On July 30, 2012, the IRS Large Business & International (LB&I) Division issued guidelines intended to reduce the controversy associated with partial worthlessness deductions claimed by insurance companies. In brief, the guidelines, which were released as an industry director directive (the Directive), instruct IRS examiners not to challenge partial worthlessness deductions claimed by an insurance company under § 166(a)(2)* if (i) they are limited to the credit-related portion of the impairment charge-off (not the full fair market value) and (ii) they comport with the National Association of Insurance Commissioners (NAIC) Statement of Statutory Accounting Principle (SSAP) 43R accounting rules. Importantly, although the Directive does not discuss whether the conclusive presumption of worthlessness standard of Treas. Reg. § 1.166-2(d) applies to insurance companies, the Directive, in effect, applies that standard to the credit-related impairment portion of the charge-offs.
With respect to a debt that does not constitute a security (as defined in § 165(g)(2)(C)), the rules concerning the determination of worthlessness are set forth in § 166. In general, § 166(a)(2) provides that the IRS may allow a deduction with respect to a debt in an amount that is not in excess of the part of the debt that is charged off within the taxable year “when satisfied that a debt is recoverable only in part.” Stated differently, § 166(a)(2) generally provides that partial worthlessness deductions may be allowed to be claimed with respect to a non-security debt.
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