Tax Update

1. Tax Update Drew Westall, CPA Senior Manager Johnson Lambert LLP

2. Agenda • SSAP 101 Refresher & Best Practices • Valuation Allowances & Uncertain Tax Positions • Tax Sharing Agreements • Recent Court Cases • New/Proposed Laws • Questions & Answers

3. SSAP 101 Refresher • SSAP 101 • Paragraph 11(a) – Carryback • Paragraph 11(b) – Forward Looking • Paragraph 11(c) – DTL Offset • Use Current Period Surplus

4. SSAP 101 Best Practices • Projected Income Calculations • Tax-Planning Strategies • Scheduling DTAs/DTLs

5. SSAP 101 – Common Mistakes • Carryback periods under 11(a) – Life vs. P&C • Maintain separate year analysis • Keep reversal patterns updated • Taxable Income forecasts need to be realistic • Update taxable income available from prior years due to any carrybacks

6. Valuation Allowance and UTP • When do you need a Valuation Allowance (VA)? • More likely than not (MLTN) that some portion of the DTA will not be realized in the future • MLTN = >50% • Must consider VA before the admissibility test • Gross deferred tax asset – VA = Adjusted gross deferred tax asset

7. Valuation Allowance and UTP • Sources of taxable income that can be used to support a conclusion that a DTA will be realized include: • Reversals of existing DTLs; • Carryback capacity under the tax law; • Projections of future taxable income; • Income from tax planning strategies

8. Valuation Allowance and UTP • Uncertain tax position consideration is required under SSAP 101 • “More likely than not” threshold like GAAP • SAP only filers have different disclosure and reporting than GAAP

9. Tax Sharing Agreements • Systematic, rational, and consistent • Three Basic Reasons: • Earnings & Profits • Stock Basis • To determine how to split the actual liability and intercompany settlements

10. Tax Sharing Agreements • Earnings & Profits – IRC 1552(a) • (1) – Contribution to Consolidated Taxable Income • (2) – Separate Return Tax Liability • (3) – Allocation of Tax Increases from Consolidation • (4) – With Approval from the Secretary • Tax Attribute Absorption Methods – Treas. Reg. 1.1502-33(d) • “Wait and See” • “Percentage Method” • Other Approved Methods • Stock Basis

11. Recent Court Cases • Acuity Mutual Insurance Co. v. Commissioner, TC Memo 2013-209 • Tax Court ruled in favor of taxpayer • Acuity supplied substantial evidence to support position and IRS did not • Again, looked to NAIC approved annual statement for starting point

12. Recent Court Cases • Acuity Mutual Insurance Co. v. Commissioner, TC Memo 2013-209 • Take-away: Memorandum decision but reinforces the court’s reliance on documentation to support position that loss reserves are ‘fair and reasonable’ and makes it more difficult for the IRS to argue otherwise

13. Recent Court Cases • State Farm v. Commissioner, No. 11–3478 • Seventh Circuit in US Court of Appeals did not allow bad-faith damage award that was punitive as part of loss reserves • Portion of award related to compensatory was included in loss reserves • Court largely followed the NAIC guidance

14. Recent Court Cases • New York Life v. United States, No. 11–2394 • Second Circuit Court affirmed district court decision that deductions for policyholder dividends did not satisfy the “all-events” test under IRC 461 • New York Life deducted two types of dividends • Annual dividend mandated by state law; credited but not paid until PH anniversary date • Voluntary termination dividend accrued but no paid until death, maturity, or surrender

15. Recent Court Cases • Mass Mutual Life v. United States, No. 07-648T • U.S. Court of Claims; nearly identical facts as NY Life • Court applied standard of deductibility that requires absolute liability rather than absolute discharge through payment • Court viewed Board approval of guaranteed dividend prior to year end as an established liability, deductible in the year of adoption and resolution • Court held that PH dividends qualified as recurring and satisfied the “all-events” test • Takeaway

16. New Tax Laws • Tangible Property Regulations • Final regulations issued September 2013 • Effective January 1, 2014 • Early adopt for 2012 and 2013 • Goal was to simplify and provide more guidance

17. New Tax Laws • Tangible Property Regulations – Main Focus • Materials and Supplies (1.162-3) • Repairs and Maintenance (1.162-4) • Capital Expenditures (1.263(a)-1) • Amounts paid for the acquisition or production of tangible property (1.263(a)-2) • Amounts paid for the improvement of tangible property (1.263(a)-3)

18. New Tax Laws • Tangible Property Regulations – De Minimis Capitalization • Safe harbor at the invoice or item level • $5,000 per invoice or item, if applicable financial statement • $500 per invoice or item, if no applicable financial statement

19. New Tax Laws • Tangible Property Regulations – Transition • IRS expects that nearly all companies will have a change in their accounting method • Transition guidance was issued in early 2014 in Revenue Procedure 2014-16 and 2014-17 • How to apply the regulations for years prior to 2014 • Change of accounting procedures

20. Proposed Tax Laws • Camp Tax Reform Proposal • Reduce top corporate tax rate to 25% • Repeal AMT and revise NOL rules • Eliminates exclusion of performance-based compensation from §162(m) • Life reserves – increase in discount rate to compute tax reserves • Non-life reserves – increase in rate, loss payment pattern lengthening, no company election

21. Proposed Tax Laws • Camp Tax Reform Proposal – Continued… • Increase in DAC percentages • Change in proration rules • Removes benefits for small life and non-life insurers • Limits COLI interest expense exception to 20% owners for new contracts • Repeal of §847

22. Questions & Answers • Drew Westall, CPA • Senior Manager • Johnson Lambert LLP • dwestall@johnsonlambert.com • 919-719-6427