Monthly LRA Update
Monthly LRA Update
TAX DEVELOPMENTS
IRS Revenue Ruling 2020-05 – Adjustments to Basis
The February 24 Internal Revenue Bulletin included publication of Revenue Ruling 2020-05, which updates previous IRS guidance on the income recognized under situations described in Revenue Rulings 2009-13 and 2009-14.
In particular, Section 13521 of the Tax Cuts and Jobs Act (TCJA) amended IRC § 1016(a) to provide that, in determining the basis of a life insurance contract, no adjustment is made for mortality, expense, or other reasonable charges incurred under the contract. This amendment is effective for transactions entered into on or after August 26, 2009 (the effective date of Rev. Rul. 2009-13).
Rev. Rul. 2020-05 modifies the results of applicable situations in the previous revenue rulings. For example, Situation 2 of Rev. Rul. 2009-13 is modified as follows:
| Description of Situation | Rev. Rul. 2009-13 | Rev. Rul. 2020-05 |
| [A] sold the life insurance contract to [B], an unrelated person, for $80,000Prior to the sale, [A] had paid $64,000 in premiums; cost of insurance charges were $10,000 as of the date of the sale | The basis ($64,000) had to be reduced by the portion of premium that was “expended for the provision of insurance”The result was an adjusted basis of $54,000 and a gain on sale of $26,000 (i.e., $80,000 less $54,000) | The basis is no longer adjusted for any chargesThe result is a gain on sale of $16,000 (i.e., $80,000 less $64,000) |
Similar clarifications were set forth for other situations of Rev. Rul. 2009-13 and 2009-14. It is worth noting that the IRS had taken a similar position regarding adjustments to basis in the context of computing losses recognized on a policy surrender in Private Letter Ruling 133066-08. Rev. Rul. 2020-05 does not address that situation (likely because it was a non-precedential private letter ruling); however, we would anticipate a similar interpretation being applicable.
Rev. Rul. 2020-05 notes that the retroactive change in law “does not automatically permit a claim for a refund for such a year when the claim is barred by the period of limitations.”
Trump Administration Budget Proposal for FY 2021
On February 10, the Trump Administration released its budget proposal for fiscal year 2021. We did not observe any tax-related proposals that are noteworthy in the context of BOLI/COLI or employee benefit programs.
The budget proposal identified the following key priorities for the Administration:
- Better Trade Deals
- Preserving Peace through Strength
- Overcoming the Opioid Crisis
- Regulation Relief
- American Energy Independence
Regarding Regulation Relief, the Administration asserts that it “has cut more than seven regulations for every significant new regulation.”
House Ways & Means Committee Hearing – The Disappearing Corporate Income Tax
On February 11, the House Ways & Means Committee held a hearing titled “The Disappearing Corporate Income Tax.” Committee members and panelists discussed views on the impact of the TCJA on corporate income tax revenues. In general, panelists appeared to agree that the previous U.S. corporate tax rates were not competitive; that the adjustment to a territorial system under current law is better than the previous world-wide system; and that the tax cuts under TCJA do not pay for themselves.
Panelists and committee members disagreed regarding appropriate modifications to tax policy prospectively.
JUDICIAL DEVELOPMENTS
Transamerica COI Litigation Update
On February 19, the District Court (CA-Central District) ruled on Transamerica’s motion to dismiss the complaint in case no. 2:19-cv-06478-CAS(GJS) (Wells Fargo Bank, N.A. Et Al. v. Transamerica Life Insurance Company). Wells Fargo and US Bank, as securities intermediaries, are among the plaintiffs in this matter.
The complaint sought to challenge 2015 increases that Transamerica instituted for its Monthly Deduction Rates (“MDRs”), which is largely synonymous to cost of insurance (COI) rates. The breach of contract claim alleges that Transamerica materially breached the policies’ terms in four respects:
- By increasing the MDRs for reasons other than changes to its future cost expectations;
- By increasing the MDRs in an attempt to circumvent the guaranteed minimum interest rate;
- By increasing the MDRs in an attempt to recoup past losses and recover shortfalls in expected revenues; and
- By imposing excessive cost of insurance rates, including by failing to lower these rates.
The court pointed to a previous ruling generally rejecting these arguments (“Brighton Trustees”) and noted that the distinction in another matter (“Feller”) was that those policies did not include the word “interest” as a cost factor. As such, the court dismissed the complaint with regard to 74 of the 86 policies, which included “interest” as an enumerated cost factor.
Accordingly, the Court denied the motion to dismiss with respect to the other 12 policies.
Athene vs. American General, et al. – COLI SVP Product Dispute
On February 18, the docket for this matter was updated to include the transcript of a hearing held December 18, 2019 regarding American General’s motion to dismiss.
To briefly recap this dispute:
- In October of 2000 and June of 2001, American General separately sold two substantially similar group-variable life insurance policies to Plaintiffs in return for $150 million in premiums.
- Athene chose to invest in a portfolio named the SVP Balanced Portfolio, which was comprised of two components: 1) an equity and bond portfolio; and 2) a guarantee from non-party Zurich Insurance Company that is calculated as “the difference between (i) the total value of the SVP Balanced Portfolio and (ii) the net asset value of the equity and bond portfolio.
- In 2001, Athene provided notice of its intention to surrender the policies at a time that the SVP product value was $23 million. Instead of proceeding with the surrender, the parties agreed to amend the Transaction Documents to, among other things, set a minimum crediting rate of eight percent and a cap of ten percent. Importantly from AGL’s perspective, the renegotiation also vested “sole discretion” with AGL as to when surrender proceeds would be paid.
- Over time, the SVP Product has grown to become a larger and larger portion of the SVP Balanced Portfolio value.
- In late 2011 and early 2012, AGL issued amendments to “cap” the value of the SVP Product at fifty-five percent of the total value of the SVP Balanced Portfolio and to change Athene’s surrender rights.
- The amendment to Athene’s surrender rights changed the timing of payment from six months after exercise of the right to the time at which the value of the SVP Product is at or below zero.
The transcript from the December hearing sets forth each party’s primary arguments. It is available in PDF format upon request.