Section 338 Insurance Company Regulations Finalized

(Coauthored with Mark H. Kovey)

The IRS has finalized the last package of regulations dealing with taxable acquisitions and dispositions of insurance businesses under section 1060 and pursuant to section 338 elections. The final regulations did not make any major changes to the proposed regulations, adopting an assumption reinsurance model for the transfer of an insurance business pursuant to a section 338 deemed asset sale. The final regulations also retain the distinction between acquisitions of insurance businesses which are subject to section 1060 (assumption reinsurance or indemnity reinsurance transactions) because they involve the acquisition of a significant business asset versus mere reinsurance which continues to be subject only to the principles under Treas. Reg. § 1.817-4(d).

Specifically, in T.D. 9377, published on Jan. 22, 2008, the IRS finalized proposed and temporary regulations under sections 197, 338, 381 and 846 primarily without change. All of the regulations apply to transactions that occur on or after April 10, 2006 when the rest of the related regulations were finalized. This new set of final regulations deals with situations where the proposed regulations (originally issued on March 8, 2002) were modified as a result of comments. Specifically, the newly finalized regulations include Treas. Reg. § 1.197-2(g)(5)(ii) which provides guidance on the interplay between section 197(f)(5) (generally requiring capitalization of a ceding commission in an assumption reinsurance transaction in excess of the section 848 amortization) and section 848 (requiring capitalization of specified policy acquisition expenses). Treas. Reg. § 1.338-11(d) deals with reserve increases by new target after the deemed asset sale pursuant to a section 338 election or the actual asset sale subject to section 1060. Treas. Reg. § 1.381(c) (22)-1 amends Example 3 by correcting a mathematical error. Finally, Treas. Reg. § 1.846-4 lists a section 338 election as an event pursuant to which a company can make a section 846(e) election (if the qualified stock purchase is made on or after April 10, 2006). 

T3: Taxing Times Tidbits, 36 Taxing Times, Vol. 4, Issue 2 (May 2008)