ACLI Recommends Changes to Proposed Regs on Consolidated NOLs

August 24, 2020

CC:PA:LPD:PR (REG-125716-18)
Room 5203
Internal Revenue Service
P.O. Box 7604
Ben Franklin Station
Washington, DC 20044

Re: REG-125716-18 Consolidated Net Operating Losses

Dear Sir or Madam:

On July 8, 2020, a notice of proposed rulemaking (“NPRM”) from the Internal Revenue Service (“IRS”) and the Department of the Treasury was published in the Federal Register setting forth proposed amendments to the consolidated return regulations under section 1502 of the Internal Revenue Code (“Code”). The proposed regulations provide guidance implementing recent statutory amendments to section 172 and withdraw and re-propose certain sections of proposed regulations issued in prior NPRMs relating to the absorption of consolidated net operating loss carryovers and carrybacks. In addition, the proposed regulations update regulations applicable to consolidated groups that include both life insurance companies and other companies (amendments to § 1.1502-47, also referred to as the “life-nonlife” consolidated return regulations). On behalf of its member companies, the American Council of Life Insurers (“ACLI”) is pleased to submit our comments on the proposed amendments to § 1.1502-47.

The NPRM notes that, as a result of changes in the taxation of insurance companies under the Tax Cuts and Jobs Act (“TCJA”)¹ and prior legislation, various provisions in § 1.1502-47 currently are outdated. Accordingly, the proposed regulations would update § 1.1502-47 by:

• Removing paragraphs implementing statutory provisions that have been repealed;

• Revising paragraphs implementing statutory provisions that have been substantially revised;

• Updating terminology and statutory references to account for other statutory changes; and

• Removing paragraphs that contain obsolete transition rules or that are no longer applicable because the effective dates in the current life-nonlife regulations have passed.

The ACLI agrees with the vast majority of these changes and, accordingly, our comments will be limited to a few specific areas where we believe our recommended changes would provide useful or necessary clarification.

The ACLI has long maintained that certain substantive aspects of the life-nonlife consolidated return regulations also are outdated and unnecessary. These regulations, which affect almost every major U.S. insurance group, do not fully reflect, even with the proposed updates, fundamental changes to the taxation of both life and property and casualty insurance companies that were enacted as far back as the 1980's. Over the past 35+ years, the life-nonlife consolidated return regulations have not kept pace with policy changes reflected in enacted statutory law changes, or with the continuing evolution of guidance provided in the consolidated return regulations for taxpayers generally. This has caused difficulties for taxpayers and the IRS alike.

So, while the ACLI very much appreciates the NPRM's proposals to update the life-nonlife regulations, the revisions do not address other essential changes. Accordingly, the ACLI continues to strongly advocate for further substantive revisions necessitated by fundamental statutory changes in the taxation of insurance companies and by the development of the generally applicable consolidated return regulations. In this regard, we were pleased to note that the NPRM states that Treasury and IRS continue to study other issues pertinent to life-nonlife groups for purposes of potential future guidance.²

The life-nonlife rules ultimately deal with the determination, allocation and utilization of losses among the members of a life-nonlife consolidated return group. The ACLI believes it is imperative that the use of such losses follow the principles of the broader consolidated return regulations to the extent possible and that unnecessary restrictions not be perpetuated that, subsequent to significant law changes, no longer serve an appropriate policy purpose.

Among the further substantive changes to the life-nonlife regulations advocated by the ACLI are the following:

• Apply “normal” consolidated return loss allocation rules to losses of eligible and ineligible nonlife members;

• Apply SRLY principles to utilization of ineligible nonlife losses, including in the context of acquired nonlife groups;

• Apply “normal” consolidated return rules to allow the netting of capital losses against capital gains of all members of the group; and

• Simplify the eligibility and tacking rules.

We strongly recommend that these changes be among those considered for potential future guidance.

