy or annuity contract or application from $50 to $100. H.B. 52, effective 03/28/2013, removes the sunset provision relating to the corporate franchise tax. The following rates (previously scheduled to be reduced effective January 1, 2013) will remain in effect: the maximum franchise tax of $180,000, the assumed par 2013: The year in review 27

32 value multiplier of $350, and the minimum assumed par value tax of $350. H.B. 215, effective 07/01/2013, increases the premium tax on surplus lines from 2% to 3%. The proceeds from the increase will be used to fund medical coverage for retired State, County, and Municipal police officers and firefighters. S.B. 44, effective 07/15/2013, amends the fire department fund premium reporting requirement to provide that every insurance company covering risks of loss on Delaware real and personal property to submit a report on its gross premiums from all of its business in the counties of New Castle, Kent, and Sussex, and the City of Wilmington, for the previous calendar year. Delaware maintains a fund to be used for assisting and maintaining its fire department and fire companies. The amount of premiums paid to this fund by insurers is calculated from detailed reports on premium income submitted annually by the insurers to the insurance commissioner. Florida H.B. 4013, effective 07/01/2013, eliminates the cap on tax refunds a business, including insurance, could receive over all fiscal years for both: 1) the qualified defense contractor and space flight business tax refund; and 2) the qualified target industry businesses refund. The maximum amount for both refund programs was $7 million, except that $7.5 million was allowed under the qualified target industry businesses refund for projects located in an enterprise zone. S.B. 406, effective 05/20/2013, provides that the cap on the corporate income tax credit for property taxes paid on certain improvements made in enterprise zones applies to each eligible location rather than for each business entity. Increases the total amount of New Markets Income Tax Credits by $15 million and increases the annual amount by $3 million. S.B. 692, effective 07/02/2013, deletes various corporate income tax provisions that have expired, including the Unemployed Tax Credit Program. S.B. 1516, effective retroactive to 01/01/2013, adopts the 2013 version of the Internal Revenue Code, incorporates the federal definition of adjusted federal income into state law, authorizes the Department of Revenue to adopt emergency rules, and provides for retroactive application to January 1, The legislation also continues statutory provisions, adopted by Florida in both 2009 and 2011, to decouple from federal bonus depreciation and enhanced expensing provisions. S.B. 1770, effective 07/01/2013, changes the name of the Florida Hurricane Catastrophe Fund Finance Corporation to the State Board of Administration Finance Corporation, creates the Florida Catastrophe Risk Capital Access Facility to increase access to riskcapital markets by small domestic insurers, and provides that Citizens Property Insurance Corporation is subject to civil actions as an insurance agent of the state covered by sovereign immunity. Emergency Regs. 12CER13-02: Procedures are provided for a target industry business that is allowed and claims a tax credit against federal corporate income tax for qualified research expenses to claim a Florida research and development tax credit against corporate income tax, as provided in Fla. Stat. Section This emergency rule provides that: 1) the credit is available annually for tax years beginning on or after January 1, 2012; 2) beginning March 20 of each year, a target industry business must file an Allocation for Research and Development Tax Credit for Corporate Income Tax with the Department; 3) the Florida corporate income tax credit is to be taken in the same tax year as the federal credit for increasing research activities is taken; 4) a business taking the tax credit must provide a copy of the federal forms regarding the related federal tax credit with the business' Florida corporate income tax return; 5) the calculation of the Florida tax credit and examples of the calculations are required; 6) the credit is limited to 50% of the Florida income tax liability after all other tax credits are applied; 7) any unused credit may be carried forward up to five tax years; and 8) there are recordkeeping requirements for those businesses taking this credit. (Effective 03/05/2013) Emergency Regs. 12CER13-01, 12CER13-04, 12CER13-06: The regulations provide procedures for taxpayers Continuing developments in the taxation of insurance companies 28

33 subject to the adjustments contained in Fla. Stat. Section (1)(e) for IRC Section 179 expense in excess of $250,000 (for tax years beginning in 2010) and $128,000 (for tax years beginning in 2011, 2012, and 2013), and bonus depreciation under IRC Section 167 and IRC Section 168(k), for assets purchased in This emergency rule: 1) provides the additions that taxpayers are required to add back to the amount of the federal deduction claimed under IRC Section 167 and IRC Section 168(k) for bonus depreciation (for assets placed in service in 2013) and under IRC Section 179, that exceeds $128,000 (for tax years beginning in 2013); 2) provides the subtractions that are available in each of seven tax years, beginning with the year an addition is made under Fla. Stat. Section (1)(e); 3) requires taxpayers to maintain a schedule reflecting all adjustments made under Fla. Stat. Section (1)(e); 4) provides that these adjustments do not affect the basis of the property; and 5) provides when the subtractions under Fla. Stat. Section (1)(e), are allowed. (Effective 08/14/2013) Admin. Code Section 12B-8.002: The rule concerning the tax on wet marine and transportation insurance is repealed as the rule is redundant of Fla. Stat. Section (Effective 01/17/2013) Admin. Code Section 12B-8.003: By reference, the code adopts changes to forms used by the DOR in the administration of the insurance premium taxes, fees, and surcharges. (Effective 01/17/2013) Admin. Code Sections ; ; ; ; ; ; ; ; and : The codes were amended, created, or repealed to: 1) update provisions for administering the Department's authority to compromise or settle outstanding liabilities for tax, penalty, interest, and service fees; 2) remove the requirement that a taxpayer's written request be required for the Department to settle or compromise such outstanding liabilities; and 3) remove unnecessary or redundant provisions. (Effective 10/29/2013) Admin. Code Section : The code was amended to provide that the Executive Director of the Department has the authorization to issue a delegation of authority, which will designate authorized positions to enter into consent agreements with a taxpayer. These delegations must be in writing, signed by the Executive Director, and maintained by the Office of the General Counsel. (Effective 10/29/2013) Admin. Code Section : The code was amended to: 1) simplify the tax types and filing method selections contained in Form DR-600 (Enrollment and Authorization for e-services Program); and 2) implement changes that will update the privacy notice statement on Form DR-654 (Request for Waiver from Electronic Filing), used by the DOR in the administration of the e- Services program. (Effective 05/09/2013) Admin. Code Section : Recordkeeping requirements for electronic storage usage and Electronic Data Interchange are updated. (Effective 05/09/2013) Technical Assistance Advisement 13C1-003: A parent/subsidiary consolidated filing group was granted permission to cease filing Florida consolidated tax returns, based on provisions of the Florida Administrative Code that address changes in law and business circumstances. During the taxpayer's first election of consolidated filing, the taxpayer was engaged in originating, purchasing, and servicing federallyinsured student loans. However, since its initial election, the taxpayer has significantly changed its business operations by diversifying its products and services, acquiring several independent companies, and discontinuing originating private FFELP education consolidation loans. Further, since the taxpayer s election for consolidated filing, the taxpayer's revenues from student loan/guaranty servicing have significantly decreased as a percentage of it total revenues. Further, the taxpayer is no longer in the business of originating private student loans and has nearly sold its entire private student/consolidation loan portfolio; and since July 1, 2010, as a result of the Health Care and Education Reconciliation Act of 2010, the taxpayer is prohibited from originating new FFELP loans, since the act requires all new federal student loans to be originated through the Federal Direct Loan Program. These changes to the taxpayer's overall business model, and its entrance into and significant growth in new business lines, indicate major changes in circumstances have occurred, sufficient 2013: The year in review 29

34 for the Department to grant its request to discontinue filing Florida consolidated corporate income tax returns. (05/08/2013, released 7/25/2013) Tax Information Publication 12(B)8-01: An updated address/jurisdiction database for insurance premium tax is available online. It contains changes submitted by the local jurisdictions that reflect annexations, new addresses, and other relevant changes. Insurance companies must register online to download the address/jurisdiction database files for insurance premium tax. The current access code that is needed to register and create a user name and password is INS , and is valid until September Insurance companies use this database to allocate premiums to the proper local taxing jurisdictions for Firefighters' and Police Officers' Pension Trust Funds. (04/11/2013) Tax Information Publication 13C01-01: The research and development tax credit allowed under Fla. Stat. Section applies to an industry business that claims, and is allowed, a research credit against federal corporate income tax for qualified research expenses as provided in IRC Section 41. The combined total amount of research and development tax credits that may be granted during any calendar year is $9 million to all business enterprises. In order to receive the tax credit, an application must be submitted beginning on March 20, 2013, 8:00 a.m. eastern time. Tax credit applications approved for the 2012 calendar year will be based on qualified research expenses incurred during the 2012 calendar year for tax years that begin in The target business enterprise must be a corporation, as defined in Fla. Stat. Section , and a target industry business, as defined in Fla. Stat. Section The Information Bulletin provides guidance on how to apply for this credit. (03/07/2013) Tax Information Publication 13C01-02: A tax credit for property tax paid can be taken against the Florida corporate income tax if a business performs one of the following within an enterprise zone: 1) starts a new business, 2) expands an existing business, or 3) rebuilds an existing business located in the state. Beginning May 20, 2013, taxpayers can claim the enterprise zone property tax credit for each location that is eligible to claim it, rather than restricting the credit to no more than $25,000 or, if at least 20% of the full-time employees of the business reside in an enterprise zone, $50,000 on a single Florida corporate income tax return. All eligibility and credit application filing requirements remain the same. (06/20/2013) Tax Information Publication No. 13ADM-02: The tax credit cap amount for the Florida Tax Credit Scholarship Program, which enables taxpayers to receive a dollar-fordollar credit for their private voluntary contributions to nonprofit scholarship-funding organizations against certain taxes including, among others, sales and use tax, corporate income tax, severance tax, and insurance tax, will increase to $357,812,500 for the state fiscal year. (06/24/2013) Georgia Rule : Taxpayers and third party bulk filers are required to register with the DOR using the Georgia Tax Center instead of the e-file & Pay System. (Effective 10/03/2013) Directive DIR 13-EX-3: Beginning January 1, 2014, the Georgia Department of Insurance will only accept electronically filed quarterly and annual premium tax returns. Insurers can e-file via TriTech or the DOI website directly. (07/08/2013) Idaho H.B. 178, effective 07/01/2013, extends the sunset date for the provision authorizing the Idaho Immunization Assessment Board to impose an annual assessment against health insurers and administrators from July 1, 2013, to July 1, H.B. 196, effective 07/01/2013, clarifies the timing of the Idaho GFA tax offset to be 20% of the amount of the assessment for five years, beginning with the premium tax due with respect to the year of the assessment and for each of the four succeeding years thereafter. Previously, the premium tax could be offset in each of the five calendar years following the year in which the assessment was paid. Continuing developments in the taxation of insurance companies 30

