December 20, 1979
Circular Letter No. 33 (1979)
TO: ALL DOMESTIC INSURERS
SUBJECT: TAX ALLOCATION AGREEMENTS
It has come to the attention of the Insurance Department that many domestic insurers are entering into tax allocation agreements with their parent corporations, other companies in their holding company system and/or their subsidiaries. Income taxes paid based on consolidated tax returns and intercorporate income tax allocations are transactions between related parties and as such the agreement must be fair and equitable and recognize the separate operating identity of the domestic insurer. This would be consistent with various sections of the Insurance Law, namely, Sections 46-a, 69-e, 69-g and 85-a. In addition, many insurers not subject to the above Sections of the Law have given commitments to this Department which in essence contain similar requirements. These commitments were obtained in order to assure fair and equitable intercompany transactions.
The Department has reviewed several methods currently being used in determining payments under consolidated federal corporate income tax allocation agreements and has developed the attached guidelines to assist domestic insurers in maintaining their fiscal integrity. It is the opinion of this Department that tax allocation agreements must meet the principles contained in these guidelines to be fair and equitable, and to give appropriate recognition to the separate operating identity of the insurer. Any tax allocation agreements involving a domestic insurer presently in existence should be amended to comply with these guidelines.
Pursuant to the provisions of Section 27 of the insurance Law every domestic insurer is directed to notify this Department within 60 days of this circular letter if it participates in a consolidated tax return and to submit a copy of its tax allocation agreement with such notification. Any domestic insurer which currently does not participate in a consolidated tax return shall file a copy of its tax allocation agreement with this Department within 30 days of electing to do so. Furthermore, notification to this Department should be given within 30 days of any amendment to or termination of a tax allocation agreement.
GUIDELINES FOR TAX ALLOCATION AGREEMENTS BETWEEN DOMESTIC INSURERS AND THEIR AFFILIATED COMPANIES
1. Every domestic insurer which is a party to a consolidated federal income tax filing must have a definitive written agreement, approved by its Board of Directors, governing its participation therein.
2. The ultimate holding corporation, any intermediate corporation which owns a controlling interest in the stock of the domestic insurer and the domestic insurer itself must be parties to, but need not necessarily participate in, the consolidated federal income tax agreement. In the case of an alien owned domestic insurer, the ultimate United States Corporation, in whose behalf the consolidated corporate federal income tax return is filed with the Internal Revenue Service, may be substituted for the ultimate holding corporation.
3. The domestic insurer must calculate its tax liability under method (A), (3) or (C) below. Once a method is elected it should not be changed without 30 days prior notification to this Department.
(A) The tax charge or tax refund to the domestic insurer under the agreement shall be the amount that the domestic insurer would have paid or received if it had filed on a separate return basis with the Internal Revenue Service.
To help assure the domestic insurer"s enforceable right to recoup federal income taxes in the event of future net losses an escrow account consisting of assets eligible as an investment for the domestic insurer shall be established and maintained by the parent in an amount equal to the excess of the amount paid by the domestic insurer to the parent for federal income taxes over the actual payment made by the parent to the Internal Revenue Service.
Escrow assets may be released to the parent from the escrow account at such time as the permissible period for loss carrybacks has elapsed.
(B) The tax charge to the domestic insurer under the agreement shall not be more than it would have paid if it had filed on a separate return basis. The domestic insurer shall be "paid" for any foreign tax credits, investments credits, losses or any loss carry over (collectively herein referred to as credits) generated by it, to the extent actually used in the consolidated return. Payment shall be equal to the "savings" generated by its credits. All payments shall be recorded on the domestic insurer"s books as contributed surplus.
If the amount paid by the domestic insurer to the parent for federal income taxes is greater than the actual payment made by the parent to the Internal Revenue Service then the difference shall be placed in escrow in the same manner and under the same conditions as in (A) above.
Once an insurer is "paid" for its credits it cannot use such credits in the calculation of its tax liability under the separate return basis. Any of the insurer"s credits which are not used in the consolidated return and for which it has not been paid shall be retained by the domestic insurer for possible future use.
(C) Any other method of calculating the domestic insurer"s tax liability which provides:
(i) That the tax charge to the domestic insurer shall not be more than it would have paid if it had filed on a separate return basis,
(ii) That payments to the domestic insurer give appropriate recognition to the separate operating identity of the insurer, and
(iii) for a method, such as the use of an escrow account as described in (A) above, to help assure the domestic insurer"s enforceable right to recoup federal income taxes in the event of future net losses.
In order to avoid any problems that may ensue as a result of the Department"s finding that a particular method of tax allocation is not fair and equitable and/or does not give appropriate recognition to the separate operating identity of the insurer it is recommended that any method other than (A) or (B) above should be submitted to this Department for prior review.
4. For purposes of this circular letter a separate return is defined as a return completed by an insurer as if it were and had been filing as a separate individual taxpayer. However, intercompany transactions which are deferred under a consolidated tax return filing should be recognized.
5. All settlements under this agreement shall be made within 30 days of the filing of the applicable estimated or actual consolidated federal corporate income tax return with the Internal Revenue Service, except where a refund is due the parent, in which case, it may defer payment to the domestic insurer to within 30 days of receipt of such refund. All settlements shall be in cash or securities eligible as investments for such domestic insurer, at market value.
6. If taxable income, special deductions or credits reported in a consolidated federal income tax return are revised by the Internal Revenue Service or other appropriate authority, a recalculation of the tax liability for all parties to the agreement shall be made.
7. The agreement shall be terminated if:
a. The parties agree in writing to such termination.
b. Membership in the affiliated group or consolidated group ceases or is terminated for any reason whatsoever.
c. The affiliated group fails to file a consolidated return for any taxable year.
8. Notwithstanding the termination of the agreement, its provisions will remain in effect, with respect to any period of time during the tax year in which termination occurs, for which the income of the terminating party must be included in the consolidated return.
9. The agreement shall not be assignable by any party, without the prior written consent of the others.
10. The agreement should provide for the arbitration of disputes arising in the implementation of its terms and conditions.
11. The agreement should provide that, notwithstanding its termination, all material including, but not limited to, returns, supporting schedules, workpapers, correspondence and other documents relating to the consolidated return shall be made available to any party to the agreement during regular business hours.
Kindly acknowledge receipt of this letter to: Mr. Alvin H. Alpert, Chief of the Life Insurance and Companies Bureau or Mr. Francis T. Donohue, Chief of the Property Companies Bureau at the New York Insurance Department, 2 World Trade Center, New York, NY 10047.
Very truly yours,
ALBERT B. LEWIS
Superintendent of Insurance