rp-19-10.pdf

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Administrative, Procedural, and Miscellaneous

26 CFR 601.204: Changes in accounting periods and in methods of accounting.
(Also: Part I, §§ 446, 481, 807.)

Rev. Proc. 2019-10

SECTION 1. PURPOSE
This revenue procedure provides procedures for an insurance company
changing its basis of computing reserves pursuant to § 807(f) of the Internal Revenue
Code (Code), as amended by section 13513 of the Tax Cuts and Jobs Act, Pub. L. No.
115-97 (December 22, 2017) (TCJA). This revenue procedure modifies Rev. Proc.
2018-31, 2018-22 I.R.B. 637, to provide procedures under § 446 and § 1.446-1(e) of the
Income Tax Regulations for an insurance company to obtain automatic consent of the
Commissioner of Internal Revenue (Commissioner) to change its method of accounting
to comply with § 807(f). This revenue procedure also modifies Rev. Rul. 94-74, 1994-2
C.B. 157, and Rev. Rul. 2002-6, 2002-1 C.B. 460, to the extent the holdings are
inconsistent with the general rules for changing a method of accounting under § 446(e)
and § 1.446-1(e).

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In addition, this revenue procedure provides guidance on (i) accounting for an
adjustment that arose under § 807(f) prior to its amendment by the TCJA and (ii) how a
change in basis of computing life insurance reserves must be taken into account for
purposes of computing amounts under the transition relief rule of section 13517 of the
TCJA.
SECTION 2. BACKGROUND
.01 Section 801(a) imposes a tax on the life insurance company taxable income
of a life insurance company. For purposes of computing life insurance company taxable
income, §§ 803(a)(2) and 807(a) include in gross income a decrease over the taxable
year in reserves described in § 807(c). Sections 805(a)(2) and 807(b) permit a
deduction for an increase over the taxable year in such reserves.
.02 Section 831(a) imposes a tax on the taxable income of a nonlife insurance
company. For purposes of computing taxable income of a nonlife insurance company,
§ 832(b)(4) provides that a decrease in unearned premiums over the taxable year
increases premiums earned for that year and an increase in unearned premiums over
the taxable year reduces premiums earned for that year. The flush language of
§ 832(b)(4) includes life insurance reserves, as determined under § 807, in unearned
premiums for this purpose.
.03 Section 807(c) enumerates items that a life insurance company must
account for on a reserve basis and take into account under § 807(a) and (b).
.04 Section 807(c)(1) includes life insurance reserves as an item that is taken
into account under § 807(a) and (b). Under § 807(d), the amount of the life insurance

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reserves for any contract is generally determined based on the tax reserve method
applicable to the contract, which is the Commissioners’ Reserve Valuation Method
(CRVM), Commissioners’ Annuity Reserve Valuation Method (CARVM), or other
method prescribed by the National Association of Insurance Commissioners (NAIC) that
covers the contract as of the date the reserve is determined.
.05 Section 807(f) provides rules for life insurance companies to implement a
change in the basis of computing items referred to in § 807(c). Rev. Rul. 65-240, 1965-
2 C.B. 236, concludes that because a nonlife insurance company includes life insurance
reserves in unearned premiums under § 832(b)(4), a nonlife insurance company
likewise should account for a change in basis of computing such reserves under
§ 810(d)(1) of the Code as it existed then, which was similar to § 807(f)(1) of the Code
prior to its amendment by the TCJA.
.06 Prior to amendment by the TCJA, § 807(f)(1) provided that if the amount of a
§ 807(c) reserve at the close of a taxable year was determined on a basis that differed
from the basis for such determination at the close of the preceding taxable year, then
1/10th of the difference between the amount determined at the close of the taxable year
under the old basis and the amount determined at the close of the taxable year under
the new basis, to the extent attributable to contracts issued before the taxable year, was
taken into account for each of the succeeding ten taxable years as a deduction under
§ 805(a)(2) or as gross income under § 803(a)(2), as appropriate.
.07 Section 13513 of the TCJA amended § 807(f)(1) to treat the adjustments
required under § 807(f) as adjustments under § 481 attributable to a change in method

