ACLI Disagrees With Life Insurance Reserve Reg Suggestion

April 5, 2019

Steven T. Mnuchin
Secretary
Department of the Treasury
1500 Pennsylvania Avenue, N.W.
Washington, D.C. 20220

L.G. "Chip" Harter
Deputy Assistant Secretary
(International Tax)
Department of the Treasury
1500 Pennsylvania Avenue, N.W.
Washington, D.C. 20220

David J. Kautter
Assistant Secretary for Tax Policy
Department of the Treasury
1500 Pennsylvania Avenue, N.W.
Washington, D.C. 20220

Re: REG-105600-18 — Proposed Foreign Tax Credit Regulations¹

Dear Messrs. Mnuchin, Kautter, and Harter:

On behalf of the American Council of Life Insurers (”ACLI”)², we are writing in regard to written comments received by the Department of the Treasury (“Treasury”) and the Internal Revenue Service (“IRS”) with respect to the proposed regulations modifying the guidance necessary for US taxpayers to calculate their foreign tax credits. That regulatory package also refers to the possibility of re-proposing portions of the current temporary regulations under section 861 through 865 of the Internal Revenue Code of 1986, as amended (the “Code”).³ In response to that request in a letter dated December 7, 2018, Hogan Lovells US LLP requested that the regulations provide a rule for the allocation and apportionment of life insurance reserve deductions on a consolidated basis.

As a representative and advocate for our members companies, it is our view that the request for the specific language included in that comment letter is not representative of the views of our members. It is the view of our member companies that the current rules under Treasury Regulation Sections 861 through 865 provide adequate guidance while adhering to the fundamental principle that expenses be allocated and apportioned based on a factual relationship between the expense and the item or class of gross income of the entity, or group of entities, to which the expense is allocated or apportioned.

Section 818(f)(1) provides that deductions for life insurance reserves, claim payments, policyholder dividends, and changes in reserve basis are treated as items which cannot definitely be allocated to an item or class of gross income. The legislative history under Section 818(f) makes it clear that the primary purpose of this provision was to require apportionment of these items against investment income as well as premium income of the insurance company. Historically, the insurance industry distinguished between “underwriting income” and “investment income”. Section 818(f) recognizes that investment income of life insurance companies is used to fund policyholder obligations and establishes a rule for allocation and apportionment of life insurance reserve deductions that is consistent with that reality.

Treas. Reg. § 1.861-8 provides the general rules for allocating and apportioning deductions other than interest. These rules are applied separately to each member in an affiliated group for purposes of determining such member's taxable income, except to the extent required under Treas. Reg. § 1.861-14T. If a deduction is not definitely related to an item or class of gross income, it must be apportioned by attributing the deduction to gross income within the class to which the deduction has been allocated (which is in one or more statutory groupings) and to gross income (within the class) which is in the residual grouping. This is accomplished by allocating and apportioning expenses in a manner that reflects a factual relationship between the deduction and the grouping of gross income.

Treas. Reg. § 1.861-14T provides special rules for allocating and apportioning certain deductions other than interest expense of an affiliated group of corporations. Generally, for expenses not directly allocable to specific income producing activities or property, the taxable income of each member of an affiliated group is computed as if all members of the affiliated group were a single corporation. However, if any of those expenses are allocable to gross income of at least one member that incurred the expense, but fewer than all members of an affiliated group, then the deduction is apportioned against the income of the members based upon a factual relationship between the deduction and the income of those members.

Thus, Treas. Reg. § 1.861-8 and Treas. Reg. § 1.861-14T operate in tandem to apportion and allocate deductions against classes of income and legal entities within an affiliated group based upon factual relationships between the deduction and the income and the entities. The members of the ACLI believe this is the appropriate analytical framework given the diverse business practices and organizational structures of its members. Therefore, items allocable under section 818(f)(1) should be allocable based on the income of a life insurance company or on a life subgroup basis, depending on the factual relationship. A requirement that such items related to the business of a life insurance company be allocated among the consolidated group of companies that includes non-life companies, as that proposed by Hogan Lovells, is unnecessarily restrictive.

We thank you for the opportunity for dialogue and welcome the opportunity to discuss these items in further detail. We believe this discussion will assist you in analyzing feedback you have received from commenters and the life insurance industry to issue guidance implementing changes made by the TCJA related to the foreign tax credit.

Sincerely,

Regina Rose

Mandana Parsazad

American Council of Life Insurers 
Washington, DC

CC:
Douglas Poms
International Tax Counsel
Department of Treasury

Angela J. Walitt
Attorney-Advisor
Department of Treasury

Brett York
Attorney-Advisor
Department of Treasury