An Internal Revenue Service development this week will be welcome news to many insurance companies.

After two years of negotiation between the IRS National Office and insurance industry organizations, the IRS has issued a nationwide directive to its examining agents not to challenge partial bad-debt deductions under section 166(a)(2) of the Internal Revenue Code by insurance company taxpayers (both life and property and casualty), so long as the deduction is based on the loss in value of certain types of securities that the company has recorded on its Annual Statement filed with state insurance regulators, and the charge-off complies with Statement of Statutory Accounting Principle (SSAP) 43-R. In short, this is a "safe harbor" rule that allows a tax deduction for the partial worthlessness of certain investments as long as the governing Annual Statement accounting method is followed. Real estate mortgage investment conduit (REMIC) regular interests are the most common example of an investment covered by the directive.

Many insurance companies invested in the housing and mortgage markets in the form of REMIC interests, and because of the subprime mortgage collapse and subsequent financial crisis of 2007 – 2009 (and continuing), many such investments lost substantial value. However, the ability of insurance companies to take tax deductions for the loss in value was very uncertain. This IRS directive resolves a key uncertainty, and is good news for insurance company taxpayers.

IMPORTANT NOTE: Insurance companies can take advantage of this directive for tax years 2009 through 2012 if they are under audit for any of those years — and companies also may file amended returns and claim refunds if they did not previously adopt this approach but are eligible for the safe harbor.