ACLI Update
By Sarah Lashley, Mandana Parsazad and Regina Rose
TAXING TIMES, March 2025
ACLI's Response to Proposed CAMT Regulations
On Sept. 13, 2024, Treasury and the IRS published proposed regulations to implement the Corporate Alternative Minimum Tax (CAMT), introduced by the Inflation Reduction Act of 2022.[1] The CAMT imposes a 15% minimum tax on the adjusted financial statement income (AFSI) of large corporations with an average annual AFSI exceeding $1 billion. The American Council of Life Insurers (ACLI) submitted three detailed comment letters on the proposed regulations. The comment letters focused on provisions of the proposed regulations relating to changes in accounting principles,[2] the complexity of the proposed regulations’ calculation of a company’s distributive share of partnership income,[3] and comments on provisions in the proposed regulations affecting life insurers’ variable contracts and reinsurance agreements, accounting for acquisitions, consolidated return issues (including life-nonlife complexities), accounting for hedges and proper treatment of foreign tax credits.[4]
Changes in Accounting Principles:
Guidance on changes in accounting principles is necessary as part of the CAMT enactment for life insurers due to recent adoptions of Long-Duration Targeted Improvements (LDTI) under GAAP and International Financial Reporting Standards (IFRS) 17. Both changes in accounting principles require adjustments to companies’ retained earnings that may result in the duplication of prior years’ income as these amounts are reflected in income in future years. ACLI and other commenters requested that companies be permitted to spread adjustments to retained earnings attributable to changes in accounting principles over a period of years.[5] The proposed regulations and earlier guidance issued in September 2023 under Notice 2023-64[6] permitted companies to spread the entire effect of retained earnings from accounting principle change adjustments through income, but unlike the notice, the proposed regulations required that companies disregard portions of the adjustments attributable to tax years prior to 2019. ACLI raised concerns about the practicality of this requirement for insurance companies, as it is challenging to determine pre-2019 amounts and such a requirement could lead to double counting of adjustments and distortion of income.
ACLI recommended that the entire cumulative adjustment to retained earnings from accounting principles changes should be considered in determining AFSI for purposes of the CAMT, without excluding pre-2020 amounts, though whether pre-2020 amounts are included or excluded should be elective. Additionally, ACLI’s comments emphasized the need for transition rules to preserve the treatment under Notice 2023-64 for accounting principle changes made before final regulations are published.
Partnership Provisions:
Many insurance company investments are structured in partnership form. ACLI expressed concerns about the complexity and burden imposed by the proposed regulations’ requirements for calculating a partner's distributive share of partnership AFSI for inclusion in CAMT income.[7] The proposed rules would require extensive data collection and reporting, which may not be feasible within the mandated timelines. This issue is especially problematic for insurance companies, many of which invest in hundreds to thousands of partnerships, with some of those investments comprised of multiple tiered partnerships, exacerbating the reporting and data collection issues. Insurance companies already face difficulties in obtaining timely Schedule K-1 data from investments in the form of partnerships, and the proposed regulations would exacerbate these challenges. ACLI recommended a simplified elective approach to use book or regular taxable income for calculation of CAMT income from partnerships if the corporation does not hold a controlling interest in the partnership investment. At a bare minimum, such a simplified approach should be available for partnerships in which a company holds less than a 20% ownership interest.
General Comment Letter:
In its third comment letter, ACLI addressed several significant issues, including:
AFSI Adjustments for Certain Variable Contracts and Reinsurance Agreements:
The proposed regulations generally follow ACLI's recommendations[8] for variable contracts and reinsurance agreements and preserve the guidance provided in Notice 2023-20 which eliminated much of the volatility that would have resulted for those contracts and agreements under the CAMT without specific guidance for life insurers.[9] ACLI supported the approach in the proposed regulations and requested that final rules again clarify that closed-block contracts qualify for the same treatment as variable contracts, guidance which had been explicitly included in Notice 2023-20.
Purchase Accounting and Push Down Accounting for Stock Acquisitions:
Purchase and push down accounting involve revaluing the assets and liabilities of an acquired company to their fair values as of the acquisition date. The proposed regulations[10] require companies to exclude these adjustments, which would produce complexities for life insurers and presumably require historical accounting to be maintained for CAMT purposes after stock acquisitions. Such a requirement would necessitate maintaining an additional set of books for CAMT purposes, adding significant complexity and burden. ACLI recommended excluding these adjustments from the final regulations due to these challenges. Alternatively, ACLI recommended allowing a CAMT entity to account for the net step-up or step-down in all the target's assets and liabilities—investment and other assets, insurance reserves, DAC, VOBA, and any other items—over a period of up to 15 years in computing AFSI.