Comments on Proposed Amendments to § 1.502-47

1. Redesignated paragraph (b) — Definitions

Redesignated paragraph (b) includes several revisions (see redesignated subparagraphs (3), (4), and (9)) to refer to the meanings in § 1.1502-1. The NPRM proposes adding a new definition to section 1.1502-1(k) to define the term nonlife insurance company as a member that is an insurance company other than a life insurance company. The ACLI recommends that a new definition of nonlife insurance company be added to redesignated § 1.1502-47(b) to provide that the term “nonlife insurance company” has the meaning provided in § 1.1502--1(k), and that such term be used consistently throughout the -47 regulations.

2. Redesignated paragraph (d)(5) — Dividends Received Deduction (“DRD”)

The proposed regulations, in redesignated paragraph (d)(5) provide:

(i) Dividends received by an “eligible member” insurance company taxed under section 801 or 831 from another “eligible member” of the group are treated as if the group did not file a consolidated tax return (see sections 818(e)(2), 805(a)(4), 832(g), and 832(b)(5)(B) through (E)).

(ii) Dividends received from a life company member of the group that are not subject to (d)(5)(i) are not included in gross income (see section 1504(c)(2)(B)(i)), unless the distributee corporation is a nonlife company taxed under section 831, in which case the rules of section 832(b)(5)(E) apply.

The two references to “eligible member” in paragraph (d)(5)(i) should both instead be to “includible member”. While a life insurance company taxed under section 801 is not includible in the life-nonlife consolidated return unless it is eligible, nonlife insurance companies taxed under section 831 and noninsurance companies taxed under section 11 are includible even if ineligible. Accordingly, any dividend received by an includible insurance company (whether eligible or ineligible) from another includible member of the group (whether eligible or ineligible) should be treated as if the group did not file a consolidated tax return as described in paragraph (d)(5)(i).³

More broadly, however, paragraph (d)(5) should provide rules which cover the three situations in which an includible member of a life-nonlife consolidated return could receive dividends from another member of the group (with “group” determined under section 1504(c)(2)(A) without regard to the section 1504(b)(2) exclusion of life insurance companies):

• General rule for dividends received by an includible member from another includible member. In general, dividends from an includible member of the consolidated return group received by another includible member of the consolidated return group should be subject to the rules of § 1.1502-13(f)(2) and not included in the gross income of the distributee member.

• Dividends received by an includible insurance company. However, if both the distributee and the distributor are includible members, and if the distributee is an insurance company taxed under section 801 or section 831, the distributee treats the dividend as if the group did not file a consolidated return, and the appropriate rules provided in Subchapter L apply.⁴

• Dividends received by an includible member from a non-includible member. If a dividend received by an includible member (whether an insurance company or a non-insurance company) is from a member of the group (determined without regard to section 1504(b)(2)) that is not includible in the consolidated return, then the rules of section 243, as modified by section 1504(c)(2)(B)(i), apply to determine if the dividend is a qualifying dividend.⁵

If a life-nonlife election has been made for a taxable year, section 1504(c)(2)(B)(i) provides that section 243(b)(3) and the exception provided under section 243(b)(2) with respect to section 1504(b)(2) and (c) shall not be effective for such taxable year. In other words, section 1504(c)(2)(B)(i) turns off the requirement for a section 243(b)(3) election in a year for which a life-nonlife election is in effect. Also, the expanded definition of affiliated group in section 243(b)(2) is unnecessary in a life-nonlife consolidated return year because the life-nonlife affiliated group by definition in section 1504(c)(2)(A) is determined without regard to section 1504(b)(2). Accordingly, dividends from an ineligible life insurance company to an includible member of the life-nonlife consolidated return group should be treated as qualifying dividends if the requirements of section 243(b)(1) are satisfied.

Accordingly, the ACLI recommends that redesignated paragraph (d)(5) of the proposed regulations be modified to provide as follows (redlined against proposed (d)(5)):

(5) Dividends received and dividends received deduction

The ACLI also recommends that a modification be made to the last sentence of redesignated paragraph (l) to indicate that the usual rules in § 1.1502-13 apply, except to the extent provided otherwise in redesignated paragraph (d)(5).

