The IRS has begun to scrutinize life insurance securitizations. The law firm of Sidley Austin in New York reports in its latest newsletter that Diane Helfgott, a senior tax attorney with the IRS Large and Mid-Size Business (LMSB) division, stated publicy recently that “the IRS will begin studying life insurance securitization transactions to determine whether holders of the securities are different from typical bondholders because the holders are ‘accepting insurance risk.’”
The newsletter notes that Helfgott’s comments could be interpreted “as questioning the status of the notes issued in connection with life securitization as ‘debt’ for tax purposes (implicitly questioning the deduction of interest paid with respect to the notes).” But given the fact that life insurance securitizations are fairly new and the IRS may be less familiar with the transactions, the newsletter argues it’s “unclear whether the IRS has considered the fact that most life insurance securitizations involve a significant equity investment by the sponsor.”
Helfgott and colleague Anna Petinova serve as resources to IRS field auditors who request assistance on audits of corporate income tax returns, including returns of life insurance companies that completed what Sidley says were “significant” securitizations in recent years. Those returns are now due for regularly scheduled IRS audits, Sidley says. As it stands now, Sidley reports in its newsletter, “the IRS does not seem to have any specific guidance project in mind” regarding life insurance securitizations, and LMSB is “simply handling calls from IRS auditors in the field and conducting informal discussions with IRS National Office insurance tax experts in the office of Financial Institutions and Products, Branch 4.” That is the branch that would ultimately issue a formal ruling.