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of accounting initiated by the taxpayer and made with the consent of the Secretary of
the Treasury (Secretary). The § 481 adjustment takes into account only amounts
attributable to contracts issued before the taxable year of change. The amendments
made by section 13513 are effective for taxable years beginning after December 31,
2017.
.08 To avoid duplication or omission of amounts related to changes that arose
under § 807(f) in a year beginning prior to January 1, 2018, a taxpayer must continue
the ten-year spread under prior law by taking such amounts into account as described
in § 807(f)(1) before its amendment by the TCJA. See § 807(d)(1)(D); § 13513(b) of the
TCJA.
.09 Section 13517 of the TCJA, among other things, amends § 807(d) to provide
a new method for computing the amount of life insurance reserves, effective for taxable
years beginning after December 31, 2017. Section 13517(c)(3) of the TCJA provides a
transition relief rule that generally requires the difference between (1) the amount of life
insurance reserves with respect to any contract as of the close of the taxable year
preceding the first taxable year beginning after December 31, 2017, computed using the
method prescribed by the TCJA (the post-TCJA closing balance) and (2) the amount of
such reserves computed using the method prior to the amendments by the TCJA (the
pre-TCJA closing balance), to be taken into account over the eight succeeding taxable
years. To avoid duplication or omission of income, the computation of the pre-TCJA
closing balance must take into account any change in basis that is taken into account as
required by § 807(f).

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.10 A change in basis of computing reserves is a type of change in method of
accounting. See Am. Gen. Life & Accident Ins. Co. v. United States, 90-1 USTC (CCH)
¶ 50,010 (M.D. Tenn. 1989). After the amendment of § 807(f) by section 13513 of the
TCJA, an insurance company must follow the administrative procedures for a change in
method of accounting to change its basis of computing reserves. See H.R. Rep. No.
115-466, at 467 (2017) (Conf. Rep.). Section 13513 of the TCJA, however, does not
set forth the administrative procedures for an insurance company to change the basis of
computing reserves to comply with § 807(f) and does not specify whether an insurance
company is entitled to audit protection or ruling protection.
.11 In general, § 446(e) requires a taxpayer to secure the consent of the
Secretary before changing a method of accounting for federal income tax purposes.
Section 1.446-1(e)(3)(ii) provides that the Commissioner may prescribe administrative
procedures under which a taxpayer will be permitted to change a method of accounting.
Except as otherwise provided in § 1.446-1(e)(3)(ii), a taxpayer must file a Form 3115,
“Application for Change in Accounting Method,” in order to secure the Commissioner’s
consent to change a method of accounting. Rev. Proc. 2015-13, 2015-5 I.R.B. 419, as
clarified and modified by Rev. Proc. 2015-33, 2015-24 I.R.B. 1067, and as modified by
Rev. Proc. 2016-1, 2016-1 I.R.B. 1, and Rev. Proc. 2017-59, 2017-48 I.R.B. 543,
provides the general procedures by which a taxpayer may obtain automatic consent of
the Commissioner to change a method of accounting described in the List of Automatic
Changes. Rev. Proc. 2018-31 contains the current List of Automatic Changes.

