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Proration and The Separate Account Dividends Received Deduction

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1 Proration and The Separate Account Dividends Received Deduction
Tax Technical Session May 14, 2010 CUNA Mutual Group Power Point Guidelines PowerPoint is our way to digitally present information both internally and externally. Every PowerPoint should color coordinate with corporate colors or the respective business unit color palette. The CUNA Mutual PowerPoint presentation template is corporately branded and includes: A Title Slide that can be used for On Screen and Printed presentations Several Content Slide examples to show different samples of content with and without graphics A Chart Slide example Note on the Copyright Notice: Many works created by CUNA Mutual Group employees are subject to and protected under the copyright laws. The preferred format for a copyright notice is included in the master slide template: CUNA Mutual Group Proprietary Reproduction, Adaptation or Distribution Prohibited © CUNA Mutual Group Other types of information or cautionary statements can be added to a copyright notice to further explain the owner’s expectations. The preferred format of the cautionary statement is ‘For Internal Use Only’ and this statement should appear following the Copyright symbol. Find example below highlighting correct format: CUNA Mutual Group Proprietary Reproduction, Adaptation or Distribution Prohibited © CUNA Mutual Group, For Internal Use Only NOTE: We have several PowerPoint template available, including a vertical version, available with the new Corporate branding. Please contact your Corporate Marketing Leader for further information. Or, contact Brand Management leaders Dale Tomalin (ext. 6081) or Dana Henke (ext. 8222) for further information. CUNA Mutual Group Proprietary Reproduction, Adaptation or Distribution Prohibited © CUNA Mutual Group XXXX-XXXX-XXXX

2 Discussion Topics Key Concepts Of Life Co. General Account Proration
SA DRD Proration Characteristics that distinguish SA from GA The Calculation Historical Background Different Interpretations of the rules

3 I. Key Concepts of Life Co Proration
The IRC §812 Proration rules for life insurers disallows the exclusion of tax preferenced income (TEI, DRD) to the extent the income is credited to life reserves The purpose is to prevent life insurers from funding the growth of tax deductible life reserves with income excluded from LICTI General Account Proration – Example

4 I. Key Concepts of Life Co. Proration
General Account Proration – Example

5 SA Reserves vs. General Account Reserves
General Account Reserves Reflect Substantial Mortality Risk Separate Account Reserve are comprised primarily of variable policyholder cash accumulations

6 Separate Account Proration/DRD
Life insurance companies with variable product separate accounts are allowed to claim a dividends received deduction on qualified separate account dividend income Industry has claimed substantial tax benefits from the SA DRD. The benefit grew dramatically during the 1990’s when the variable annuity business experienced explosive growth Tax Risk – SA DRD is a contentious area, particularly over the last 10 years IRC §812 and Treas. Reg. § (e) set forth the rules for determining separate account proration

7 SA DRD Historical Background
SA DRD was part of the 1959 Act 1984 Act added IRC §812, changed part of the computation

8 Separate Account Proration Formula
1959 Regulations:

9 Separate Account Proration Formula
The 1984 Act:

10 Interpretations and Risks
Different Interpretations, Different Risks Level at which the proration calculation is performed Add graphic showing account level, fund level, sub account level Determination of net investment income IRC §812 defines as 90%; assumes investment expenses are 10%. Exclude STCG Computation of “Amount Retained” Include- M&E Charge, VA expense charge, Cost of insurance Reduction for investment expenses

11 Benefits of Restructuring
Addresses a customer service issue – perceived inconsistent sales tax treatment for deposit document (CMBS Product) and lending document products (CMIS Product) Aligns the Deposit Document business with the Lending Document business within the CMIA legal entity Creates resource efficiencies - Elimination of entity reduces required financial reporting and tax compliance resources needs General Guidelines on creating effective PowerPoint presentations: KEYS TO EFFECTIVE SLIDES: Include only necessary information Avoid ‘mega data’ slides Use no more than 7 words per line, 7 lines per slide (some experts say 6), brevity is clarity COLOR GUIDELINES Coordinate colors to utilize corporate color palette (use default corporate primary and accent colors available for text and fills) Refer to Brand Standards for color guide and color breakdown General Guidelines Use Default defined Accent Colors for charts and graphs. If data exceeds four elements, use business unit/corporate primary colors as additional elements. Do not use borders and lines in charts and graphs. Present organizational charts in one color – gray. Color formula follows: gray RGB 221,221,221 with 10% transparency When presenting tables and text charts, fill table with one color and coordinate with Corporate or Business Unit colors as applicable. Use .5pt black rule to divide space and use 1pt black rule for table border FONT BASICS Font size on text should range between 18 & 48 point Main points should be larger compared to lesser points Use default corporate font of Arial TYPE BASICS Headers: Capitalize the first character of each word in Titles (it’s hard to read ALL CAPITAL LETTERS) Body copy: Capitalize the first character of each line in bulleted copy Use phrases, not sentences when possible (no periods needed with phrases) Avoid abbreviations and acronyms – in first use, include full name, then abbreviation or acronym in parentheses PHOTOGRAPHY To enhance PowerPoint presentations, incorporate Photography from the approved photography library available on the brand website (www.cunamutual.com/livethebrand) Make every attempt to use these pre-approved images. If a specific need arises that is not found within the library, request approval for your unique image through your Corporate Marketing leader or Brand Management. CUNA Mutual Group Proprietary Reproduction, Adaptation or Distribution Prohibited © CUNA Mutual Group XXXX-XXXX-XXXX

