Subchapter L - Insurance Companies

TITLE 26 - US CODE - PART I - LIFE INSURANCE COMPANIES

Subpart A - Tax Imposed

26 USC 801 - Tax imposed

(a) Tax imposed 

(1) In general 
A tax is hereby imposed for each taxable year on the life insurance company taxable income of every life insurance company. Such tax shall consist of a tax computed as provided in section 11 as though the life insurance company taxable income were the taxable income referred to in section 11.
(2) Alternative tax in case of capital gains 

(A) In general 
If a life insurance company has a net capital gain for the taxable year, then (in lieu of the tax imposed by paragraph (1)), there is hereby imposed a tax (if such tax is less than the tax imposed by paragraph (1)).
(B) Amount of tax 
The amount of the tax imposed by this paragraph shall be the sum of
(i) a partial tax, computed as provided by paragraph (1), on the life insurance company taxable income reduced by the amount of the net capital gain, and
(ii) an amount determined as provided in section 1201 (a) on such net capital gain.
(C) Net capital gain not taken into account in determining small life insurance company deduction 
For purposes of subparagraph (B)(i), the amount allowable as a deduction under paragraph (2) of section 804 shall be determined by reducing the tentative LICTI by the amount of the net capital gain (determined without regard to items attributable to noninsurance businesses).
(b) Life insurance company taxable income 
For purposes of this part, the term life insurance company taxable income means
(1) life insurance gross income, reduced by
(2) life insurance deductions.
(c) Taxation of distributions from pre-1984 policyholders surplus account 
For provision taxing distributions to shareholders from pre-1984 policyholders surplus account, see section 815.

Subpart B - Life Insurance Gross Income

26 USC 803 - Life insurance gross income

(a) In general 
For purposes of this part, the term life insurance gross income means the sum of the following amounts:
(1) Premiums 

(A) The gross amount of premiums and other consideration on insurance and annuity contracts, less
(B) return premiums, and premiums and other consideration arising out of indemnity reinsurance.
(2) Decreases in certain reserves 
Each net decrease in reserves which is required by section 807 (a) to be taken into account under this paragraph.
(3) Other amounts 
All amounts not includible under paragraph (1) or (2) which under this subtitle are includible in gross income.
(b) Special rules for premiums 

(1) Certain items included 
For purposes of subsection (a)(1)(A), the term gross amount of premiums and other consideration includes
(A) advance premiums,
(B) deposits,
(C) fees,
(D) assessments,
(E) consideration in respect of assuming liabilities under contracts not issued by the taxpayer, and
(F) the amount of policyholder dividends reimbursable to the taxpayer by a reinsurer in respect of reinsured policies,

on insurance and annuity contracts.

(2) Policyholder dividends excluded from return premiums 
For purposes of subsection (a)(1)(B)
(A) In general 
Except as provided in subparagraph (B), the term return premiums does not include any policyholder dividends.
(B) Exception for indemnity reinsurance 
Subparagraph (A) shall not apply to amounts of premiums or other consideration returned to another life insurance company in respect of indemnity reinsurance.

Subpart C - Life Insurance Deductions

26 USC 804 - Life insurance deductions

For purposes of this part, the term life insurance deductions means
(1) the general deductions provided in section 805, and
(2) the small life insurance company deduction (if any) determined under section 806 (a).

26 USC 805 - General deductions

(a) General rule 
For purposes of this part, there shall be allowed the following deductions:
(1) Death benefits, etc. 
All claims and benefits accrued, and all losses incurred (whether or not ascertained), during the taxable year on insurance and annuity contracts.
(2) Increases in certain reserves 
The net increase in reserves which is required by section 807 (b) to be taken into account under this paragraph.
(3) Policyholder dividends 
The deduction for policyholder dividends (determined under section 808 (c)).
(4) Dividends received by company 

(A) In general 
The deductions provided by sections 243, 244, and 245 (as modified by subparagraph (B))
(i) for 100 percent dividends received, and
(ii) for the life insurance companys share of the dividends (other than 100 percent dividends) received.
(B) Application of section 246 (b) 
In applying section 246 (b) (relating to limitation on aggregate amount of deductions for dividends received) for purposes of subparagraph (A), the limit on the aggregate amount of the deductions allowed by sections 243 (a)(1), 244 (a), and 245 shall be the percentage determined under section 246(b)(3) of the life insurance company taxable income (and such limitation shall be applied as provided in section 246 (b)(3)), computed without regard to
(i) the small life insurance company deduction,
(ii) the operations loss deduction provided by section 810,
(iii) the deductions allowed by sections 243 (a)(1), 244 (a), and 245, and
(iv) any capital loss carryback to the taxable year under section 1212 (a)(1),

but such limit shall not apply for any taxable year for which there is a loss from operations.

(C) 100 percent dividend 
For purposes of subparagraph (A)
(i) In general Except as provided in clause (ii), the term 100 percent dividend means any dividend if the percentage used for purposes of determining the deduction allowable under section 243, 244, or 245 (b) is 100 percent.
(ii) Treatment of dividends from noninsurance companies The term 100 percent dividend does not include any distribution by a corporation which is not an insurance company to the extent such distribution is out of tax-exempt interest, or out of the increase for the taxable year in policy cash values (within the meaning of subparagraph (F)) of life insurance policies and annuity and endowment contracts to which section 264 (f) applies, or out of dividends which are not 100 percent dividends (determined with the application of this clause as if it applies to distributions by all corporations including insurance companies).
(D) Special rules for certain dividends from insurance companies 

(i) In general In the case of any 100 percent dividend paid to any life insurance company out of the earnings and profits for any taxable year beginning after December 31, 1983, of another life insurance company if
(I) the paying companys share determined under section 812 for such taxable year, exceeds
(II) the receiving companys share determined under section 812 for its taxable year in which the dividend is received or accrued,

the deduction allowed under section 243, 244, or 245 (b) (as the case may be) shall be reduced as provided in clause (ii).

(ii) Amount of reduction The reduction under this clause for a dividend is an amount equal to
(I) the portion of such dividend attributable to prorated amounts, multiplied by
(II) the percentage obtained by subtracting the share described in subclause (II) of clause (i) from the share described in subclause (I) of such clause.
(iii) Prorated amounts For purposes of this subparagraph, the term prorated amounts means tax-exempt interest, the increase for the taxable year in policy cash values (within the meaning of subparagraph (F)) of life insurance policies and annuity and endowment contracts to which section 264 (f) applies, and dividends other than 100 percent dividends.
(iv) Portion of dividend attributable to prorated amounts For purposes of this subparagraph, in determining the portion of any dividend attributable to prorated amounts
(I) any dividend by the paying corporation shall be treated as paid first out of earnings and profits for taxable years beginning after December 31, 1983, attributable to prorated amounts (to the extent thereof), and
(II) by determining the portion of earnings and profits so attributable without any reduction for the tax imposed by this chapter.
(v) Subparagraph to apply to dividends from other insurance companies Rules similar to the rules of this subsection shall apply in the case of 100 percent dividends paid by an insurance company which is not a life insurance company.
(E) Certain dividends received by foreign corporations 
Subparagraph (A)(i) (and not subparagraph (A)(ii)) shall apply to any dividend received by a foreign corporation from a domestic corporation which would be a 100 percent dividend if section 1504 (b)(3) did not apply for purposes of applying section 243 (b)(2).
(F) Increase in policy cash values 
For purposes of subparagraphs (C) and (D)
(i) In general The increase in the policy cash value for any taxable year with respect to policy or contract is the amount of the increase in the adjusted cash value during such taxable year determined without regard to
(I) gross premiums paid during such taxable year, and
(II) distributions (other than amounts includible in the policyholders gross income) during such taxable year to which section 72 (e) applies.
(ii) Adjusted cash value For purposes of clause (i), the term adjusted cash value means the cash surrender value of the policy or contract increased by the sum of
(I) commissions payable with respect to such policy or contract for the taxable year, and
(II) asset management fees, surrender charges, mortality and expense charges, and any other fees or charges specified in regulations prescribed by the Secretary which are imposed (or which would be imposed were the policy or contract canceled) with respect to such policy or contract for the taxable year.
(5) Operations loss deduction 
The operations loss deduction (determined under section 810).
(6) Assumption by another person of liabilities under insurance, etc., contracts 
The consideration (other than consideration arising out of indemnity reinsurance) in respect of the assumption by another person of liabilities under insurance and annuity contracts.
(7) Reimbursable dividends 
The amount of policyholder dividends which
(A) are paid or accrued by another insurance company in respect of policies the taxpayer has reinsured, and
(B) are reimbursable by the taxpayer under the terms of the reinsurance contract.
(8) Other deductions 
Subject to the modifications provided by subsection (b), all other deductions allowed under this subtitle for purposes of computing taxable income.

Except as provided in paragraph (3), no amount shall be allowed as a deduction under this part in respect of policyholder dividends.

(b) Modifications 
The modifications referred to in subsection (a)(8) are as follows:
(1) Interest 
In applying section 163 (relating to deduction for interest), no deduction shall be allowed for interest in respect of items described in section 807 (c).
(2) Charitable, etc., contributions and gifts 
In applying section 170
(A) the limit on the total deductions under such section provided by section 170 (b)(2) shall be 10 percent of the life insurance company taxable income computed without regard to
(i) the deduction provided by section 170,
(ii) the deductions provided by paragraphs (3) and (4) of subsection (a),
(iii) the small life insurance company deduction,
(iv) any operations loss carryback to the taxable year under section 810, and
(v) any capital loss carryback to the taxable year under section 1212 (a)(1), and
(B) under regulations prescribed by the Secretary, a rule similar to the rule contained in section 170 (d)(2)(B) (relating to special rule for net operating loss carryovers) shall be applied.
(3) Amortizable bond premium 

(A) In general 
Section 171 shall not apply.
(B) Cross reference 
For rules relating to amortizable bond premium, see section 811 (b).
(4) Net operating loss deduction 
Except as provided by section 844, the deduction for net operating losses provided in section 172 shall not be allowed.
(5) Dividends received deduction 
Except as provided in subsection (a)(4), the deductions for dividends received provided by sections 243, 244, and 245 shall not be allowed.

