The Prudential Series Fund

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