rr-14-07.pdf

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Part I

Section 807.—Rules for certain reserves

Rev. Rul. 2014-7

ISSUE
What is the amount of the life insurance reserves taken into account under
section 807 of the Internal Revenue Code for a variable contract where some or all of
the reserves are accounted for as part of a life insurance company’s separate account
reserves?
FACTS
Situation 1. IC
is a life insurance company as defined in section 816(a) and is
the issuer of Contract A. Contract A provides for the payment of variable annuity
benefits computed on the basis of a recognized mortality table and the investment
experience of IC
's segregated asset account (separate account). IC bears the mortality
risks with regard to the contingencies involved in the variable annuity benefits. Contract
A neither provides any “supplemental benefits” (as defined in section 807(e)(3)(D)) nor
involves any “qualified substandard risks” (as defined in section 807(e)(5)(B)).

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Contract A is a “variable contract” as defined in section 817(d) and an “annuity
contract” under section 817(g). IC's reserves for Contract A are “life insurance
reserves” as defined in section 816(b).
For taxable years 2012 and 2013, the amounts of end-of-year tax reserves
determined under section 807(d)(2) for Contract A are $8,000 and $10,000,
respectively.
The 2012 and 2013 end-of-year net surrender values determined under section
807(e)(1) for Contract A are $7,840 and $9,830, respectively. The amounts taken into
account by IC
with regard to Contract A in determining its 2012 and 2013 end-of-year
statutory reserves within the meaning of section 807(d)(6) are $8,050 and $10,045,
respectively. None of IC's statutory reserves is attributable to any deferred or
uncollected premium.
Situation 2. The facts are the same as Situation 1, except that Contract A
provides a minimum guaranteed death benefit in addition to variable annuity benefits.
IC
bears the mortality risks and investment risks with regard to the contingencies
involved in the provision of the death benefit.
For taxable years 2012 and 2013, the end-of-year tax reserves determined under
section 807(d)(2) for Contract A are $8,155 and $10,165, respectively. The 2012 and
2013 end-of-year net surrender values determined under section 807(e)(1) for Contract
A are $8,000 and $10,000, respectively. The amount taken into account by IC
with
regard to Contract A in determining its 2012 and 2013 end-of-year statutory reserves
within the meaning of section 807(d)(6) are $8,210 and $10,215, respectively.

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If Contract A had not provided the minimum guaranteed death benefit, the 2012
and 2013 end-of-year tax reserves determined under section 807(d)(2) would have
been $8,000 and $10,000, respectively.
LAW AND ANALYSIS
Section 803(a) provides that life insurance company gross income is the sum of
(i) premiums, (ii) net decreases in certain reserves under section 807(a), and (iii) other
amounts generally included by a taxpayer in gross income. Section 805(a)(2)
authorizes a deduction for the net increase in certain reserves under section 807(b). In
calculating the change in reserves for a variable contract, the increase or decrease in
the reserves due to appreciation and depreciation of separate account assets is
removed. See section 817(a).
Section 807(c) sets forth the items taken into account in determining the net
decrease or net increase in reserves under section 807(a) and (b). Among the items
taken into account are “life insurance reserves” (as defined in section 816(b)).
For purposes of determining a life insurance company's income or deduction
from a change in reserves, section 807(d)(1) provides that the amount of the life
insurance reserves for any contract is the greater of-- (i) the contract's net surrender
value, or (ii) the contract's tax reserve determined under section 807(d)(2). However,
the life insurance reserves for a contract cannot exceed the “statutory reserves” (as
defined in section 807(d)(6)).
Section 807(d)(2) provides that the amount of the tax reserve for any contract is
determined using-- (i) the tax reserve method applicable to the contract, (ii) the greater
of the applicable Federal interest rate or the prevailing State assumed interest rate, and