26 USC 806 - Small life insurance company deduction

(a) Small life insurance company deduction 

(1) In general 
For purposes of section 804, the small life insurance company deduction for any taxable year is 60 percent of so much of the tentative LICTI for such taxable year as does not exceed $3,000,000.
(2) Phaseout between $3,000,000 and $15,000,000 
The amount of the small life insurance company deduction determined under paragraph (1) for any taxable year shall be reduced (but not below zero) by 15 percent of so much of the tentative LICTI for such taxable year as exceeds $3,000,000.
(3) Small life insurance company deduction not allowable to company with assets of $500,000,000 or more 

(A) In general 
The small life insurance company deduction shall not be allowed for any taxable year to any life insurance company which, at the close of such taxable year, has assets equal to or greater than $500,000,000.
(B) Assets 
For purposes of this paragraph, the term assets means all assets of the company.
(C) Valuation of assets 
For purposes of this paragraph, the amount attributable to
(i) real property and stock shall be the fair market value thereof, and
(ii) any other asset shall be the adjusted basis of such asset for purposes of determining gain on sale or other disposition.
(D) Special rule for interests in partnerships and trusts 
For purposes of this paragraph
(i) an interest in a partnership or trust shall not be treated as an asset of the company, but
(ii) the company shall be treated as actually owning its proportionate share of the assets held by the partnership or trust (as the case may be).
(b) Tentative LICTI 
For purposes of this part
(1) In general 
The term tentative LICTI means life insurance company taxable income determined without regard to the small life insurance company deduction.
(2) Exclusion of items attributable to noninsurance businesses 
The amount of the tentative LICTI for any taxable year shall be determined without regard to all items attributable to noninsurance businesses.
(3) Noninsurance business 

(A) In general 
The term noninsurance business means any activity which is not an insurance business.
(B) Certain activities treated as insurance businesses 
For purposes of subparagraph (A), any activity which is not an insurance business shall be treated as an insurance business if
(i) it is of a type traditionally carried on by life insurance companies for investment purposes, but only if the carrying on of such activity (other than in the case of real estate) does not constitute the active conduct of a trade or business, or
(ii) it involves the performance of administrative services in connection with plans providing life insurance, pension, or accident and health benefits.
(C) Limitation on amount of loss from noninsurance business which may offset income from insurance business 
In computing the life insurance company taxable income of any life insurance company, any loss from a noninsurance business shall be limited under the principles of section 1503 (c).
(c) Special rule for controlled groups 

(1) Small life insurance company deduction determined on controlled group basis 
For purposes of subsection (a)
(A) all life insurance companies which are members of the same controlled group shall be treated as 1 life insurance company, and
(B) any small life insurance company deduction determined with respect to such group shall be allocated among the life insurance companies which are members of such group in proportion to their respective tentative LICTIs.
(2) Nonlife insurance members included for asset test 
For purposes of subsection (a)(3), all members of the same controlled group (whether or not life insurance companies) shall be treated as 1 company.
(3) Controlled group 
For purposes of this subsection, the term controlled group means any controlled group of corporations (as defined in section 1563 (a)); except that subsections (a)(4) and (b)(2)(D) of section 1563 shall not apply.
(4) Adjustments to prevent excess detriment or benefit 
Under regulations prescribed by the Secretary, proper adjustments shall be made in the application of this subsection to prevent any excess detriment or benefit (whether from year-to-year or otherwise) arising from the application of this subsection.

26 USC 807 - Rules for certain reserves

(a) Decrease treated as gross income 
If for any taxable year
(1) the opening balance for the items described in subsection (c), exceeds
(2) 
(A) the closing balance for such items, reduced by
(B) the amount of the policyholders share of tax-exempt interest and the amount of the policyholders share of the increase for the taxable year in policy cash values (within the meaning of section 805(a)(4)(F)) of life insurance policies and annuity and endowment contracts to which section 264 (f) applies,

such excess shall be included in gross income under section 803 (a)(2).

(b) Increase treated as deduction 
If for any taxable year
(1) 
(A) the closing balance for the items described in subsection (c), reduced by
(B) the amount of the policyholders share of tax-exempt interest and the amount of the policyholders share of the increase for the taxable year in policy cash values (within the meaning of section 805(a)(4)(F)) of life insurance policies and annuity and endowment contracts to which section 264 (f) applies, exceeds
(2) the opening balance for such items,

such excess shall be taken into account as a deduction under section 805 (a)(2).

(c) Items taken into account 
The items referred to in subsections (a) and (b) are as follows:
(1) The life insurance reserves (as defined in section 816 (b)).
(2) The unearned premiums and unpaid losses included in total reserves under section 816 (c)(2).
(3) The amounts (discounted at the appropriate rate of interest) necessary to satisfy the obligations under insurance and annuity contracts, but only if such obligations do not involve (at the time with respect to which the computation is made under this paragraph) life, accident, or health contingencies.
(4) Dividend accumulations, and other amounts, held at interest in connection with insurance and annuity contracts.
(5) Premiums received in advance, and liabilities for premium deposit funds.
(6) Reasonable special contingency reserves under contracts of group term life insurance or group accident and health insurance which are established and maintained for the provision of insurance on retired lives, for premium stabilization, or for a combination thereof.

For purposes of paragraph (3), the appropriate rate of interest for any obligation is whichever of the following rates is the highest as of the time such obligation first did not involve life, accident, or health contingencies: the applicable Federal interest rate under subsection (d)(2)(B)(i), the prevailing State assumed interest rate under subsection (d)(2)(B)(ii), or the rate of interest assumed by the company in determining the guaranteed benefit. In no case shall the amount determined under paragraph (3) for any contract be less than the net surrender value of such contract. For purposes of paragraph (2) and section 805 (a)(1), the amount of the unpaid losses (other than losses on life insurance contracts) shall be the amount of the discounted unpaid losses as defined in section 846.

(d) Method of computing reserves for purposes of determining income 

(1) In general 
For purposes of this part (other than section 816), the amount of the life insurance reserves for any contract shall be the greater of
(A) the net surrender value of such contract, or
(B) the reserve determined under paragraph (2).

In no event shall the reserve determined under the preceding sentence for any contract as of any time exceed the amount which would be taken into account with respect to such contract as of such time in determining statutory reserves (as defined in paragraph (6)).

(2) Amount of reserve 
The amount of the reserve determined under this paragraph with respect to any contract shall be determined by using
(A) the tax reserve method applicable to such contract,
(B) the greater of
(i) the applicable Federal interest rate, or
(ii) the prevailing State assumed interest rate, and
(C) the prevailing commissioners standard tables for mortality and morbidity adjusted as appropriate to reflect the risks (such as substandard risks) incurred under the contract which are not otherwise taken into account.
(3) Tax reserve method 
For purposes of this subsection
(A) In general 
The term tax reserve method means
(i) Life insurance contracts The CRVM in the case of a contract covered by the CRVM.
(ii) Annuity contracts The CARVM in the case of a contract covered by the CARVM.
(iii) Noncancellable accident and health insurance contracts In the case of any noncancellable accident and health insurance contract (other than a qualified long-term care insurance contract, as defined in section 7702B (b)), a 2-year full preliminary term method.
(iv) Other contracts In the case of any contract not described in clause (i), (ii), or (iii)
(I) the reserve method prescribed by the National Association of Insurance Commissioners which covers such contract (as of the date of issuance), or
(II) if no reserve method has been prescribed by the National Association of Insurance Commissioners which covers such contract, a reserve method which is consistent with the reserve method required under clause (i), (ii), or (iii) or under subclause (I) of this clause as of the date of the issuance of such contract (whichever is most appropriate).
(B) Definition of CRVM and CARVM 
For purposes of this paragraph
(i) CRVM The term CRVM means the Commissioners Reserve Valuation Method prescribed by the National Association of Insurance Commissioners which is in effect on the date of the issuance of the contract.
(ii) CARVM The term CARVM means the Commissioners Annuities Reserve Valuation Method prescribed by the National Association of Insurance Commissioners which is in effect on the date of the issuance of the contract.
(C) No additional reserve deduction allowed for deficiency reserves 
Nothing in any reserve method described under this paragraph shall permit any increase in the reserve because the net premium (computed on the basis of assumptions required under this subsection) exceeds the actual premiums or other consideration charged for the benefit.
(4) Applicable Federal interest rate; prevailing State assumed interest rate 
For purposes of this subsection
(A) Applicable Federal interest rate 

(i) In general Except as provided in clause (ii), the term applicable Federal interest rate means the annual rate determined by the Secretary under section 846 (c)(2) for the calendar year in which the contract was issued.
(ii) Election to recompute Federal interest rate every 5 years
(I) In general In computing the amount of the reserve with respect to any contract to which an election under this clause applies for periods during any recomputation period, the applicable Federal interest rate shall be the annual rate determined by the Secretary under section 846 (c)(2) for the 1st year of such period. No change in the applicable Federal interest rate shall be made under the preceding sentence unless such change would equal or exceed 1/2 of 1 percentage point.
(II) Recomputation period For purposes of subclause (I), the term recomputation period means, with respect to any contract, the 5 calendar year period beginning with the 5th calendar year beginning after the calendar year in which the contract was issued (and each subsequent 5 calendar year period).
(III) Election An election under this clause shall apply to all contracts issued during the calendar year for which the election was made or during any subsequent calendar year unless such election is revoked with the consent of the Secretary.
(IV) Spread not available Subsection (f) shall not apply to any adjustment required under this clause.
(B) Prevailing State assumed interest rate 

(i) In general The term prevailing State assumed interest rate means, with respect to any contract, the highest assumed interest rate permitted to be used in computing life insurance reserves for insurance contracts or annuity contracts (as the case may be) under the insurance laws of at least 26 States. For purposes of the preceding sentence, the effect of nonforfeiture laws of a State on interest rates for reserves shall not be taken into account.
(ii) When rate determined The prevailing State assumed interest rate with respect to any contract shall be determined as of the beginning of the calendar year in which the contract was issued.
(5) Prevailing commissioners’ standard tables 
For purposes of this subsection
(A) In general 
The term prevailing commissioners standard tables means, with respect to any contract, the most recent commissioners standard tables prescribed by the National Association of Insurance Commissioners which are permitted to be used in computing reserves for that type of contract under the insurance laws of at least 26 States when the contract was issued.
(B) Insurer may use old tables for 3 years when tables change 
If the prevailing commissioners standard tables as of the beginning of any calendar year (hereinafter in this subparagraph referred to as the year of change) is different from the prevailing commissioners standard tables as of the beginning of the preceding calendar year, the issuer may use the prevailing commissioners standard tables as of the beginning of the preceding calendar year with respect to any contract issued after the change and before the close of the 3-year period beginning on the first day of the year of change.
(C) Special rule for contracts for which there are no commissioners’ standard tables 
If there are no commissioners standard tables applicable to any contract when it is issued, the mortality and morbidity tables used for purposes of paragraph (2)(C) shall be determined under regulations prescribed by the Secretary. When the Secretary by regulation changes the table applicable to a type of contract, the new table shall be treated (for purposes of subparagraph (B) and for purposes of determining the issue dates of contracts for which it shall be used) as if it were a new prevailing commissioners standard table adopted by the twenty-sixth State as of a date (no earlier than the date the regulation is issued) specified by the Secretary.
(D) Special rule for contracts issued before 1948 
If
(i) a contract was issued before 1948, and
(ii) there were no commissioners standard tables applicable to such contract when it was issued,

the mortality and morbidity tables used in computing statutory reserves for such contracts shall be used for purposes of paragraph (2)(C).

