The Prudential Series Fund
The Prudential Series Fund
The Prudential Series Fund
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Pruco Life Insurance Company<br />
Notes to Consolidated Financial Statements<br />
7. INCOME TAXES (continued)<br />
In December 2006, the IRS completed all fieldwork with regards to its examination of the consolidated federal income tax<br />
returns for tax years 2002 and 2003. <strong>The</strong> final report was initially submitted to the Joint Committee on Taxation for their review<br />
in April 2007. <strong>The</strong> final report was resubmitted in March 2008 and again in April 2008. <strong>The</strong> Joint Committee returned the report<br />
to the IRS for additional review of an industry issue regarding the methodology for calculating the DRD related to variable life<br />
insurance and annuity contracts. Within the table above, reconciling the Company’s effective tax rate to the expected amount<br />
determined using the federal statutory rate of 35%, the DRD was the primary component of the non-taxable investment income in<br />
recent years. <strong>The</strong> IRS completed its review of the issue and proposed an adjustment with respect to the calculation of the DRD.<br />
In order to expedite receipt of an income tax refund related to the 2002 and 2003 years, the Company has agreed to such<br />
adjustment. Nevertheless, the Company believes that its return position is technically correct. <strong>The</strong>refore, the Company intends to<br />
file a protective refund claim to recover the taxes associated with the agreed upon adjustment and to pursue such other actions as<br />
appropriate. <strong>The</strong> report, with the adjustment, was submitted to the Joint Committee on Taxation in October 2008. <strong>The</strong> Company<br />
was advised on January 2, 2009 that the Joint Committee completed its consideration of the report and has taken no exception to<br />
the conclusions reached by the IRS. Accordingly, the final report was processed and a refund was received. <strong>The</strong> statute of<br />
limitations for these years will close on December 31, 2009. <strong>The</strong>se activities had no impact on the Company’s 2007 or 2008<br />
results.<br />
In January 2007, the IRS began an examination of the consolidated U.S. federal income tax years 2004 through 2006. For the<br />
consolidated U.S. federal income tax years 2007 and 2008, the Company participated in the IRS’s Compliance Assurance<br />
Program (―CAP‖). Under CAP, the IRS assigns an examination team to review completed transactions contemporaneously<br />
during the 2007 and 2008 tax years in order to reach agreement with the Company on how they should be reported in the tax<br />
return. If disagreements arise, accelerated resolutions programs are available to resolve the disagreements in a timely manner<br />
before the tax return is filed. It is management’s expectation this program will shorten the time period between the Company’s<br />
filing of its federal income tax return and the IRS’s completion of its examination of the return.<br />
8. CERTAIN NONTRADITIONAL LONG-DURATION CONTRACTS<br />
<strong>The</strong> Company issues traditional variable annuity contracts through its separate accounts for which investment income and<br />
investment gains and losses accrue directly to, and investment risk is borne by, the contractholder. <strong>The</strong> Company also issues<br />
variable annuity contracts with general and separate account options where the Company contractually guarantees to the<br />
contractholder a return of no less than (1) total deposits made to the contract less any partial withdrawals (―return of net<br />
deposits‖), (2) total deposits made to the contract less any partial withdrawals plus a minimum return (―minimum return‖), or (3)<br />
the highest contract value on a specified date minus any withdrawals (―contract value‖). <strong>The</strong>se guarantees include benefits that<br />
are payable in the event of death, annuitization or at specified dates during the accumulation period including withdrawal and<br />
income benefits payable during specified periods. <strong>The</strong> company also offers an enhanced withdrawal benefit should a<br />
contractholder not be able to perform normal activities of daily living.<br />
<strong>The</strong> Company also issues annuity contracts with market value adjusted investment options (―MVAs‖), which provide for a return<br />
of principal plus a fixed rate of return if held to maturity, or, alternatively, a ―market adjusted value‖ if surrendered prior to<br />
maturity or if funds are reallocated to other investment options. <strong>The</strong> market value adjustment may result in a gain or loss to the<br />
Company, depending on crediting rates or an indexed rate at surrender, as applicable.<br />
In addition, the Company issues variable life, variable universal life and universal life contracts where the Company contractually<br />
guarantees to the contractholder a death benefit even when there is insufficient value to cover monthly mortality and expense<br />
charges, whereas otherwise the contract would typically lapse (―no lapse guarantee‖). Variable life and variable universal life<br />
contracts are offered with general and separate account options.<br />
<strong>The</strong> assets supporting the variable portion of both traditional variable annuities and certain variable contracts with guarantees are<br />
carried at fair value and reported as ―Separate account assets‖ with an equivalent amount reported as ―Separate account<br />
liabilities.‖ Amounts assessed against the contractholders for mortality, administration, and other services are included within<br />
revenue in ―Policy charges and fee income‖ and changes in liabilities for minimum guarantees are generally included in<br />
―Policyholders’ benefits.‖ In 2008 and 2007 there were no gains or losses on transfers of assets from the general account to a<br />
separate account.<br />
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