Consolidated Returns:
Unique issues for insurance companies arise due to the interplay of CAMT and consolidated returns rules.
Limitations on the use of nonlife member losses required by the Internal Revenue Code (IRC) can accelerate tax and create NOL carryforwards that would not exist for other consolidated groups. When the pre-CAMT NOL carryforwards due to these limitations are later utilized, they can create CAMT liability that otherwise would not arise since corresponding financial statement net operating loss (FSNOL) carryforwards do not exist. ACLI recommended a transition rule to ameliorate this problem by adjusting AFSI for certain pre-2023 nonlife net operating losses (NOLs).
ACLI also recommended guidance clarifying that CAMT credits generated by a life insurance company during the 5-year waiting period to join a life-nonlife consolidated group should not be subject to Separate Return Limitation Year (SRLY) limitations that prevent those credits from being used by other members of the group after the company joins the consolidated group.
ACLI requested further guidance to address distortions that may occur when there are reinsurance transactions among members of a consolidated financial statement group that is not consolidated for tax because of the life-nonlife rules, if the transaction is not recognized in the consolidated financial statement.
Loss carrybacks:
While the CAMT does not provide any carryback for net operating losses, regular tax requires corporations to carry back capital losses for three years[11] and, unlike most corporations, nonlife insurance companies may elect to carry back NOLs for two years.[12] This discrepancy in the rules for loss carrybacks for CAMT and regular tax purposes can distort the difference between CAMT and regular taxable income. To reduce this distortion, ACLI recommended calculating CAMT without regard to carrybacks and reducing AFSI loss carryforwards by the amount of losses carried back that result in a tax refund.
AFSI Adjustments for Hedging Transactions:
At the request of ACLI, the proposed regulations provided a special rule for insurance hedges that would prevent mismatches in accounting for hedges and hedged items, such as contract guarantees, if one item, but not the other is accounted for at fair value on the financial statement.[13] The general approach for AFSI hedges in the proposed regulations would also prevent these mismatches. Therefore, while the rule for insurance hedges is appreciated by life insurers, it is unnecessary since the general rule accomplishes the needed outcome. Under the proposed regulations, a CAMT entity would disregard the fair value measurement adjustment for an AFSI hedge or hedged item if neither the hedge nor the hedged item is marked to market for regular tax purposes.[14] For this reason, ACLI recommended removing the special rule for insurance hedges to simplify the regulations so long as the general rule is finalized without change.
Controlled Foreign Corporations with Nonconforming Tax Years:
The CAMT provides U.S. shareholders of controlled foreign corporations (CFCs) with a credit for certain taxes the CFC pays to foreign countries and possessions of the U.S.[15] The CAMT statute could be interpreted to mean that a CAMT entity can only receive credit for taxes paid or accrued and included on the financial statement during the taxable year. If a CFC has a different standard tax year than the U.S. parent, this interpretation could lead to a company not receiving credit for the full amount of annual taxes paid to a foreign country. The proposed regulations did not address this issue. ACLI recommended allowing U.S. shareholders to apportion foreign taxes of CFCs on a closing-of-the-books basis to ensure a full twelve months of tax credits for these nonconforming tax years.[16]
Applicability Dates and Transition Rules:
ACLI also provided comments on the proposed patchwork of applicability dates that are needlessly confusing and, in some cases, inappropriately burdens taxpayers with complex rules that should not be finalized without substantial revisions. The ACLI advocated that until final regulations are published, taxpayers should be allowed to rely on either the proposed regulations or on the guidance in previously issued Notices. In addition, when final regulations are published, the IRS and Treasury should prescribe applicability dates that include reasonable lead times for taxpayers to implement systems to comply with the new, complex regulations.
ACLI's Advocacy and Engagement
Through ongoing advocacy, ACLI aims to ensure that the final regulations address the industry's unique challenges and provide clear, fair, and administrable rules.