(E) Special rule where more than 1 table or option applicable 
If, with respect to any category of risks, there are 2 or more tables (or options under 1 or more tables) which meet the requirements of subparagraph (A) (or, where applicable, subparagraph (B) or (C)), the table (and option thereunder) which generally yields the lowest reserves shall be used for purposes of paragraph (2)(C).
(6) Statutory reserves 
The term statutory reserves means the aggregate amount set forth in the annual statement with respect to items described in section 807 (c). Such term shall not include any reserve attributable to a deferred and uncollected premium if the establishment of such reserve is not permitted under section 811 (c).
(e) Special rules for computing reserves 

(1) Net surrender value 
For purposes of this section
(A) In general 
The net surrender value of any contract shall be determined
(i) with regard to any penalty or charge which would be imposed on surrender, but
(ii) without regard to any market value adjustment on surrender.
(B) Special rule for pension plan contracts 
In the case of a pension plan contract, the balance in the policyholders fund shall be treated as the net surrender value of such contract. For purposes of the preceding sentence, such balance shall be determined with regard to any penalty or forfeiture which would be imposed on surrender but without regard to any market value adjustment.
(2) Issuance date in case of group contracts 
For purposes of this section, in the case of a group contract, the date on which such contract is issued shall be the date as of which the master plan is issued (or, with respect to a benefit guaranteed to a participant after such date, the date as of which such benefit is guaranteed).
(3) Supplemental benefits 

(A) Qualified supplemental benefits treated separately 
For purposes of this part, the amount of the life insurance reserve for any qualified supplemental benefit
(i) shall be computed separately as though such benefit were under a separate contract, and
(ii) shall, except to the extent otherwise provided in regulations, be the reserve taken into account for purposes of the annual statement approved by the National Association of Insurance Commissioners.
(B) Supplemental benefits which are not qualified supplemental benefits 
In the case of any supplemental benefit described in subparagraph (D) which is not a qualified supplemental benefit, the amount of the reserve determined under paragraph (2) of subsection (d) shall, except to the extent otherwise provided in regulations, be the reserve taken into account for purposes of the annual statement approved by the National Association of Insurance Commissioners.
(C) Qualified supplemental benefit 
For purposes of this paragraph, the term qualified supplemental benefit means any supplemental benefit described in subparagraph (D) if
(i) there is a separately identified premium or charge for such benefit, and
(ii) any net surrender value under the contract attributable to any other benefit is not available to fund such benefit.
(D) Supplemental benefits 
For purposes of this paragraph, the supplemental benefits described in this subparagraph are any
(i) guaranteed insurability,
(ii) accidental death or disability benefit,
(iii) convertibility,
(iv) disability waiver benefit, or
(v) other benefit prescribed by regulations,

which is supplemental to a contract for which there is a reserve described in subsection (c).

(4) Certain contracts issued by foreign branches of domestic life insurance companies 

(A) In general 
In the case of any qualified foreign contract, the amount of the reserve shall be not less than the minimum reserve required by the laws, regulations, or administrative guidance of the regulatory authority of the foreign country referred to in subparagraph (B) (but not to exceed the net level reserves for such contract).
(B) Qualified foreign contract 
For purposes of subparagraph (A), the term qualified foreign contract means any contract issued by a foreign life insurance branch (which has its principal place of business in a foreign country) of a domestic life insurance company if
(i) such contract is issued on the life or health of a resident of such country,
(ii) such domestic life insurance company was required by such foreign country (as of the time it began operations in such country) to operate in such country through a branch, and
(iii) such foreign country is not contiguous to the United States.
(5) Treatment of substandard risks 

(A) Separate computation 
Except to the extent provided in regulations, the amount of the life insurance reserve for any qualified substandard risk shall be computed separately under subsection (d)(1) from any other reserve under the contract.
(B) Qualified substandard risk 
For purposes of subparagraph (A), the term qualified substandard risk means any substandard risk if
(i) the insurance company maintains a separate reserve for such risk,
(ii) there is a separately identified premium or charge for such risk,
(iii) the amount of the net surrender value under the contract is not increased or decreased by reason of such risk, and
(iv) the net surrender value under the contract is not regularly used to pay premium charges for such risk.
(C) Limitation on amount of life insurance reserve 
The amount of the life insurance reserve determined for any qualified substandard risk shall in no event exceed the sum of the separately identified premiums charged for such risk plus interest less mortality charges for such risk.
(D) Limitation on amount of contracts to which paragraph applies 
The aggregate amount of insurance in force under contracts to which this paragraph applies shall not exceed 10 percent of the insurance in force (other than term insurance) under life insurance contracts of the company.
(6) Special rules for contracts issued before January 1, 1989, under existing plans of insurance, with term insurance or annuity benefits 
For purposes of this part
(A) In general 
In the case of a life insurance contract issued before January 1, 1989, under an existing plan of insurance, the life insurance reserve for any benefit to which this paragraph applies shall be computed separately under subsection (d)(1) from any other reserve under the contract.
(B) Benefits to which this paragraph applies 
This paragraph applies to any term insurance or annuity benefit with respect to which the requirements of clauses (i) and (ii) of paragraph (3)(C) are met.
(C) Existing plan of insurance 
For purposes of this paragraph, the term existing plan of insurance means, with respect to any contract, any plan of insurance which was filed by the company using such contract in one or more States before January 1, 1984, and is on file in the appropriate State for such contract.
(7) Special rules for treatment of certain nonlife reserves 

(A) In general 
The amount taken into account for purposes of subsections (a) and (b) as
(i) the opening balance of the items referred to in subparagraph (C), and
(ii) the closing balance of such items,

shall be 80 percent of the amount which (without regard to this subparagraph) would have been taken into account as such opening or closing balance, as the case may be.

(B) Transitional rule 

(i) In general In the case of any taxable year beginning on or after September 30, 1990, and before September 30, 1996, there shall be included in the gross income of any life insurance company an amount equal to 31/3 percent of such companys closing balance of the items referred to in subparagraph (C) for its most recent taxable year beginning before September 30, 1990.
(ii) Termination as life insurance company Except as provided in section 381 (c)(22), if, for any taxable year beginning on or before September 30, 1996, the taxpayer ceases to be a life insurance company, the aggregate inclusions which would have been made under clause (i) for such taxable year and subsequent taxable years but for such cessation shall be taken into account for the taxable year preceding such cessation year.
(C) Description of items 
For purposes of this paragraph, the items referred to in this subparagraph are the items described in subsection (c) which consist of unearned premiums and premiums received in advance under insurance contracts not described in section 816 (b)(1)(B).
(f) Adjustment for change in computing reserves 

(1) 10-year spread 

(A) In general 
For purposes of this part, if the basis for determining any item referred to in subsection (c) as of the close of any taxable year differs from the basis for such determination as of the close of the preceding taxable year, then so much of the difference between
(i) the amount of the item at the close of the taxable year, computed on the new basis, and
(ii) the amount of the item at the close of the taxable year, computed on the old basis,

as is attributable to contracts issued before the taxable year shall be taken into account under the method provided in subparagraph (B).

(B) Method 
The method provided in this subparagraph is as follows:
(i) if the amount determined under subparagraph (A)(i) exceeds the amount determined under subparagraph (A)(ii), 1/10 of such excess shall be taken into account, for each of the succeeding 10 taxable years, as a deduction under section 805 (a)(2); or
(ii) if the amount determined under subparagraph (A)(ii) exceeds the amount determined under subparagraph (A)(i), 1/10 of such excess shall be included in gross income, for each of the 10 succeeding taxable years, under section 803 (a)(2).
(2) Termination as life insurance company 
Except as provided in section 381 (c)(22) (relating to carryovers in certain corporate readjustments), if for any taxable year the taxpayer is not a life insurance company, the balance of any adjustments under this subsection shall be taken into account for the preceding taxable year.

26 USC 808 - Policyholder dividends deduction

(a) Policyholder dividend defined 
For purposes of this part, the term policyholder dividend means any dividend or similar distribution to policyholders in their capacity as such.
(b) Certain amounts included 
For purposes of this part, the term policyholder dividend includes
(1) any amount paid or credited (including as an increase in benefits) where the amount is not fixed in the contract but depends on the experience of the company or the discretion of the management,
(2) excess interest,
(3) premium adjustments, and
(4) experience-rated refunds.
(c) Amount of deduction 
The deduction for policyholder dividends for any taxable year shall be an amount equal to the policyholder dividends paid or accrued during the taxable year.
(d) Definitions 
For purposes of this section
(1) Excess interest 
The term excess interest means any amount in the nature of interest
(A) paid or credited to a policyholder in his capacity as such, and
(B) in excess of interest determined at the prevailing State assumed rate for such contract.
(2) Premium adjustment 
The term premium adjustment means any reduction in the premium under an insurance or annuity contract which (but for the reduction) would have been required to be paid under the contract.
(3) Experience-rated refund 
The term experience-rated refund means any refund or credit based on the experience of the contract or group involved.
(e) Treatment of policyholder dividends 
For purposes of this part, any policyholder dividend which
(1) increases the cash surrender value of the contract or other benefits payable under the contract, or
(2) reduces the premium otherwise required to be paid,

shall be treated as paid to the policyholder and returned by the policyholder to the company as a premium.

(f) Coordination of 1984 fresh-start adjustment with acceleration of policyholder dividends deduction through change in business practice 

(1) In general 
The amount determined under paragraph (1) of subsection (c) for the year of change shall (before any reduction under paragraph (2) of subsection (c)) be reduced by so much of the accelerated policyholder dividends deduction for such year as does not exceed the 1984 fresh-start adjustment for policyholder dividends (to the extent such adjustment was not previously taken into account under this subsection).
(2) Year of change 
For purposes of this subsection, the term year of change means the taxable year in which the change in business practices which results in the accelerated policyholder dividends deduction takes effect.
(3) Accelerated policyholder dividends deduction defined 
For purposes of this subsection, the term accelerated policyholder dividends deduction means the amount which (but for this subsection) would be determined for the taxable year under paragraph (1) of subsection (c) but which would have been determined (under such paragraph) for a later taxable year under the business practices of the taxpayer as in effect at the close of the preceding taxable year.
(4) 1984 fresh-start adjustment for policyholder dividends 
For purposes of this subsection, the term 1984 fresh-start adjustment for policyholder dividends means the amounts held as of December 31, 1983, by the taxpayer as reserves for dividends to policyholders under section 811 (b) (as in effect on the day before the date of the enactment of the Tax Reform Act of 1984) other than for dividends which accrued before January 1, 1984. Such amounts shall be properly reduced to reflect the amount of previously nondeductible policyholder dividends (as determined under section 809 (f) as in effect on the day before the date of the enactment of the Tax Reform Act of 1984).
(5) Separate application with respect to lines of business 
This subsection shall be applied separately with respect to each line of business of the taxpayer.
(6) Subsection not to apply to mere change in dividend amount 
This subsection shall not apply to a mere change in the amount of policyholder dividends.
(7) Subsection not to apply to policies issued after December 31, 1983 

(A) In general 
This subsection shall not apply to any policyholder dividend paid or accrued with respect to a policy issued after December 31, 1983.
(B) Exchanges of substantially similar policies 
For purposes of subparagraph (A), any policy issued after December 31, 1983, in exchange for a substantially similar policy issued on or before such date shall be treated as issued before January 1, 1984. A similar rule shall apply in the case of a series of exchanges.
(8) Subsection to apply to policies provided under employee benefit plans 
This subsection shall not apply to any policyholder dividend paid or accrued with respect to a group policy issued in connection with a plan to provide welfare benefits to employees (within the meaning of section 419 (e)(2)).

