When a life insurer is deducting changes in reserves from federal taxable income, it can use the highest reserve amount required by any state in which it does business.
Officials at the Internal Revenue Service come to that conclusion in Revenue Ruling 2008-37, which covers the reserve figures used in income tax calculations required by Section 807(d)(1) and Section 807(d)(6) of the Internal Revenue Code.
A taxpayer that does business in 45 states and had about $406 million in statutory reserves in 2007 asked the IRS whether, for federal income tax purposes, it should use the reserve amount required by its home state, or if it could use the largest reserve amount required by any of the states in which it was doing business.
The insurer copes with differing reserve requirements by holding enough reserves to accommodate the highest reserve requirements imposed by any of the states in which it does business, officials write in the revenue ruling.
Officials describe 2 alternatives.
The insurer could have reported the highest reserve amount required as its reserve amount in all states in which it filed annual statements, officials write.
The insurer also could have kept the amount of reserves required by the state with the strictest standards, then told each state it had the amount of reserves required by that state, officials write.
Either way, the highest amount of reserves "was required to be held, was actually held, and was set forth in [the insurance company's] annual statement," officials write.
Because the insurance company actually held the highest amount of reserves, it could record that highest amount as its statutory reserve figure for purposes of applying the federal income tax provisions of Section 807(d)(6) of the Internal Revenue Code, officials write.
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