rp-07-61.pdf

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Part III

Administrative, Procedural, and Miscellaneous

Section 807. – Rules for Certain Reserves
(Also §§ 805, 812, 832)

Rev. Proc. 2007-61

SECTION 1. PURPOSE
This revenue procedure provides a safe harbor under which an insurance
company subject to tax under subchapter L of the Internal Revenue Code is not
required to take into account any portion of the increase for the taxable year in policy
cash values of life insurance contracts described in § 264(f)(4)(A) (I-COLI Contracts) for
purposes of applying the insurance company proration rules in §§ 807(a)(2), 807(b)(1),
805(a)(4), 812, or 832(b)(5).
SECTION 2. BACKGROUND
.01 Insurance company proration rules
. (1) To clearly reflect income, an
insurance company is allowed to deduct increases in certain insurance reserves
reflecting the company’s obligations to policyholders. Like other taxpayers, an
insurance company may receive tax-favored income, such as tax-exempt interest,

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intercorporate dividends, and the inside build-up under life insurance contracts.
Because a portion of the reserve increase can be viewed as funded by tax-favored
income, the insurance company proration rules require that tax-favored income be
prorated between the insurance company and its policyholders. See
§§ 807(a) and (b)
(requiring that a life insurance company’s deductible reserves be reduced by the
“policyholders’ share” of certain tax-favored income) and § 832(b)(5)(B) (requiring that a
property and casualty insurance company’s deductible additions to reserves be reduced
by 15 percent of tax-favored income). See also
§ 805(a)(4) (generally limiting a life
insurance company’s deduction for dividends received to the “company’s share” of the
dividends); § 812 (setting forth the methodology for determining the company’s share
and the policyholder’s share).
(2) Prior to 1997, the tax-favored investment income items taken into account
under the insurance company proration rules were tax-exempt interest and
intercorporate dividends. In the Taxpayer Relief Act of 1997, 1997-4 C.B. (Vol. 1) 165-
69 (“1997 Act”), Congress amended §§ 807(a)(2), 807(b)(1), 805(a)(4), 812(d)(1), and
832(b)(5) to take into account “the increase for the taxable year in policy cash values . .
. of life insurance policies and annuity and endowment contracts to which section 264(f)
applies.” (Emphasis added.) See
§ 1084(b) of the 1997 Act. The legislative history
explained:
[T]he rules reducing certain deductions for losses incurred, in the case of
property and casualty companies, and reducing reserve deductions or
dividends received deductions of life insurance companies, are modified to

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take into account the increase in the cash values of life insurance policies
or annuity or endowment contracts held by insurance companies.
H. R. Rep. No. 105-220, 105
th
Cong., 1
st
Sess. 588 (1997), 1997-4 (Vol. 2) C.B. 2058.
.02 Contracts to which § 264(f) applies. The IRS and the Treasury Department
have become aware of questions concerning the interpretation of the phrase “contracts
to which § 264(f) applies.” For example, it may be argued that § 264(f) does not “apply”
to contracts described in § 264(f)(4)(A) (i.e., contracts covering 20-percent owners,
officers, directors and employees) because those contracts are excepted from the
disallowance rule of § 264(f)(1). Alternatively, it may be argued that the § 264(f)(4)(A)
exception applies only for purposes of the disallowance rule of § 264(f)(1) and that other
provisions of § 264(f) continue to "apply" to contracts covering 20-percent owners,
officers, directors and employees. See, e.g., § 264(f)(4)(C).
SECTION 3. SCOPE
This revenue procedure applies to I-COLI Contracts covering no more than 35
percent of the total aggregate number of the individuals described in § 264(f)(4)(A) at
any time during the taxable year.
SECTION 4. SAFE HARBOR
For purposes of applying the insurance company proration rules in §§ 807(a)(2),
807(b)(1), 805(a)(4), 812, or 832(b)(5), an insurance company is not required to take
into account any portion of the increase for the taxable year in the policy cash values
(within the meaning of section 805(a)(4)) of I-COLI contracts to which this revenue

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procedure applies pending the publication of additional guidance. Arrangements
involving such contracts, however, remain subject to challenge by the IRS under other
provisions of the tax law, including judicial doctrines such as the business purpose
doctrine.
SECTION 5. EFFECTIVE DATE
This revenue procedure is effective September 11, 2007. If, in response to
comments, additional guidance is published interpreting the phrase “contracts to which
section 264(f) applies," such guidance will apply prospectively.
SECTION 6. REQUEST FOR COMMENTS
.01 Comments are requested concerning the need for additional guidance in this
area. Specifically, comments are requested regarding the existence of any non-tax
regulatory rules or other requirements that limit an insurance company’s ability to invest
in I-COLI Contracts and the effect of any experience rating, inter-insurance, reciprocal,
or reinsurance arrangement on transactions involving I-COLI Contracts. In addition, the
IRS would welcome comments on the operation of arrangements involving I-COLI
Contracts.
.02 Comments should be submitted by December 31, 2007. Comments may be
submitted by mail addressed to: Internal Revenue Service, P.O. Box 7604, Ben Franklin
Station, Washington, D.C. 20044, Attn. CC:PA:LPD:PR (Rev. Proc. 2007-61), Room
5205; by hand delivery (Monday through Friday between the hours of 8:00 a.m. through
4:00 p.m.) addressed to: Courier’s Desk, Internal Revenue Service, Attn.:
CC:PA:LPD:PR (Rev. Proc. 2007-61), Room 5205, 1111 Constitution Avenue, NW,

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Washington, DC 20224; or by email addressed to:
Notice.Comments@irscounsel.treas.gov
. Commentators should include the
identification number of the publication (Rev. Proc. 2007-61) in both the email subject
line and the body of the comment. All materials submitted will be available for public
inspection and copying.
DRAFTING INFORMATION
The principal authors of this revenue procedure are Stephen D. Hooe and John
E. Glover of the Office of Associate Chief Counsel (Financial Institutions & Products).
For further information regarding this notice contact Messrs. Hooe or Glover (202) 622-
3900 (not a toll-free call).