35 H.B 197, effective 07/01/2013, repeals and replaces Idaho insurance holding company statutory provisions to match the NAIC model law. However, no substantive changes are made concerning the gross premium taxation of the subsidiary or the corporate income taxation of the holding company. S.B. 1100, effective 07/01/2013, exempts health care sharing ministries from the Idaho Insurance Code, including premium tax. S.B. 1145, effective 07/01/2013, extends the period during which the lower 2% industrial administration fund premium tax rate remains in effect until December 31, Accordingly, the tax rate increases to 2.5% on January 1, Previously, the 2% rate would have been in effect through December 31, 2013 and the rate would have increased to 2.5% on January 1, Illinois S.B. 20, effective 07/25/2013, provides that the enterprise zone credits, which as of July 25, 2013 have a term of 20 years, may be extended by municipal or county ordinance for an additional 10 years. Additionally, the $500 corporate and personal income tax credit for each job created in a river edge redevelopment zone and foreign trade zone or subzone is repealed. S.B. 1329, effective 06/19/2013, provides that the Independent Tax Tribunal will exercise jurisdiction on and after January 1, Any protests received prior to January 1, 2014 will continue to be filed with the Department of Revenue. Any administrative proceedings after June 1, 2013 may be subject to the procedures of the Independent Tax Tribunal Act if the taxpayer elects. Additionally, the irrevocable election has been changed and must now be made on or before January 1, 2014, but no later than February 1, S.B. 1730, effective 08/02/2013, provides that the Department of Insurance shall have a lien upon all the real/personal property of any company/person for taxes, fees, fines, penalties, interest, other charges, imposed pursuant to the Code under the following conditions: 1) any assessment or final order has been issued, 2) a tax return is filed without payment of the tax, or 3) the penalty shown therein is due. H.B. 3157, effective 08/16/2013, provides for a taxpayer petition and DOR authority to require alternative apportionment if the standard apportionment does not fairly represent the "market for the taxpayer's business in the state" for tax years after Further, for taxable years after 2013, common ownership is defined as direct or indirect ownership of an interest in the taxpayer that allows that person, or any related party of that person, to control the business activities of the taxpayer. A related party of a person means any other person who is a member of the same unitary business group as that person, determined without regard to the prohibitions against foreign entities, special apportionment, or by virtue of being a partnership. Metropolitan Life Insurance Co. v. Hamer, Illinois Supreme Court, No , June 20, 2013: The Illinois Supreme Court reversed the Appellate Court decision, holding that the Department of Revenue may impose a double interest penalty against a taxpayer that incurs additional tax liability resulting from an audit that is pending during an amnesty period. In 2003, the legislature enacted the Tax Delinquency Amnesty Act for taxpayers who paid any tax owed for periods beginning in June 1983 to July Taxpayers who participated in the program were required to make their full payment during the amnesty period from October 1 through November 15, The legislature also amended the Uniform Penalty and Interest Act, Section 3-2, to provide a double interest penalty for taxpayers who were eligible for amnesty but failed to pay their liability during the amnesty period. In May 2002 the Department of Revenue began an audit of MetLife for tax years 1998 and Following the close of the audit in 2004, the Department determined that MetLife owed additional income tax. MetLife paid the tax in The Department later determined that MetLife owed additional taxes and reopened the audit to allow MetLife to pay the additional amount. The Department then issued an assessment contending that MetLife was liable for the double interest penalty for failure to pay its tax liabilities during the amnesty period. MetLife appealed to the circuit court, arguing that the double interest penalty did not apply because the audit was not completed until after the amnesty period had expired. MetLife also argued that the statutory phrase "all taxes due" refers to taxes assessed and due and not an undeterminable amount that is assessed as a result of a federal or state audit. The circuit court found in favor of MetLife, and the Department appealed to the Illinois Court of Appeals, 2013: The year in review 31

36 First Division. The court held that MetLife was not liable for the double interest penalty because the statutory phrase "all taxes due" means those taxes that a taxpayer knew were due and owed during the amnesty period. It explained that MetLife could not have participated in the amnesty program because the Department did not make its final determinations until after the amnesty period. The court rejected the Department's argument that under Illinois Income Tax Act Section 601(a), MetLife's 1998 and 1999 taxes were due when the tax return for those years was due. The court found that Section 601 does not control the interpretation of "all taxes due." Moreover, the court determined that MetLife paid the amount of its taxes due in 1998 and 1999 when it initially filed its tax returns. It noted that MetLife did not become liable for the additional taxes until 2004, which was when it was discovered through the audit that the company had underpaid taxes. Finally, the court rejected the Department's reliance on 86 Ill Adm. Code , which requires a taxpayer to pay taxes based on a goodfaith estimate of an unknown amount, and held that the Department exceeded its authority in promulgating this rule. The circuit court's decision was affirmed. Marriott International, Inc. v. Hamer, Illinois Supreme Court, No , September 25, 2013: Similar facts and circumstances to Met Life (above), but the Appellate Court had held for the Department of Revenue. Coupled with the decision in Met Life, the Illinois Supreme Court denied review. Wendy's International v. Hamer, et. al., Ill. App. Ct. (4th), Dkt. No , October 7, 2013: The Illinois Appellate Court has reversed and remanded the trial court's summary judgment holding that the taxpayer was a bona fide insurance company for federal income tax purposes, because it met the requirements during applicable years and engaged in the necessary risk shifting and risk distribution, and therefore should be treated similarly for Illinois income tax purposes. The taxpayer created a wholly owned captive insurance company in Vermont to insure affiliated companies and to reduce insurance expenses and obtain coverage not easily available in the marketplace. The captive insurance company received royalty income after acquiring the taxpayer's affiliate that held the taxpayer's trademarks. The court noted that the captive insurance company's only business was to provide insurance and that receiving royalty income from the affiliate does not factor into the decision as the insurance company is not engaged in the business of licensing intellectual property. Additionally, the court noted that ownership of the affiliate actually enabled the captive insurance company to meet the capitalization requirements. The court further noted that the captive insurance company met the definition of an insurance company for federal income tax purposes since the character of the business was insurance and the insurance company's planning with affiliates met requirements for risk shifting and risk distribution. DOR Info Bulletin No. FY : New reporting requirements imposed on businesses receiving incentives in enterprise zones and river edge redevelopment zones, high impact businesses receiving incentives, utility providers and zone administrators, which became effective for the 2012 tax year, require that businesses receiving tax incentives from enterprise zones and zone administrators provide certain information concerning the incentives received to the Department of Revenue each year by March 30. Reports may be filed using the Department's online reporting system, WebFile. For 2012 reports, which are due on March 30, 2013, the Department will grant an automatic 60-day extension until May 29, 2013 to file the necessary reports. Failure to report the benefits per the Department's regulations will result in ineligibility to receive future incentives. (020/2/2013) Indiana H.B. 1003, provides that a taxpayer may carry forward a school scholarship income tax credit for taxable years beginning after December 31, 2012 (previously there was no carryforward). The legislation also establishes a preschool education scholarship and tax credit program. H.B. 1324, effective 01/01/2014, provides an income tax credit for placing into service a gas-powered vehicle that has a gross weight rating of more than 33,000 lbs. Any unused tax credit may be carried forward for no more than six years and may not be carried back or refunded. The total amount of the tax credits granted to a person for a particular taxable year may not exceed $150,000. The credit is applicable to taxable years beginning after December 31, A person is not entitled to a tax credit for placing a qualified vehicle into service after December 31, Continuing developments in the taxation of insurance companies 32

37 United Parcel Service, Inc. v. Indiana Department of State Revenue, Indiana Tax Court, No. 49T TA- 24, September 16, 2013: A package delivery corporation s affiliated foreign reinsurance companies must be physically present in Indiana to satisfy the statutory requirement of "doing business," for purposes of Indiana s gross premium tax. Previously, the Indiana Supreme Court found that the foreign reinsurance companies were not subject to Indiana s gross premium privilege tax statute, which meant that the reinsurance companies were not exempt from the Indiana gross income tax; however, the evidence failed to show whether the reinsurance companies were "doing business" within Indiana, which would make them "subject to" the premium tax. The court clarified that foreign reinsurers must be physically present in Indiana to satisfy the statutory requirement of "doing business" in order to be "subject to" the premium tax. DOR Letter of Finding : Three related entities were entitled to file a consolidated gross income tax return allowing the elimination of intercompany transactions, even though two of the entities had withdrawn their registration with the Secretary of State to conduct business in Indiana. On audit, the DOR determined that two of the entities were no longer registered with the Secretary of State and therefore, could not be included in consolidated return since the entities were no longer able to conduct business in Indiana. The taxpayers argued that they were entitled to file a single, consolidated gross income tax return pursuant to a prior settlement agreement and the agreement precludes the Department's position to the contrary. The agreement stated that any ambiguities are to be strictly construed against the party who employed the language and who prepared the contract; therefore, the Department determined that the taxpayers were entitled to file a consolidated gross income tax return. (Effective 04/01/2013) DOR Letter of Finding : The DOR determined that the Texas Franchise Tax was an income based tax and, therefore, required to be added back to state taxable income. (Effective 04/01/2013) E-file Mandate: The final installment in a series of DOR reminders regarding the electronic filing mandate for filing and remitting sales and withholding taxes. The latest installment discusses how authorized practitioners can file and pay business taxes on a client's behalf using INtax. In addition, practitioners can use INtax to correspond with the DOR online through a confidential and secure inbox, schedule payments in advance of due date, file returns even when no tax is due for a filing period, and view client payment and return history. (01/11/2013) Iowa H.B 620, retroactively effective 01/01/2012, increases the Economic Development Authority s tax credit cap to $170 million per year from $120 million. Further, the economic development credits awarded during the fiscal year, but declined by the recipient on or before June 30 of the next year, may be reallocated, authorized, and awarded during the year in which they were declined. Declined credits that are awarded to a different recipient do not count toward the aggregate credit limit for the year in which they were awarded to the second recipient. The legislation also increases the cap on the Endow Iowa Tax Credit from $3 million to $6 million per year. Lastly, the Economic Development Authority collects a onetime, $500 compliance cost fee from the business before issuing any tax incentive certificate under the high quality jobs program and the enterprise zone program. If an agreement has an aggregate tax incentive value of $100,000 or greater, the fee is 0.5% of the value of the tax incentives claimed and is collected from the business after the incentive has been claimed by the business. Kansas H.B. 2107, effective 07/01/2013, creates the Electronic Notice and Document Act, which allows the transfer of electronic insurance notices and documents when the insurer has obtained the consent of the other party. The recently enacted legislation also corrects invalid and obsolete statutory references in the insurance code and allows dividends to be credited to a member s account and distributed in accordance with a plan adopted by the board of directors of a mutual insurance company that is 2013: The year in review 33

