Recent Developments in Insurance Tax Life Insurance and Variable Contracts New Correction Procedures Septemb

1. Recent Developments in Insurance Tax Life Insurance and Variable Contracts New Correction Procedures September 12, 2008 © 2008 Davis & Harman LLP

2. Introduction • Recognition that prior correction procedures could be improved upon • Formal cost of correction (the “toll charge”) • Notice 2007-15 • Requested comments on correction procedures • Provided draft closing agreements for review • Industry dialogue with the Government • Release of draft revenue procedures • Final revenue procedures • Reflect Government and industry collaboration • Effective July 21, 2008 2 © 2008 Davis & Harman LLP

3. Revenue Procedure 2008-42 • Revenue procedure for obtaining automatic waivers under sections 7702(f)(8) and 101(f)(3)(H) • “Eligible Reasonable Error” • Examples: incorrect input of age or gender of insured, or incorrect input of amount or time of premium payment • “Reasonable steps” to remedy the Eligible Reasonable Error • Procedure for obtaining automatic waivers • Tax return attachment • Attach to timely filed Federal income tax return • A statement that an automatic waiver request has been submitted to the National Office • Waiver statement • File with National Office, in duplicate, a signed statement – “Automatic Waiver Request under Rev. Proc. 2008-42” • What can you do about a Non-Eligible Error? © 2008 Davis & Harman LLP

4. Revenue Procedure 2008-38 • Background • Rev. Rul. 2005-6 • Held: QAB charges are subject to the reasonable expense charge rule of section 7702(c)(3)(B)(ii) • Provides for remediation of failed contracts and inadvertent MECs due to incorrect treatment of QAB charges • Only Alternative C closing agreement remains available • Rev. Proc. 2008-38 • Provides details for Alternative C closing agreement • Correct system within 90 days • Correct failed contracts and inadvertent MECs within 90 days • Provides model closing agreement 4 © 2008 Davis & Harman LLP

5. Revenue Procedure 2008-39 • Inadvertent MEC correction procedure • Co-insured contracts may be corrected • Less information required about inadvertent MECs • 2 Alternative toll charge calculations • Original Rev. Proc. 2001-42 toll charge • Alternative toll charge • 100% of “overage” • Overage - “the excess, if any, of (1) the sum of amounts paid under the contract during the testing period for the contract year and all prior contract years, over (2) the sum of the 7-pay premiums for the contract year and all prior contract years of the testing period.” • Required representations • Toll charge properly computed in accordance with section 5.03(1) or (2) of Rev. Proc. 2008-39, as applicable • Issuer within scope of section 4 of Rev. Proc. 2008-39 • Documentation must be available on audit to support the representations © 2008 Davis & Harman LLP

6. Revenue Procedure 2008-40 • “Failed Contract” correction procedure • Life insurance contracts under applicable law • Otherwise fail to meet the requirements of section 7702(a) or 101(f), as applicable • What is the same? • File closing agreement request with IRS National Office • Policy numbers of failed contracts, description of errors causing failed contracts, description of procedures implemented to prevent additional failed contracts • Correct failed contracts 6 © 2008 Davis & Harman LLP

7. Revenue Procedure 2008-40 (cont.) • Three toll charge calculations • Section 7702(g) toll charge • Tax on section 7702(g) income and • Deficiency interest on tax • Excess Earnings > $5,000 • “Excess Earnings” toll charge • Tax on Excess Earnings and • Deficiency interest on tax • Excess Earnings < $5,000 • 100% of the error toll charge • 100% of the “excess premiums” • Highest amount by which premiums paid exceed the guideline premium limitation at any time during the life of the contract 7 © 2008 Davis & Harman LLP

8. Revenue Procedure 2008-41 • Addresses failures of variable contracts to satisfy section 817(h) • Only “inadvertent failures” eligible • Toll charge • Prior “income on the contract” method retained • Alternative toll charge calculation (applicable if less than above) • 100% of the amount by which the segregated asset account’s interest in a single investment exceeds the applicable limitation • If non-diversification spans multiple quarters, use calendar quarter that produces the highest amount 8 © 2008 Davis & Harman LLP

9. Revenue Procedure 2008-41 (cont.) Toll charge Dollar cap on “toll charge” Lesser of $5 million or 5% of the total asset value of the segregated asset account on the 30th day after the last day of the non-diversified quarter Limit is per segregated asset account and is not increased by any interest Required representations Model closing agreement 9 © 2008 Davis & Harman LLP