Change In Basis Of Computing Reserves—Is It Or Isn’t It?

This article was originally published in the February 2010 issue of "Taxing Times."

High on the list of the most frequently asked questions by tax professionals working for life insurance companies is whether a change in reserving methodology or assumptions will be subject to the "10-year spread" requirements of section 807(f) of the Internal Revenue Code. Section 807(f) applies where there is a change in basis of computing certain reserves of a life insurance company. When applicable, it requires that the difference between the deductible insurance reserves listed in section 807(c) computed under the new method and the reserves computed under the old method as of the end of the year of the change be reflected ratably over 10 years. Usually the question is posed as, "Is the reserve change reflected all at once or is it spread over 10 years?" Understanding when the 10-year spread rule applies is important because it is a favorite topic for Internal Revenue Service