3. Redesignated paragraph (g)(3) — Life consolidated capital gain net income or loss

Redesignated paragraph (g)(3)(ii)⁷ — life consolidated net capital loss carryovers and carrybacks — is an update of paragraph (k)(5) of the current regulations. When the life-nonlife regulations were first issued in 1983, much of paragraphs (k) and (l) were reserved, because of questions regarding the consolidation of life insurance company taxable income under the “three-phase” system of taxing life insurers in effect prior to 1984. However, portions of paragraphs (k) and (l) were completed, including paragraph (k)(5). Although the three-phase system was discarded more than 35 years ago, the -47 regulations were not updated to provide guidance on consolidated LICTI and related issues in the manner that guidance on nonlife consolidated taxable income had been provided in paragraph (h) (redesignated (f)).

Redesignated paragraphs (g)(1) and (2) of the proposed regulations provide guidance on consolidated LICTI. In doing so, they closely follow redesignated paragraphs (f)(1) and (2) relating to nonlife consolidated taxable income, with appropriate substitutions of “life” for “nonlife” and vice versa and with modifications for items applicable to nonlife companies, but not life companies, or vice versa.⁸ However, this symmetry is not maintained when redesignated paragraph (f)(3) is compared to (g)(3). The reason is that, in providing guidance on the application of § 1.1502-22, paragraph (f)(3) has always been able to refer back to rules for application of § 1.1502-21 in paragraphs (f)(2)(iii) through (v). However, because the regulations issued in 1983 did not provide guidance on consolidated LICTI, paragraph (k)(5) was unable to be worded similarly, as there was no guidance on how to apply § 1.1502-21 to the life subgroup. Accordingly, by updating paragraph (k)(5) and redesignating it as paragraph (g)(3), wording differences exist between redesignated paragraphs (f)(3) and (g)(3) that do not exist between redesignated paragraphs (f)(1)-(2) and (g)(1)-(2) now that (g)(1) and (2) have been updated. Although not substantive in nature, the ACLI recommends that redesignated paragraph (g)(3) be revised to more closely parallel the language of redesignated paragraph (f)(3) in the same manner that (g)(1)-(2) parallel (f)(1)-(2).⁹

4. Redesignated paragraph (n) — Effective/applicability dates

With a few changes to update cross-references to other paragraphs of the -47 regulations, paragraph (n) retains the effective date provisions of the current regulations and adds the following subparagraph (4):

(4) The rules of paragraphs (a)(2)(i), (a)(2)(ii), (b)(1) through (b)(4), (b)(9), (b)(10), (b)(12), (b)(13)(ii), (d)(5)(i), (d)(7)(ii), (f)(2)(iii), (f)(2)(vi), (f)(2)(vii), (f)(3)(ii), (g), (h)(4)(ii), (h)(4)(iii), and (j)(3) of this section apply to taxable years beginning after [EFFECTIVE DATE OF FINAL RULE].

The reason why these paragraphs are singled out, when other paragraphs also have been changed, is not explained. This approach seems cumbersome and likely to lead to confusion and potentially to controversy, particularly if further revisions to the -47 regulations to provide additional guidance are forthcoming. The ACLI recommends instead that updated § 1.1502-47 be made effective in its entirety for taxable years beginning after the publication of final regulations in the Federal Register. To the extent that prior effective/applicability dates need to be retained for guidance with respect to prior years, such effective/applicability dates could be separately spelled out and clearly marked as no longer effective for taxable years to which the updated -47 regulations apply.

* * * * * *

Thank you again for these proposed revisions to § 1.1502-47, which represent a significant improvement to the current regulations. However, as noted at the outset of this letter, the ACLI and its members remain committed to seeking further, substantive changes necessary to reflect current tax policy regarding the taxation of insurance companies and to conform the life-nonlife consolidated return regulations as closely as possible with the principles of other provisions of the consolidated return regulations. We would be pleased to discuss our recommendations for substantive changes with you at any time.

Sincerely,

Regina Y. Rose
Senior Vice President, Taxes & Retirement Security
(202) 624-2154 t
reginarose@acli.com

Mandana Parsazad
Vice President, Taxes & Retirement Security
(202) 624-2152 t
mandanaparsazad@acli.com

American Council of Life Insurers
Washington, DC