P&C Insurance Companies Seek Guidance on Business Interest Regs

January 17, 2019

CA:PA:LPD:PR (REG-106089-18)
Internal Revenue Service
Room 5203
P.O. Box 7604
Ben Franklin Station
Washington, DC 20044

Re: Comments on REG-106089-18

Dear Sir/Madam:

These comments are filed with respect to REG-106089-18 which contains proposed regulations on limitations for business interest expense deductions under section 163(j) of the Internal Revenue Code of 1986. They are filed on behalf of a group of property/casualty insurance companies that file consolidated returns both with and without life insurance companies. Our comments make three recommendations.

Single Limitation

Prop. Reg. § 1.163(j)-4(d)(2)(i) provides that there is a single section 163(j) limitation for members of a consolidated group. It would be helpful to provide clarification that there are not limitations for each subgroup in a life/nonlife consolidated return under Treas. Reg. § 1.1502-47. Although we believe that the proposed regulations already preclude separate limitations for each life/nonlife subgroup, our experience is that the subgroup approach to life/nonlife consolidation often creates confusion as to how to apply special Code limitations on deductions. This clarification could be made by an amendment to Treas. Reg. § 1.1502-47(r).

NOL Carrybacks

Our second recommendation relates to the calculation of adjusted taxable income (ATI) in the context of a life/nonlife consolidated group. Under section 172, net operating losses (NOLs) of nonlife insurance companies can be carried back for two years and carried forward for 20 years.

ATI as defined in Prop. Reg. § 1.163(j)-4(d) does not appear to eliminate the amount of any NOL carryback in computing consolidated ATI.

Prop. Reg. § 1.163(j)-4(d)(2)(iv) provides:

(iv) Calculation of adjusted taxable income. For purposes of calculating the ATI for a consolidated group, the relevant taxable income is the consolidated group's consolidated taxable income, determined under § 1.1502-11 without regard to any carryforwards or disallowances under section 163(j). . . .

Treas. Reg. § 1.1502-11 defines consolidated taxable income, in general, and includes deductions for NOL carryforwards and carrybacks pursuant to Treas. Reg. § 1.1502-11(a)(2). Section 163(j)(8) defines ATI as the taxable income of the taxpayer computed without regard to the amount of any NOL deduction under section 172 (and certain other items). Consistent with the statute, the general rule in Prop. Reg. § 1.163(j)-1(b) defines ATI correctly without regard to NOL deductions. However, in the consolidated context, the rule set forth above in Prop. Reg. § 1.163(j)-4(d)(2)(iv) for determining ATI could be read to exclude only NOL carryforwards and not NOL carrybacks. We suggest that the final regulations clarify that the consolidated group's consolidated ATI not take into account any NOL deductions available under section 172 and Treas. Reg. § 1.1502-11(a)(2), whether they result from the carryback or the carryforward of NOLs.

Interest Carryforwards

Prop. Reg. § 1.163(j)-5 provides rules for implementing the carryforward of disallowed interest deductions under section 163(j). We assume that any excess interest deduction carryforwards would be used under Prop. Reg. § 1.163(j)-5 before any NOL carryforward or carryback under section 172 and before any nonlife subgroup loss disallowance under section 1503(c)(1), but it would be helpful if the final regulations confirmed the application of these ordering rules.

We appreciate your taking into consideration our comments.

Respectfully submitted,

Peter H. Winslow

Lori J. Jones
Scribner, Hall & Thompson, LLP
Washington, DC