Insurance Groups Approve of Proposed Consolidated NOL Regs

August 19, 2020

Charles Rettig, Esq., Commissioner
Michael J. Desmond, Esq., Chief Counsel
Internal Revenue Service
1111 Constitutions Avenue, N.W.
Washington, D.C. 20224-0002

RE: Proposed Regulations on Net Operating Losses of Consolidated Groups
(REG-125716-18)

Dear Messrs. Rettig and Desmond:

The American Property Casualty Insurers Association, the National Association of Mutual Insurance Companies and the Reinsurance Association of America (the “Trades”) represent the great majority of insurance and reinsurance companies underwriting property and casualty insurance throughout the United States.

The Trades commend IRS/Treasury on the clarification provided by the proposed regulations addressing the changes to the Net Operating Loss deduction of Code §172 by Pub. L. 115-97, known as the Tax Cuts and Jobs Act (TCJA) and the Coronavirus Aid, Relief and Economic Security (CARES) Act, Pub. L. 116-136. These regulations provide guidance on the application of the special rules for “nonlife” or property and casualty (P&C) companies to consolidated groups that include both P&C companies and other companies that are subject to the post-2017 rules (after the CARES Act, the post-2020 rules).

The Explanation of Provisions in Section II, B, 2 of the Preamble notes that the application of the 80% limitation depends on the status of the entity whose income is being offset, rather than on the status of the entity whose loss is being absorbed. The Explanation then sets out a two-factor computation for groups that consist of both P&C insurance companies and non-P&C companies (the most common arrangement for P&C groups consists of several P&C insurance companies held by a noninsurance holding company).

Subsection (f) of section 172 provides that the deduction allowed under subparagraph (a) for nonlife insurance companies is the aggregate of the NOL carried forward or back to the taxable year and provides that the 80% limitation of taxable income in the carryback or carryforward year does not apply. The language in subsection (a) and (b)(2)(C) of section 172 was modified by the CARES Act to focus the 80% limitation on taxable income.

The Allocation Method of Prop. Treas. Regs. §1.1502-21

In a June, 2018 comment letter, the Trades requested that these regulations follow two principles:

• The regulations should not create a separate P&C subgroup, which would thwart Congressional intent in preserving the pre-2018 carryback/ carryforward rules, i.e., to allow P&C companies to recover from catastrophe losses more rapidly; and

• The regulations should follow the well known -21 regulation's method of allocating NOLs among members of a consolidated group.

The proposed regulation's allocation method is consistent with the allocation methods of Treas. Regs. §1.1502-21(b) and consolidated return principles. As the Explanation notes, the proposed allocation method follows the “historical application” of the -21 regulation, developed before the enactment of TCJA. Nothing in the revised statute or the TCJA's legislative history indicates that a change to the long-standing allocation method of the -21 regulation is required or contemplated.

The Trades are supportive of the use of the pro rata approach to determine the amount of P&C losses that can be carried over, and the creation of a two-factor computation and two pools method to determine the amount of the 80% limit on taxable income. These methods appropriately implement the intent of Congress to allow P&C insurers to recover funds after catastrophe losses.

Life/Nonlife Consolidated Return Regulations

A number of P&C insurance groups include life insurance companies as well. In the proposed regulations, IRS and Treasury have taken an important step toward modernizing the outdated life/nonlife consolidated return regulations of Treas. Regs. §1.1502-47. Those regulations were promulgated under life insurance company tax rules that have been substantially revised, first in the Deficit Reduction Act of 1984, Pub. L. 98-369, and most recently in the Tax Cuts and Jobs Act, supra. The proposed regulation removes provisions of the regulation that have become outdated. We urge IRS/Treasury to continue to revise and update Treas. Regs. §1.1502-47.

If you have questions about this comment, please contact us using the information below or contact Brenda Viehe-Naess (bvns@att.net or 202-841-3902).

Respectfully,

Joseph Sieverling
Reinsurance Association of America
sieverling@reinsurance.org
202-468-5484

David Pearce
American Property Casualty Insurance Association
david.pearce@apcia.org
202-828-7114

Jonathan Rodgers
National Association of Mutual Insurance Companies
jrodgers@namic.org
317-876-4206