Time to Simplify the Life-Nonlife Rules?

(Co-authored with Mark H. Kovey)

The IRS recently added another layer of complexity onto the maze of “life-nonlife” rules found in Treas. Reg. section 1.1502-47, which are applicable to consolidated groups that include both life insurance companies and other corporations. In LTR 200252070 (Sept. 20, 2002) (the “Ruling”), Doc 2003-70 (6 original pages), 2002 TNT 250-56, the IRS ruled that net operating losses (“NOLs”) carried over in a tax-free liquidation subject to section 381(a) from “ineligible” nonlife companies to an eligible life insurance company continue to be treated as ineligible NOLs which are subject to the separate return limitation year (“SRLY”) restrictions as applied to the eligible life company’s income. While this is a better result than eliminating the consolidated group’s ability to use the NOLs altogether, it creates a knotty situation. The use of the NOLs, restricted by two separate regimes, is now dependent upon the income of both the eligible life insurance company and the income of the entire nonlife subgroup. Therefore, the Ruling underscores the need to simplify the life-nonlife rules.