26 USC 809 - Repealed. Pub. L. 108218, title II, 205(a), Apr. 10, 2004, 118 Stat. 610]

Section, added Pub. L. 98–369, div. A, title II, 211(a), July 18, 1984, 98 Stat. 733; amended Pub. L. 99–514, title XVIII, § 1821(d)(h), (r), Oct. 22, 1986, 100 Stat. 2839, 2840, 2843; Pub. L. 100–647, title I, § 1018(u)(47), Nov. 10, 1988, 102 Stat. 3593; Pub. L. 107–147, title VI, § 611(a), Mar. 9, 2002, 116 Stat. 61, related to reduction in certain deductions of mutual life insurance companies. A prior section 809, added Pub. L. 86–69, § 2(a), June 25, 1959, 73 Stat. 121; amended Pub. L. 87–59, § 2(a), (b), June 27, 1961, 75 Stat. 120; Pub. L. 87–790, § 3(a), Oct. 10, 1962, 76 Stat. 808; Pub. L. 87–858, § 3(b)(3), (c), Oct. 23, 1962, 76 Stat. 1137; Pub. L. 88–272, title II, §§ 214(b)(4), 228 (a), Feb. 26, 1964, 78 Stat. 55, 98; Pub. L. 91–172, title II, § 201(a)(2)(C), title IX, 907(c)(2)(B), Dec. 30, 1969, 83 Stat. 558, 717; Pub. L. 94–455, title XV, § 1508(a), title XIX, 1901(a)(98), (b)(1)(J)(iv), (L)(N), 33(G), 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1741, 1781, 1791, 1801, 1834; Pub. L. 97–248, title II, §§ 255(b)(2)(4), 259(a), 264(c)(2), (3), Sept. 3, 1982, 96 Stat. 534, 538, 544; Pub. L. 97–448, title I, § 102(m)(1), Jan. 12, 1983, 96 Stat. 2374, related to general provisions regarding gain and loss from operations, prior to the general revision of this part by Pub. L. 98–369, § 211(a).

26 USC 810 - Operations loss deduction

(a) Deduction allowed 
There shall be allowed as a deduction for the taxable year an amount equal to the aggregate of
(1) the operations loss carryovers to such year, plus
(2) the operations loss carrybacks to such year.

For purposes of this part, the term operations loss deduction means the deduction allowed by this subsection.

(b) Operations loss carrybacks and carryovers 

(1) Years to which loss may be carried 
The loss from operations for any taxable year (hereinafter in this section referred to as the loss year) shall be
(A) an operations loss carryback to each of the 3 taxable years preceding the loss year,
(B) an operations loss carryover to each of the 15 taxable years following the loss year, and
(C) if the life insurance company is a new company for the loss year, an operations loss carryover to each of the 3 taxable years following the 15 taxable years described in subparagraph (B).
(2) Amount of carrybacks and carryovers 
The entire amount of the loss from operations for any loss year shall be carried to the earliest of the taxable years to which (by reason of paragraph (1)) such loss may be carried. The portion of such loss which shall be carried to each of the other taxable years shall be the excess (if any) of the amount of such loss over the sum of the offsets (as defined in subsection (d)) for each of the prior taxable years to which such loss may be carried.
(3) Election for operations loss carrybacks 
In the case of a loss from operations for any taxable year, the taxpayer may elect to relinquish the entire carryback period for such loss. Such election shall be made by the due date (including extensions of time) for filing the return for the taxable year of the loss from operations for which the election is to be in effect, and, once made for any taxable year, such election shall be irrevocable for that taxable year.
(c) Computation of loss from operations 
For purposes of this section
(1) In general 
The term loss from operations means the excess of the life insurance deductions for any taxable year over the life insurance gross income for such taxable year.
(2) Modifications 
For purposes of paragraph (1)
(A) the operations loss deduction shall not be allowed, and
(B) the deductions allowed by sections 243 (relating to dividends received by corporations), 244 (relating to dividends received on certain preferred stock of public utilities), and 245 (relating to dividends received from certain foreign corporations) shall be computed without regard to section 246 (b) as modified by section 805 (a)(4).
(d) Offset defined 

(1) In general 
For purposes of subsection (b)(2), the term offset means, with respect to any taxable year, an amount equal to that increase in the operations loss deduction for the taxable year which reduces the life insurance company taxable income (computed without regard to paragraphs (2) and (3) of section 804)[1] or such year to zero.
(2) Operations loss deduction 
For purposes of paragraph (1), the operations loss deduction for any taxable year shall be computed without regard to the loss from operations for the loss year or for any taxable year thereafter.
(e) New company defined 
For purposes of this part, a life insurance company is a new company for any taxable year only if such taxable year begins not more than 5 years after the first day on which it (or any predecessor, if section 381 (c)(22) applies) was authorized to do business as an insurance company.
(f) Application of subtitles A and F in respect of operation losses 
Except as provided in section 805 (b)(5),1 subtitles A and F shall apply in respect of operation loss carrybacks, operation loss carryovers, and the operations loss deduction under this part, in the same manner and to the same extent as such subtitles apply in respect of net operating loss carrybacks, net operating loss carryovers, and the net operating loss deduction.
(g) Transitional rule 
For purposes of this section and section 812 (as in effect before the enactment of the Life Insurance Tax Act of 1984), this section shall be treated as a continuation of such section 812.
[1] See References in Text note below.

Subpart D - Accounting, Allocation, and Foreign Provisions

26 USC 811 - Accounting provisions

(a) Method of accounting 
All computations entering into the determination of the taxes imposed by this part shall be made
(1) under an accrual method of accounting, or
(2) to the extent permitted under regulations prescribed by the Secretary, under a combination of an accrual method of accounting with any other method permitted by this chapter (other than the cash receipts and disbursements method).

To the extent not inconsistent with the preceding sentence or any other provision of this part, all such computations shall be made in a manner consistent with the manner required for purposes of the annual statement approved by the National Association of Insurance Commissioners.

(b) Amortization of premium and accrual of discount 

(1) In general 
The appropriate items of income, deductions, and adjustments under this part shall be adjusted to reflect the appropriate amortization of premium and the appropriate accrual of discount attributable to the taxable year on bonds, notes, debentures, or other evidences of indebtedness held by a life insurance company. Such amortization and accrual shall be determined
(A) in accordance with the method regularly employed by such company, if such method is reasonable, and
(B) in all other cases, in accordance with regulations prescribed by the Secretary.
(2) Special rules 

(A) Amortization of bond premium 
In the case of any bond (as defined in section 171 (d)), the amount of bond premium, and the amortizable bond premium for the taxable year, shall be determined under section 171 (b) as if the election set forth in section 171 (c) had been made.
(B) Convertible evidence of indebtedness 
In no case shall the amount of premium on a convertible evidence of indebtedness include any amount attributable to the conversion features of the evidence of indebtedness.
(3) Exception 
No accrual of discount shall be required under paragraph (1) on any bond (as defined in section 171 (d)), except in the case of discount which is
(A) interest to which section 103 applies, or
(B) original issue discount (as defined in section 1273).
(c) No double counting 
Nothing in this part shall permit
(1) a reserve to be established for any item unless the gross amount of premiums and other consideration attributable to such item are required to be included in life insurance gross income,
(2) the same item to be counted more than once for reserve purposes, or
(3) any item to be deducted (either directly or as an increase in reserves) more than once.
(d) Method of computing reserves on contract where interest is guaranteed beyond end of taxable year 
For purposes of this part (other than section 816), amounts in the nature of interest to be paid or credited under any contract for any period which is computed at a rate which
(1) exceeds the greater of the prevailing State assumed interest rate or applicable Federal interest rate in effect under section 807 for the contract for such period, and
(2) is guaranteed beyond the end of the taxable year on which the reserves are being computed,

shall be taken into account in computing the reserves with respect to such contract as if such interest were guaranteed only up to the end of the taxable year.

(e) Short taxable years 
If any return of a corporation made under this part is for a period of less than the entire calendar year (referred to in this subsection as short period), then section 443 shall not apply in respect to such period, but life insurance company taxable income shall be determined, under regulations prescribed by the Secretary, on an annual basis by a ratable daily projection of the appropriate figures for the short period.

26 USC 812 - Definition of companys share and policyholders share

(a) General rule 

(1) Company’s share 
For purposes of section 805 (a)(4), the term companys share means, with respect to any taxable year, the percentage obtained by dividing
(A) the companys share of the net investment income for the taxable year, by
(B) the net investment income for the taxable year.
(2) Policyholders’ share 
For purposes of section 807, the term policyholders share means, with respect to any taxable year, the excess of 100 percent over the percentage determined under paragraph (1).
(b) Company’s share of net investment income 

(1) In general 
For purposes of this section, the companys share of net investment income is the excess (if any) of
(A) the net investment income for the taxable year, over
(B) the sum of
(i) the policy interest, for the taxable year, plus
(ii) the gross investment incomes proportionate share of policyholder dividends for the taxable year.
(2) Policy interest 
For purposes of this subsection, the term policy interest means
(A) required interest (at the greater of the prevailing State assumed rate or the applicable Federal interest rate) on reserves under section 807 (c) (other than paragraph (2) thereof),
(B) the deductible portion of excess interest,
(C) the deductible portion of any amount (whether or not a policyholder dividend), and not taken into account under subparagraph (A) or (B), credited to
(i) a policyholders fund under a pension plan contract for employees (other than retired employees), or
(ii) a deferred annuity contract before the annuity starting date, and
(D) interest on amounts left on deposit with the company.

In any case where neither the prevailing State assumed interest rate nor the applicable Federal interest rate is used, another appropriate rate shall be used for purposes of subparagraph (A).

(3) Gross investment income’s proportionate share of policyholder dividends 
For purposes of paragraph (1), the gross investment incomes proportionate share of policyholder dividends is
(A) the deduction for policyholders dividends determined under section 808 for the taxable year, but not including
(i) the deductible portion of excess interest,
(ii) the deductible portion of policyholder dividends on contracts referred to in clauses (i) and (ii) of paragraph (2)(C), and
(iii) the deductible portion of the premium and mortality charge adjustments with respect to contracts paying excess interest for such year,

multiplied by

(B) the fraction
(i) the numerator of which is gross investment income for the taxable year (reduced by the policy interest for such year), and
(ii) the denominator of which is life insurance gross income reduced by the excess (if any) of the closing balance for the items described in section 807 (c) over the opening balance for such items for the taxable year.

