Taxes
The potential tax and accounting issues associated with a segregated account and other captive-type insurance programs can be complex. East Isles Re cannot provide and is not providing advice regarding the legal, accounting, regulatory or tax issues associated with your participation in an East Isles Re policyholder insurance program. If you are considering participating in a segregated account or captive-type insurance program you should seek appropriate tax, accounting, regulatory, and legal counsel for advice on your rights and obligations arising from or attendant to your participation in such programs. The following summary is not an exhaustive list of the issues you should consider and it is not a substitute for obtaining appropriate counsel.
Tax Deductibility of Premiums Paid by a Program Participant
Deductibility of your insurance premiums in connection with your participation in a policyholder insurance program, as an “ordinary and necessary expense” of carrying on a trade or business, should be evaluated by you and your advisors. An area for analysis is the degree to which your participation in the segregated account for a policyholder insurance program involves risk transfer. Risk transfer refers to both “risk shifting” and “risk distribution.” Risk shifting is a process where an insurable loss will be borne by someone other than the insured. Risk distribution is the process of pooling unrelated risks from various insureds.
East Isles Re structures its segregated account programs so that the losses of each program participant are shared with the other participants in that segregated account. Therefore, each program participant has exposure to the losses of the other participants participating in the segregated account for their particular program. East Isles Re assumes that the premiums paid by each program participant to the insurance carrier will be deducted by the participant as an ordinary and necessary business expense in the year in which such premiums are paid.
Taxation of East Isles Re Income
East Isles Re, as a Bermuda domiciled insurance company, intends to elect to be treated as a U.S. corporation for federal income tax purposes, under Section 953(d) of the Internal Revenue Code. Accordingly, the Company will be subject to U.S. federal income taxes and will join in the U.S. federal tax consolidation of its ultimate parent, W. R. Berkley Corporation. A pro forma federal tax return will be prepared on a separate company basis for East Isles Re that will reflect the components of its taxable income to be included in W. R. Berkley Corporation’s consolidated tax return (e.g., premiums, investment income, losses incurred, expenses, policyholder distributions, etc.). The computation of East Isles Re’s pro forma taxable income will be based upon its general account and each of its segregated accounts’ financial information and the related tax rules.
Each segregated account will be governed by a tax sharing arrangement in the SAPA. Taxable income at each segregated account will result in taxes that will be due and payable. Alternatively, if a segregated account has a tax loss, a tax benefit will only be allocated to such segregated account if such segregated account has the ability to carry the tax loss back or forward to years with taxable income from that segregated account. Such timing may result in the delay of policyholder distributions made to a participant in a policyholder insurance program.
Segregated Accounts Company Tax Guidance - IRS Notice 2008-19
In early 2008, the IRS proposed changes in the way segregated account companies are taxed. The IRS proposed that taxes be calculated and paid by each segregated account. Depending on the IRS’s final determination, the tax allocations as described above may change. A full copy of the Notice can be found at:
Tax Treatment of Policyholder Distributions
Policyholder distributions paid to a program participant, if and when declared by the Board of Directors of East Isles Re, will be paid from the surplus of the segregated account for the participant’s program. East Isles Re intends to reflect a tax deduction for policyholder distributions. Should the Service successfully assert that such distributions are not a tax deductible business expense; the segregated account may incur additional taxes.