12 Tax Treatment CMIC’s contribution of CMBS stock to CMIA qualifies for non- recognition treatment under IRC §351 Merger of CMBS into CMIA qualifies qualifies as a tax-free subsidiary-parent merger under IRC §368(a)(1)(A)____ CMIA assumes carryover basis CMBS tax attributes carryover to CMIA in accordance with IRC §381(c)(__) General Guidelines on creating effective PowerPoint presentations: KEYS TO EFFECTIVE SLIDES: Include only necessary information Avoid ‘mega data’ slides Use no more than 7 words per line, 7 lines per slide (some experts say 6), brevity is clarity COLOR GUIDELINES Coordinate colors to utilize corporate color palette (use default corporate primary and accent colors available for text and fills) Refer to Brand Standards for color guide and color breakdown General Guidelines Use Default defined Accent Colors for charts and graphs. If data exceeds four elements, use business unit/corporate primary colors as additional elements. Do not use borders and lines in charts and graphs. Present organizational charts in one color – gray. Color formula follows: gray RGB 221,221,221 with 10% transparency When presenting tables and text charts, fill table with one color and coordinate with Corporate or Business Unit colors as applicable. Use .5pt black rule to divide space and use 1pt black rule for table border FONT BASICS Font size on text should range between 18 & 48 point Main points should be larger compared to lesser points Use default corporate font of Arial TYPE BASICS Headers: Capitalize the first character of each word in Titles (it’s hard to read ALL CAPITAL LETTERS) Body copy: Capitalize the first character of each line in bulleted copy Use phrases, not sentences when possible (no periods needed with phrases) Avoid abbreviations and acronyms – in first use, include full name, then abbreviation or acronym in parentheses PHOTOGRAPHY To enhance PowerPoint presentations, incorporate Photography from the approved photography library available on the brand website (www.cunamutual.com/livethebrand) Make every attempt to use these pre-approved images. If a specific need arises that is not found within the library, request approval for your unique image through your Corporate Marketing leader or Brand Management. CUNA Mutual Group Proprietary Reproduction, Adaptation or Distribution Prohibited © CUNA Mutual Group XXXX-XXXX-XXXX

13 Tax Risk Assessment Merger – Potential Continuity of business enterprise requirement (“COBE”) risk, which is viewed as a marginal risk, is addressed by structuring as a S-P merger. ___ (case) provides authority for recasting a failed S-P merger as a tax-free IRC §332 subsidiary liquidation Strong position for tax-free treatment in primary and secondary position. In the unlikely event the first and second position were successfully challenged and the transaction was deemed taxable upon exam, gain would be deferred under the provisions of Treas Reg § General Guidelines on creating effective PowerPoint presentations: KEYS TO EFFECTIVE SLIDES: Include only necessary information Avoid ‘mega data’ slides Use no more than 7 words per line, 7 lines per slide (some experts say 6), brevity is clarity COLOR GUIDELINES Coordinate colors to utilize corporate color palette (use default corporate primary and accent colors available for text and fills) Refer to Brand Standards for color guide and color breakdown General Guidelines Use Default defined Accent Colors for charts and graphs. If data exceeds four elements, use business unit/corporate primary colors as additional elements. Do not use borders and lines in charts and graphs. Present organizational charts in one color – gray. Color formula follows: gray RGB 221,221,221 with 10% transparency When presenting tables and text charts, fill table with one color and coordinate with Corporate or Business Unit colors as applicable. Use .5pt black rule to divide space and use 1pt black rule for table border FONT BASICS Font size on text should range between 18 & 48 point Main points should be larger compared to lesser points Use default corporate font of Arial TYPE BASICS Headers: Capitalize the first character of each word in Titles (it’s hard to read ALL CAPITAL LETTERS) Body copy: Capitalize the first character of each line in bulleted copy Use phrases, not sentences when possible (no periods needed with phrases) Avoid abbreviations and acronyms – in first use, include full name, then abbreviation or acronym in parentheses PHOTOGRAPHY To enhance PowerPoint presentations, incorporate Photography from the approved photography library available on the brand website (www.cunamutual.com/livethebrand) Make every attempt to use these pre-approved images. If a specific need arises that is not found within the library, request approval for your unique image through your Corporate Marketing leader or Brand Management. CUNA Mutual Group Proprietary Reproduction, Adaptation or Distribution Prohibited © CUNA Mutual Group XXXX-XXXX-XXXX

