Proration for Segregated Asset Accounts – Part Two

Although my article “Proration for Segregated Asset Accounts—How Is the Company’s Share Computed?” in Taxing Times (September 2007) is very recent, already two rulings have been issued that require additional comments. Just before my article went to press, the Internal Revenue Service (IRS) issued Rev. Rul. 2007-54, 2007-38 I.R.B. 604, stating that: (i) Under I.R.C. § 807(d)(1), the amount of the year-end life insurance reserves for a contract in two situations was the amount of the tax reserves determined under I.R.C. § 807(d)(2); and (ii) in both situations, because the reserves determined under I.R.C. § 807(d)(2) for the contract used the applicable Federal interest rate (AFIR) and exceeded the net surrender value of the contract, the required interest on the contract’s life insurance reserves was calculated by multiplying the mean
of the contract’s beginning-of-year and end-of-year reserves by the AFIR for the
contract. Then, the IRS issued Rev. Rul. 2007-61, 2007-42 I.R.B. 799, suspending Rev. Rul. 2007-54 and informing taxpayers that Treasury and the IRS intend to address in regulations the issues considered in Rev. Rul. 2007-54. The suspension was in response to industry arguments that the provisions on which Rev. Rul. 2007-54 is based carried over from the 1959 Act to the 1984 Act, and that the ruling should not be applied retroactively because its analysis is inconsistent with certain authorities under the 1959 Act. This article discusses the two rulings.