Actuary/Accountant/Tax Attorney Dialogue on Internal Revenue Code Deference to the NAIC Part III: Policyholder Tax Issues

Note from the Editor: Welcome again to our series of dialogues on the important and evolving topic of the extent to which federal tax law defers to the National Association of Insurance Commissioners (NAIC) in taxing life insurance companies and products. In the prior two issues of Taxing Times, our distinguished panelists explored many aspects of tax reserves including their deductibility, classification and computation, as well as product tax considerations relating to life insurance, annuities, long-term care insurance and accelerated death benefits. In this Part III, the panelists will address legal and accounting questions relating to insurance classification and qualification under U.S. federal income tax law: examining the various characteristics required for a company to be treated as a life insurance company, for a transaction to be treated as insurance, for a reinsurance arrangement to be respected as such, and for a given insurance product to be placed in one of the several categories of contracts defined in the tax law.

We have made two adjustments to the series for the current edition: First, since the questions in this segment are focused on legal and accounting issues, our actuarial contributors have deferred to members of those professions, and the panel for Part III does not include an actuary. Second, due to the breadth of the topic of deference, we will expand the dialogue to a fourth installment, to appear in the next issue of Taxing Times, where we will wrap up our journey with an examination of deference to NAIC annual statement accounting in areas such as pre- miums, investment income, hedging and expenses. 

Peter Winslow: This is the third installment of our extended dialogue on the issue of federal tax law’s deference to insurance regulation rules. We have covered in some depth the deference issue as it relates to tax reserves and to policyholder tax issues. This installment will cover what I will call insurance classification issues, including the existential question—what is insurance? To what extent does guidance from the NAIC or state regulators matter in answering this question?

In the context of life company taxation, our discussion will cover issues such as whether the company will be taxed as an insurance company, whether an insurance company will be classified as a life or nonlife company, and, of course, captive issues. Whether a transaction qualifies as reinsurance or something else also comes within this broad “what is insurance?” inquiry.

As in the past, I want to begin the discussion with our “In the Beginning” panelists, Susan Hotine and John Adney, who were both instrumental in the development of the 1984 Act, which forms the basis of current law. Susan, can you please describe for us what Congress did in the 1984 Act on the basic issues of classification of a company as an insurance company and/or a life insurance company? 

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Taxing Times, Vol . 12, Issue 1 (March 2016)