Insurance rules!!! Provisions of the new proposed net operating loss regulations specifically applicable to insurance companies

Eversheds Sutherland (US) LLP

Eversheds Sutherland (US) LLPOn July 2, 2020, the IRS issued proposed1 and temporary2 regulations under section 1502 that implement certain statutory amendments made by the Tax Cuts and Jobs Act (TCJA)3 and Coronavirus Aid, Relief, and Economic Security Act (CARES Act).4 Generally, the regulations package addresses the absorption of consolidated net operating loss (CNOL) carryovers and carrybacks by consolidated groups under the TCJA and CARES Act.

The proposed and temporary regulations apply to several different issues related to revisions of the net operating loss (NOL) provisions under the TCJA and CARES Act. The regulations provide (i) guidance regarding special “split-waiver” elections for consolidated groups, (ii) guidance for consolidated groups regarding the application of the 80% limitation to post-2017 NOLs for taxable years beginning after December 31, 2020, (iii) special rules for consolidated groups that include at least one nonlife insurance company, (iv) special rules applicable to losses incurred by farming businesses, (v) rules determining the calculation of the limitation to losses from separate return limitation years (SRLYs), and (vi) an extensive rewrite of the Treas. Reg. § 1.1502-47 “life-nonlife regulations” (Life-Nonlife Regulations) to reflect the current law applicable to insurance companies.

This client alert covers provisions of the regulations specifically of interest to insurance companies (items (iii) and (vi) of the list above). Additional background on the proposed and temporary regulations is available at this link.

Treatment of Consolidated Groups with Nonlife Insurance Companies (Mixed Groups)


Before 2018, section 172(a) allowed taxpayers to apply NOLs to fully offset taxable income in a taxable year. Section 172(a) permitted taxpayers to carry back NOLs two years and carry over NOLs 20 years. Section 172 did not apply to life insurance companies. Instead, special rules applied to life insurance net losses for a taxable year. The so-called operations loss deduction generally was eligible to be carried back three years and carried forward 15 years (or 18 years for a new life insurance company).5

The TCJA extensively revised the NOL rules. Under the revised rules, the NOL deduction is equal to the lesser of the aggregate amount of the pre-2018 NOLs plus the lesser of the aggregate amount of post-2017 NOLs and 80% of taxable income (subject to certain adjustments) (the “80% Limitation”).

After 2017, life insurance companies are subject to the same NOL rules as other corporations. However, the TCJA provided special rules for nonlife insurance companies, which remain subject to the pre-2018 NOL rules that had been applicable to all companies (i.e., a two-year carryback, a twenty-year carryforward, and no 80% Limitation). The purpose of the special rule for nonlife insurance companies was to account for these companies’ cyclical earnings and severe loss years in the event of large-scale disasters.

The CARES Act, enacted in March 2020, further amended the NOL rules for the 2018, 2019, and 2020 taxable years. Under these changes, the 80% Limitation does not apply for the 2018, 2019, and 2020 taxable years. In addition, the CARES Act amended section 172(b) to require (unless waived) a five-year carryback for the 2018, 2019, and 2020 taxable years.

Eversheds Sutherland Observation: In keeping with the literal language of section 172 as modified by the CARES Act, the 80% Limitation does not apply to losses arising in the 2018, 2019, and 2020 taxable years that are applied against income arising in taxable years through 2020. Beginning in 2021 and thereafter, however, all post-2017 NOLs (including the 2018, 2019, and 2020 NOLs) will become subject to the 80% Limitation.

Application of the 80% Limitation to Mixed Groups

Beginning with the 2020 taxable year, the calculation of the amount of the CNOL deduction for a consolidated group that includes both nonlife insurance companies and other companies (referred to in the proposed regulations as “mixed groups”) will present unique issues. Specifically, it will be necessary to determine how much of the CNOL deduction, deriving both from nonlife insurance companies and other corporations, is subject to the 80% Limitation.

Under the proposed regulations, the application of the 80% Limitation to an NOL carryforward depends on the status of the entity that generated the income being offset in the consolidated group. Under this proposed approach, NOL carryforwards and carrybacks offsetting income from nonlife insurance companies would not be subject to the 80% Limitation, but NOL carryforwards and carrybacks offsetting income from other corporations would be subject to the limitation. If the income being offset derives both from corporations subject to the 80% Limitation (non-insurance companies or life insurance companies) and from other companies not subject to the limitation (nonlife insurance companies), the amount of the NOL deduction is calculated from two “pools,” the nonlife income pool (the amount attributable to the nonlife insurance companies) and the residual income pool (the amount attributable to the remaining companies in the group).

