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IRS Cancels VA Ruling

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The Internal Revenue Service has decided to rescind recent advice it gave concerning variable annuity separate account reserve accounting.

The IRS is suspending IRS Revenue Ruling 2007-54, a batch of guidance that was released Aug. 16, IRS officials write today in IRS Revenue Ruling 2007-61.

The IRS and its parent, the U.S. Treasury Department, will replace the guidance with regulations that will address the same issues, officials write.

“The Treasury Department and the IRS are mindful of the benefits of notice and public comment and believe the issues in the revenue ruling would be more appropriately addressed by regulation,” officials write.

Revenue Ruling 2007-54 deals with situations in which VA tax reserves are greater than VA contract net surrender values.

When the tax reserves are greater than the net surrender values, life insurers should use the tax reserve figures to calculate the effects of decreases in VA separate account reserves on gross income, IRS officials wrote.

Since then, some taxpayers have told the IRS that applying the revenue ruling analysis retroactively would clash with provisions of the Life Insurance Company Tax Act of 1959.

The 1959 act provisions continue to govern interpretation of insurance tax rules added to the Internal Revenue Code by the Deficit Reduction Act of 1984, the taxpayers have argued.

While the IRS is preparing the new regulations, “the issues should be analyzed as though Revenue Ruling 2007-54 had not been issued,” IRS officials write.

Although the IRS is suspending use of 2007-54, officials there and at the Treasury Department continue to “believe it is important that the company’s share and policyholder’s share of net investment income be determined in a manner that effectively prevents the double benefit that otherwise would result from the use of tax-favored investment income (such as dividends qualifying for the dividends received deduction) to fund the company’s obligations to policyholders,” officials write.

A company of the new revenue ruling is available