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1 CUNA Mutual Group Proprietary Reproduction, Adaptation or Distribution Prohibited © CUNA Mutual Group Tax Interaction Session Capital Gains & Losses.

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Presentation on theme: "1 CUNA Mutual Group Proprietary Reproduction, Adaptation or Distribution Prohibited © CUNA Mutual Group Tax Interaction Session Capital Gains & Losses."— Presentation transcript:

1 1 CUNA Mutual Group Proprietary Reproduction, Adaptation or Distribution Prohibited © CUNA Mutual Group Tax Interaction Session Capital Gains & Losses April 29, 2010 DRAFT

2 2 Objectives Deferred Tax & Valuation Allowance Valuation Allowance Strategies Trading Strategies I II III IV

3 3 DRAFT Objectives Utilize Capital Loss Carryovers Manage & Reduce Valuation Allowance Risk On Deferred Tax Assets Minimize Cash Taxes On 2010 Gains Taking Strategy Increase Surplus By Reducing Non-Admitted Deferred Tax Assets I [TROY-VERIFY WITH JERRY] Through Regular Communication & Shared Ownership For Outcomes

4 4 DRAFT Deferred Taxes II PAUL – [UPDATE TABLE] [HOW DOES THIS PAGE TIE / WALK TO NEXT PAGE?] Interest Rate Risk (Est. $20-30 Per 10 bps) –1% Upward Parallel Shift Could Create $ Additional DTA Primary Risk Is Additional Impairments –Additional Credit Impairments (Principal Losses On Structured Securities)

5 5 DRAFT Recoverability Testing II Aggregate Unrealized Capital Losses Identify Existing Unrealized Capital Gains –Standard Requires Scheduling Identify Tax Planning Strategies –Prudent and Feasible Including Costs – If > 0, Then Go To Step 2, Otherwise Stop – If Losses > Gains, Then Step 3, Otherwise Stop – If Losses > Gains, Then Valuation Allowance StepAction CAMI – [WHAT STRATEGIES/AMTS ARE INCLUDED?]

6 6 DRAFT Valuation Allowance Capital Gains Strategies Needed To Reduce Valuation Allowance Risk Valuation Allowance Required Unless Utilization >50% Likely –Cannot Assume Assets Will Appreciate In Value –Above Line (Continuing Ops) For GAAP Significant Risks Exist For Valuation Allowance –Relying Upon Planning Strategies For Offsets –Rising Rates Could Erode Gains / Increase Losses II Acceptable Proof For Recoverability –Capital Loss Carryback, If Any –Future Capital Gains That Can Be Scheduled To Cover Losses –Technically Sound Strategies –Considering Costs –Could Require Management Representation Recoverability Demonstrated At 4Q 2009 And 1Q 2010 –Extension Losses Covered By Assertion That Well Hold To Maturity

7 7 DRAFT Partial Worthlessness [Show DTA With/Without] –Show Book Value & Tax Value –Make Point Re: Sec 166 II Tax Deduction Allowed –Non-Corporate Issuers (e.g. REMIC Interests) –High Certainty (Although Default On Actual Security Not Required) –To Extent Of Principal Loss (Extension Loss Not Deductible) –Industry Issue From IRSs Perspective – Anticipate Heavy Auditing Other Considerations

8 8 DRAFT Valuation Allowance Strategies Quantify Strategies To Provide Future Capital Gains; Determine Feasibility –RE-REMIC –Coupon Stripping –Lend Zero Coupon Bonds –Selling Assets In Gain Position Match Gains & Losses –Considering Differences In Tax And Book Bases Minimize Selling In Hold To Maturity Bucket III Financial Reporting Standard Is Whether Prudent And Feasible –Execution May Not Be Required –Still Need To Assess Whether Strategies Are Persistent Under Changing Conditions Next Steps 1 2 3

