Memo #
31608

ICI-SIFMA Letter to Treasury and IRS Requesting Additional Guidance on Single Security Initiative and Section 817(h)
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[31608]

February 12, 2019 TO: ICI Members
Tax Committee
Variable Insurance Products Advisory Committee SUBJECTS: Tax RE: ICI-SIFMA Letter to Treasury and IRS Requesting Additional Guidance on Single Security Initiative and Section 817(h)

 

The Institute and the Securities Industry and Financial Markets Association (SIFMA) sent the attached letter to the Treasury Department and Internal Revenue Service (IRS) requesting clarification of recently released guidance regarding the Single Security Initiative.[1]  The IRS issued Revenue Procedure 2018-54 to address concerns about application of the diversification requirements under section 817(h) to Uniform Mortgage-Backed Securities (UMBS) acquired in the To-Be-Announced (TBA) market.  Once trading begins, a taxpayer who acquires UMBS through the TBA market will not know the actual issuer(s) of the securities until 48 hours prior to settlement, thus potentially impacting a segregated asset account’s ability to satisfy the diversification requirements.       

In general, the revenue procedure permits taxpayers to elect to apply a “deemed issuer ratio” to UMBS acquired in the TBA market for purposes of section 817(h) diversification testing.  This deemed issuer ratio, if the election is made, would apply to the UMBS for as long as the securities are held by the taxpayer and regardless of the actual securities delivered under the TBA contract.    

The joint letter explains that the guidance in Rev. Proc. 2018-54 does not address the more pressing diversification issue arising from the TBA contracts themselves.  It also describes the operational difficulties that taxpayers will face if they apply the deemed issuer ratio election to UMBS acquired through the TBA market.  SIFMA and the Institute thus ask the Treasury Department and the IRS to provide that:

  1. Taxpayers may elect to apply the deemed issuance ratio to UMBS TBA contracts before the underlying UMBS have been physically delivered; and
  2. The deemed issuance ratio election applies separately to a TBA contract and the UMBS that are delivered pursuant to that contract, so that the election could apply to an open TBA contract prior to the UMBS being delivered without the election also applying to the UMBS once physically delivered.

To address additional concerns arising from the guidance, we also ask the IRS and Treasury to provide that:

  1. The deemed issuance ratio will be adjusted annually only if the change in the ratio is material.  We suggest a reasonable threshold would be 5 percent.
  2. The “taxpayer” that makes the deemed issuance ratio election with respect to any UMBS or TBA contracts is the entity that acquires those securities or contracts (either the insurance company segregated asset account or the insurance dedicated fund in which the segregated asset account invests).  If the taxpayer is the insurance company, the election is made separately for each segregated asset account. 
  3. A taxpayer may revoke the deemed issuance ratio election by stating that it is doing so in a statement or form filed with its tax return for the year in which the taxpayer wishes to no longer apply the deemed issuance ratio. 

 

Karen Lau Gibian
Associate General Counsel

 

Attachment

endnotes

[1] See Institute Memorandum No. 31439, dated October 17, 2018, which can be found at: https://www.ici.org/my_ici/memorandum/memo31439.