Insurance company planning.Tax benefit rule
In Allstate Insurnce Co., Fed. Cir., 6/19/91, rev'g Cl. Ct., 1990, the Court of Appeals has held that the "tax benefit rule" entitled en·ti·tle
tr.v. en·ti·tled, en·ti·tling, en·ti·tles
1. To give a name or title to.
2. To furnish with a right or claim to something: Allstate to exclude from taxable income Under the federal tax law, gross income reduced by adjustments and allowable deductions. It is the income against which tax rates are applied to compute an individual or entity's tax liability. The essence of taxable income is the accrual of some gain, profit, or benefit to a taxpayer. subrogation The substitution of one person in the place of another with reference to a lawful claim, demand, or right, so that he or she who is substituted succeeds to the rights of the other in relation to the debt or claim, and its rights, remedies, or Securities. recoveries in 1971 related to losses incurred in 1969. The tax benefit rule allows taxpayers to exclude from income amounts recovered from a previously deducted de·duct
v. de·duct·ed, de·duct·ing, de·ducts
1. To take away (a quantity) from another; subtract.
2. To derive by deduction; deduce.
v.intr. loss to the extent that the previous deduction generated no tax benefit.
Allstate, a property and casualty insurance company, had claimed a deduction for losses incurred in its insurance business in 1969. Because of the alternative capital gains tax, a portion of its ordinary deductions in 1969 was not used to reduce tax liability. In 1971, Allstate recovered subrogation from third parties that related to the incurred loss deduction claimed in 1969.
The court explained that the tax benefit rule insures equitable treatment for taxpayers who use estimates of income or loss on their annual tax returns for transactions spanning several annual accounting periods. Subrogation recoveries are often collected and reported after the year of the loss deduction. Because Allstate received no tax benefit for $1.8 million of losses incurred in 1969, it could exclude that amount from its subrogation income in 1971. The court believed Allstate had established sufficient linkage linkage
In mechanical engineering, a system of solid, usually metallic, links (bars) connected to two or more other links by pin joints (hinges), sliding joints, or ball-and-socket joints to form a closed chain or a series of closed chains. between the 1971 subrogation recoveries and the 1969 loss deductions.
The Allstate decision reinforces the need to challenge other income items that could possibly be excluded from taxable income because of the tax benefit rule.
Estimated taxes Federal and state tax laws require a quarterly payment of estimated taxes due from corporations, trusts, estates, non-wage employees, and wage employees with income not subject to withholding.
In certain circumstances CIRCUMSTANCES, evidence. The particulars which accompany a fact.
2. The facts proved are either possible or impossible, ordinary and probable, or extraordinary and improbable, recent or ancient; they may have happened near us, or afar off; they are public or , life insurers who have an existing "policyholders' surplus account" under Sec. 815 can minimize their estimated tax payments by making an election to transfer a minimal amount in the policyholders' surplus account to the company's "shareholders' surplus account."
Sec. 6655(d)(1)(B)(ii) allows a corporation that is not a "large corporation" under Sec. 6655(g)(2) to meet an exception to the penalty for underpayment of estimated income tax if, in a tax year, the corporation pays 25% of the tax shown on the return for the previous year, on the prescribed pre·scribe
v. pre·scribed, pre·scrib·ing, pre·scribes
1. To set down as a rule or guide; enjoin. See Synonyms at dictate.
2. To order the use of (a medicine or other treatment). due dates for estimated income taxes. (A large corporation can base only its first estimated income tax payment on 25% of the prior year tax.) This exception does not apply, however, if there is no tax shown on the previous year's return. If, for example, a life insurance company incurred an operations loss and had no tax liability in the preceding year, its estimated tax payments for the current year may not be based on the previous year's tax liability; it must pay 25% of 90% of current year tax at each installment date, or use either the annualized annualized
Of or relating to a variable that has been mathematically converted to a yearly rate. Inflation and interest rates are generally annualized since it is on this basis that these two variables are ordinarily stated and compared. income exception or the adjusted seasonal installment exception of Sec. 6655(e)(2) or (3), respectively.
Life insurance companies with existing policyholders' surplus accounts, however, have the ability to incur an income tax liability even if they have an operations loss. Under Sec. 815(d)(1) (in effect prior to the Tax Reform Act of 1984 and still applicable by virtue of Sec. 815(f)), a life insurance company may elect to transfer amounts out of its policyholders' surplus account and into a shareholders' surplus account. The amount tranferred will generate taxable income that cannot be offset by an operations loss. By electing to transfer a minor amount of policyholder Policyholder
An individual who owns an insurance policy. surplus (say $10), the company will incur a tax liability in the year of election and, thus, will be able to avail itself of Sec. 6655(d)(1)(B)(ii) for the next tax year. It should be noted that the tax triggered by the election can be offset by credits; if the credits fully offset the tax, there is no tax liability in the year of election, and Sec. 6655(d)(1)(B)(ii) would not apply. However, in the absence of credits, this strategy may provide significant cash flow savings.