38 organized to provide health care provider liability insurance. Louisiana H.B. 726, effective 08/01/13, establishes a New Markets Tax Credit for investment in qualified low-income housing to be taken against the premium tax of 0% of the investment for the first two credit allowance dates and 10% of the investment for the next four credit allowance dates. The credit cannot exceed the tax liability but may be carried forward 10 years and can be sold. Total statewide investments of $125 million are available and will be allocated/certified 50% on September 1, 2013 and 50% on September 1, H.B. 543, effective 06/10/2013, conforms state law to the Dodd-Frank Act in terms of home state definition and authority for jurisdictions to tax unauthorized insurance. H.B. 456, effective 06/21/2013, directs the Department of Revenue to develop and implement a tax amnesty program for qualifying taxpayers for a period of at least two months occurring before December 31, 2013, for a period of at least one month in 2014 between July 1, 2014 and December 31, 2014, and for a period of at least one month in 2015 between July 1, 2015, and December 31, The amnesty program would apply to all taxes administered by the Department of Revenue, with the exception of motor fuel taxes and any penalties assessed based on the failure to submit information reports that are not based on an underpayment of tax. The Act authorizes the Department of Revenue to waive certain penalties and interest charges related to the taxes involved. Louisiana Admin. Code Section 61:III.2503: Beginning with returns due on April 15, 2013, taxpayers seeking to obtain a corporation income and franchise tax return filing extension must submit the extension request electronically on or before the return due date. An electronic extension request can be submitted via the Department's website, tax preparation software, or any other electronic method authorized by the Secretary of Revenue. (Effective 01/20/2013) OAG, : Under the provisions of La. Rev. Stat. Ann. Section 22:834(A), municipalities and parishes can sign a contract with the Louisiana Municipal Advisory and Technical Assistance Bureau (LaMATS) to authorize LaMATS to collect their insurance premium taxes. LaMATS is a wholly-owned for-profit subsidiary of the Louisiana Municipal Association (LMA) and was created to contract with Louisiana municipalities for the collection of local insurance premium taxes. After a locality adopts an ordinance implementing its tax and the locality contracts with LaMATS to collect the tax, LaMATS is authorized under statute to access any information regarding local taxes deemed necessary or proper for the enforcement of Louisiana state laws or local ordinances. Accordingly, in those contractual relationships, LaMATS possesses the same authority as any municipality or parish acting alone in collecting the insurance premium taxes. This authority includes the ability to request access to any information regarding local taxes deemed necessary for the purpose of auditing records to ensure that companies are complying with necessary legal requirements. (05/22/2013) Revenue Ruling : The ruling provides guidance regarding statutory prescription or statute of limitations provisions that prohibit untimely tax overpayment refund or credit claims. The DOR takes the position that the term refund or credit refers to the ultimate disposition of an overpayment, either in the form of a credit that is applied to a prior or subsequent tax year or a refund to the taxpayer, and not the tax credit being claimed, which ultimately results in the overpayment. In such cases a prescription adjustment will adjust the overpaid accounts. This means that a refund or credit for prior or subsequent periods will not be allowed even though an overpayment exists. Instead, a tax credit up to the amount of tax computed for the tax period at issue will be allowed in order to eliminate or zero out the tax liability for the period. Additionally, the DOR takes the position that federal RARs do not open prescribed periods for issues not related to the federal adjustment. (06/18/2013) Revenue Information Bulletin No : The bulletin provides guidance regarding the Louisiana New Markets Jobs Act created by Act 265 (H.B. 726), Laws 2013, Continuing developments in the taxation of insurance companies 34

39 which gives a tax credit against the premium tax to investors making a qualified equity investment into a qualified community development entity which, in turn, makes a qualified low-income investment in a qualified low-income business in the state. The credit is equal to the purchase price paid for the qualified equity investment multiplied by the applicable percentage for such credit allowance date. Qualified community development entities must apply with the Louisiana Department of Revenue to certify any issued equity investments by the entity. Applicants will receive a grant or denial of certification of the qualified equity investment within 30 days from the date that the DOR receives the completed application containing the information set forth in R If any part of the application is denied by the DOR, the qualified community development entity will be informed of reasons for denial. The DOR will certify qualified equity investments in the order in which applications are received. The DOR, in partnership with the DOI, will promulgate rules for administering the Act. (07/26/2013) Revenue Information Bulletin : The DOR will institute an amnesty program beginning September 23 and ending November 22 that would be applicable to all taxes except motor fuel taxes and penalties for failure to submit information reports that are not based on underpayment of tax. Amnesty will only be granted to taxpayers who pay the entirety of the tax and costs due, plus half of the outstanding interest balance. Taxpayers seeking amnesty must submit an application, and business taxpayers must file returns with their application. To receive an amnesty invitation, businesses must be registered with the department, and individuals must file any outstanding tax returns. If the taxpayer's application is approved, the remaining half of the interest and penalties associated with the tax periods for which amnesty is applied will be waived. (08/01/2013) Maine H.B. 205, effective 10/08/2013, ensures that the fire investigation and prevention tax rate will remain at 1.4% for all fire insurance companies and associations doing business in Maine. The Department of Professional and Financial Regulation, Bureau of Insurance is required to determine the basis percentage of fire risk allocated to each line of insurance every five years. Fire insurance companies and associations are required to pay the established percentage based on the basis allocation. H.B. 778, effective 05/07/2013, clarifies that the maximum investment is determined on a per-project basis regardless of whether there is common ownership of each project, for the purposes of the new markets capital investment credit against income and insurance premium taxes. The term project is defined. Lastly, the legislation stipulates that for projects where the $40 million limitation applies the taxpayer must create or retain more than 200 jobs. S.B. 236, effective 05/30/2013, authorizes the Superintendent of Insurance to adjust the assessment rate for the Rural Medical Access Program by rule. The current assessment rate is 0.75% of professional liability insurance premium. The assessment rate may not result in expected collections exceeding $500,000 per assessment year and may not exceed 0.75% of premium unless the fund is less than $50,000; however, the maximum rate may not exceed 1.0%. Maine Rule 325: The Finance Authority of Maine (FAME) has amended its regulation governing the new markets capital investment credit against corporate income, personal income, and insurance premiums taxes to clarify that a "qualified low-income community investment" must be made prior to FAME certifying a "qualified equity investment" for the credit. The amendment also implements certain legislative changes that were enacted in 2013 changing the credit program limits from $10 million and $40 million per business to $10 million and $40 million per distinct project undertaken by a business. The new markets capital investment credit, which is modeled after the federal credit (IRC Section 45D), is available for certain taxpayers that invest in economically distressed areas. (Effective 09/01/2013) 2013: The year in review 35

40 Maryland H.B. 228, effective 06/01/2013, provides an exemption from the insurance premiums tax for a qualified nonprofit health insurance insurer that is established under Section 1322 of the Federal Patient Protection and Affordable Care Act. Massachusetts H.B. 3538, effective 07/01/2013, requires taxpayers to provide all accounting records and information in a searchable electronic format to the commissioner to the extent that the taxpayer maintains such records in electronic format. Offset agreements between Massachusetts, the U.S. Secretary of Treasury and other states are authorized for the collection of federal and/or state tax liabilities owed from tax refunds due in the other jurisdiction. Michigan H.B. 4586, effective 10/15/2013, amends the State Revenue Act with respect to VDAs as follows: 1) includes the Corporate Income Tax among the taxes covered by the lookback period of a VDA; 2) provides for a combined 48-month lookback period for the former Single Business Tax, the Michigan Business Tax and the Corporate Income Tax; and 3) requires the refund of taxes to a taxpayer who entered into a VDA after October 1, 2012, and before May 1, 2013, if the combined lookback period under that agreement exceeded the combined 48-month period. S.B. 335, effective 06/11/2013, extends the repeal of the health insurance claims assessment to December 31, 2017; previously Michigan: Commerce and Industry Insurance Co., et al. v. Department of Treasury, Mich. Ct. App., Dkt. No , June 6, 2013: Three statutory assessments imposed by New York were held to be burdens on insurance companies doing business in New York, and so the Michigan retaliatory tax applies to the entire amount of the assessments placed on insurers. The three assessments involved are: the Workers' Compensation Board assessment, which covers the administrative expenses of the board; the Special Disability Fund assessment, which finances a special fund for certain stale claims filed after a delay; and the Reopened Case Fund assessment, which finances a special fund for certain state claims filed after a delay. The plain language of the three New York statutes provides that either the chair or the board imposes the assessments on insurers, and then surcharges are placed on policyholders by the insurers so that the insurers can recover what they have paid in assessments. New York courts have indicated that the assessments are imposed on the insurers themselves, not the policyholders. Mich. Comp. Laws Ann. Section a provides that Michigan's retaliatory tax applies to the extent that a burden is imposed on an insurer by a foreign state, and so the retaliatory tax applies to the entire amount of the assessments. Executive Order : All authority and responsibilities previously bestowed upon the commissioner of the Office of Financial and Insurance Regulation are to be transferred to the newly created Department of Insurance and Financial Services director, including all board and commission roles. (Effective 03/17/2013) Minnesota S.B. 1589, effective for the fiscal year ending June 30, 2013 and all fiscal years thereafter, requires taxpayers with estimated aggregate taxes of $10,000 or more in a fiscal year to electronically remit insurance taxes and surcharges to the Department of Revenue. Additionally, automobile insurers are required to file a tax return quarterly for the automobile theft prevention surcharge. Collection of the surcharge is transferred to the Department of Revenue from the Department of Public Safety. DOR Newsletter: Insurance companies that write automobile insurance premiums and pay the auto theft prevention surcharge are now required to electronically file returns using Minnesota Department of Revenue s e- Services. The first return is due November 1, 2013, for surcharges collected July 1, 2013 through September 30, Continuing developments in the taxation of insurance companies 36

41 2013. Taxpayers are able to file their returns through the Minnesota Department of Revenue s e-services any time after October 1, The newsletter discusses how to file an auto theft prevention surcharge return using e- Services, payment options, and the advantages of using e-services. (09/01/2013) Mississippi H.B. 117, effective 07/01/2013, implements a job training grant fund that provides community/junior colleges, public universities, and work force investment areas a portion of business enterprise costs for training or retraining employees who are eligible for the state jobs tax credit. The payment of funds from the grant will be made over a five-year period in years two through six after creation of the qualified job and will be 75% of the costs of training or retraining, not to exceed $1,000 per job in counties designated as Tier One areas, $1,500 per job in counties designated as Tier Two areas or $2,000 per job in counties designated as Tier Three areas. Any business enterprise that chooses to utilize a job training grant under this section will not be eligible for the job tax credit. H.B. 591, the tax credit portion of the legislation is effective retroactively to 01/01/2013 and the sales tax exemption provision is effective 04/26/2013. It establishes an income tax credit and sales tax exemption for businesses that expand, or make additions to, their national or regional headquarters in the state after January 1, The tax credit amounts are $500 per new full-time employee, $1,000 per new full-time employee paid a salary of at least 125 percent of the state's average annual wage or $2,000 per new full-time employee paid a salary of at least 200% of the state's average annual wage. To qualify, a business must create at least 20 new jobs. Businesses receiving certain job training grants are not eligible for the credit. H.B. 748, effective 07/01/2013, amends the Mississippi reciprocal insurance laws to allow any authorized legal entity existing under Mississippi law to enter into and exchange reciprocal contracts. The bill clarifies that a reciprocal entity must pay premium tax. H.B. 934, effective retroactive to 01/01/2007, amends the definition of credit allowance date under the qualified equity investment tax credit, as the date when the investment is initially made. In cases where an investment is made prior to allocation of credits, the credit allowance date is determined by the date that the Mississippi Development Authority issues a certificate allocating credits based on the investment. If the qualified equity investment has not been issued by the allocation date, then the qualified equity investment must be issued no later than 60 days from the allocation date. H.B. 892, effective 01/01/2013, provides that if an examination of an income, franchise or sales/use tax return has been commenced by the Department of Revenue within the three-year examination period, a determination of the correct tax liability must be made within one year after the expiration of the examination period. The one-year limitation period for determining the correct tax liability will not apply to: 1) a taxpayer who failed to file a return for any tax period, 2) a taxpayer who filed a fraudulent return with the intent to evade tax, 3) the Department and the taxpayer enter in to a written agreement to extend the three-year examination period or 1-year determination period, or 4) taxpayer has requested an extension of time for filing his or her return and the Department has granted such request. H.B. 1003, effective 07/01/2013, amends the definition of structure in a certified historic district to include a structure or a district determined eligible by the Secretary of the U.S. Department of the Interior and which will be listed within 30 months of claiming the credit in the National Register of Historic Places. The credit received is subject to recapture if the deemed eligible structure or location district is not actually listed within 30 months of claiming the credit, or for abandonment of rehabilitation of the property for which the credit is granted. S.B. 2447, effective 07/01/2013, provides that, prior to July 1, 2014, a county or municipality may not charge any taxpayer a fee greater than the processing fee for the use of a credit card to make payments of taxes, fees or other 2013: The year in review 37

