IRS Concludes in CCA That Section 197 Applies to All Section 1060 Indemnity Reinsurance Transactions

In an interesting start to the new year, the Internal Revenue Service (IRS) released guidance which concluded that section 1971 requires the capitalization and amortization of a ceding commission in excess of the amount capitalized under section 848 in “any” section 1060 transaction involving an insurance business. Section 197(f)(5) provides rules to determine the amount of an amortizable section 197 intangible resulting from an assumption reinsurance transaction. In Chief Counsel Advice (CCA) 201501011 (Sept. 4, 2014), the IRS concluded that section 197 applies to a ceding commission regardless of whether the transfer of the insurance business occurs pursuant to an underlying assumption reinsurance or indemnity reinsurance transaction. When the regulations under sections 338 and 1060 were being finalized in 2006, commentators asked for clarification that a ceding commission is deductible under section 848(g) in an indemnity reinsurance transaction even if the overall transaction is subject to section 1060. The clarification was not made and no explicit clarification (supporting either conclusion) was included at that time. It is unfortunate that the guidance on this significant issue is being offered by the IRS only in the form of a CCA. Moreover, the analysis set forth in the CCA raises questions as to its validity.