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.12 Section 481(a) provides that in computing the taxpayer's taxable income for
any taxable year (referred to as the year of the change), if such computation is under a
method of accounting different from the method under which the taxpayer's taxable
income for the preceding taxable year was computed, then there shall be taken into
account those adjustments that are determined to be necessary solely by reason of the
change in order to prevent amounts from being duplicated or omitted.
.13 Section 481(c) provides that in the case of any change described in
§ 481(a), the taxpayer may, in such manner and subject to such conditions as the
Secretary may by regulations prescribe, take the adjustments required by § 481(a) into
account in computing the tax imposed by Chapter 1 for the taxable year or years
permitted under such regulations.
.14 Section 1.481-1(c)(2) provides that if a change in method of accounting is
voluntary (that is, initiated by the taxpayer), then the entire amount of the adjustments
required by § 481(a) is generally taken into account in computing taxable income in the
taxable year of the change, regardless of whether the adjustments increase or decrease
taxable income. Section 1.481-1(c)(2) references §§ 1.446-1(e)(3) and 1.481-4,
however, which provide that the Commissioner may prescribe the taxable year or years
in which the adjustments are taken into account. Under section 7.03(1) of Rev. Proc.
2015-13, the § 481(a) adjustment period generally is one taxable year (year of change)
for a negative § 481(a) adjustment and four taxable years (year of change and next
three taxable years) for a positive § 481(a) adjustment.

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.15 Under § 1.481-1(c)(1), the reference to "adjustments" as used in § 481
means the net amount of the adjustments required by § 481(a) with regard to a change.
.16 Rev. Rul. 94-74 applies § 807(f) (as it existed then) to several factual
situations. Among the holdings of Rev. Rul. 94-74 are (1) there is no requirement under
§ 446(e) to obtain the Commissioner’s consent to change the basis of computing life
insurance reserves, (2) the adjustment rule of § 807(f) applies if the recomputation is
initiated by the Service, and (3) if a change in basis of computing life insurance reserves
is required to correct for an erroneous application of the computation rules of
§ 807(d)(2) (as it existed then), either the taxpayer or the Service may make the change
retroactively by amending (or adjusting) the taxpayer’s return (not otherwise barred by
the statute of limitations) for periods for which there was an erroneous application of the
prescribed rules. Similarly, Rev. Rul. 2002-6 permits a taxpayer to file an amended
return for past taxable years to recalculate its life insurance reserves for such years to
take into account omitted factors. These holdings of Rev. Rul. 94-74 and Rev. Rul.
2002-6 are inconsistent with the general rules for changing a method of accounting
under § 446(e) and § 1.446-1(e). Rev. Rul. 94-74 and Rev. Rul. 2002-6 are modified to
the extent they are inconsistent with the general rules for changing a method of
accounting under § 446(e) and § 1.446-1(e).
.17 This revenue procedure modifies Rev. Proc. 2018-31 to provide procedures
for an insurance company to obtain automatic consent of the Commissioner to change
its basis of computing reserves pursuant to § 807(f).

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SECTION 3. AUTOMATIC METHOD CHANGE
Rev. Proc. 2018-31 is modified to add new section 26.04 to the List of Automatic
Changes to read as follows:
.04 Changes in basis of computing reserves under § 807(f).
(1) Description of change and applicability. This automatic change applies to
a change in basis of computing reserves, as described in § 807(f), by a life insurance
company or by an insurance company that is not a life insurance company.
(2) Manner of making change.
(a)(i) In general. If the basis of computing any reserves referenced in
§ 807(c) is changed during a taxable year (year of change), then for purposes of
applying § 807(a) and (b) with respect to contracts issued before the year of change,
the amount of reserves at the close of the year of change attributable to those contracts
is determined on the old basis and the amount of reserves at the opening of the
succeeding taxable year attributable to those contracts is determined on the new basis.
Reserves attributable to contracts issued during the year of change and thereafter must
be computed on the new basis.
(ii) Requirement to file Form 3115. A taxpayer that changes its basis
of computing reserves is subject to the procedures that apply to obtain the automatic
consent of the Commissioner to change a method of accounting. Under these
procedures, (A) the taxpayer must file Form 3115 as provided in this section 26.04, (B)
the taxpayer may receive audit protection for taxable years prior to the year of change
as provided in section 8.01 of Rev. Proc. 2015-13 in connection with the change, and