42 accounts receivable to the county or municipality. The term accounts receivable includes, but is not limited to, judgments, fines, costs and penalties imposed upon conviction for criminal and traffic offenses. Missouri S.B. 20, effective 03/29/2013, amends tax credits for franchise, income and insurance gross premium tax purposes as follows: 1) the sunset date for the public safety officer surviving spouse tax credit program is extended from August 28, 2013, to December 31, 2019; 2) the special needs adoption tax credit is revised to prohibit use of the tax credit for out-of-state adoptions, to establish a $2 million cap on in-state adoptions, and to eliminate the authority to use untapped funds from the special needs adoption tax credit program for the children in crisis tax credit program; 3) the children in crisis tax credit program, which previously expired on August 28, 2012, is reauthorized as the champion for children tax credit program with a new sunset date on December 31, 2019, and a $1-million-per-year cap on the tax credit; 4) the sunset date for the provision that allows a tax credit for certain taxpayers who modify their homes to make them accessible for a disabled resident is extended from December 31, 2013, to December 31, 2019; 5) the rebuilding communities tax credit program is revised to remove the requirement that tax credits remaining under the tax credit cap be used for the residential dwelling accessibility tax credit; 6) the sunset date for the provisions authorizing a tax credit for contributions to pregnancy resource centers is extended from August 28, 2013, to December 31, 2019, and the assignment or transfer of the credit is prohibited; 7) the tax credit program for donations to food pantries, which previously expired on August 28, 2011, is reauthorized with a new sunset date on December 31, 2019, and a reduced tax credit cap of $1.25 million per year; and 8) the developmental disability care provider tax credit program is made subject to the requirements of the Tax Credit Accountability Act. S.B. 59, effective 08/28/2013, repeals and re-creates the Property and Casualty Insurance Guaranty Association with the same general provisions. The maximum amount that may be assessed in any year on any account is increased from 1% to 2% of that member insurer's net direct written premium for the preceding calendar year on the kinds of insurance in the account. S.B. 287, effective 08/28/2013, modifies the Missouri captive insurance law to permit the formation of sponsored captive insurance companies. A sponsored captive insurance company will be incorporated as a stock insurer and will divide its capital into shares that are held by the stockholders, as a mutual, nonprofit corporation with one or more members; or as a managermanaged limited liability company. Additionally, a captive insurance company shall pay the annual minimum aggregate tax of $7,500, which applies to the sponsored captive insurance company as a whole, not to each protected cell. The annual maximum aggregate tax to be paid by a sponsored captive insurance company is $200,000, and the maximum tax to be remitted by a sponsored captive insurance company will be the aggregate tax liabilities of each protected cell. The bill modifies the term common ownership and control for purposes of applying the reinsurance premium tax. Code Regs. 13 Section : Amendments are provided to the residential treatment agency tax credit (eligible against premium tax), which include amending the purpose and adding the tax credit transfer form to conform to changes that were made in the statute. Statutory changes in 2007 modified the definition of eligible donation for purposes of the residential treatment agency tax credit to include donations of cash, publicly traded stocks and bonds, and real estate. (Effective 08/30/2013) Nevada A. 425, effective 06/12/2013, permits the home/regional office premium tax credit to be taken by an insurer exempt from federal taxation. A. 435, effective 06/11/2013, revises the language for fraud assessment to specify that the $500 to $2,000 fee is an exact amount by premium volume instead of an upper limit. Continuing developments in the taxation of insurance companies 38

43 S.B. 165, effective 06/11/2013, provides approval for issuance of transferable tax credits to attract film and other productions to Nevada. The credits would be applicable against the premium tax and are generally 15% of the qualified production costs. The credit program is limited to $20 million in total and no more than $6 million for a specific production. Credits must be applied for by September 31, 2017 and expire on June 30, S.B. 357, effective 06/12/2013, creates a premium tax credit for investing in a qualified community development entity in the amount of 0% for the first two credit allowance dates, 12% for the next three credit allowance dates and 11% for the next two credit allowance dates. Excess credit is not refundable or transferrable, but may be carried forward indefinitely. If the premium tax is eliminated, the taxpayer may use the credit against any other Department of Revenue tax. S.B 479, effective 07/01/2013, provides that the credit provided to an insurer against the premium tax for policies of industrial insurance does not expire, and the insurer may carry forward any unused amount of the credit into subsequent years until the entire amount of the credit is used. New Hampshire H.B. 598, effective 07/01/2013, increases the recordkeeping safe harbor deduction under the business profits tax. This deduction may be taken in lieu of the substantiated value of compensation deduction. The recordkeeping safe harbor deduction has increased to $75,000 from $50,000. H.B. 676, effective 07/01/2013, extends the jobs creation credit of Coos County for five years, from December 31, 2013 through December 31, S.B. 30, effective 08/19/2013, provides that, when a taxpayer reports to the Department of Revenue that a change has been made to the federal return, the Department of Revenue must give notice to the taxpayer within six months of the filing of the taxpayer's report that the return is being reviewed. Duncan v. New Hampshire, NH Super. Ct. (Strafford County), Dkt. No CV-00121, June 17, 2013: An education business tax credit program intended to fund scholarships for private and parochial schools violates New Hampshire's Constitution Part II, Article 83 No-Aid Clause. The court pointed out that Article 83 provides that no money raised by taxation shall ever be granted or applied for the use of schools of institutions of any religious sect or denomination. The court held, however, that under the statute's severability clause, the program could proceed, except that scholarship monies could not go to schools or institutions of any religious sect or denomination within the meaning of the No-Aid Clause. Rev /Rev : The updated rules provide that a business enterprise having an annual projected tax liability in excess of $260 (previously $200) must file the applicable estimated tax form. (Effective 05/09/2013) New Jersey A. 3680/S.B. 2583, effective 09/18/2013, phases out the Urban Transit Hub Tax Credit, Business Employment Incentive Program and Business Retention and Relocation Assistance Grant Program. Approval of any new awards under the three programs will not be made after December 31, The legislation also expands the award amounts and eligibility requirements for the Grow New Jersey Assistance Program and the Economic Redevelopment and Growth Program, and provides a sunset date of July 1, 2019 for both programs. Lastly, a new tax credit is established for capital investments made to repurpose former licensed health care facilities as licensed non-acute health care and health support services centers. Matter of Prudential Financial Inc.'s Urban Transit Hub Tax Credit Program Application; Docket No. A T3, August 22, 2013: The New Jersey Superior Court, Appellate Division, affirmed a $210 million hub tax credit for Prudential Financial Inc. after rejecting Prudential's lessor's contentions that the New Jersey Economic Development Authority's (EDA's) award of the credit was based on an arbitrary and biased cost analysis. Following real estate incentive consulting work, Prudential decided to construct a new facility, move its 2013: The year in review 39

44 current workforce out of the Gateway property, and hire 400 new employees. The EDA approved Prudential's incentive application for the project and granted a $210 million hub tax credit to Prudential in June Gateway (current lessor) appealed the EDA's decision, arguing that the authority's cost benefit analysis failed to account for negative effects of Prudential's proposed move to commercial lease value in Newark, incorrectly estimated Prudential's job growth, and failed to account for local infrastructure and safety costs. New Mexico H.B. 45, effective 03/29/2013, implements the transfer of insurance regulatory power away from the Public Regulation Commission through a constitutional mandate and creates the Office of Insurance. New York S.B. 2609D, effective 03/28/2013, extends the sunset date of the Metropolitan Transportation Authority surcharges on corporate franchise, bank and insurance taxes by five years to December 31, Additionally, the legislation extends the enhanced tax credit available for rehabilitation of historic properties through tax years beginning before January 1, 2020, and makes necessary technical corrections to the method of determining eligible census tracts. Also, the film production credit is extended by five years at $420 million per year (through 2019) and the share available for post-production credit costs is increased from $7 million per year to $25 million per year. Credits of $1 million and $5 million should be realized over a two-year period and credits over $5 million should be realized over a three-year period. Lastly, a non-refundable tax credit is established for hiring qualified veterans who were discharged after September 11, 2001 and were not fully employed for the previous six months, equal to 10% of wages paid in the first year of employment, up to a maximum of $5,000 (or 15% and $15,000 for qualified disabled veterans). Emergency Rule 5 NYCRR Parts 10 through 16: In regard to the Empire Zones Program, the revisions include, but are not limited to, the following: 1) updates to outdated references; 2) additional definitions, such as cost-benefit analysis, applicant municipality, chief executive, concurring municipality, EZ capital tax credits or zone capital tax credits, change of ownership, and regionally significant project; 3) higher standards for entry into and continued eligibility in the program; 4) amendments to the application for EZ designation and the certification and decertification processes; and 5) new recordkeeping requirements. Effective 07/15/2013. Emergency Rule 5 NYCRR Parts 190 through 196: In regard to the Excelsior Jobs Program, the revisions 1) add definitions; 2) establish the application process; 3) provide standards for application evaluation; 4) provide procedures for businesses claiming the tax credit; and 5) incorporate statutory amendments that were designed to strengthen the program. Effective 04/12/2013 and reissued 10/10/2013. Emergency Rule 5 NYCRR Parts 200 through 204: In regard to the Economic Transformation and Facility Redevelopment Program, the revisions 1) add key definitions for the Program; 2) create the application and review process; 3) set forth the eligibility criteria; 4) identify the evaluation standards; and 5) lay out the appeal process for participants who have been removed from the program. Effective 07/03/2013. Emergency Rule 5 NYCRR Parts 210 through 216: In regard to the Empire State Jobs Retention Program Tax Credit, the revisions 1) add key definitions for the program; 2) create the application and review process; 3) set forth the eligibility criteria; 4) identify the evaluation standards; and 5) lay out the appeal process for participants who have been removed from the program. Effective 04/10/2013 and 07/03/2013. Technical Memorandum TSB-M-13(3)C: This memorandum explains amendments to the franchise tax regulations regarding combined reports, applicable to taxable years beginning on or after January 1, The amendments conform the regulations to current law and largely codify the interpretations contained in TSB-M- 08(2)C. However, certain amendments depart from interpretations regarding the substantial intercorporate transactions determination set forth in the TSB-M. The amendments change the treatment of interest paid and Continuing developments in the taxation of insurance companies 40

