AAM Investment Accounting Update – August 2012

IRS Directive Related to Partial Worthlessness Deduction for Eligible Securities Reported by Insurance Companies

On July 30, 2012, the IRS issued a directive that instructs Large Business & International Examiners to not challenge an insurance company’s partial worthlessness deduction of eligible securities related to credit impairment write-downs in accordance with SSAP 43R.

As a result, an opportunity may exist to accelerate for tax purposes the loss from the eligible impaired securities as well as to convert what could have been capital losses into ordinary tax deductions. For some companies this may provide cash inflow through tax savings as well as possibly improve the company’s statutory surplus and risk-based capital positions through the tax recognition of impairments currently reported as deferred tax assets.

Unlike traditional tax accounting method changes, the IRS has offered an administrative solution that provides flexibility to the company with respect to what year the Company recognizes the loss and the manner in which the company reports to the IRS the adoption of this tax position.

The directive provides specific procedures the company must follow in computing the loss and certifications the company must sign and present to the IRS upon request.

Due to the IRS flexibility in application and the uniqueness of each company’s tax position, it may be advantageous to run a scenario analysis of the different IRS alternatives to find the position that best suits the company’s tax posture.

If you have any questions or would like assistance in analyzing and applying the IRS Directive Related to Partial Worthlessness Deduction for Eligible Securities Reported by Insurance Companies (View Directive (IRS website)) feel free to contact Joe Borgmann or AAM’s Tax Advisor, Jason Simkin of SIMKIN CPA, LLC, The Insurance Tax Advisory Firm.

Written by:

Joseph A. Borgmann, CPA
Director of Investment Accounting
312.263.2900
joe.borgmann@aamcompany.com

Jason Simkin, CPA
SIMKIN CPA, LLC – The Insurance Tax Advisory Firm
972.308.0044
jason.simkin@aamcompany.com

Disclaimer: Asset Allocation & Management Company, LLC (AAM) is an investment adviser registered with the Securities and Exchange Commission, specializing in fixed-income asset management services for insurance companies. This information was developed using publicly available information, internally developed data and outside sources believed to be reliable. While all reasonable care has been taken to ensure that the facts stated and the opinions given are accurate, complete and reasonable, liability is expressly disclaimed by AAM and any affiliates (collectively known as “AAM”), and their representative officers and employees. This report has been prepared for informational purposes only and does not purport to represent a complete analysis of any security, company or industry discussed. Any opinions and/or recommendations expressed are subject to change without notice and should be considered only as part of a diversified portfolio. A complete list of investment recommendations made during the past year is available upon request. Past performance is not an indication of future returns.

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