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(C) the § 481(a) adjustment period generally will be one taxable year (year of change)
for a negative § 481(a) adjustment, and four taxable years (year of change and next
three taxable years) for a positive § 481(a) adjustment in accordance with section
7.03(1) of Rev. Proc. 2015-13.
(iii) Example. The following example illustrates the rules of sections
26.04(2)(a)(i) and (ii) of this revenue procedure in two situations: (A) the change in basis
in computing reserves for contracts issued prior to the year of change results in an
increase in the reserves at the end of the year of change (negative § 481(a) adjustment)
and (B) the change in basis in computing reserves for contracts issued prior to the year
of change results in a decrease in the reserves at the end of the year of change
(positive § 481(a) adjustment). The following table summarizes the reserve amounts for
contracts issued before the year of change.
Old Basis New Basis
(Negative § 481(a)
Adjustment)
New Basis
(Positive § 481(a)
Adjustment)
End of Year Prior to
Year of Change
100
End of Year of
Change
105 109 101
End of Year
Following Year of
Change
112 104
Section 481(a)
Adjustment
105-109=(4) 105-101=4

Under section 26.04(2)(a)(i) of this revenue procedure, reserves for contracts
issued before the year of change are reported under the old basis at the close of the
year of change and under the new basis at the beginning of the year following the year
of change; reserves for contracts issued during the year of change and thereafter are

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computed under the new basis. The remainder of this example describes only the
deductions and income inclusions relating to reserves for contracts issued before the
year of change.

Deduction for a net increase in reserves for the year of change. In both the
negative and positive § 481(a) adjustment situations, the company must take $105 of
reserves into account (on the old basis) at the end of the year of change, resulting in a
$5 increase in reserves ($105 - $100) and a corresponding deduction for a net increase
in reserves for the year of change.

Negative § 481 adjustment situation. As described in section 26.04(2)(a)(ii) of
this revenue procedure, the negative § 481(a) adjustment of $4 ($109-$105) is taken
into account in the year of change, such that the company would recognize a deduction
for an increase in reserves under § 807(f) of $4 in the year of change. This results in
total deductions in the year of change of $9 ($5 + $4).

At the beginning of the following year, the company must take $109 of reserves
into account (new basis) and the deduction for the net increase in reserves for that year
is $3 ($112 - $109).

Positive § 481 adjustment situation. As described in section 26.04(2)(a)(ii) of this
revenue procedure, the positive § 481(a) adjustment of $4 ($101-$105) is taken into
account over four years, such that the company recognizes additional income from a
decrease in reserves under § 807(f) of $1 (1/4th of the § 481(a) adjustment) in the year
of change. This results in a net reduction in taxable income in the year of change of $4
($5 - $1).

At the beginning of the following year, the company takes $101 of reserves into
account (new basis), and the deduction for the net increase in reserves for that year is
$3 ($104 - $101). The company also would recognize another 1/4th of the § 481(a)
adjustment, resulting in a $1 increase in income due to a decrease in reserves under §
807(f), and a net reduction in taxable income of $2 ($3 - $1) in that year. The remaining
$2 of the § 481 adjustment is recognized as increases in income due to a decrease in
reserves under § 807(f) in each of the two remaining years of the § 481 adjustment
period.

(b) Section 481(a) adjustment.
(i) Computation of § 481(a) adjustment at end of year. In general, a
change in basis of computing reserves under § 807(f) requires an adjustment under