For purposes of subparagraph (B)(ii), life insurance gross income shall be determined by including tax-exempt interest and by applying section 807 (a)(2)(B) as if it did not contain clause (i) thereof.

(c) Net investment income 
For purposes of this section, the term net investment income means
(1) except as provided in paragraph (2), 90 percent of gross investment income; or
(2) in the case of gross investment income attributable to assets held in segregated asset accounts under variable contracts, 95 percent of gross investment income.
(d) Gross investment income 
For purposes of this section, the term gross investment income means the sum of the following:
(1) Interest, etc. 
The gross amount of income from
(A) interest (including tax-exempt interest), dividends, rents, and royalties,
(B) the entering into of any lease, mortgage, or other instrument or agreement from which the life insurance company derives interest, rents, or royalties,
(C) the alteration or termination of any instrument or agreement described in subparagraph (B), and
(D) the increase for any taxable year in the policy cash values (within the meaning of section 805(a)(4)(F)) of life insurance policies and annuity and endowment contracts to which section 264 (f) applies.
(2) Short-term capital gain 
The amount (if any) by which the net short-term capital gain exceeds the net long-term capital loss.
(3) Trade or business income 
The gross income from any trade or business (other than an insurance business) carried on by the life insurance company, or by a partnership of which the life insurance company is a partner. In computing gross income under this paragraph, there shall be excluded any item described in paragraph (1).

Except as provided in paragraph (2), in computing gross investment income under this subsection, there shall be excluded any gain from the sale or exchange of a capital asset, and any gain considered as gain from the sale or exchange of a capital asset.

(e) Dividends from certain subsidiaries not included in gross investment income 

(1) In general 
For purposes of this section, the term gross investment income shall not include any dividend received by the life insurance company which is a 100 percent dividend.
(2) 100 percent dividend defined 

(A) In general 
Except as provided in subparagraphs (B) and (C), the term 100 percent dividend means any dividend if the percentage used for purposes of determining the deduction allowable under section 243, 244, or 245 (b) is 100 percent.
(B) Certain dividends out of tax-exempt interest, etc. 
The term 100 percent dividend does not include any distribution by a corporation to the extent such distribution is out of tax-exempt interest or out of dividends which are not 100 percent dividends (determined with the application of this subparagraph).
(C) Certain dividends received by foreign corporations 
The term 100 percent dividends does not include any dividend described in section 805 (a)(4)(E) (relating to certain dividends in the case of foreign corporations).
(f) No double counting 
Under regulations, proper adjustments shall be made in the application of this section to prevent an item from being counted more than once.

26 USC 813 - Repealed. Pub. L. 100203, title X, 10242(c)(1), Dec. 22, 1987, 101 Stat. 1330423]

Section, added Pub. L. 98–369, div. A, title II, 211(a), July 18, 1984, 98 Stat. 743; amended Pub. L. 99–514, title X, § 1011(b)(9), title XVIII, 1821(j), Oct. 22, 1986, 100 Stat. 2389, 2841; Pub. L. 100–647, title I, § 1010(a)(1), Nov. 10, 1988, 102 Stat. 3450, related to foreign life insurance companies. A prior section 813, act Aug. 16, 1954, ch. 736, 813, as added Mar. 13, 1956, ch. 83, 2, 70 Stat. 46, related to adjustment for certain reserves, prior to the general revision of this part by Pub. L. 86–69, § 2(a).

26 USC 814 - Contiguous country branches of domestic life insurance companies

(a) Exclusion of items 
In the case of a domestic mutual insurance company which
(1) is a life insurance company,
(2) has a contiguous country life insurance branch, and
(3) makes the election provided by subsection (g) with respect to such branch,

there shall be excluded from each item involved in the determination of life insurance company taxable income the items separately accounted for in accordance with subsection (c).

(b) Contiguous country life insurance branch 
For purposes of this section, the term contiguous country life insurance branch means a branch which
(1) issues insurance contracts insuring risks in connection with the lives or health of residents of a country which is contiguous to the United States,
(2) has its principal place of business in such contiguous country, and
(3) would constitute a mutual life insurance company if such branch were a separate domestic insurance company.

For purposes of this section, the term insurance contract means any life, health, accident, or annuity contract or reinsurance contract or any contract relating thereto.

(c) Separate accounting required 
Any taxpayer which makes the election provided by subsection (g) shall establish and maintain a separate account for the various income, exclusion, deduction, asset, reserve, liability, and surplus items properly attributable to the contracts described in subsection (b). Such separate accounting shall be made
(1) in accordance with the method regularly employed by such company, if such method clearly reflects income derived from, and the other items attributable to, the contracts described in subsection (b), and
(2) in all other cases, in accordance with regulations prescribed by the Secretary.
(d) Recognition of gain on assets in branch account 
If the aggregate fair market value of all the invested assets and tangible property which are separately accounted for by the domestic life insurance company in the branch account established pursuant to subsection (c) exceeds the aggregate adjusted basis of such assets for purposes of determining gain, then the domestic life insurance company shall be treated as having sold all such assets on the first day of the first taxable year for which the election is in effect at their fair market value on such first day. Notwithstanding any other provision of this chapter, the net gain shall be recognized to the domestic life insurance company on the deemed sale described in the preceding sentence.
(e) Transactions between contiguous country branch and domestic life insurance company 

(1) Reimbursement for home office services, etc. 
Any payment, transfer, reimbursement, credit, or allowance which is made from a separate account established pursuant to subsection (c) to one or more other accounts of a domestic life insurance company as reimbursement for costs incurred for or with respect to the insurance (or reinsurance) of risks accounted for in such separate account shall be taken into account by the domestic life insurance company in the same manner as if such payment, transfer, reimbursement, credit, or allowance had been received from a separate person.
(2) Repatriation of income 

(A) In general 
Except as provided in subparagraph (B), any amount directly or indirectly transferred or credited from a branch account established pursuant to subsection (c) to one or more other accounts of such company shall, unless such transfer or credit is a reimbursement to which paragraph (1) applies, be added to the income of the domestic life insurance company.
(B) Limitation 
The addition provided by subparagraph (A) for the taxable year with respect to any contiguous country life insurance branch shall not exceed the amount by which
(i) the aggregate decrease in the tentative LICTI of the domestic life insurance company for the taxable year and for all prior taxable years resulting solely from the application of subsection (a) of this section with respect to such branch, exceeds
(ii) the amount of additions to tentative LICTI pursuant to subparagraph (A) with respect to such contiguous country branch for all prior taxable years.
(C) Transitional rule 
For purposes of this paragraph, in the case of a prior taxable year beginning before January 1, 1984, the term tentative LICTI means life insurance company taxable income determined under this part (as in effect for such year) without regard to this paragraph.
(f) Other rules 

(1) Treatment of foreign taxes 

(A) In general 
No income, war profits, or excess profits taxes paid or accrued to any foreign country or possession of the United States which is attributable to income excluded under subsection (a) shall be taken into account for purposes of subpart A of part III of subchapter N (relating to foreign tax credit) or allowable as a deduction.
(B) Treatment of repatriated amounts 
For purposes of sections 78 and 902, where any amount is added to the life insurance company taxable income of the domestic life insurance company by reason of subsection (e)(2), the contiguous country life insurance branch shall be treated as a foreign corporation. Any amount so added shall be treated as a dividend paid by a foreign corporation, and the taxes paid to any foreign country or possession of the United States with respect to such amount shall be deemed to have been paid by such branch.
(2) United States source income allocable to contiguous country branch 
For purposes of sections 881, 882, and 1442, each contiguous country life insurance branch shall be treated as a foreign corporation. Such sections shall be applied to each such branch in the same manner as if such sections contained the provisions of any treaty to which the United States and the contiguous country are parties, to the same extent such provisions would apply if such branch were incorporated in such contiguous country.
(g) Election 
A taxpayer may make the election provided by this subsection with respect to any contiguous country for any taxable year. An election made under this subsection for any taxable year shall remain in effect for all subsequent taxable years, except that it may be revoked with the consent of the Secretary. The election provided by this subsection shall be made not later than the time prescribed by law for filing the return for the taxable year (including extensions thereof) with respect to which such election is made, and such election and any approved revocation thereof shall be made in the manner provided by the Secretary.
(h) Special rule for domestic stock life insurance companies 
At the election of a domestic stock life insurance company which has a contiguous country life insurance branch described in subsection (b) (without regard to the mutual requirement in subsection (b)(3)), the assets of such branch may be transferred to a foreign corporation organized under the laws of the contiguous country without the application of section 367. Subsection (a) shall apply to the stock of such foreign corporation as if such domestic company were a mutual company and as if the stock were an item described in subsection (c). Subsection (e)(2) shall apply to amounts transferred or credited to such domestic company as if such domestic company and such foreign corporation constituted one domestic mutual life insurance company. The insurance contracts which may be transferred pursuant to this subsection shall include only those which are similar to the types of insurance contracts issued by a mutual life insurance company. Notwithstanding the first sentence of this subsection, if the aggregate fair market value of the invested assets and tangible property which are separately accounted for by the domestic life insurance company in the branch account exceeds the aggregate adjusted basis of such assets for purposes of determining gain, the domestic life insurance company shall be deemed to have sold all such assets on the first day of the taxable year for which the election under this subsection applies and the net gain shall be recognized to the domestic life insurance company on the deemed sale, but not in excess of the proportion of such net gain which equals the proportion which the aggregate fair market value of such assets which are transferred pursuant to this subsection is of the aggregate fair market value of all such assets.

26 USC 815 - Distributions to shareholders from pre-1984 policyholders surplus account

(a) General rule 
In the case of a stock life insurance company which has an existing policyholders surplus account, the tax imposed by section 801 for any taxable year shall be the amount which would be imposed by such section for such year on the sum of
(1) life insurance company taxable income for such year (but not less than zero), plus
(2) the amount of direct and indirect distributions during such year to shareholders from such account.

For purposes of the preceding sentence, the term indirect distribution shall not include any bona fide loan with arms-length terms and conditions.

(b) Ordering rule 
For purposes of this section, any distribution to shareholders shall be treated as made
(1) first out of the shareholders surplus account, to the extent thereof,
(2) then out of the policyholders surplus account, to the extent thereof, and
(3) finally, out of other accounts.
(c) Shareholders surplus account 

(1) In general 
Each stock life insurance company which has an existing policyholders surplus account shall continue its shareholders surplus account for purposes of this part.
(2) Additions to account 
The amount added to the shareholders surplus account for any taxable year beginning after December 31, 1983, shall be the excess of
(A) the sum of
(i) the life insurance companys taxable income (but not below zero),
(ii) the small life insurance company deduction provided by section 806, and
(iii) the deductions for dividends received provided by sections 243, 244, and 245 (as modified by section 805 (a)(4)) and the amount of interest excluded from gross income under section 103, over
(B) the taxes imposed for the taxable year by section 801 (determined without regard to this section).

