IRS Revenue Ruling
2002-6

 Code Sec. 807

<<FULL TEXT>>

Insurance companies; change in computation of life insurance reserves
to use NAIC Actuarial Guideline. A change in the computation of existing
life insurance reserves for annuity contracts to take into account
specific factors set forth by the National Association of Insurance
Commissioners (NAIC) in Actuarial Guideline 33 is a change in basis
subject to section 807(f) of the Internal Revenue Code.


REV. RUL. 2002-6

ISSUE

Whether, under the circumstances described below, a change in the
computation of existing life insurance reserves for annuity contracts is a
change in basis subject to section 807(f) of the Code?


FACTS

The National Association of Insurance Commissioners (NAIC) adopted
Actuarial Guideline XXXIII, Determining Minimum Commissioners' Annuities
Reserve Valuation Method (CARVM) Reserves for Individual Annuity Contracts
(AG 33), effective on December 31, 1995, for all contracts issued on or
after January 1, 1981.

IC, a life insurance company within the meaning of section 816(a),
issued Annuity Contracts in 1999. In computing its end of the year (EOY)
life insurance reserves for Annuity Contracts under section 807(d)(2) for
taxable years 1999 and 2000, IC did not take into account several specific
factors set forth by the NAIC in AG 33. In 2001, IC modified its reserve
computation to take those factors into account in computing its EOY 2001
reserves for Annuity Contracts. IC's EOY 2001 reserves for Annuity
Contracts equaled $8x. If IC had continued using its former method, its
EOY 2001 life insurance reserves for Annuity Contracts would have been
$6x.

For taxable years 1999 through 2001, the EOY reserve computed under
section 807(d)(2) for Annuity Contracts exceeded the net surrender value
of the contracts. The 1999 and 2000 tax years for IC remain open.


APPLICABLE LAW AND ANALYSIS

Section 807(c) lists various items, including life insurance reserves,
that are taken into account in determining life insurance company taxable
income.

Section 807(d)(1) provides that, other than for purposes of section 816
(relating to qualification as a life insurance company), the amount of the
life insurance reserve for any contract is the greater of -- (i) the net
surrender value of the contract, or (ii) the reserve determined under
section 807(d)(2). At no time may the reserve for a contract exceed the
amount taken into account with respect to that contract as of that time in
determining the statutory reserves set forth in the company's annual
statement.

Sections 807(d)(2) and 807(d)(3)(B)(ii) provide that the reserve for
any contract must be determined using the tax reserve method applicable to
that type of contract. The tax reserve method applicable to annuity
contracts is the CARVM prescribed by the NAIC and in effect on the date of
the issuance of the contract.

Section 807(f) provides that if the basis for determining any item
referred to in section 807(c) as of the close of any taxable year differs
from the basis for determining that item as of the close of the preceding
taxable year, then 1/10 of the difference between -- (i) the amount of the
item at the close of the taxable year, computed on the new basis, and (ii)
the amount of the item at the close of the taxable year, computed on the
old basis, that is attributable to contracts issued before the taxable
year, is taken into account (as either a deduction or an item of gross
income), for each of the succeeding 10 taxable years.

AG 33 contains the statement that the guideline "does not constitute a
change of method or basis from any previously used method." This statement
could lead one to conclude that taking this guideline into account in a
company's CARVM computation does not result in a change in basis. However,
for purposes of determining life insurance company taxable income, any
change in a company's tax reserve method is a change in basis subject to
the change in basis rules under section 807(f). See Rev. Rul. 94-74
(1994-2 C.B. 157).

Under section 807(d), IC is required to calculate the life insurance
reserves for Annuity Contracts using CARVM. For taxable years 1999 and
2000, IC did not take into account several specific factors set forth in
AG 33. For tax year 2001, IC modified its reserve computation to take
those factors into account in computing its EOY 2001 reserves for Annuity
Contracts. IC's change of reserving method is a change in basis under
section 807(f).

IC's EOY 2001 life insurance reserves for Annuity Contracts, computed
on the new basis, exceed the EOY 2001 reserves for those contracts,
computed on the old basis, by $2x. Pursuant to the adjustment rules of
section 807(f), IC can take 1/10 of the $2x into account as a deduction
under section 805(a)(2) in each of succeeding 10 taxable years, beginning
with the 2002 tax year. In the alternative, in accordance with Rev. Rul.
94-74, IC may file amended returns for 1999 and 2000 and recalculate its
tax reserves for Annuity Contracts for those years in accordance with AG
33.


HOLDING:

A change in the computation of existing life insurance reserves by IC
for Annuity Contracts to take into account specific factors set forth in
AG 33 is a change in basis subject to section 807(f) of the Code.


DRAFTING INFORMATION:

The principal author of this revenue ruling is Linda Boyd of the Office
of Associate Chief Counsel (Financial Institutions and Products). For
further information regarding this revenue ruling contact Ms. Boyd at
(202) 622-3970 (not a toll-free call).

<<END RULING>>

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