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§ 481(a). The § 481(a) adjustment is computed as of the end of the year of change and
is only with respect to contracts issued before the year of change.
(ii) Eligibility for additional change within five taxable years. The
eligibility rule in section 5.01(1)(f) of Rev. Proc. 2015-13 does not apply to a change
under this section 26.04.
(iii) Number of § 481(a) adjustments. Multiple changes during the
same taxable year in methods, assumptions, or factors, each of which alone would
constitute a change in basis of computing reserves under § 807(f) for the same type of
contract (life insurance, annuity, etc.), are considered a single change in basis, and the
effects of such multiple changes are netted and treated as a single net negative
§ 481(a) adjustment or net positive § 481(a) adjustment.
A change in basis of computing the reserve for each type of contract
(life insurance, annuity, etc.) is considered a separate change in basis. A separate
§ 481(a) adjustment must be determined for each type of contract, and each such
§ 481(a) adjustment must be taken into account separately.
(c) No ruling protection for year of change or subsequent years. The
consent granted under section 9 of Rev. Proc. 2015-13 for a change under this section
26.04 is not a determination by the Commissioner that the new basis of computing
reserves is a permissible basis of computing reserves and does not create any
presumption that the new basis is a permissible basis of computing reserves. The
Director may ascertain whether the new method of accounting is a permissible method
of accounting. Thus, a taxpayer that changes its basis of computing reserves under this

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section 26.04 may be required to change or modify that basis of computing reserves for
the year of change or any subsequent year if it is determined by the Commissioner that
the basis to which the taxpayer changed does not meet the requirements of federal
income tax law.
(d) Information required to be furnished.
(i) In view of the amendment of § 807(f) by section 13513 of the Tax
Cuts and Jobs Act, Pub. L. No. 115-97 (December 22, 2017) and the information
required in section 26.04(2)(d)(ii) of this revenue procedure, the information required
under § 1.801-5(c) is not required to be furnished with the taxpayer’s return or on Form
3115.
(ii) A taxpayer that files a Form 3115 under this section 26.04 is
required to complete or provide only the following information on Form 3115:
• The identification section of page 1 (above Part I);
• The signature section at the bottom of page 1;
• Part I;
• Part II, lines 4, 5, 6a-d, 7a-b, 8a-d, 9, 11a-c, 12, 17, and 18;
• The following information, in lieu of completing Part II, line 14:
• The item in § 807(c) to which the change in basis relates,
• The type of contract (e.g., life insurance, annuity) to which the change
relates,
• If a life insurance reserve, a description of the applicable tax reserve
method (e.g., Commissioners’ Reserve Valuation Method or
Commissioners’ Annuity Reserve Valuation Method),
• A description of the change in basis,
• A description of the reason for the change in basis, including (i) whether
the change results from a change in the method prescribed by the
National Association of Insurance Commissioners or from another

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change (such as a change in assumption for mortality, morbidity, or
interest rate), regardless of whether the change is reflected on an annual
statement and (ii) whether the change results from a prior incorrect
application of federal income tax law and the nature of such incorrect
application.

• Part IV. (The taxpayer may indicate that the § 481(a) adjustment is an
estimate or is to be determined.)

(e) Concurrent automatic changes. A taxpayer that makes multiple
changes in basis under this section 26.04 may file a single Form 3115 that includes all
the changes in basis for the year of change. Likewise, a single Form 3115 may be filed
for all changes in basis for members of a group filing a consolidated return. The
information required by section 26.04(2)(d)(ii) of this revenue procedure is required for
each separate change for each member of the group.
(3) Designated automatic accounting method change number. The
designated automatic accounting method change number for a change under this
section 26.04 is “240.”
(4) Contact information. For further information regarding a change under this
section, contact Dan Phillips at (202) 317-6995 (not a toll-free call).
SECTION 4. EFFECTIVE DATE
This revenue procedure is effective for taxable years beginning after
December 31, 2017.
SECTION 5. EFFECT ON OTHER DOCUMENTS
This revenue procedure modifies Rev. Proc. 2018-31. This revenue procedure
also modifies Rev. Rul. 94-74 and Rev. Rul. 2002-6.
SECTION 6. DRAFTING INFORMATION

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The principal author of this revenue procedure is Dan Phillips of the Office of
the Associate Chief Counsel (Financial Institutions and Products). For further
information regarding this revenue procedure, contact Mr. Phillips at (202) 317-6995
(not a toll-free call).