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(iii) the prevailing commissioners' standard tables for mortality and morbidity adjusted as
appropriate to reflect the risks (such as substandard risks) incurred under the contract
which are not otherwise taken into account. The tax reserves determined under section
807(d)(2) reflect all of the benefits (including the net surrender value) payable under the
contract.
Section 807(e)(1) provides generally that the net surrender value of “any
contract” is determined with regard to any penalty or charge that would be imposed on
surrender, but without regard to any market value adjustment on surrender. The net
surrender value represents the current contractual cash benefit payable under a
contract.
Except as otherwise provided in special rules under section 807(e)(3) and (5)
(relating to qualified supplemental benefits and qualified substandard risks), the
comparison of the tax reserve and the net surrender value is made on an aggregate
benefit basis. See H. Rep. No. 432, Pt. 2, 98th Cong., 2d Sess. 1414 (1984); S. Prt.
169, Vol. I, 98th Cong. 2d Sess. 540 (1984).
Section 807 makes no distinction between a fixed (non-variable) contract and a
variable contract. For both fixed and variable contracts, a life insurance company
determines its income or deduction from a change in reserves using the amounts of its
life insurance reserves determined under section 807. See also section 817(a)
(referring to “the sum of the items described in section 807(c)”).
Section 817(c) requires a life insurance company to account separately for the
income, exclusion, deduction, asset, reserve, and other liability items attributable to
variable contracts. If a variable contract contains a guarantee (for example, a minimum

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death benefit), section 817(d) (flush language) requires an insurance company to
account for the excess of obligations under the guarantee over the obligations under the
contract without regard to the guarantee as part of the company's general account, and
not as part of the company's separate account.
In both Situation 1 and Situation 2, the end-of-year tax reserves determined
under section 807(d)(2) for Contract A-- (i) exceed the end-of-year net surrender value
of the Contract, but (ii) are less than the end-of-year statutory reserves for the Contract.
Accordingly, under section 807(d)(1), the amount of the end-of-year life insurance
reserves taken into account under section 807 for Contract A in both Situations is the
amount of the end-of-year tax reserves determined under section 807(d)(2). In
Situation 1, the amounts of the 2012 and 2013 end-of-year life insurance reserves for
Contract A are $8,000 and $10,000, respectively. In Situation 2, the amounts of the
2012 and 2013 end-of-year life insurance reserves for Contract A are $8,155 and
$10,165, respectively.
In Situation 2, IC
is required under section 817(d) to account for the excess of its
obligations under Contract A with the minimum death benefit over its obligations under
the Contract without the death benefit as part of the company's general account
reserves. Pursuant to section 817(c), IC
accounts for its remaining obligations under
the Contract A as part of the company's separate account reserves. Accordingly, for
end-of-year 2012, IC
accounts for the $155 excess of its obligations under Contract A
with the minimum death benefit ($8,155) over its obligations under the Contract without
the death benefit ($8,000) as part of the company's general account reserves. IC
accounts for the remaining $8,000 as part of its separate account reserves. For end-of-

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year 2013, IC
accounts for the $165 excess of its obligations under Contract A with the
minimum death benefit ($10,165) over its obligations under Contract A without the death
benefit ($10,000) as part of the company's general account reserves. IC
accounts for
the remaining $10,000 as part of its separate account reserves.
This revenue ruling provides guidance only with regard to the determination
under section 807(d) of the amount of the life insurance reserves for a variable contract
when some or all of the reserves are accounted for as part of a life insurance
company’s separate account reserves.
HOLDING
Under section 807(d)(1), the amounts of the end-of-year life insurance reserves
for Contract A in both Situation 1 and Situation 2 are the amounts of the tax reserve
determined under section 807(d)(2). Thus, in Situation 1, the amounts of the 2012 and
2013 end-of-year life insurance reserves for Contract A are $8,000 and $10,000,
respectively. In Situation 2, the amounts of the 2012 and 2013 end-of-year life
insurance reserves for Contract A are $8,155 and $10,165, respectively.
EFFECT ON OTHER DOCUMENTS
Rev. Rul. 2007-54 is modified and superseded. Rev. Rul. 2007-61 is obsoleted.
DRAFTING INFORMATION
The principal author of this revenue ruling is David Remus of the Office of the
Associate Chief Counsel (Financial Institutions & Products). For further information
regarding this revenue ruling, contact Mr. Remus at (202) 317-6995 (not a toll-free call).