45 received on loans constituting subsidiary capital between related corporations. Under the original TSB-M, this interest was not considered in the determination; however, under the amendments, the interest on loans constituting subsidiary capital will factor in the determination. In regard to the asset transfer test, the TSB-M provided that assets transferred in exchange for stock or paid in capital would be considered in the determination, and transfers of assets other than for stock or paid in capital, including through a nonmonetary property dividend, will be considered if the transfer s principal purpose is the avoidance or evasion of tax. Furthermore, the amendments include the treatment of income derived from the sale of items produced from transferred production equipment, for which, alone, would not constitute gross income derived directly from transferred assets. However, income from the sale of items produced from transferred assets constituting substantially all of the production process, including associated intangibles, would constitute gross income derived directly from the transferred assets. A new Part 33 has been added to the Franchise Taxes on Insurance Corporations Regulations stating that combined reporting provisions are now applicable to insurance corporations, except where otherwise provided by the Tax Law or Part 33. (06/05/2013) North Carolina H.B. 473, effective 07/01/2013, enacts the state captive insurance act. The captive premium tax on assumed reinsurance premiums is 0.225% on the first $20 million of premium; 0.150% on the next $20 million of premium; 0.050% on the next $20 million of premium and 0.025% on premium over $60 million. The tax on direct premium is 0.400% on the first $20million of direct written premium and 0.300% on direct written premium over $20 million. When determining premium subject to tax, amounts paid to policyholders as return premium may be deducted. Return premiums include dividends on unabsorbed premium or premium deposits returned/credited to policyholders. The aggregate amount of tax payable may not be less than $5,000 and may not exceed $100,000 (doubled for a protected cell captive insurance company). H.B. 650, effective 07/01/2013, makes clarifying, conforming, and other changes to the North Carolina Life and Health Insurance Guaranty Association Act, including an increase to coverage on certain health insurance and an increase to the Class A assessments to $500; previously $150. North Dakota Requires fire districts to report expenditures from grant money received annually, changes the date of funding to fire districts from October to December, increases appropriations to fire districts, and specifies that fire tax payments falling on a weekend or holiday are due the next business day. (H.B. 1145, effective 04/18/2013) Provides that North Dakota domestic insurers may be considered domestic surplus lines insurers if the insurer possesses a policyholder surplus of at least $15 million, the insurer's Board of Directors passes a resolution to permit such designation and the Insurance Commissioner approves the designation. The insurers will be subject to the surplus lines premiums tax. (H.B. 1181, effective 08/01/2013) Provides for the disclosure of confidential information to the Insurance Commissioner to be used for the sole purpose of administering an insurance producer license, assessing a civil penalty, or investigating a fraudulent act under North Dakota's insurance laws. (H.B. 1098, effective 08/01/2013) Ohio Authorizes a small claims docket within the Board of Tax Appeals, requires the Board to adopt rules to manage appeals and operate a mediation program, expressly authorizes the Board to consider motions, and requires the Board be able to receive notices of appeal and statutory transcripts electronically. (H.B. 138, generally effective 10/01/2013, with limited sections taking effect 01/01/2015) H.B. 510, effective 01/01/2014 for Financial Institution Tax and effective 01/01/2013 for the elimination of the Franchise Tax. It implements the corporate tax reform to 2013: The year in review 41

46 establish the new Financial Institution Tax law changes from H.B Additionally, the Franchise Tax is repealed, effectively placing subsidiaries (including SMLLCs) of insurance companies on the Commercial Activity Tax. Administrative Code : Ohio amended legislation to require all insurance companies to make any and all franchise tax payments via EFT. (Effective 02/04/2013) Oklahoma H.B. 1108, effective 11/01/2013, establishes a flat premium tax rate of 0.2% on direct premiums and 0.1% of assumed reinsurance for each captive insurance company, other than a sponsored captive insurance company and each protected cell of a sponsored captive insurance company. A sponsored captive insurance company must pay tax on direct and assumed premiums equal, in the aggregate, to the minimum tax by March 1 st of each year. Captive insurance companies employing more than 25 individuals are required to pay $50,000. Further, the $5,000 captive reinsurance tax has been eliminated. S.B. 343, effective 01/01/2014), extends the coal tax credit available against Oklahoma corporate income tax, utilities tax, and insurance gross premium tax from December 31, 2014, until December 31, The additional credits allowed but not used are converted from transferrable credits to refundable credits beginning January 1, Unused credits as of January 1, 2014 will be refunded to all taxpayers at 85% of the value of the credit. S.B. 613, effective 11/01/2013, modifies the quality jobs incentive program (applicable against the premium tax) to make more industries eligible for the program, raise the wage criteria for participating companies (lesser of 300% of the county average or an indexed $94,000), and require credit recipients to pay back all incentive payments if they cease business operations in the state within three years of receiving the first payment. Oregon H.B. 2084, effective for gross premium taxes paid on or after 01/01/2014, increases the premium tax rate paid by insurers on fire insurance policies from 1.0% to 1.15%. H.B. 2241, effective 06/13/2013 and operative 01/02/2014, provides that each violation of the Oregon Insurance Code by an insurer is subject to a civil penalty in an amount up to $10,000, and failure to comply with a filing requirement is subject to a civil penalty in an amount up to $50,000. Officers or directors of an insurance company holding system are subject to additional civil penalties for engaging in transactions or making investments that have not been properly reported or for not otherwise complying with the rules. In addition, a violation of any provision of the amended Insurance Code is considered to be a Class C felony, and any officer or director of an insurance holding company system who willfully and knowingly makes a false statement or filing with the intent to deceive the Director is guilty of a Class C misdemeanor. H.B. 2763, effective on the 91st day following adjournment of the 2013 legislative session, provides that, effective for investments made after December 31, 2013, any qualified equity investment tax credit not used by the taxpayer may now be carried forward and offset against the taxpayer s tax liability for five years. Further, the amount of qualified low-income community investments that may be made in a qualified active lowincome community business and its affiliates is increased from $4 million to $8 million. Also, for qualified equity investments made after June 30, 2012, if the investment is issued before the submission of an application for certification, the qualified community development entity must provide evidence of the qualified equity investment and of receipt of the cash investment at the time of application for certification. Lastly, beginning January 1, 2013, for purposes of determining retaliatory taxes on foreign and alien insurers, the corporate excise (income) tax will be imposed without taking into consideration the amount of any reduction due to the equity investment tax credit. H.B. 3367, effective 10/07/2013, increases the annual cap on the film and video tax credit from $6 million to Continuing developments in the taxation of insurance companies 42

47 $10 million starting with the 2014 tax year and also modifies the reimbursement policy for the credit. Additionally, the legislation makes several technical modifications to tax credits and other tax expenditures. Many of these changes are clarifications to previous legislation. H.B. 3601a, effective 01/01/2013, increases corporate excise tax rate on taxable income between $1 million and $10 million. Income is now taxed at 6.6% on taxable income up to $1 million and at 7.6% on taxable income in excess of $1 million. DOI Notice, 10/22/2013, specifies that in regard to the 1% Health Premium Tax with a sunset date of September 30, 2013, for those insurers who have a balance due, their payment is due 45 days after the end of the quarter, and that credit balances will be refunded. Once all the payments have been made and refunds issued, the reporting function of the Health Premium Tax module in i-reg will be shut down but historical information will remain available for a period of time. Stancorp Financial Group, Inc. v. Dept. of Rev., Or. Tax. Ct. Reg. Div., Dkt. No. TC 5039, January 8, 2013: The Oregon Tax Court granted the taxpayer's motion for summary judgment and reaffirmed its prior decision, allowing Stancorp to exclude dividend income from an affiliated insurance company in its calculation of Oregon taxable income. The court originally held that a parent corporation was not required to add dividends received from a subsidiary because the dividends were eliminated under the federal consolidated return regulations. Standard Insurance Company (SIC) and Standard Life Insurance Company of New York (SNY) are subsidiaries of Stancorp Financial Group (SFG) Inc. SIC and SFG are members are of the same federal affiliated group of corporations. During the tax years at issue, SIC paid dividends to SFG. On its consolidated federal income tax return, the SFG group did not include the dividends paid by SIC to SFG. The SFG group, under ORS (5), also excluded SIC's and SNY's income from their Oregon consolidated income tax return. SIC and SNY each filed its own separate Oregon return. Following an audit, the Department of Revenue determined that the SFG group improperly excluded the dividend payment. The department included the dividend income on the consolidated return; however, it allowed for an 80 percent deduction under ORS (2). SFG appealed to the Magistrate Division of the tax court, arguing that the dividends paid by SIC to SFG should be eliminated from its income. The magistrate found in favor of the department and SFG appealed to the Regular Division of the tax court. The court held that SFG was not required to add the dividend income because the dividends were eliminated under the federal consolidation return regulations. Moreover, the court concluded that the dividends were paid by a member of the federal affiliated group that was eliminated from the consolidated return. The court also found that the department's reliance on ORS (5)(b) was misplaced because the statute does not deal with computation of taxable income. The court also wrote, "the return exclusion rule of ORS (5)(b) does not, by its terms, override the provisions of ORS with respect to determination of the taxable income of SFG." The magistrate's decision was reversed. Oregon Rules Sections , , and : Rules dealing with the Business Energy Tax Credit (BETC) for pass-through, transfers and sunset provisions are amended. Although the 2011 Oregon Legislature replaced the BETC program with the new Energy Incentives Program, the Oregon Department of Energy still must carry out its obligations to BETC participants before that program officially ends in The amended rules provide a safe harbor date for projects subject to the July 1, 2014 sunset date, to submit final applications at least 60 days before the expiration of their preliminary certification or by May 1, The amended rules also expand the transfer process to include all projects unable to find a passthrough partner prior to the sunset date. Lastly, the amendments make permanent the November 16, 2012 temporary rule that defines use as any time the tax credit offsets any portion of the applicant's tax liability rendering the tax credit nontransferable. Effective 05/13/2013. Oregon DOR Notice, Income Tax: The DOR has clarified its position on corporate income tax credits in view of an Oregon Supreme Court decision that recently upheld the judgment of the Oregon Tax Court allowing the Business Energy Tax Credit (BETC) to be taken against the 2013: The year in review 43

