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.
Joseph A. Borgmann, CPA
Director of Investment Accounting
Jason Simkin, CPA
SIMKIN CPA, LLC – The Insurance Tax Advisory Firm
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