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.

This information is distributed to recipients including AAM, any of which may have acted on the basis of the information, or may have an ownership interest in securities to which the information relates. It may also be distributed to clients of AAM, as well as to other recipients with whom no such client relationship exists. Providing this information does not, in and of itself, constitute a recommendation by AAM, nor does it imply that the purchase or sale of any security is suitable for the recipient. Investing in the bond market is subject to certain risks including market, interest-rate, issuer, credit, inflation, liquidity, valuation, volatility, prepayment and extension. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission.

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. Registration does not imply a certain level of skill or training. 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. Any opinions and statements contained herein of financial market trends based on market conditions constitute our judgment. This material may contain projections or other forward-looking statements regarding future events, targets or expectations, and is only current as of the date indicated. There is no assurance that such events or targets will be achieved, and may be significantly different than that discussed here. The information presented, including any statements concerning financial market trends, is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. Although the assumptions underlying the forward-looking statements that may be contained herein are believed to be reasonable they can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. AAM assumes no duty to provide updates to any analysis contained herein. A complete list of investment recommendations made during the past year is available upon request. Past performance is not an indication of future returns. This information is distributed to recipients including AAM, any of which may have acted on the basis of the information, or may have an ownership interest in securities to which the information relates. It may also be distributed to clients of AAM, as well as to other recipients with whom no such client relationship exists. Providing this information does not, in and of itself, constitute a recommendation by AAM, nor does it imply that the purchase or sale of any security is suitable for the recipient. Investing in the bond market is subject to certain risks including market, interest-rate, issuer, credit, inflation, liquidity, valuation, volatility, prepayment and extension. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission.