On September 13, 2012, the United States Tax Court issued its much-anticipated opinion in Cigna Corp. v. Commissioner. In deciding the case, the court declined to rule on the issue of whether a life insurance company may compute tax reserves under § 8072 by retroactively applying National Association of Insurance Commissioners (NAIC) Actuarial Guideline XXXIV (AG 34) for minimum guaranteed death benefits (MGDB) in variable annuity contracts. The court’s conclusion was based, in large part, on the concession by the Internal Revenue Service (IRS) that the taxpayer’s tax reserves were calculated correctly for the relevant taxable year, and the IRS’s representation that it will not challenge taxpayers that used AG 34 to compute tax reserves for MGDB.

Sutherland Observation: Because the IRS has disputed whether AG 34 may be applied retroactively for purposes of calculating the tax reserves for insurance products other than those at issue in Cigna Corp., taxpayers may continue to face challenges in this area.

In Cigna Corp., the taxpayer had entered into reinsurance treaties prior to 1998 in order to reinsure certain MGDB (the Reinsurance Treaties). At the times that the taxpayer entered into the Reinsurance Treaties, there was no universally accepted method for computing statutory reserves for MGDB, and, as a result, life insurance companies generally computed their statutory reserves for MGDB under various standards imposed by state insurance regulators. On December 31, 1998, the NAIC sought to standardize these statutory reserve computations by promulgating AG 34. From 1999 to 2008, the taxpayer computed all of its statutory reserves for MGDB in accordance with AG 34, including the statutory reserves attributable to the Reinsurance Treaties, notwithstanding the fact that the taxpayer had entered into the Reinsurance Treaties before the promulgation of AG 34.