If for any taxable year a tax is imposed by section 55, under regulations proper adjustments shall be made for such year and all subsequent taxable years in the amounts taken into account under subparagraphs (A) and (B) of this paragraph and subparagraph (B) of subsection (d)(3).

(3) Subtractions from account 
There shall be subtracted from the shareholders surplus account for any taxable year the amount which is treated under this section as distributed out of such account.
(d) Policyholders surplus account 

(1) In general 
Each stock life insurance company which has an existing policyholders surplus account shall continue such account.
(2) No additions to account 
No amount shall be added to the policyholders surplus account for any taxable year beginning after December 31, 1983.
(3) Subtractions from account 
There shall be subtracted from the policyholders surplus account for any taxable year an amount equal to the sum of
(A) the amount which (without regard to subparagraph (B)) is treated under this section as distributed out of the policyholders surplus account, and
(B) the amount by which the tax imposed for the taxable year by section 801 is increased by reason of this section.
(e) Existing policyholders surplus account 
For purposes of this section, the term existing policyholders surplus account means any policyholders surplus account which has a balance as of the close of December 31, 1983.
(f) Other rules applicable to policyholders surplus account continued 
Except to the extent inconsistent with the provisions of this part, the provisions of subsections (d), (e), (f), and (g) of section 815 (and of sections 819 (b), 6501 (c)(6), 6501 (k), 6511 (d)(6), 6601 (d)(3), and 6611 (f)(4)) as in effect before the enactment of the Tax Reform Act of 1984 are hereby made applicable in respect of any policyholders surplus account for which there was a balance as of December 31, 1983.
(g) Special rules applicable during 2005 and 2006 
In the case of any taxable year of a stock life insurance company beginning after December 31, 2004, and before January 1, 2007
(1) the amount under subsection (a)(2) for such taxable year shall be treated as zero, and
(2) notwithstanding subsection (b), in determining any subtractions from an account under subsections (c)(3) and (d)(3), any distribution to shareholders during such taxable year shall be treated as made first out of the policyholders surplus account, then out of the shareholders surplus account, and finally out of other accounts.

Subpart E - Definitions and Special Rules

26 USC 816 - Life insurance company defined

(a) Life insurance company defined 
For purposes of this subtitle, the term life insurance company means an insurance company which is engaged in the business of issuing life insurance and annuity contracts (either separately or combined with accident and health insurance), or noncancellable contracts of health and accident insurance, if
(1) its life insurance reserves (as defined in subsection (b)), plus
(2) unearned premiums, and unpaid losses (whether or not ascertained), on noncancellable life, accident, or health policies not included in life insurance reserves,

comprise more than 50 percent of its total reserves (as defined in subsection (c)). For purposes of the preceding sentence, the term insurance company means any company more than half of the business of which during the taxable year is the issuing of insurance or annuity contracts or the reinsuring of risks underwritten by insurance companies.

(b) Life insurance reserves defined 

(1) In general 
For purposes of this part, the term life insurance reserves means amounts
(A) which are computed or estimated on the basis of recognized mortality or morbidity tables and assumed rates of interest, and
(B) which are set aside to mature or liquidate, either by payment or reinsurance, future unaccrued claims arising from life insurance, annuity, and noncancellable accident and health insurance contracts (including life insurance or annuity contracts combined with noncancellable accident and health insurance) involving, at the time with respect to which the reserve is computed, life, accident, or health contingencies.
(2) Reserves must be required by law 
Except
(A) in the case of policies covering life, accident, and health insurance combined in one policy issued on the weekly premium payment plan, continuing for life and not subject to cancellation, and
(B) as provided in paragraph (3),

in addition to the requirements set forth in paragraph (1), life insurance reserves must be required by law.

(3) Assessment companies 
In the case of an assessment life insurance company or association, the term life insurance reserves includes
(A) sums actually deposited by such company or association with State officers pursuant to law as guaranty or reserve funds, and
(B) any funds maintained, under the charter or articles of incorporation or association (or bylaws approved by a State insurance commissioner) of such company or association, exclusively for the payment of claims arising under certificates of membership or policies issued on the assessment plan and not subject to any other use.
(4) Amount of reserves 
For purposes of this subsection, subsection (a), and subsection (c), the amount of any reserve (or portion thereof) for any taxable year shall be the mean of such reserve (or portion thereof) at the beginning and end of the taxable year.
(c) Total reserves defined 
For purposes of subsection (a), the term total reserves means
(1) life insurance reserves,
(2) unearned premiums, and unpaid losses (whether or not ascertained), not included in life insurance reserves, and
(3) all other insurance reserves required by law.
(d) Adjustments in reserves for policy loans 
For purposes only of determining under subsection (a) whether or not an insurance company is a life insurance company, the life insurance reserves, and the total reserves, shall each be reduced by an amount equal to the mean of the aggregates, at the beginning and end of the taxable year, of the policy loans outstanding with respect to contracts for which life insurance reserves are maintained.
(e) Guaranteed renewable contracts 
For purposes of this part, guaranteed renewable life, accident, and health insurance shall be treated in the same manner as noncancellable life, accident, and health insurance.
(f) Amounts not involving life, accident, or health contingencies 
For purposes only of determining under subsection (a) whether or not an insurance company is a life insurance company, amounts set aside and held at interest to satisfy obligations under contracts which do not contain permanent guarantees with respect to life, accident, or health contingencies shall not be included in reserves described in paragraph (1) or (3) of subsection (c).
(g) Burial and funeral benefit insurance companies 
A burial or funeral benefit insurance company engaged directly in the manufacture of funeral supplies or the performance of funeral services shall not be taxable under this part but shall be taxable under section 831.
(h) Treatment of deficiency reserves 
For purposes of this section and section 842 (b)(2)(B)(i), the terms life insurance reserves and total reserves shall not include deficiency reserves.

26 USC 817 - Treatment of variable contracts

(a) Increases and decreases in reserves 
For purposes of subsections (a) and (b) of section 807, the sum of the items described in section 807 (c) taken into account as of the close of the taxable year with respect to any variable contract shall, under regulations prescribed by the Secretary, be adjusted
(1) by subtracting therefrom an amount equal to the sum of the amounts added from time to time (for the taxable year) to the reserves separately accounted for in accordance with subsection (c) by reason of appreciation in value of assets (whether or not the assets have been disposed of), and
(2) by adding thereto an amount equal to the sum of the amounts subtracted from time to time (for the taxable year) from such reserves by reason of depreciation in value of assets (whether or not the assets have been disposed of).

The deduction allowable for items described in paragraphs (1) and (6) of section 805 (a) with respect to variable contracts shall be reduced to the extent that the amount of such items is increased for the taxable year by appreciation (or increased to the extent that the amount of such items is decreased for the taxable year by depreciation) not reflected in adjustments under the preceding sentence.

(b) Adjustment to basis of assets held in segregated asset account 
In the case of variable contracts, the basis of each asset in a segregated asset account shall (in addition to all other adjustments to basis) be
(1) increased by the amount of any appreciation in value, and
(2) decreased by the amount of any depreciation in value,

to the extent such appreciation and depreciation are from time to time reflected in the increases and decreases in reserves or other items referred to in subsection (a) with respect to such contracts.

(c) Separate accounting 
For purposes of this part, a life insurance company which issues variable contracts shall separately account for the various income, exclusion, deduction, asset, reserve, and other liability items properly attributable to such variable contracts. For such items as are not accounted for directly, separate accounting shall be made
(1) in accordance with the method regularly employed by such company, if such method is reasonable, and
(2) in all other cases, in accordance with regulations prescribed by the Secretary.
(d) Variable contract defined 
For purposes of this part, the term variable contract means a contract
(1) which provides for the allocation of all or part of the amounts received under the contract to an account which, pursuant to State law or regulation, is segregated from the general asset accounts of the company,
(2) which
(A) provides for the payment of annuities,
(B) is a life insurance contract, or
(C) provides for funding of insurance on retired lives as described in section 807 (c)(6), and
(3) under which
(A) in the case of an annuity contract, the amounts paid in, or the amount paid out, reflect the investment return and the market value of the segregated asset account,
(B) in the case of a life insurance contract, the amount of the death benefit (or the period of coverage) is adjusted on the basis of the investment return and the market value of the segregated asset account, or
(C) in the case of funds held under a contract described in paragraph (2)(C), the amounts paid in, or the amounts paid out, reflect the investment return and the market value of the segregated asset account.

If a contract ceases to reflect current investment return and current market value, such contract shall not be considered as meeting the requirements of paragraph (3) after such cessation. Paragraph (3) shall be applied without regard to whether there is a guarantee, and obligations under such guarantee which exceed obligations under the contract without regard to such guarantee shall be accounted for as part of the companys general account.

(e) Pension plan contracts treated as paying annuity 
A pension plan contract which is not a life, accident, or health, property, casualty, or liability insurance contract shall be treated as a contract which provides for the payments of annuities for purposes of subsection (d).
(f) Other special rules 

(1) Life insurance reserves 
For purposes of subsection (b)(1)(A) of section 816, the reflection of the investment return and the market value of the segregated asset account shall be considered an assumed rate of interest.
(2) Additional separate computations 
Under regulations prescribed by the Secretary, such additional separate computations shall be made, with respect to the items separately accounted for in accordance with subsection (c), as may be necessary to carry out the purposes of this section and this part.
(g) Variable annuity contracts treated as annuity contracts 
For purposes of this part, the term annuity contract includes a contract which provides for the payment of a variable annuity computed on the basis of
(1) recognized mortality tables, and
(2) 
(A) the investment experience of a segregated asset account, or
(B) the company-wide investment experience of the company.

Paragraph (2)(B) shall not apply to any company which issues contracts which are not variable contracts.

(h) Treatment of certain nondiversified contracts 

(1) In general 
For purposes of subchapter L, section 72 (relating to annuities), and section 7702 (a) (relating to definition of life insurance contract), a variable contract (other than a pension plan contract) which is otherwise described in this section and which is based on a segregated asset account shall not be treated as an annuity, endowment, or life insurance contract for any period (and any subsequent period) for which the investments made by such account are not, in accordance with regulations prescribed by the Secretary, adequately diversified.
(2) Safe harbor for diversification 
A segregated asset account shall be treated as meeting the requirements of paragraph (1) for any quarter of a taxable year if as of the close of such quarter
(A) it meets the requirements of section 851 (b)(3), and
(B) no more than 55 percent of the value of the total assets of the account are assets described in section 851 (b)(3)(A)(i).
(3) Special rule for investments in United States obligations 
To the extent that any segregated asset account with respect to a variable life insurance contract is invested in securities issued by the United States Treasury, the investments made by such account shall be treated as adequately diversified for purposes of paragraph (1).
(4) Look-through in certain cases 
For purposes of this subsection, if all of the beneficial interests in a regulated investment company or in a trust are held by 1 or more
(A) insurance companies (or affiliated companies) in their general account or in segregated asset accounts, or
(B) fund managers (or affiliated companies) in connection with the creation or management of the regulated investment company or trust,

the diversification requirements of paragraph (1) shall be applied by taking into account the assets held by such regulated investment company or trust.

