Do We Finally Have Guidance On Separate Account DRD?
The Internal Revenue Service (IRS) recently released Rev. Rul. 2014-7,1 which addresses what is the amount of life insurance reserves taken into account under I.R.C. § 807 for a variable contract where some or all of the reserves are accounted for as part of a life insurance company’s separate account reserves. Perhaps more important than what this ruling addresses is what it does not address. Rev. Rul. 2014-7 merely republishes the first, perhaps noncontroversial, holding of Rev. Rul. 2007-542 relating to the tax reserve amount for a variable contract. Rev. Rul. 2007-54 included a second holding, however, that stunned the industry with its conclusion that required interest for separate account reserves (which ultimately determines the company’s share of the dividends-received deduction (“DRD”)) should be calculated using the applicable federal interest rate. This second holding would have had a significant negative financial impact on variable contract writers because following it would result in a substantial diminution to, if not elimination of, a company’s share of the separate account’s available DRD. The possibility of this negative financial impact was avoided by the publication of Rev. Rul. 2007-61,4 which suspended Rev. Rul. 2007-54 and provided that the IRS would work on further guidance. Since 2007, every Priority Guidance Plan released by the Treasury Department and the IRS has included an item for “Revenue Ruling [or Guidance] on the determination of the company’s share and the policyholders’ share of the net investment income of a life insurance company under § 812.” Rev. Rul. 2014-7 states that Rev. Rul. 2007-54 is modified and superseded, and that Rev. Rul. 2007-61 is obsoleted.
T3: Taxing Times Tidbits, Taxing Times, Vol. 10, Issue 2 (May 2014)