The steps to determine this amount are as follows:

  1. Calculate the “nonlife income pool,” which is the aggregate amount of the consolidated taxable income of the nonlife insurance companies available to be offset.
  2. Calculate the “residual income pool,” which is the lesser of the post-2017 NOLs or 80% of the consolidated taxable income of the residual corporations.
  3. Allocate the pre-2018 NOLs that can be carried to the current year on a pro-rata basis between the income in the nonlife income pool and the residual income pool.
  4. Subtract the pre-2018 NOL allocated to the nonlife income pool from the nonlife income pool. Subtract the pre-2018 NOL allocated to the residual income pool from the residual income pool.
  5. If the nonlife income pool is negative and the residual income is positive, the entire group is subject to the 80% Limitation. Conversely, if the nonlife income pool is positive and the residual income pool is negative, the group is not subject to the 80% Limitation at all.
  6. Otherwise, the pre-2018 NOL plus the sum of the two amounts determined in Step 4 constitute the NOL deduction limit for the taxable year.

Eversheds Sutherland Observation: The principle underlying these procedures, as noted above, is that the character of the income being offset (i.e., nonlife or residual) determines whether the 80% Limitation should apply. It is by no means clear from the statute that this principle is consistent with Congress’s intent when it exempted nonlife insurance companies from the TCJA revisions to section 172. It will be interesting to see whether taxpayers comment on this principle. As the Preamble points out, while it is by no means mandated by the statute, it is also not as taxpayer unfavorable as other potential methods to apply section 172 to mixed groups.

Life-Nonlife Regulations (Treas. Reg. § 1.1502-47)

Sections 1503(c) and 1504(c) provide special limitations for federal income tax consolidated returns filed by life-nonlife groups. The Life-Nonlife Regulations in Treas. Reg. § 1.1502-47 provides rules for filing of life-nonlife groups.

Life insurance companies are generally not “includible corporations” (and therefore cannot consolidate with nonlife companies) for purposes of the Code. The historical reasons for this rule dates back to 1928, at which time life insurance companies were taxed under a very different system than other companies. After 1976, however, life insurance companies were permitted to consolidate with nonlife companies, but subject to the limitations of section 1503(c) and 1504(c).

Congress completely overhauled the taxation of life insurance companies in 1984 and 1986, after which the taxation of life insurance companies conformed to a much greater extent to the taxation of other companies. However, the Life-Nonlife Regulations, until now, have not been revised to reflect the 1984 and 1986 changes to the Code (nor any subsequent changes to subchapter L of the Code). As a result, significant interpretation is required to apply the principles of the Life-Nonlife Regulations in light of the vastly different statutory provisions of subchapter L.

The new proposed version of the Life-Nonlife Regulations brings Treas. Reg. § 1.1502-47 into the twenty-first century by updating the statutory references to reflect current law. It also carefully rewrites the provisions to make them conform to current versions of the consolidated return regulations, such as the current NOL rules under Treas. Reg. § 1.1502-21.

Eversheds Sutherland Observation: The new proposed Life-Nonlife Regulations are much easier to read and to apply than the existing version. However, while Treasury’s proposed update of the Life-Nonlife regulations represents a major, overdue undertaking, the regulations make almost no material substantive changes to the basic rules of the Life-Nonlife Regulations. This omission is notable because the insurance industry has long argued that the current life-nonlife rules are unnecessarily cumbersome and go well beyond the mandate of the statute with no sound policy basis for such breadth. For example, both the existing Life-Nonlife Regulations and the proposed regulations apply subgrouping to capital gains and losses despite no statutory requirement for such application. The proposed Life-Nonlife Regulations do not propose to adopt the simplifications requested by the industry and request further comments. It seems likely that the industry will again submit comments addressing these issues.


1 REG-125716-18; 85 FR 40927 (July 8, 2020).
2 T.D. 9900; 85 FR 40927 (July 8, 2020).
3 P.L. 115-97 (Dec. 22, 2017).
4 P.L. 116-136 (Mar. 27, 2020). All section references are to the Internal Revenue Code of 1986, as amended, (Code) or to the Treasury Regulations promulgated thereunder.
5 Pre-TCJA section 810.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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