48 corporation minimum tax. The decision addressed only the BETC, but the Department is now interpreting the ruling to broadly apply to corporation tax credits. The Department explained that there are two credits that are specifically prohibited from being allowed against the minimum tax: the contributions of computers or scientific equipment credit and the surplus kicker credit. The Department is informing taxpayers that it is currently implementing the necessary changes into its system to begin processing returns and issuing refunds by October 1, Taxpayers that filed a timely protective refund claim on an amended tax return do not need to contact the Department since these claims will be processed as soon as the system is in place. Taxpayers will need to file an amended tax return if their claim was filed in letter format. The amended returns will also be processed as soon as the processing system is up. If the refund statute of limitations is no longer open for the amended return, taxpayers should attach a statement indicating that they filed a timely protective refund claim in letter format. Taxpayers that did not file a protective refund claim can no longer do so since the protective claim was only available to prevent the expiration statute of limitations for refunds during litigation. If the refund statute of limitations is still open, a taxpayer may file a timely amended corporation tax return to apply tax credits against the corporation minimum tax. Taxpayers that claim other credits on their amended corporation tax return must attach a schedule that clearly identifies the credit(s) being claimed. (08/23/2013) Pennsylvania H.B. 465, effective 07/09/2013, enacts the Innovate in Pennsylvania tax credit, available against the insurance premium tax, for investments in the Ben Franklin Technology Development Authority, the Ben Franklin Technology Partners, regional biotechnology research centers, the Department of Community and Economic Development and venture capital funds. The department may sell up to $100 million in tax credits after October 1, Beginning in 2017, tax credits can be claimed against premium tax for tax years beginning on or after January 1, The total amount of tax credits applied against the premium tax liability from all taxpayers cannot exceed $20 million per fiscal year. A taxpayer can carry over or sell a credit, but the credits cannot be carried back. Tax Update 166: Taxpayers are reminded that beginning in January 1, 2013, tax payments of $10,000 or more (previously $20,000 or more) are to be made by ACH debit, ACH credit, or credit card. The lower electronic payment threshold applies to payments of the following taxes: corporate net income tax, employer withholding, capital stock/foreign franchise tax, sales/use tax, liquid fuels/fuels tax, bank shares tax, mutual thrift institutions tax, title insurance and trust company shares tax, oil company franchise tax, insurance premiums tax, malt beverage tax, public utility realty tax, motor carriers road tax, and gross receipts tax. Payments must be made by an approved EFT method. Taxpayers who pay by other means are encouraged to voluntarily remit payments via EFT regardless of the type of payment or amount. Failure to comply with EFT requirements may result in penalties equal to 3% on each payment required to be made by EFT, up to a maximum of $500. (02/01/2013) Tax Update 167: The DOR is now able to automate and streamline nonpayment penalties and interest imposed on payments of estimated tax. To ensure compliance with the EFT law, a 3% penalty of the total tax due, not to exceed $500, will be imposed on each payment of $10,000 or more not made through electronic funds transfer. In addition, the requirements for estimated tax will be enforced for tax year Any interest due on underpayments of estimated tax will be calculated at the time that the 2013 tax return is filed next year. (04/01/2013) Puerto Rico H.B. 1073, effective as noted, includes several tax provisions, most notably for insurers is the imposition of a new special 1% tax on premiums on top of the current premium tax for taxable years beginning after December 31, 2012 with respect to premiums subscribed after June 30, The special tax must be paid by March 31 following the applicable tax year. Continuing developments in the taxation of insurance companies 44

49 Rhode Island H.B. 5127, effective as noted, provides a historic rehabilitation credit, effective July 3, 2013, that may be taken against the income tax, the franchise tax, the bank tax, the public service corporation tax and the gross insurance premium tax. Taxpayers incurring qualified rehabilitation expenditures for the substantial rehabilitation of a certified historic structure may claim a credit in the amount of 20% of the expenses, or 25% of the expenses if at least 25% of the total rentable area is available for trade or business, or the entire rentable area located on the first floor is available for trade or business. The credit is capped at $5 million for any project and may be carried forward for 10 years. The credit cannot be reserved on or after June 30, 2016, or on the exhaustion of the maximum aggregate credits, whichever is first. Certain properties may not qualify for the credit, and a nonrefundable fee of 3% of the qualified rehabilitation expenses must be paid. Additionally, the legislation provides that effective July 3, 2013, the total credits for contributions to scholarship organizations that may be claimed against the corporate income tax and gross insurance premium tax are increased to $1.5 million per fiscal year from $1 million. H.B. 5609, effective May 24, 2013, increases the nonrefundable fee required to be submitted with an application by foreign insurance companies from $1,000 to $1,200. The requirement that foreign insurance companies with pending applications submit a fee of $1,200 to keep the application current is eliminated. Similarly, the requirement that foreign insurance companies pay the Department of Insurance a nonrefundable fee of $1,800 to review the application is eliminated, but will be assessed for the actual time incurred for the review. Rhode Island: Emergency Reg. CR 13-16, DOR Advisory and DOR Advisory : The new historic rehabilitation credit (as enacted by H 5127) is available against the corporate and personal income taxes, the franchise tax, the bank tax, the public service corporations tax, and the gross insurance premium tax. The previous historic credit program has been closed since The emergency regulation covers many topics, including definitions, apprenticeship requirements, application guidelines, reporting requirements, credit assignment, phased projects, qualified rehabilitation expenditures, appeals, and recapture provisions. (Effective 08/01/2013) As of May 15, 2013, there was about $34.5 million in available but unclaimed credits. To receive the credit, taxpayers must submit two applications: 1) an application to the Division of Taxation on or after August 1, 2013, and 2) parts one and two of the Historical Preservation and Heritage Commission s application. If the aggregate credits requested exceed the available funds, then the division will hold a drawing. (07/17/2013) South Carolina MASC v USAA General Indemnity, Case No (C.A. 4, March 1, 2013)The United States Court of Appeals (4th Circuit) overturned the South Carolina District Court and held that the federal flood insurance program is a United States Government program under Federal Emergency Management Agency and, therefore, premiums written through commercial insurers are exempt from municipal taxation under the doctrine of sovereign immunity. South Carolina: Information Letter 13-6: The DOR has issued an information letter ranking the state's counties for purposes of the job tax credit for 2013, designating Chesterfield, Dillon and Marlboro Counties as moratorium counties for 2013 for purposes of the 10-year moratorium (15 years in certain cases) on insurance premium taxes for qualifying taxpayers. (03/05/2013) South Carolina: Attorney General Opinion: The South Carolina Attorney General has provided an opinion that the DOR under S.C. Code Ann. Section , which allows fees to be charged up to 5% of the total of a warrant or tax lien, and S.C. Code Ann. Section , which allows the DOR to charge fees to file documents related to tax collection enforcement, cannot impose an additional fee for the electronic filing of such documents. Costs and fees are in the nature of penalties, and the statutes granting them are strictly construed. Therefore, 2013: The year in review 45

50 the DOR is limited to the amounts stated in the statutes, S.C. Code Ann. Section , and additional legislation would be needed to allow the DOR to impose an extra fee for electronic filing of recording documents. This opinion should be applicable to other tax types and state agencies. (04/05/2013) South Dakota H.B. 1069, effective 07/01/2013, increases the annual administrative assessment fee that may be assessed to insurance companies by the South Dakota Insurance Guaranty Association from $150 to $500. H.B. 1061, effective 07/01/2013, amends the tax on each captive insurance company from 0.25% on gross premiums to an annual supervision fee assessed at the greater of $5,000 or 0.08% on gross premiums. Further, a sponsored captive company must pay an additional annual supervision fee for each protected cell. The fee will be the greater of $5,000 or 0.08% on gross premiums less return premiums for insurance written on all risks or property situated within the state, and on risks and property situated elsewhere upon that have not been assessed a premium tax or fee throughout the year. The aggregate annual supervision fees cannot equal more than $50,000. Further, the due date for the annual report on the financial condition of captive insurance companies is changed from on or before March 1 st of each year to no later than six months after the close of the company s financial year. Also, the nonrefundable fee that each captive insurance company must pay the director for examining, investigating, and processing its application for certificate of authority is increased from $500 to $2,000, and sponsored captive insurance companies must pay a $1,000 fee for every additional cell, in addition to the application processing fee. Lastly, the amount of unimpaired paid-in capital and surplus that a captive insurance company must possess and maintain is increased to $250,000 from $200,000. Tennessee S.B. 141, effective 04/12/2013, amends the taxation of captive insurance companies by specifying that for a protected cell captive insurance company with more than 10 cells, the annual minimum aggregate tax is $10,000, and the annual maximum aggregate tax is the lesser of $100,000 plus $5,000 multiplied by the number of cells over 10 or $200,000. The amount of capital required to be eligible to receive a protected cell captive insurance company license has been reduced from $500,000 to $250,000. S.B. 150, effective 01/01/2014, provides that any surplus lines agent or any writing agent who fails to make returns and payments promptly and correctly is subject to a penalty equal to 5% for the first month and 0.5% per additional month. All delinquencies will be assessed interest at a 10% interest rate per annum. The penalty and interest will apply to any part of the tax unpaid by the due date and no penalty or interest may be waived. The commissioner of commerce and insurance has the discretion to grant an extension of time for good cause shown. Any surplus lines agent or writing agent failing to pay the tax due plus penalty and interest within the 60- day period may be debarred from transacting any insurance business until taxes and penalties are fully paid, and the license of the surplus lines agent must be revoked. The legislation also authorizes the commissioner to promulgate rules for a convenience fee that covers the cost of accepting electronic monthly affidavits, annual reports and tax payments. H.B. 574, effective 05/13/2013, imposes property tax on the intangibles of an insurance company without stockholders, as computed on a basis of total dividends paid to policyholders in the preceding calendar year. Returns or reductions of premium,or credits applied to premium, are not included as dividends. Texas H.B. 7, effective 06/14/2013, provides that the comptroller will assess all property and casualty insurers authorized to do business in Texas, subject to the volunteer fire department assistance fund assessment. The assessment shall be the lesser of the total amount in the general revenue fund for that state fiscal year collected by General Appropriations Act from the Continuing developments in the taxation of insurance companies 46

51 volunteer fire department assistance fund account or $30 million. H.B. 500, effective 01/01/2014, clarifies that any licensed insurer that is paying a tax based on premium and/or a nonadmitted insurance organization subject to tax in another jurisdiction is exempted from the franchise tax. H.B. 1405, effective 01/01/2014, allows a surplus lines agent to enter into a written agreement with a managing underwriter to collect surplus lines insurance premium tax on insurance placed with the underwriter. H.B. 2163, effective 09/01/2013, imposes an annual assessment on foreign insurers doing business in the state and subject to examination. The assessment imposed must be computed in the same manner as the amount imposed for domestic insurers. H.B. 2972, effective 01/01/2014, exempts from surplus lines insurance premium tax, ocean marine insurance premiums covering risks or exposures of stored or intransit baled cotton for export. S.B. 734, effective 09/01/2013, establishes licensing of captive insurance companies in Texas and imposes a 0.5% premium tax on captives, with a base of $7,500 and cap of $200,000. The tax is in lieu of the state franchise tax. 28 TAC Section 1.414: The DOI has amended its rule concerning the 2013 assessment/rates of maintenance taxes and fees (i.e. on gross premium receipts for calendar year 2012). The rates are as follows: 1) pursuant to the Insurance Code Section , the rate for motor vehicle insurance is 0.072% (formerly 0.077%); 2) pursuant to the Insurance Code Section , the rate for casualty insurance, and fidelity, guaranty, and surety bonds is 0.151% (formerly 0.152%); 3) pursuant to the Insurance Code Section , the rate for fire insurance and allied lines, including inland marine is 0.305% (formerly 0.331%); 4) pursuant to the Insurance Code Section , the rate for workers' compensation insurance is 0.108% (formerly 0.151%); 5) pursuant to the Labor Code Section , the rate for workers' compensation insurance remains 1.669%; 6) pursuant to the Labor Code Section , the rate for workers' compensation insurance is 0.017% (formerly 0.016%); 7) pursuant to the Labor Code Section 407A.301, the rate for workers' compensation insurance remains 1.669%; 8) pursuant to the Labor Code Section 407A.302, the rate for workers' compensation insurance is 0.108% (formerly 0.151%); 9) pursuant to the Insurance Code Section , the rate for title insurance is 0.151% (formerly 0.401%); and 10) pursuant to the Insurance Code Section , the rate for life, health, and accident insurance and the gross annuity considerations and endowment contracts remains 0.040%. The DOI assesses maintenance taxes for calendar year 2012 for the following entities as follows: 1) pursuant to the Insurance Code Section , the rate is $0.41 (formerly. $0.50) per enrollee for single service health maintenance organizations, $1.23 (formerly, $1.50) per enrollee for multi-service health maintenance organizations, and $0.41 (formerly, $0.50) per enrollee for limited service health maintenance organizations; 2) pursuant to the Insurance Code Section , the rate is 0.035% (formerly 0.047%) of the correctly reported gross amount of administrative or service fees for thirdparty administrators; and 3) pursuant to the Insurance Code Section , the rate is 0.029% (formerly 0.030%) of correctly reported gross revenues for nonprofit legal service corporations issuing prepaid legal service contracts. Each certified self-insurer must pay a maintenance tax for the workers' compensation research and evaluation group in calendar year 2013 at a rate of 0.017% (formerly 0.016%) of the tax base calculated pursuant to the Labor Code Section (b). Each certified self-insurer must pay a self-insurer maintenance tax in calendar year 2013 at a rate of 1.669% of the tax base calculated pursuant to the Labor Code Section (b). Both taxes must be billed to the certified selfinsurer by the Division of Workers' Compensation. (Effective 01/30/2013) 34 TAC Section 3.1: The new rule provides guidelines for the public to request, and the comptroller to issue, general information letters and private letter rulings. Effective 01/28/ TAC Section 3.811: The amendment updates the rule to permit insurance exchanges which would normally file premium tax under Section 224 (1.7% tax), to file under Section 221 (1.6% tax); the amendments would clarify the election and amend statutory references. This election must be filed by the 31st day before the beginning of the 2013: The year in review 47