9 9 DRAFT RE-REMIC Issue Debt (Regular And Residual Interests) Backed By MBS Collateral Example –Issue $10, 2-Year Senior Debt Backed By MBS Pool Worth $100 (Tax Basis = $250) Sell Senior Tranche To External Party Follow Ups –Surplus/Required Capital Impact –Regulatory View –Rating Agency View III

10 10 DRAFT Coupon Stripping Example –Assume 15 Year Bond, $100 Principal, 3% Semi-Annual Coupon –Could Create $3 Capital Gain Per $100 Face Amount –Strip 6-Month Coupon And Sell For $3 –Remaining Tax Basis Is $97 (Equals Value) –In 6 Months The Bonds Value Accretes to $100 –Tax Basis Remains $97 Provided Stripped Coupon Is De Minimis –De Minimis If Stripped Coupon Is Less Than ¼% Times Years To Maturity Strip Upcoming Coupon From Long Duration Bonds Amount Stripped Creates Potential Capital Gains Follow Ups –Capacity To Strip Bonds –Impact On Ability To Pledge Stripped Bonds As Collateral Accelerates Cash Recognition III

11 11 DRAFT Lend Zero Coupon Bonds Example –Purchase $100 Zero Coupon Bond For $70 –Loan The Bond –Basis Remains $70 During Term Of Security Loan –No OID To Securities Lender –Purchaser From Securities Lender Accrues The OID –Accretion Creates Capital Gain Upon Closing The Loan –Capital Gain = Principal * Interest Rate Acquire And Lend Zero Coupon Bonds Potential Capital Gains = Accretion While On Loan Follow Ups –Market Availability Of High-Yielding Zeros –Asset/Liability Matching –Lending Appetite (Internal And External) III

12 12 DRAFT Other Strategies Sell Appreciated Securities And Repurchase Similar Securities III Partnerships Sell Other Assets (Mortgage Loans, Subsidiaries, Etc.) Follow Ups –Identify Appreciated Assets –Determine GAAP & SAP Impact (DAC Recoverablity, Cash Flow Testing, etc.) –Drill Down On Partnerships –Quantify Other Opportunities [Add Economic Substance Codification Requirement]

13 13 DRAFT Y-T-D Tax Capital Gains / Losses INSERT CHART SHOWING GAINS/ LOSSES TO DATE IV CAMI – [HOW MUCH CAP G/L HAS BEEN RECOGNIZED? LIFE/ NON-LIFE?]

14 14 DRAFT 2010 Targeted Capital Gains / Losses INSERT CHART SHOWING TARGETS IV

15 15 DRAFT 2009 Surplus Planning INSERT SIMPLIFIED VIEW OF TRANSACTION – WITH & WITHOUT IV CAMI – [NEED SIMPLE DISCUSSION]

16 16 DRAFT Summary IV Need Decisioning Tool –Easily Accessed –Data Validated –Market Value, Book Basis & Tax Basis Quantify Potential Strategies & Evaluate Work Together On 2010 Gains Taking Periodically Reconvene – Smaller Group

17 17 DRAFT Appendix

18 18 DRAFT Deferred Tax Cheat Sheet Tax Basis > Book Basis –E.g. Impairments Not Currently Allowed For Tax Future Tax Losses > Book Future Tax Gains < Book Non-Earning Asset (Future Tax Benefits) Book Basis > Tax Basis –E.g. Accelerated Tax Depreciation In Leases Future Tax Losses > Book Future Tax Gains < Book Non-Interest Bearing Liability (Future Tax Payments) Deferred Tax AssetsDeferred Tax Liabilities III

19 19 DRAFT Deferred Tax Cheat Sheet Tax Basis > Book Basis –E.g. Impairments Not Currently Allowed For Tax Future Tax Losses > Book Future Tax Gains < Book Non-Earning Asset (Future Tax Benefits) Book Basis > Tax Basis –E.g. Accelerated Tax Depreciation In Leases Future Tax Losses > Book Future Tax Gains < Book Non-Interest Bearing Liability (Future Tax Payments) Deferred Tax AssetsDeferred Tax Liabilities III


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