IRS written determination 201443015

Private letter rulings and published taxpayer determination letters. Native document type is retained separately; a determination letter is not labeled a private letter ruling. These taxpayer-specific releases cannot be used or cited as precedent under 26 USC 6110(k)(3); applicability and current legal force are not independently certified. Keep repeated UILC subjects attached to one actual numbered document.

Internal Revenue Service
Department of the Treasury
Washington, DC 20224
Number: 201443015
Release Date: 10/24/2014
Index Number: 7702.00-00, 7702A.00-00,
72.00-00, 101.00-00, 264.00-
00
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Person To Contact:
--------------------, ID No. -----------------
Telephone Number:
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Refer Reply To:
CC:FIP:B04
PLR-122451-14
Date:
July 15, 2014
LEGEND:
Parent = -----------------------------------------------------------
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LifeSub1 = ----------------------------------------------
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LifeSub2 = ---------------------------------------------------------------
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State1 = ---------------
State2 = ------------------
Group of Businesses = -------------------------------------------------------------------------------------
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-------
Contracts = -------------------------------------------------------
Contractholders = ----------------------------------------------------------------
Business Activities = ---------------------------------------------------------------------------------------
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Year = -------

PLR-122451-14
2
Dear ------------------:
This is in reply to your request for a ruling that the transfer of Contracts from LifeSub1
and LifeSub2 to a potential Reinsurer, pursuant to an assumption reinsurance
agreement, will not (1) affect the date the Contracts were issued, entered into,
purchased, or came into existence or (2) require re-testing the Contracts or the start of
new test periods.
Parent is a publicly traded corporation organized under State1. It is a holding company
that owns Group of Businesses and files its federal income tax returns on a calendar
year basis as the common parent of a life/non-life consolidated group of companies.
LifeSub1 and LifeSub2 are a State2 companies taxed as life insurance companies
under Part I of Subchapter L of the Internal Revenue Code. Both are wholly-owned
indirect subsidiaries of Parent and are part of its life subgroup. LifeSub1 and LifeSub2
issued Contracts.
Parent has decided to focus exclusively on Business Activities and, since Year, has
been exiting its life insurance business. Accordingly, pursuant to a yet to be agreed
upon assumption reinsurance contract with a potential Reinsurer (an unrelated life
insurance company) and, subject to required state regulatory approval and the consent
of the Contractholders,Parent will transfer the Contracts to Reinsurer.
The taxpayer makes the following representations:
Contracts are life insurance contracts under the laws of the jurisdiction in which
they were issued.
Other than substituting a new insurer for LifeSub1 or LifeSub2, as applicable, the
Contracts will not be modified or restructured as a result of the assumption
transaction, and all terms of the Contracts will remain unchanged, including the
amount and pattern of death benefit, the premium pattern, the rate or rates, and
mortality and expense charges guaranteed under the Contracts.
The assumption transaction will not be implemented without approval by
insurance regulatory authorities in each of the applicable jurisdictions.
Reinsurer will be licensed to conduct an insurance business in the state in which
it is located and in the states and territories in which the reinsured contracts were
issued.
ISSUE

PLR-122451-14
3
Whether the assumption reinsurance agreement between Parent and Reinsurer
constitutes a “material change” to the existing policies causing them to be (1) treated as
“exchanged” for new policies, newly “issued” or “entered into” or “reissued” and
therefore subject to new tax rules, (2) re-tested under the rules applicable when they
were originally issued, or (3) subject to the start of new test periods.
LAW
Reinsurance is “insurance for insurance companies.” Atkinson & Dallas, LIFE
INSURANCE PRODUCTS AND FINANCE (Soc. Of Actuaries 2000) at 384.
Describing assumption reinsurance, the United States Supreme Court stated:
[T]he reinsurer steps into the shoes of the ceding company with respect to the
reinsured policy, assuming all its liabilities and its responsibility to maintain
required reserves against potential claims. The assumption reinsurer thereafter
receives all premiums directly and becomes directly liable to the holders of the
policies it has reinsured
Colonial Am. Life Ins. Co. v. Commissioner, 491 U.S. 244, 247 (1989).
Treas. Reg. § 1.809-5(a)(7)(ii) defines assumption reinsurance as“an arrangement
whereby another person (the reinsurer) becomes solely liable to the policyholders on
the contracts transferred by the taxpayer. Such term does not include indemnity
reinsurance or reinsurance ceded.”
In general, the tax rules that applies to a contract depends on when a contract was
“issued” or “entered into”. The contract is then “grandfathered” under those rules (i.e.,
not subject to changes in the tax law that apply to policies “issued” or entered into” on or
after an effective date). However, certain life insurance provisions of the Code provide
that, if there is a “material change” to a policy, it loses it “grandfathered” status and (1) is
subject to the new provision; (2) must be re-tested; or (3) new test periods commence.
ANALYSIS
Among other reasons, insurance companies enter assumption reinsurance contracts to
completely withdraw from a line of business.
Policyholders must consent to an assumption reinsurance arrangement but do not
initiate it. Also, although the reinsurer replaces the direct writer for all purposes of the
contract, assumption reinsurance does not cancel the original policy in exchange for a
new one nor change the existing contractual obligations of the underlying life insurance
policies.

PLR-122451-14
4
After Reinsurer assumes all obligations under the Contracts, their terms -- including the
amount and pattern of death benefit, the premium pattern, the rate guaranteed on the
issuance of the contract, and the mortality and expense charges -- will remain the same.
The assumption reinsurance agreement between Parent and Reinsurer does not
constitute a “material change” or an exchange of Contracts for new policies for
purposes of §§ 72, 101(f), 101(j), 264, 7702, and 7702A causing them to lose their
“grandfathered” status. Accordingly, the assumption reinsurance agreement, will not (1)
affect the date the Contracts were issued, entered into, purchased, or came into
existence; (2) require retesting the Contracts; or (3) require the start of new test periods.
Sincerely,
DONALD J. DREES, JR.
Senior Technician Reviewer (CC:FIP:B04)