52 tax year for which the election is to be effective. Effective 07/01/ TAC Section 3.828: The amendment clarifies that the maintenance tax base is imposed on new, renewal and additional premium for any adjustment computed per the Texas Basic Manual of Rules, Classifications and Experience Rating Plan for Workers Compensation and Employer s Liability Insurance Rule III. The policyholder deductible is required to be added back to the tax base, and retro-rated policies are required to treat additional adjustments as premium in the year they occur. Effective 09/04/ TAC Section 3.834: The amendment updates the rule to include language not previously included in relation to recoupment of the volunteer fire department assessment. The language in the rule is updated and clarified to specify that insurers recovering assessments from policyholders are required by Insurance Code Section to provide notice to each policyholder regarding the amount of the recovered assessment on the declarations page, the renewal certificate, or a billing statement. Effective 07/01/ TAC Section 3.835: The new rule concerns the reporting of unauthorized insurance premium tax by non-admitted captive insurers. The new section provides information about the unauthorized insurance premium tax, defines terms, and provides information about acceptable methods for allocating premium among states for a multiple state policy and the basis of taxation for unauthorized insurance. Effective 10/16/ TAC Section 3.9: The amendments to regulations relating to electronic filing and electronic transfer payments state that a person using TexNet for entering payment information may choose the settlement date offered by TexNet or enter a settlement date up to 30 days from the business day after the payment is submitted. The business day following the day on which payment information is entered into TexNet will be available provided that the information is entered by 6:00 p.m. central time on any business day. Taxpayers using the electronic data interchange (EDI) system to file combined tax returns and make payments must submit payment information to the comptroller by 2:30 p.m. central time to meet the 6:00 p.m. central time requirement. Taxpayers using an approved electronic funds transfer method other than TexNet or the EDI system must transmit payment information by 11:59 p.m. central time on the date payment is due. Effective 03/26/2013. Vermont H.B. 513, effective 05/13/2013, increases the initial and annual renewal license fee for Vermont special purpose financial insurance companies from $500 to $5,000. Additionally, the prohibition against special purpose financial captive insurance companies consolidating with other captive insurance companies that are not special purpose financial captives for purposes of calculating the Vermont insurance gross premium taxes due is repealed. Other amendments change the name of special purpose financial captive insurance companies to special purpose financial insurance companies. DOI Notice, 11/07/2013, repeals and replaces the health care claims assessment with a health care claims tax (July 1, 2013). The Department of Tax will collect the health care claims assessment for the fiscal year July 1, 2012 June 30, 2013, and has created Form HC-1 for companies to report and pay the assessment, which is due on or before January 2, This will be the last time the assessment and reinvestment fee will be collected. The health care claims tax became effective July, 1, 2013, and is imposed on every health insurer in an amount equal to 0.999% of all health insurance claims paid by the insurer for its Vermont members in the previous fiscal year ending June 30. The tax applies to all health care and dental claims that are not financed through a federal program. Virginia H.B. 1784/S.B. 780, effective 01/01/2014, eliminates certain provisions that set a tax rate of 0.75% on premium from policies sold under the open enrollment program. For taxable years 2014 and thereafter, the tax rate on such policies will be 2.25%. H.B. 1923, effective 07/01/2013, provides that the worker retraining credit eligible against the income and premium tax will sunset January 21, Additionally, Continuing developments in the taxation of insurance companies 48

53 the legislation provides that for taxable years beginning January 1, 2013, the worker retraining credit will be available to eligible worker retraining courses conducted at a private school. The credit is equal to the cost per qualified employee of either up to $200 per qualified employee annually, or up to $300 per qualified employee annually, if retraining includes retraining in a science, technology, engineering, or applied mathematics (STEM) or STEM discipline including, but not limited to, industry-recognized credentials, certificates, and certifications. H.B. 2155/S.B 1216, effective 01/01/2013, facilitates the transfer of the administration of the state insurance premium license tax from the State Corporation Commission to the Department of Taxation pursuant to 2011 legislation. S.B. 1350, effective 01/01/2014, replaces references to the Department of Business Assistance with the Department of Small Business and Supplier Diversity for purposes of the worker retraining tax credit. Public Document Ruling : During the 2011 Virginia General Assembly session, Senate Bill 1124 was enacted. The bill transferred the administration of the insurance premiums license tax from the State Corporation Commission ( SCC ) Bureau of Insurance ( BOI ) to the Department of Taxation. However, the licensing of insurance companies will remain the responsibility of the BOI. The guidelines discuss: 1) the timing of the transfer of the insurance premium license tax; 2) declarations of estimated tax; 3) penalty and interest rules for the underpayment of taxes; and 4) exchange of information between the Department and the SCC. The guidelines do not constitute formal rulemaking and therefore do not have the force and effect of law or regulation. (07/01/2013) of any other interest, additions and penalties. (07/03/2013) DOR Notice: Beginning January 1, 2014, individuals who have made total tax payments of $100,000 and businesses that have made total tax payments of $25,000 during the period of July 1, 2012 through June 30, 2013 may be required to file and pay their West Virginia taxes electronically. (08/21/2013) Wisconsin A. 40, effective 07/01/2013 (The budget bill), makes numerous income tax changes, among which include: 1) conforms state tax law to the IRC, in effect on 01/01/2014; 2) creates a new provision concerning reliance on past audits for the taxpayer and their combined group members if specified conditions are satisfied; 3) eliminates many second tier tax credits; 4) makes various modifications to the jobs tax credit and the enterprise zone tax credit; 5) increases the state supplement to the federal historic rehabilitation tax credit from 5% to 10%. West Virginia DOR Notice: The DOR has announced that taxpayers paying more than $50,000 for a single tax type, for periods starting on January 1, 2013, must file returns and make tax payments electronically, unless specifically excluded. Failing to comply with the requirements can result in a civil penalty of 3% of total tax liability on top 2013: The year in review 49

54 Tax accounting SSAP 101 update In May 2013, the National Association of Insurance Commissioners (NAIC) Statutory Accounting Principles Working Group (the Working Group), adopted proposed revisions to SSAP 101 to clarify the deferred tax asset admissibility test for financial and mortgage guaranty insurers. The Working Group clarified paragraph 11.b.i. by changing the numerator to include policyholders surplus, plus contingency reserves. The denominator is the required minimum aggregate capital. This table is applicable only to financial and mortgage guaranty companies that are not subject to risk-based capital. The Working Group stated that the clarifications were needed because the wording of paragraph 11.b. did not reflect the original intent of the regulators and interested parties. In addition, at the NAIC s Summer National Meeting, the Working Group exposed for comment, proposed nonsubstantive changes to the SSAP 101 paragraph 22 disclosures and Q&A questions 1 and 4 to be consistent with the changes to paragraph 11.b. discussed above. ASU No In July 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) No , Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward or Tax Credit Carryforward Exists. US GAAP previously did not include explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss (NOL) carryforward, a similar tax loss, or a tax credit carryforward exists. An unrecognized tax benefit (UTB) results when the amount of benefit recognized in the balance sheet differs from the amount taken or expected to be taken in the tax return. On a jurisdictional basis, ASU No generally requires a UTB to be presented in the financial statements as a reduction to a deferred tax asset for an NOL carryforward. This would be the case except when an NOL carryforward is not available under the tax laws of the applicable jurisdiction to settle any additional income taxes resulting from the disallowance of a tax position. In such instances, the UTB should be recorded as a liability and cannot be combined with the deferred tax asset. The assessment as to whether a deferred tax asset is available is based on the UTB and deferred tax asset that exist at the reporting date and should be made assuming disallowance of the tax position at the reporting date. ASU No is expected to reduce diversity in practice by providing specific guidance on the presentation of unrecognized tax benefits. Note, this guidance is a departure from the original guidance provided by the FASB staff, and currently reflected in PwC s Guide to Accounting for Income Taxes. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, For nonpublic entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, Early adoption is permitted. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. Insurance contracts accounting proposals In June 2013, both the FASB and the International Accounting Standards Board (IASB) issued exposure drafts describing proposals that would fundamentally change the accounting and financial reporting for insurance contracts. These proposals likely will frame the insurance reporting landscape for at least the next generation. At a high level, both boards are proposing the use of a current value discounted cash flow measurement for insurance liabilities. Any excess of expected premiums to be received over expected claims and expenses would be deferred as margin and amortized into income over the periods for which the insurance is provided. Expected losses would be recognized immediately. The IASB s proposal requires an explicit risk adjustment related to the nature of the insured risk essentially bifurcating the Continuing developments in the taxation of insurance companies 50

