Continuing developments in the taxation of insurance companies

www.pwc.com/us/insurance Continuing developments in the taxation of insurance companies 2013: The year in review

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

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

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, 2013. 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

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 2017. 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, 2014. 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, 2014. 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 2014. Senator Jeanne Shaheen (D-NH) and Rep. Dan Maffei (D-NY) have introduced legislation (S. 1844 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. 1869 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, 2014. "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

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 $17.212 trillion federal statutory debt limit through March 15, 2015. 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, 2015. 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, 2015. 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 2014. 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

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 2013. 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

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

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 $20.725 billion to $30.425 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. 2054 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. 2054 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. 3157 (Oct. 12, 2011), H.R. 3424 (Jul. 30, 2009), and H.R. 6969 (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

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 2013. S. 1461 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. 1846 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 2012. 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

Federal Life-nonlife consolidations Consolidated return election In PLR 201341018, 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 1.1502-47(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 1.1502-47(d)(12)(vi) and 1.1502-75(d)(2)(ii) and Rev. Rul. 82-152). 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 1.1502-47(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

Priority guidance plan The IRS/Treasury s 2013-2014 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 2014. 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, 2006. 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 2005-40 or Revenue Ruling 92-93 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. 2014-7. 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, 2013. The final regulations were published in January 2014. Regulations under Section 7702 defining cash surrender value. Regulations under Section 882 regarding insurance companies. The IRS and Treasury s 2013 2014 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) 201341033 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 201341033 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

Annuity contracts In PLR 201330016, 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 201304003, 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 1035. 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 1035. Continuing developments in the taxation of insurance companies 10

Blue cross blue shield Final MLR regulations In May 2013, the IRS released proposed regulations (REG- 126633-12) 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, 2013. 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. 2013-209. 2013: The year in review 11

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 2013-19, 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

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 1984. 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. 2013-4, 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 2013. Revenue Ruling 2013-4 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 92-19. Specifically, the ruling supplements Schedules A, B, C and D -- under Part III of Rev. Rul. 92-19, by providing prevailing state-assumed interest rates for certain insurance products issued in 2012 and 2013. The ruling also supplements Part IV of Revenue Ruling 92-19 by providing the applicable federal interest rates for computing reserves for 2012 and 2013. Loss discount factors As it does annually, the IRS released loss payment patterns and discount factors (Rev. Proc. 2013-36) and salvage discount factors (Rev. Proc. 2013-37) applicable to accident year 2013. Property and casualty insurance companies use these factors to discount unpaid losses, and to compute discounted estimated salvage recoverable. Rev. Proc. 2013-36 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. 2013-37 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. 2013-36 and 2013-37 also contain applicable discount factors for entities using the composite method of Notice 88-100 for unpaid losses in prior years. Property and casualty insurance companies should use the updated percentages provided in Rev. Proc. 2013-36 and 2013-37 for accident year 2013. Small insurance company election Extension of time to file In PLR 201323009, 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 1120- 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 301.9100-3. 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

Treas. Reg. Section 301.9100-3(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 201323009, 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 301.9100-1 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 2001. 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-09-01284, 2013 WL 1704907 (D. Ariz. Apr. 19, 2013). In its earlier order, the court analyzed Treas. Reg. Section 1.61-6(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 1.61-6(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-11-09448, 2013 WL 656864, 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

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-11-09448, 2013 WL 656864 (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. 46807. 2013: The year in review 15

(for example, upon a taxpayer entering into offsetting Treasury futures). The new temporary regulations (promulgated as Treasury regulation Section 1.1092(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 201343026 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 201341036 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