(5) Independent investment advisors permitted 
Nothing in this subsection shall be construed as prohibiting the use of independent investment advisors.
(6) Government securities funds 
In determining whether a segregated asset account is adequately diversified for purposes of paragraph (1), each United States Government agency or instrumentality shall be treated as a separate issuer.

26 USC 817A - Special rules for modified guaranteed contracts

(a) Computation of reserves 
In the case of a modified guaranteed contract, clause (ii) of section 807 (e)(1)(A) shall not apply.
(b) Segregated assets under modified guaranteed contracts marked to market 

(1) In general 
In the case of any life insurance company, for purposes of this subtitle
(A) Any gain or loss with respect to a segregated asset shall be treated as ordinary income or loss, as the case may be.
(B) If any segregated asset is held by such company as of the close of any taxable year
(i) such company shall recognize gain or loss as if such asset were sold for its fair market value on the last business day of such taxable year, and
(ii) any such gain or loss shall be taken into account for such taxable year.

Proper adjustment shall be made in the amount of any gain or loss subsequently realized for gain or loss taken into account under the preceding sentence. The Secretary may provide by regulations for the application of this subparagraph at times other than the times provided in this subparagraph.

(2) Segregated asset 
For purposes of paragraph (1), the term segregated asset means any asset held as part of a segregated account referred to in subsection (d)(1) under a modified guaranteed contract.
(c) Special rule in computing life insurance reserves 
For purposes of applying section 816 (b)(1)(A) to any modified guaranteed contract, an assumed rate of interest shall include a rate of interest determined, from time to time, with reference to a market rate of interest.
(d) Modified guaranteed contract defined 
For purposes of this section, the term modified guaranteed contract means a contract not described in section 817
(1) all or part of the amounts received under which are allocated to an account which, pursuant to State law or regulation, is segregated from the general asset accounts of the company and is valued from time to time with reference to market values,
(2) which
(A) provides for the payment of annuities,
(B) is a life insurance contract, or
(C) is a pension plan contract which is not a life, accident, or health, property, casualty, or liability contract,
(3) for which reserves are valued at market for annual statement purposes, and
(4) which provides for a net surrender value or a policyholders fund (as defined in section 807 (e)(1)).

If only a portion of a contract is not described in section 817, such portion shall be treated for purposes of this section as a separate contract.

(e) Regulations 
The Secretary may prescribe regulations
(1) to provide for the treatment of market value adjustments under sections 72, 7702, 7702A, and 807 (e)(1)(B),
(2) to determine the interest rates applicable under sections 807 (c)(3), 807 (d)(2)(B), and 812 with respect to a modified guaranteed contract annually, in a manner appropriate for modified guaranteed contracts and, to the extent appropriate for such a contract, to modify or waive the applicability of section 811 (d),
(3) to provide rules to limit ordinary gain or loss treatment to assets constituting reserves for modified guaranteed contracts (and not other assets) of the company,
(4) to provide appropriate treatment of transfers of assets to and from the segregated account, and
(5) as may be necessary or appropriate to carry out the purposes of this section.

26 USC 818 - Other definitions and special rules

(a) Pension plan contracts 
For purposes of this part, the term pension plan contract means any contract
(1) entered into with trusts which (as of the time the contracts were entered into) were deemed to be trusts described in section 401 (a) and exempt from tax under section 501 (a) (or trusts exempt from tax under section 165 of the Internal Revenue Code of 1939 or the corresponding provisions of prior revenue laws);
(2) entered into under plans which (as of the time the contracts were entered into) were deemed to be plans described in section 403 (a), or plans meeting the requirements of paragraphs (3), (4), (5), and (6) of section 165(a) of the Internal Revenue Code of 1939;
(3) provided for employees of the life insurance company under a plan which, for the taxable year, meets the requirements of paragraphs (3), (4), (5), (6), (7), (8), (11), (12), (13), (14), (15), (16), (17), (19), (20), (22), (26), and (27) of section 401 (a);
(4) purchased to provide retirement annuities for its employees by an organization which (as of the time the contracts were purchased) was an organization described in section 501 (c)(3) which was exempt from tax under section 501 (a) (or was an organization exempt from tax under section 101(6) of the Internal Revenue Code of 1939 or the corresponding provisions of prior revenue laws), or purchased to provide retirement annuities for employees described in section 403 (b)(1)(A)(ii) by an employer which is a State, a political subdivision of a State, or an agency or instrumentality of any one or more of the foregoing;
(5) entered into with trusts which (at the time the contracts were entered into) were individual retirement accounts described in section 408 (a) or under contracts entered into with individual retirement annuities described in section 408 (b); or
(6) purchased by
(A) a governmental plan (within the meaning of section 414 (d)) or an eligible deferred compensation plan (within the meaning of section 457 (b)), or
(B) the Government of the United States, the government of any State or political subdivision thereof, or by any agency or instrumentality of the foregoing, or any organization (other than a governmental unit) exempt from tax under this subtitle, for use in satisfying an obligation of such government, political subdivision, agency or instrumentality, or organization to provide a benefit under a plan described in subparagraph (A).
(b) Treatment of capital gains and losses, etc. 
In the case of a life insurance company
(1) in applying section 1231 (a), the term property used in the trade or business shall be treated as including only
(A) property used in carrying on an insurance business, of a character which is subject to the allowance for depreciation provided in section 167, held for more than 1 year, and real property used in carrying on an insurance business, held for more than 1 year, which is not described in section 1231 (b)(1)(A), (B), or (C), and
(B) property described in section 1231 (b)(2), and
(2) in applying section 1221 (a)(2), the reference to property used in trade or business shall be treated as including only property used in carrying on an insurance business.
(c) Gain on property held on December 31, 1958 and certain substituted property acquired after 1958 

(1) Property held on December 31, 1958 
In the case of property held by the taxpayer on December 31, 1958, if
(A) the fair market value of such property on such date exceeds the adjusted basis for determining gain as of such date, and
(B) the taxpayer has been a life insurance company at all times on and after December 31, 1958,

the gain on the sale or other disposition of such property shall be treated as an amount (not less than zero) equal to the amount by which the gain (determined without regard to this subsection) exceeds the difference between the fair market value on December 31, 1958, and the adjusted basis for determining gain as of such date.

(2) Certain property acquired after December 31, 1958 
In the case of property acquired after December 31, 1958, and having a substituted basis (within the meaning of section 1016 (b))
(A) for purposes of paragraph (1), such property shall be deemed held continuously by the taxpayer since the beginning of the holding period thereof, determined with reference to section 1223,
(B) the fair market value and adjusted basis referred to in paragraph (1) shall be that of that property for which the holding period taken into account includes December 31, 1958,
(C) paragraph (1) shall apply only if the property or properties the holding periods of which are taken into account were held only by life insurance companies after December 31, 1958, during the holding periods so taken into account,
(D) the difference between the fair market value and adjusted basis referred to in paragraph (1) shall be reduced (to not less than zero) by the excess of
(i)  the gain that would have been recognized but for this subsection on all prior sales or dispositions after December 31, 1958, of properties referred to in subparagraph (C), over
(ii)  the gain which was recognized on such sales or other dispositions, and
(E) the basis of such property shall be determined as if the gain which would have been recognized but for this subsection were recognized gain.
(3) Property defined 
For purposes of paragraphs (1) and (2), the term property does not include insurance and annuity contracts and property described in paragraph (1) of section 1221 (a).
(d) Insurance or annuity contract includes contracts supplementary thereto 
For purposes of this part, the term insurance or annuity contract includes any contract supplementary thereto.
(e) Special rules for consolidated returns 

(1) Items of companies other than life insurance companies 
If an election under section 1504 (c)(2) is in effect with respect to an affiliated group for the taxable year, all items of the members of such group which are not life insurance companies shall not be taken into account in determining the amount of the tentative LICTI of members of such group which are life insurance companies.
(2) Dividends within group 
In the case of a life insurance company filing or required to file a consolidated return under section 1501 with respect to any affiliated group for any taxable year, any determination under this part with respect to any dividend paid by one member of such group to another member of such group shall be made as if such group was not filing a consolidated return.
(f) Allocation of certain items for purposes of foreign tax credit, etc. 

(1) In general 
Under regulations, in applying sections 861, 862, and 863 to a life insurance company, the deduction for policyholder dividends (determined under section 808 (c)), reserve adjustments under subsections (a) and (b) of section 807, and death benefits and other amounts described in section 805 (a)(1) shall be treated as items which cannot definitely be allocated to an item or class of gross income.
(2) Election of alternative allocation 

(A) In general 
On or before September 15, 1985, any life insurance company may elect to treat items described in paragraph (1) as properly apportioned or allocated among items of gross income to the extent (and in the manner) prescribed in regulations.
(B) Election irrevocable 
Any election under subparagraph (A), once made, may be revoked only with the consent of the Secretary.
(3) Items described in section 807 (c) treated as not interest for source rules, etc. 
For purposes of part I of subchapter N, items described in any paragraph of section 807 (c) shall be treated as amounts which are not interest.
(g) Qualified accelerated death benefit riders treated as life insurance 
For purposes of this part
(1) In general 
Any reference to a life insurance contract shall be treated as including a reference to a qualified accelerated death benefit rider on such contract.
(2) Qualified accelerated death benefit riders 
For purposes of this subsection, the term qualified accelerated death benefit rider means any rider on a life insurance contract if the only payments under the rider are payments meeting the requirements of section 101 (g).
(3) Exception for long-term care riders 
Paragraph (1) shall not apply to any rider which is treated as a long-term care insurance contract under section 7702B.

TITLE 26 - US CODE - PART II - OTHER INSURANCE COMPANIES

26 USC 831 - Tax on insurance companies other than life insurance companies

(a) General rule 
Taxes computed as provided in section 11 shall be imposed for each taxable year on the taxable income of every insurance company other than a life insurance company.
(b) Alternative tax for certain small companies 

(1) In general 
In lieu of the tax otherwise applicable under subsection (a), there is hereby imposed for each taxable year on the income of every insurance company to which this subsection applies a tax computed by multiplying the taxable investment income of such company for such taxable year by the rates provided in section 11 (b).
(2) Companies to which this subsection applies 

(A) In general 
This subsection shall apply to every insurance company other than life (including interinsurers and reciprocal underwriters) if
(i) the net written premiums (or, if greater, direct written premiums) for the taxable year do not exceed $1,200,000, and
(ii) such company elects the application of this subsection for such taxable year.

