When Are Guaranty Association Assessments Deductible?

Under SSAP No. 35, a liability for guaranty fund assessments must be charged to expense (Taxes, Licenses and Fees) when an insolvency giving rise to a potential assessment has occurred. The amount reported as a liability is the best estimate of the insurer’s share of the ultimate loss expected from the insolvency, taking into account the best available information about market share and premiums by state and line of business. Where state law allows a credit for future state premium taxes, the liability is established gross of the probable recovery, with the potential recovery through premium tax credits reported as a separate asset.

In Principal Life Insurance Company v. United States, 97 AFTR 2d 2006-1542 (U.S. Ct. Fed. Cl. 2006), the question came up as to whether the insurer was entitled to a current deduction for the portion of the guaranty fund assessments that were potentially available for future premium tax credits. On its tax returns, Principal deducted the guaranty fund assessments on a cash basis, but initially capitalized and amortized the portion available for premium tax credits over the period for which the credits were available. This position conformed to the historic informal position of the Insurance Branch of the IRS National Office. Principal decided to challenge this position and filed claims for refund and a Form 3115 (Application for Change in Accounting Method) to reverse the capitalization treatment. Principal’s argument was that the assessments were taxes deductible in full under I.R.C. § 164 for which no capitalization is required.