The Internal Revenue Service has come out with guidelines to help insurers apply insurance company proration rules to corporate-owned life insurance.
The guidelines, given in IRS Revenue Procedure 2007-61, affect insurers that pay taxes under Subchapter L of the Internal Revenue Code.
Current tax rules let insurers deduct increases in insurance reserves and “tax-favored income,” such as intercorporate dividends, from taxable income, IRS officials write in the revenue procedure.
“The insurance company proration rules require that tax-favored income be prorated between the insurance company and its policyholders,” officials write.
Before 1997, insurers had to apply the proration rules only to tax-exempt interest and intercorporate dividends, but the Taxpayer Relief Act of 1997 required insurers to apply the proration rules to increases in the cash values of some life insurance policies and annuity contracts.
The 1997 changed affected treatment of life insurers’ reserve deductions and life insurance company dividend deductions, officials write.