Senator Wyden Releases Discussion Draft on Private Placement Life Insurance and Annuity Contracts
On Dec. 16, 2024, former Senate Finance Committee Chairman, Ron Wyden (D- OR) released the “Protecting Proper Life Insurance From Abuse Act” (PPLI Act) targeting private placement life and annuity contracts (PPCs) purchased by accredited investors or qualified purchasers, as defined by securities law.[17] If enacted, the PPLI Act would tax the inside buildup annually and death benefits of a subset of private placement life insurance and annuity contracts defined as “applicable private placement life insurance and annuity contracts” (APPLI and APPVA). Premium and reserve treatment of such contracts is similarly denied for issuers and reinsurers of such contracts.
The PPLI Act builds off the Senate Finance Investigative Report issued in February, 2024 “Private Placement Life Insurance: A Tax Shelter for the Ultra-Wealthy Masquerading as Insurance.” A subset of PPCs are targeted by the PPLI Act and those contracts not classified as APPLI and APPVA are not addressed but could be affected due to the broad nature of the proposal. To avoid being classified as APPLI and APPVA, the segregated asset account held at the issuing insurance company that supports the contract must support at least 25 other PPCs with the value of the contract being supported by each asset in the account and the assets must support the account on a pro rata basis.
The draft legislation breaks new ground by calling for taxation of death benefits and elimination of deferral for inside buildup. The PPLI Act would be effective retroactively to “contracts whether issued before, on, or after” the enactment date. It provides a 180-day transition period for contracts which may be PPCs but are “exchanged for, or converted to, a life insurance or annuity contract that is not such an applicable private placement contract, or is cancelled or otherwise liquidated.”
The PPLI Act also covers foreign-issued contracts to U.S. persons and imposes tax reporting obligations on foreign and domestic issuers and reinsurers of APPLI and APPVA contracts, including onerous failure to file penalties starting at $1 million, with an additional $1 million in penalties imposed for each 30-day delay in reporting.
The PPLI Act has not been formally introduced as legislation.
Statements of fact and opinions expressed herein are those of the individual authors and are not necessarily those of the Society of Actuaries, the editors, or the respective authors’ employers.
Sarah Lashley is assistant vice president, Tax Policy, for the American Council of Life Insurers and may be reached at sarahlashley@acli.com.
Mandana Parsazad is vice president & senior tax counsel, Tax Policy, for the American Council of Life Insurers and may be reached at mandanaparsazad@acli.com.
Regina Rose is senior vice president, Tax Policy, for the American Council of Life Insurers and may be reached at reginarose@acli.com.
Endnotes
[2] ACLI’s comments relating to changes in accounting principles can be viewed on Regulations.gov at: https://www.regulations.gov/comment/IRS-2024-0046-0044.
[3] ACLI’s comments relating to the calculation of a partner’s distributive share of AFSI can be viewed on Regulations.gov at: https://www.regulations.gov/comment/IRS-2024-0046-0043.
[4] ACLI’s general comments can be viewed on Regulations.gov at: https://www.regulations.gov/comment/IRS-2024-0046-0038.
[5] ACLI submitted two comment letters in March 2023 with one focused specifically on changes in accounting standards which is available here: https://www.regulations.gov/comment/IRS-2023-0001-0031. The second comment letter on other life insurance specific issues is available here: https://www.regulations.gov/comment/IRS-2023-0001-0039.
[6] ACLI’s comments in response to Notice 2023-64 are available here: https://www.regulations.gov/comment/IRS-2023-0043-0018.
[7] These requirements are set forth in Prop. Treas. Reg. section 1.56A-5.
[8] ACLI’s recommendations with respect to covered variable contracts and covered reinsurance arrangements were included in ACLI’s comments in response to Notice 2023-7 and Notice 2023-20. ACLI’s comments in response to Notice 2023-20 are available here: https://www.regulations.gov/comment/IRS-2023-0005-0002.
[9] Prop. Reg. section 1.56A-22(c) provides rules relating to variable contracts and Prop. Reg. section 1.56A-22(d) provides rules relating to reinsurance agreements.
[10] Prop. Reg. section 1.56A-18(c)(2).
[11] Section 1212(a)(1)(A).
[12] Section 172(b)(1)(C)(i).
[13] Prop. Reg. section 1.56A-24(b)(1)(ii). ACLI’s comments responding to Notice 2023-7 indicated that insurance hedges may need specific rules if Treasury and the IRS were to provide guidance on mark-to-market under the CAMT.
[14] Prop. Reg. section 1.56A-24(c)(2).
[15] Section 59(l)(1)(A).
[16] ACLI also provided this recommendation in its comments responding to Notice 2023-7 and Notice 2023-64.
[17] See a one-page summary, a section-by-section summary, and legislative language of the PPLI Act for more detail.