Highest Aggregate Reserves Qualify for Statutory Reserves Cap

On June 27, 2008, the Internal Revenue Service (IRS) released Rev. Rul. 2008-371 dealing with the application of the statutory cap when a company conducts business in several states with different minimum reserve requirements. The IRS concludes that statutory reserves defined in I.R.C. § 807(d)(6) for purposes of the limitation on tax reserves in I.R.C. § 807(d)(1) is the highest aggregate reserve amount for I.R.C. § 807(c) items actually held and set forth on the annual statement pursuant to the minimum reserve requirements of any state in which the company does business.

The revenue ruling contains two examples. In situation one, the life insurance company (IC) conducts business in 45 states and issues a life insurance contract (Contract A). IC actually holds and reports to each state insurance regulatory authority on its annual statement the highest aggregate minimum amount of reserves required for its insurance and annuity contracts under the rules of any state in which IC does business. As a result, on its 2007 annual statements, IC reported end-of-year aggregate reserves of $405,955,000 which included $9,992 of life insurance reserves with respect to Contract A.

In situation two, IC reported to each state the minimum amount of reserves required for its insurance and annuity contracts under the rules of that state. Following this principle, on its annual statement filed in State X, the state in which IC is chartered, IC reported $402,540,000 of end-of-year aggregate reserves and $9,942 allocable to Contract A. However, in its annual statement filed in State Y, IC reported $405,955,000 and included $9,992 allocable to Contract A. Thus, IC actually held and reported to at least one state the highest aggregate minimum amount of reserves required for its insurance and annuity contracts under any state in which IC does business.

The IRS concluded that in both situations, the statutory reserves as defined in I.R.C. § 807(d)(6) were $405,955,000—the highest aggregate minimum reserve amount for I.R.C. § 807(c) reserve items actually held pursuant to the minimum reserve requirements of any state in which IC does business. Therefore, for purposes of applying the statutory reserves limitation contained in the flush language of I.R.C. § 807(d)(1), the amount of statutory reserves to be taken into account with respect to Contract A is $9,992.