55 margin between a service and insurance risk premium. Under the FASB proposal, the margin would be locked-in, and would not be impacted by future assumption changes unless a contract is loss making; under the IASB s proposal, the margin is unlocked for future assumption changes. Under both sets of proposals, a modified model would apply for short-duration contracts meeting specified criteria similar to today s unearned premium approach. However, unlike current GAAP, the proposed guidance would require discounting of incurred losses with limited exceptions. Revenue recognition and presentation also would change under both sets of proposals. For instance, premiums from life insurance would no longer be recognized as revenue when due. Instead, insurance revenue would be allocated to individual periods based on the expected pattern of incurred claims and release from risk. In addition, deposit elements such as cash surrender values in life insurance products and experience adjustments in property/casualty contracts would be excluded from premium and claim information presented in the income statement. There also could be a significant increase in disclosures on risk, assumptions and sensitivities to changes in estimates and assumptions. Low-Income Housing Tax Credits In December 2013, the Financial Accounting Standards Board ratified the final consensus that was reached by the Emerging Issues Task Force (EITF) in its November 2013 meeting to revise the accounting for investments in Low- Income Housing Tax Credit (LIHTC) programs. The final consensus, which will be issued as an ASU, modifies the conditions that must be met in order to present investment performance (principally, tax credits and other tax benefits net of amortization expense) as a component of income taxes. For investments that qualify for net presentation, the ASU will also introduce a new proportional amortization method in lieu of the effective yield method to amortize the investment basis. The use of the proportional amortization method will be an accounting policy election to be made once and thereafter applied to all eligible investments in LIHTC programs. The new guidance will be effective for fiscal years, and interim periods within those years, beginning after December 15, Early adoption will be permitted. Schedule M-3 In December 2013, the IRS unveiled draft instructions for the 2013 versions of tax forms used by property and casualty insurance companies, noting a change under the Affordable Care Act limiting the tax benefits certain health insurance providers can claim for compensation paid to individuals for services. The draft instructions were issued for both the Form 1120-PC, U.S. Property and Casualty Insurance Company Income Tax Return, and the accompanying Schedule M-3 used by companies with assets of $10 million or more. The instructions to Form 1120-PC clarify that the Affordable Care Act reduced the compensation limit from $1 million to $500,000 for payments for services provided by individuals to, or on behalf of, certain health insurance providers in tax years beginning after Under Section 162(m)(6), the $500,000 limit applies to any compensation that is deductible in the tax year in which it is paid. In addition, it applies to compensation deductible in future tax years (deferred deduction remuneration). According to the draft instructions, the $500,000 limitation is reduced by any amount disallowed as excess parachute payments. The draft 2013 Instructions for Schedule M-3 (Form PC), Net Income (Loss) Reconciliation for U.S. Property and Casualty Insurance Companies With Total Assets of $10 Million or More, may be accessed at: : The year in review 51

56 Appendix A Cases New York Life Ins. Co. v. U.S., 724 F.3d 256 (2 nd Cir. 2013). In an opinion decided August 1, 2013, the Second Circuit Court of Appeals affirmed a district court s decision disallowing the deductions related to annual and termination dividends, limiting the deductions to policyholder dividends actually paid during the taxable year. The Court found that the deduction otherwise did not satisfy the all-events test under the principles of Section 461. Acuity Mutual Ins. Co. v. Comm r, T.C. Memo In an opinion decided September 4, 2013, the Tax Court held that the amount of carried loss reserves claimed by an insurance company under Section 832 that were computed in accordance with the National Association of Insurance Commissioners (NAIC) and Actuarial Standards of Practice (ASOPs) and fell within a range of reasonable estimates determined by the company s appointed outside actuary were fair and reasonable. Dorrance v. U.S., No. CV , 2013 WL (D. Ariz. Apr. 19, 2013). In an opinion decided on April 19, 2013, the US District Court of Arizona amended its prior opinion that the basis in shares received upon an insurance company s demutualization transaction could be reasonably determined, the open transaction doctrine would not apply, and the basis of shares should be apportioned according to Treas. Reg. Section (a). The Court ordered the parties to confer and submit a proposed form of judgment to the Court. Reuben v. U.S., No. CV , 2013 WL (C.D. Cal. Jan. 15, 2013). In an opinion decided on January 15, 2013, the US District Court for the Central District of California held that the open transaction doctrine did not apply, concluding that the taxpayer s insurance premium payments were not for membership rights and that the taxpayer had a zero basis in the shares it received as part of a demutualization. Validus Reinsurance, Ltd. v. U.S., 113 A.F.T.R.2d (D.D.C. 2014). In an opinion decided on February 5, 2014, the United States District Court for the District of Columbia held that the insurance federal excise tax (FET) does not apply to secondary reinsurance transactions covering US risks between two foreign reinsurance companies. IRS advice/notices/procedures/rulings CCA In CCA , released May 16, 2013, the IRS determined that a nonlife subsidiary of taxpayer s lifenonlife consolidated group must apply Sections 817(a) and (b) to variable annuities it issued. ECC In ed Chief Counsel Advice released on March 22, 2013, the National Office instructed an Agent to apply the rule in the Internal Revenue Manual and include deficiency reserves in the statutory reserve cap of section 807 pending published guidance. Notice In guidance released on February 26, 2013, the IRS provided that deficiency reserves are included in the amount taken into account for a life insurance contract in determining statutory reserves under Section 807(d)(6) for purposes of applying the statutory reserve cap under Section 807(d)(1). Rev. Rul In a revenue ruling released on January 31, 2013, the IRS supplemented prevailing state-assumed interest rates in Rev. Rul , which are used to compute reserves for life insurance and supplementary total and permanent disability benefits; individual annuities and pure endowments; and group annuities and pure endowments. Rev. Proc In a revenue procedure issued on November 18, 2013, the IRS set forth the loss payment patterns and discount Continuing developments in the taxation of insurance companies 52

57 factors for the 2013 accident year to be used for computing discounted unpaid losses under Section 846. Rev. Proc In a revenue procedure issued on November 18, 2013, the IRS prescribed the salvage discount factors for the 2013 accident year to be used for computing discounted estimated salvage recoverable under Section 832. Rev. Proc In a revenue procedure issued on August 28, 2013, the IRS provided the domestic asset/liability percentages and domestic investment yields for foreign life insurance companies to compute their minimum effectively connected net investment income under Section 842(b) for tax years beginning after December 31, TD 9651 In May 2013, the IRS released proposed regulations (REG ) providing guidance to Blue Cross and Blue Shield organizations on computing and applying the medical loss ratio under Section 833(c)(5). Subsequently, in January 2014, the IRS issued the final regulations which adopt the proposed regulations in their entirety with certain modifications. Private letter rulings/technical advice memoranda PLR In a letter ruling released on October 11, 2013, the IRS ruled that a group s election to file a life-nonlife consolidated return will remain in effect after the merger of a consolidated group s common parent into a newly formed subsidiary. Insurance companies that are part of the group will remain Eligible Entities after the transaction. PLR In a letter ruling released on July 26, 2013, the IRS considered for the first time the application of Section 1035 to a contract held by a post-death beneficiary who is currently receiving distributions required by Section 72(s). The IRS concluded that the post-death beneficiary of five annuity contracts could exchange the value of those contracts tax-free pursuant to Section 1035(a)(3) for a new annuity contract offering higher payouts. PLR In a letter ruling released on January 25, 2013, the IRS ruled that a trust should not recognize any gain or loss from the exchange of an existing life insurance policy for a new life insurance policy with the same beneficiary because the insured did not change. PLR In a letter ruling released on June 7, 2013, the IRS granted an insurance company an extension of time to file an election to be subject to the alternative tax under Section 831(b) where the insurance company had hired an accountant and that accountant had neglected to make a timely election with the filing of the tax return. PLR In a letter ruling released on October 25, 2013, the IRS revoked the tax-exempt status of a small insurance company because it failed to meet the 50% gross receipts test under Section 501(c)(15). Despite being properly recognized as a tax-exempt small insurance company in prior years, the company was required to file an income tax return for the years in question. PLR In a letter ruling released on October 11, 2013, the IRS revoked the tax-exempt status of a reinsurance company that engaged in the reinsurance of credit insurance contracts, vehicle service contracts, and certain other service contracts. The IRS concluded that the gross receipts of all other companies in a controlled group must be considered when assessing the $600,000 limit imposed by Section 501(c)(15). As such, this company failed the $600,000 limitation and must file an income tax return for the year in question. PLR In a letter ruling released on September 20, 2013, the IRS revoked the tax-exempt status of an unincorporated association created to provide property and casualty insurance on a nonprofit basis for its members. The Service based their determination on the fact that the law of large 2013: The year in review 53

58 numbers did not apply to the organization and thus it had not been providing insurance to any policyholders. It also failed to meet other requirements of Section 501(c)(15). PLR In a letter ruling released on January 18, 2013, the IRS granted an extension to a foreign insurance company to elect to be treated as a domestic corporation and an extension to elect the alternative tax under Section 831(b)(2)(A). PLR In a letter ruling released on March 1, 2013, the IRS ruled that investment funds containing premium payments do not fail the diversification requirements of Section 817(h) if an asset composition discrepancy arises out of a transaction proposed by a variable life insurance issuer. PLR In a letter ruling released on April 5, 2013, the IRS ruled that vehicle service contracts constitute insurance, and thus a company that issues and administers the contracts will be treated as an insurance company under Section 831, given that the company issues such contracts for more than 50 percent of its business during the tax year. PLR In a letter ruling released on April 26, 2013, the IRS granted an extension to a foreign insurance company to elect the alternative tax under Section 831(b)(2)(A). Continuing developments in the taxation of insurance companies 54

59 Appendix B Insurance tax leaders Atlanta, Georgia Brian Anderson [email protected] Sherrie Winokur [email protected] Bermuda Richard Irvine [email protected] Birmingham, Alabama Karen Miller [email protected] Boston, Massachusetts Damon Dowell [email protected] John Farina [email protected] Julie Goosman [email protected] Kevin Johnston [email protected] James Kress [email protected] Marie-Claire Moglia [email protected] Maura McKinnon [email protected] Peter Sproul [email protected] David Wiseman [email protected] Chicago, Illinois Rob Finnegan [email protected] Haskell Garfinkel [email protected] Kurt Hopper [email protected] Yolanda Torres-Caron [email protected] Michael Palm [email protected] Columbus, Ohio Arthur Scherbel [email protected] Fort Worth, Texas Chuck Lambert [email protected] Kansas City, Missouri Dave Rudicel [email protected] Los Angeles, California Michael Callan [email protected] Jessie Foster [email protected] Patricia Gergen [email protected] Minneapolis, Minnesota Matthew Lodes [email protected] New York, New York Arash Barkhordar [email protected] Gary Berger [email protected] Steve Chapman 646) [email protected] Kevin Crowe [email protected] Joseph Foy* [email protected] 2013: The year in review 55

60 Brian Frey Timothy Kelly Gayle Kraden Michele Landon Tom Lodge Mark Lynch Ed Markovich Lisa Miller Jeff Thompson Philadelphia, Pennsylvania Dan Fraley John Peel Raheem Spivey St. Louis, Missouri Byron Crawford Jeffrey Kohler Katie Freed Washington, DC Metro Anthony DiGilio Surjya Mitra David Schenck** Mark Smith Corina Trainer * US financial services tax leader ** US insurance tax leader Continuing developments in the taxation of insurance companies 56

61 Acknowledgements This report represents the analysis and efforts of many individuals within PwC s Insurance Industry Service Group and Washington National Tax Services. This publication was produced under the direction of Anthony DiGilio. The text was prepared by a team of professionals, including Yasmin Noel Dirks, Michael Palm, Mark S. Smith, Adam Fisher, Rob Finnegan, Surjya Mitra, and Ryan Tichenor. 2013: The year in review 57

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63 Continuing developments in the taxation of insurance companies

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