14 The Transaction – Share Contribution Followed by Subsidiary-Parent Merger
Currently, CMIC owns 100% of CMBS and CMIA. On 5/30, CMIC contributes CMBS stock to CMIA Immediately following the contribution, CMBS is merged into CMIA Final Structure CUNA Mutual Insurance Corp (CMIC) CUNA Mutual Business Services, Inc. (CMBS) CUNA Mutual Insurance Agency, Inc. (CMIA) Merge CMBS into CMIA CUNA Mutual Insurance Corp (CMIC) CUNA Mutual Business Services, Inc. (CMBS) CUNA Mutual Insurance Agency, Inc. (CMIA) CUNA Mutual Insurance Corp (CMIC) CUNA Mutual Insurance Agency, Inc. (CMIA) CMBS Stock General Guidelines on creating effective PowerPoint presentations: KEYS TO EFFECTIVE SLIDES: Include only necessary information Avoid ‘mega data’ slides Use no more than 7 words per line, 7 lines per slide (some experts say 6), brevity is clarity COLOR GUIDELINES Coordinate colors to utilize corporate color palette (use default corporate primary and accent colors available for text and fills) Refer to Brand Standards for color guide and color breakdown General Guidelines Use Default defined Accent Colors for charts and graphs. If data exceeds four elements, use business unit/corporate primary colors as additional elements. Do not use borders and lines in charts and graphs. Present organizational charts in one color – gray. Color formula follows: gray RGB 221,221,221 with 10% transparency When presenting tables and text charts, fill table with one color and coordinate with Corporate or Business Unit colors as applicable. Use .5pt black rule to divide space and use 1pt black rule for table border FONT BASICS Font size on text should range between 18 & 48 point Main points should be larger compared to lesser points Use default corporate font of Arial TYPE BASICS Headers: Capitalize the first character of each word in Titles (it’s hard to read ALL CAPITAL LETTERS) Body copy: Capitalize the first character of each line in bulleted copy Use phrases, not sentences when possible (no periods needed with phrases) Avoid abbreviations and acronyms – in first use, include full name, then abbreviation or acronym in parentheses PHOTOGRAPHY To enhance PowerPoint presentations, incorporate Photography from the approved photography library available on the brand website (www.cunamutual.com/livethebrand) Make every attempt to use these pre-approved images. If a specific need arises that is not found within the library, request approval for your unique image through your Corporate Marketing leader or Brand Management. CUNA Mutual Group Proprietary Reproduction, Adaptation or Distribution Prohibited © CUNA Mutual Group XXXX-XXXX-XXXX

15 Financial Statement Treatment
Contribution - Merger - General Guidelines on creating effective PowerPoint presentations: KEYS TO EFFECTIVE SLIDES: Include only necessary information Avoid ‘mega data’ slides Use no more than 7 words per line, 7 lines per slide (some experts say 6), brevity is clarity COLOR GUIDELINES Coordinate colors to utilize corporate color palette (use default corporate primary and accent colors available for text and fills) Refer to Brand Standards for color guide and color breakdown General Guidelines Use Default defined Accent Colors for charts and graphs. If data exceeds four elements, use business unit/corporate primary colors as additional elements. Do not use borders and lines in charts and graphs. Present organizational charts in one color – gray. Color formula follows: gray RGB 221,221,221 with 10% transparency When presenting tables and text charts, fill table with one color and coordinate with Corporate or Business Unit colors as applicable. Use .5pt black rule to divide space and use 1pt black rule for table border FONT BASICS Font size on text should range between 18 & 48 point Main points should be larger compared to lesser points Use default corporate font of Arial TYPE BASICS Headers: Capitalize the first character of each word in Titles (it’s hard to read ALL CAPITAL LETTERS) Body copy: Capitalize the first character of each line in bulleted copy Use phrases, not sentences when possible (no periods needed with phrases) Avoid abbreviations and acronyms – in first use, include full name, then abbreviation or acronym in parentheses PHOTOGRAPHY To enhance PowerPoint presentations, incorporate Photography from the approved photography library available on the brand website (www.cunamutual.com/livethebrand) Make every attempt to use these pre-approved images. If a specific need arises that is not found within the library, request approval for your unique image through your Corporate Marketing leader or Brand Management. CUNA Mutual Group Proprietary Reproduction, Adaptation or Distribution Prohibited © CUNA Mutual Group XXXX-XXXX-XXXX


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