When variable annuity contract tax reserves are greater than the net surrender value and less than the statutory reserves, life insurers should use the tax reserve figures to calculate the effects of decreases in VA separate account reserves on gross income.

IRS officials give those instructions in Revenue Ruling 2007-54, an analysis of some of the rules that govern the reserve calculations used in computations of life insurance company gross income figures.

The ruling deals with the situation of an insurer that is calculating taxes for a VA contract set up in such a way that some or all of the reserves are treated as being part of the separate account reserves.

The ruling also deals with a separate situation in which the facts are similar but the VA contract provides a minimum guaranteed death benefit in addition to the VA benefits.

The contract described in the situations does not provide “supplemental benefits” or involve any “qualified substandard risks,” officials write in the revenue ruling.

Section 807(d)(1) of the Internal Revenue Code states that the amount of life insurance reserves that an insurance company should use in reserve change calculations is either the contract’s net surrender value, if that figure is greater than the tax reserve, or the tax reserve, if the tax reserve is greater, officials write.

Under that section, the insurance company should use the end-of-year tax reserves for the VA contract in reserve change calculations, officials write.

In the situation involving the minimum death benefit, the insurance company must account for the excess of its obligations under the VA contract “with the minimum death benefit over its obligations under the contract without the death benefit as part of the company’s general account reserves,” officials write.

“The allocation of obligations between general account reserves and separate account reserves has no effect on the determination of the amount of [the insurance company's] life insurance reserves” for the VA contract under IRC Section 807(d), officials write.

A copy of the IRS revenue ruling is on the Web