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1 CUNA Mutual Group Proprietary Reproduction, Adaptation or Distribution Prohibited © CUNA Mutual Group Proration and The Separate Account Dividends Received.

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Presentation on theme: "1 CUNA Mutual Group Proprietary Reproduction, Adaptation or Distribution Prohibited © CUNA Mutual Group Proration and The Separate Account Dividends Received."— Presentation transcript:

1 1 CUNA Mutual Group Proprietary Reproduction, Adaptation or Distribution Prohibited © CUNA Mutual Group Proration and The Separate Account Dividends Received Deduction Tax Technical Session May 14, 2010

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

3 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 4 I. Key Concepts of Life Co. Proration General Account Proration – Example

5 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 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 1990s 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 7 SA DRD Historical Background SA DRD was part of the 1959 Act 1984 Act added IRC §812, changed part of the computation

8 8 Separate Account Proration Formula 1959 Regulations:

9 9 Separate Account Proration Formula The 1984 Act:

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

11 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

12 12 Tax Treatment CMICs 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)(__)

13 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 §

14 14 The Transaction – Share Contribution Followed by Subsidiary-Parent Merger 1.Currently, CMIC owns 100% of CMBS and CMIA. On 5/30, CMIC contributes. CMBS stock to CMIA 2.Immediately following the contribution, CMBS is merged into CMIA 3.Final Structure CMBS Stock 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)

15 15 Financial Statement Treatment Contribution - Merger -


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