Tax Update ∙ Midwest IASA ∙ Ankeny, IA ∙ September 17, 2015 Brandy Vannoy, CPA, Partner

2 Agenda New/Proposed Legislation Other Updates Recent Court Cases Tax Sharing Agreements

6 New/Proposed Legislation Overview Review 2014 Camp Proposals Main provisions affecting insurance companies - Reduce top corporate tax rate to 25% - Repeal Alternative Minimum Tax (AMT) and revise Net Operating Loss (NOL) rules - Eliminate exclusion of performance-based compensation under IRC 162(m) - Life reserves – increase in discount rate to compute tax reserves

7 New Proposed Legislation Main provisions affecting insurance companies (cont.) - Non-life reserves – increase in rate, loss payment pattern lengthening, no company election - Increase in DAC percentages - Change in proration rules - Remove benefits for small life and non-life insurers - Limit Corporate-Owned Life Insurance (COLI) interest expense exception to 20% owners for new contracts - Repeal IRC 847

8 New Proposed Legislation Obama Administration FY 2016 budget proposal - Submitted on February 2, Reaffirmed support for reduction of top US corporate income tax rate - Included a number of items aimed at insurance industry tax reform - Would affect both foreign and domestic insurers

9 New Proposed Legislation Foreign Insurers - Limit deductions for reinsurance premiums paid to foreign affiliates - Exclusion for ceding commissions received or reinsurance recovered in same proportion that premium deduction denied - Election to treat premiums and associated investment income as Effectively Connected Income (ECI) - Would be effective for tax years beginning after December 31, 2015

10 New Proposed Legislation Domestic Insurers - Tax on large (assets +$50B) financial institutions - Carryback and carryforward periods - Derivatives - Proration - COLI - Sales of Life Insurance contracts - Would be effective for tax years beginning after December 31, 2015

11 Recent Court Cases Validus Reinsurance, Ltd. V. United States, No (D.C. Cir. May 26, 2015) - Cascading and Federal Excise Tax (FET) under IRC Reinsurance vs. Retrocession Securitas Holdings, Inc. v. Commissioner, T.C. Memo (October 29, 2014) - Allowed deduction for premiums paid to a captive insurance company - Similar to Rent-A-Center v. Commissioner (January 14, 2014)

12 Acuity Case A Mutual Insurance Company, and Subsidiaries v. Commissioner (U.S. Tax Court, Dkt. No , TC Memo , September 4, 2013) Big win for taxpayers!!!! Facts of Acuity Court Ruling

13 Acuity Case – Key Observations NAIC and ASOP standards support “fair and reasonable” Subsequent favorable development does not mean loss reserve estimate was unreasonable Actuaries everywhere 5 different actuaries involved in the case After consideration of opining actuary and company’s independent actuaries, court stated “our inquiry ends” without consideration of IRS actuaries Documentation key

14 Loss Reserves Documentation IRS requests in exam Support for method Compliance with NAIC guidance and ASOP

15 Other Updates FATCA reporting of US insurance premiums Accounting Method Changes and Procedures - Rev. Proc and Rev. Proc New procedural rules for filing method changes ‒ Taxpayers Under Examination ‒ Shortened IRC 481(a) adjustment periods Increase in IRS examinations of insurance companies Increase in investments in Master Limited Partnerships (MLPs) or other alternative investments State tax credits

16 Tax Sharing Agreements Systematic, rational, and consistent Three Basic Reasons - Earnings & Profits - Stock Basis - To determine how to split the actual liability and intercompany settlements

17 Tax Sharing Agreements Earnings & Profits – IRC 1552(a) 1. Contribution to Consolidated Taxable Income 2. Separate Return Tax Liability 3. Allocation of Tax Increases from Consolidation 4. With Approval from the Secretary Tax Attribute Absorption Methods – Treas. Reg (d) ‒ “Wait and See” ‒ “Percentage Method” ‒ Other Approved Methods Stock Basis

18 Contact Information Brandy Vannoy, CPA Partner (919)