The Mystery of PLR 201006002

(co-authored with Julie V. Goosman)

In PLR 201006002, the Internal Revenue Service (IRS) appears to apply section 351 and Rev. Rul. 94-45 to a variety of reinsurance transactions. At first glance, the PLR seems to break new ground by applying section 351 to the transfer of assets and insurance liabilities in an indemnity reinsurance transaction. However, as described below, a more in-depth review leads one to conclude that even though the PLR refers to a section 351 transfer “in the context of an indemnity coinsurance transaction,” it is not referring to the transfer of assets underlying a transfer of insurance reserves. We will explain the reasons why the IRS should rule on the application of section 351 to the transfer of assets and reserves in an indemnity coinsurance transaction where the ceding company transfers more assets to the assuming company than it would in an arms-length transaction and, therefore, the ceding company actually receives or is deemed to receive stock in the exchange for the transferred assets including the value of insurance in force. We also will summarize other interesting rulings in the PLR.