REVENUE RULING 75-163
1975-1 C.B. 189

[IRS Annotation]
Life insurance company reserves for policies assumed during year. A life insurance company subject to tax under section 802 of the Code which during the year, under an assumption reinsurance agreement, assumed total liability for policies from another life insurance company will adjust its reserves to reflect such policies reinsured only at the end of the year in determining its deduction for the increase allowed under section 809(d)(2).

Rev. Rul. 75-163
Advice has been requested whether life insurance reserves with respect to a block of life insurance policies acquired by the taxpayer pursuant to an assumption reinsurance agreement during the taxable year 1974 must be taken into account at both the beginning and end of the taxable year, for purposes of determining the deduction for the increase in reserves allowed under section 809(d)(2) of the Internal Revenue Code of 1954.

The taxpayer files its federal income tax return on a calendar year basis and is a life insurance company subject to tax under section 802 of the Code. During the taxable year it entered into an assumption reinsurance agreement with L, also a life insurance company, effective April 1, 1974. Under such agreement the taxpayer assumed all of L's liabilities under the block of policies reinsured and became solely liable to the policyholders on such policies. At the same time the contractual relationship between L (the original insurer with respect to these policies) and the policyholders ceased. L, as a result of the above-reinsurance agreement, properly included in gross amount under section 809(c)(2) the net decrease in its life insurance reserves resulting from the reinsurance transactions.

Section 809(c)(2) of the Code provides, in part, that one of the items of gross amount that is taken into [190] account for purposes of determining gain or loss from operations is a net decrease in certain reserves that are required by section 810 to be taken into account for the taxable year.

Section 809(d)(2) of the Code provides, in part, a deduction for purposes of determining gain or loss from operations for the net increase in reserves that are required by section 810 to be taken into account for the taxable year.

Section 810(b) of the Code provides, in part, that if the sum of those items described in section 810(c) as of the close of the taxable year exceeds the sum of such items as of the beginning of the taxable year, the excess shall be taken into account as a net increase in reserves referred to in section 809(d)(2).

Section 810(a) of the Code provides, in part, that if the sum of the items described in section 810(c) as of the beginning of the taxable year exceeds the sum of such items as of the close of the taxable year, the excess shall be taken into account as a net decrease in certain reserves referred to in section 809(c)(2).

In Kentucky Central Life Insurance Company, 57 T.C. 482, 496 (1972), the United States Tax Court pointed out the tax consequences of an assumption reinsurance transaction to both parties as follows:

In the case of the reinsurer, it must take into income under section 809(c)(1) the consideration it receives from assuming the liabilities under the reinsured insurance contracts and gets a deduction under section 809(d)(2) for the net increase in its reserves brought about by its assumption of the reserves required by law to be kept in order to meet future claims on the reinsured insurance contracts. Conversely, in the case of the reinsured, it must take into income under section 809(c)(2) its net decrease in reserves brought about by the reinsurer's assumption of those reserves and gets a deduction under section 809(d)(7) for the consideration it paid the reinsurer for assuming the liabilities under the reinsured insurance contracts.

As noted above, section 809(d)(2) of the Code provides for a deduction for the net increase in life insurance reserves referred to in section 810(c). The end of the year balance of the life insurance reserves must reflect such reserves with respect to the liabilities assumed by the taxpayer under the policies reinsured on April 1, 1974, just as would the life insurance reserves under any new insurance policies written during the taxable year. However, the beginning of the year balance of life insurance reserves under the policies assumed by the taxpayer is zero since on that date, L (the reinsured) and not the taxpayer, is on the risk, and consequently the taxpayer is not entitled to reflect life insurance reserves with respect to such reinsured policies at January 1, 1974. Similarly with respect to any new business written by the taxpayer during 1974, no life insurance reserves can be reflected on such new business at January 1, 1974, since on such date the new business was not yet in existence.

Accordingly, under the stated facts, the taxpayer in determining its deduction for increase in certain reserves under section 809(d)(2) of the Code for the taxable year 1974 with respect to the policies it assumed under the assumption reinsurance agreement effective April 1, 1974, will reflect the reserves under such policies reinsured only at December 31, 1974.