The election under clause (ii) shall apply to the taxable year for which made and for all subsequent taxable years for which the requirements of clause (i) are met. Such an election, once made, may be revoked only with the consent of the Secretary.

(B) Controlled group rules 

(i) In general For purposes of subparagraph (A), in determining whether any company is described in clause (i) of subparagraph (A), such company shall be treated as receiving during the taxable year amounts described in such clause (i) which are received during such year by all other companies which are members of the same controlled group as the insurance company for which the determination is being made.
(ii) Controlled group For purposes of clause (i), the term controlled group means any controlled group of corporations (as defined in section 1563 (a)); except that
(I) more than 50 percent shall be substituted for at least 80 percent each place it appears in section 1563 (a), and
(II) subsections (a)(4) and (b)(2)(D) of section 1563 shall not apply.
(3) Limitation on use of net operating losses 
For purposes of this part, except as provided in section 844, a net operating loss (as defined in section 172) shall not be carried
(A) to or from any taxable year for which the insurance company is not subject to the tax imposed by subsection (a), or
(B) to any taxable year if, between the taxable year from which such loss is being carried and such taxable year, there is an intervening taxable year for which the insurance company was not subject to the tax imposed by subsection (a).
(c) Insurance company defined 
For purposes of this section, the term insurance company has the meaning given to such term by section 816 (a)).[1]
(d) Cross references 

(1) For alternative tax in case of capital gains, see section 1201 (a).
(2) For taxation of foreign corporations carrying on an insurance business within the United States, see section 842.
(3) For exemption from tax for certain insurance companies other than life, see section 501 (c)(15).
[1] So in original. Second closing parenthesis probably should not appear.

26 USC 832 - Insurance company taxable income

(a) Definition of taxable income 
In the case of an insurance company subject to the tax imposed by section 831, the term taxable income means the gross income as defined in subsection (b)(1) less the deductions allowed by subsection (c).
(b) Definitions 
In the case of an insurance company subject to the tax imposed by section 831
(1) Gross income 
The term gross income means the sum of
(A) the combined gross amount earned during the taxable year, from investment income and from underwriting income as provided in this subsection, computed on the basis of the underwriting and investment exhibit of the annual statement approved by the National Association of Insurance Commissioners,
(B) gain during the taxable year from the sale or other disposition of property, and
(C) all other items constituting gross income under subchapter B, except that, in the case of a mutual fire insurance company exclusively issuing perpetual policies, the amount of single deposit premiums paid to such company shall not be included in gross income,
(D) in the case of a mutual fire or flood insurance company whose principal business is the issuance of policies
(i) for which the premium deposits are the same (regardless of the length of the term for which the policies are written), and
(ii) under which the unabsorbed portion of such premium deposits not required for losses, expenses, or establishment of reserves is returned or credited to the policyholder on cancellation or expiration of the policy,

an amount equal to 2 percent of the premiums earned on insurance contracts during the taxable year with respect to such policies after deduction of premium deposits returned or credited during the same taxable year, and

(E) in the case of a company which writes mortgage guaranty insurance, the amount required by subsection (e)(5) to be subtracted from the mortgage guaranty account.
(2) Investment income 
The term investment income means the gross amount of income earned during the taxable year from interest, dividends, and rents, computed as follows: To all interest, dividends, and rents received during the taxable year, add interest, dividends, and rents due and accrued at the end of the taxable year, and deduct all interest, dividends, and rents due and accrued at the end of the preceding taxable year.
(3) Underwriting income 
The term underwriting income means the premiums earned on insurance contracts during the taxable year less losses incurred and expenses incurred.
(4) Premiums earned 
The term premiums earned on insurance contracts during the taxable year means an amount computed as follows:
(A) From the amount of gross premiums written on insurance contracts during the taxable year, deduct return premiums and premiums paid for reinsurance.
(B) To the result so obtained, add 80 percent of the unearned premiums on outstanding business at the end of the preceding taxable year and deduct 80 percent of the unearned premiums on outstanding business at the end of the taxable year.
(C) To the result so obtained, in the case of a taxable year beginning after December 31, 1986, and before January 1, 1993, add an amount equal to 31/3 percent of unearned premiums on outstanding business at the end of the most recent taxable year beginning before January 1, 1987.

For purposes of this subsection, unearned premiums shall include life insurance reserves, as defined in section 816 (b) but determined as provided in section 807. For purposes of this subsection, unearned premiums of mutual fire or flood insurance companies described in paragraph (1)(D) means (with respect to the policies described in paragraph (1)(D)) the amount of unabsorbed premium deposits which the company would be obligated to return to its policyholders at the close of the taxable year if all of its policies were terminated at such time; and the determination of such amount shall be based on the schedule of unabsorbed premium deposit returns for each such company then in effect. Premiums paid by the subscriber of a mutual flood insurance company described in paragraph (1)(D) or issuing exclusively perpetual policies shall be treated, for purposes of computing the taxable income of such subscriber, in the same manner as premiums paid by a policyholder to a mutual fire insurance company described in subparagraph (C) or (D) of paragraph (1).

(5) Losses incurred 

(A) In general 
The term losses incurred means losses incurred during the taxable year on insurance contracts computed as follows:
(i) To losses paid during the taxable year, deduct salvage and reinsurance recovered during the taxable year.
(ii) To the result so obtained, add all unpaid losses on life insurance contracts plus all discounted unpaid losses (as defined in section 846) outstanding at the end of the taxable year and deduct all unpaid losses on life insurance contracts plus all discounted unpaid losses outstanding at the end of the preceding taxable year.
(iii) To the results so obtained, add estimated salvage and reinsurance recoverable as of the end of the preceding taxable year and deduct estimated salvage and reinsurance recoverable as of the end of the taxable year.

The amount of estimated salvage recoverable shall be determined on a discounted basis in accordance with procedures established by the Secretary.

(B) Reduction of deduction 
The amount which would (but for this subparagraph) be taken into account under subparagraph (A) shall be reduced by an amount equal to 15 percent of the sum of
(i) tax-exempt interest received or accrued during such taxable year,
(ii) the aggregate amount of deductions provided by sections 243, 244, and 245 for
(I) dividends (other than 100 percent dividends) received during the taxable year, and
(II) 100 percent dividends received during the taxable year to the extent attributable (directly or indirectly) to prorated amounts, and
(iii) the increase for the taxable year in policy cash values (within the meaning of section 805(a)(4)(F)) of life insurance policies and annuity and endowment contracts to which section 264 (f) applies.

In the case of a 100 percent dividend paid by an insurance company, the portion attributable to prorated amounts shall be determined under subparagraph (E)(ii).

(C) Exception for investments made before August 8, 1986 

(i) In general Except as provided in clause (ii), subparagraph (B) shall not apply to any dividend or interest received or accrued on any stock or obligation acquired before August 8, 1986.
(ii) Special rule for 100 percent dividends For purposes of clause (i), the portion of any 100 percent dividend which is attributable to prorated amounts shall be treated as received with respect to stock acquired on the later of
(I) the date the payor acquired the stock or obligation to which the prorated amounts are attributable, or
(II) the 1st day on which the payor and payee were members of the same affiliated group (as defined in section 243 (b)(2)).
(D) Definitions 
For purposes of this paragraph
(i) Prorated amounts The term prorated amounts means tax-exempt interest and dividends with respect to which a deduction is allowable under section 243, 244, or 245 (other than 100 percent dividends).
(ii) 100 percent dividend
(I) In general The term 100 percent dividend means any dividend if the percentage used for purposes of determining the deduction allowable under section 243, 244, or 245 (b) is 100 percent.
(II) Certain dividends received by foreign corporations A dividend received by a foreign corporation from a domestic corporation which would be a 100 percent dividend if section 1504 (b)(3) did not apply for purposes of applying section 243 (b)(2) shall be treated as a 100 percent dividend.
(E) Special rules for dividends subject to proration at subsidiary level 

(i) In general In the case of any 100 percent dividend paid to an insurance company to which this part applies by any insurance company, the amount of the decrease in the deductions of the payee company by reason of the portion of such dividend attributable to prorated amounts shall be reduced (but not below zero) by the amount of the decrease in the deductions (or increase in income) of the payor company attributable to the application of this section or section 805 (a)(4)(A) to such amounts.
(ii) Portion of dividend attributable to prorated amounts For purposes of this subparagraph, in determining the portion of any dividend attributable to prorated amounts
(I) any dividend by the paying corporation shall be treated as paid first out of earnings and profits attributable to prorated amounts (to the extent thereof), and
(II) by determining the portion of earnings and profits so attributable without any reduction for the tax imposed by this chapter.
(6) Expenses incurred 
The term expenses incurred means all expenses shown on the annual statement approved by the National Association of Insurance Commissioners, and shall be computed as follows: To all expenses paid during the taxable year, add expenses unpaid at the end of the taxable year and deduct expenses unpaid at the end of the preceding taxable year. For purposes of this subchapter, the term expenses unpaid shall not include any unpaid loss adjustment expenses shown on the annual statement, but such unpaid loss adjustment expenses shall be included in unpaid losses. For the purpose of computing the taxable income subject to the tax imposed by section 831, there shall be deducted from expenses incurred (as defined in this paragraph) all expenses incurred which are not allowed as deductions by subsection (c).
(7) Special rules for applying paragraph (4) 

(A) Reduction not to apply to life insurance reserves 
Subparagraph (B) of paragraph (4) shall be applied with respect to insurance contracts described in section 816 (b)(1)(B) by substituting 100 percent for 80 percent each place it appears in such subparagraph (B), and subparagraph (C) of paragraph (4) shall be applied by not taking such contracts into account.
(B) Special treatment of premiums attributable to insuring certain securities 
In the case of premiums attributable to insurance against default in the payment of principal or interest on securities described in section 165 (g)(2)(C) with maturities of more than 5 years
(i) subparagraph (B) of paragraph (4) shall be applied by substituting 90 percent for 80 percent each place it appears, and
(ii) subparagraph (C) of paragraph (4) shall be applied by substituting 12/3 percent for 31/3 percent.
(C) Termination as insurance company taxable under section 831 (a) 
Except as provided in section 381 (c)(22) (relating to carryovers in certain corporate readjustments), if, for any taxable year beginning before January 1, 1993, the taxpayer ceases to be an insurance company taxable under section 831 (a), the aggregate adjustments which would be made under paragraph (4)(C) for such taxable year and subsequent taxable years but for such cessation shall be made for the taxable year preceding such cessation year.
(D) Treatment of companies which become taxable under section 831 (a) 

(i) Exception to phase-in for companies which were not taxable, etc., before 1987 Subparagraph (C) of paragraph (4) shall not apply to any insurance company which, for each taxable year beginning before January 1, 1987, was not subject to the tax imposed by section 821 (a)1 or 831 (a) (as in effect on the day before the date of the enactment of the Tax Reform Act of 1986) by reason of being
(I) subject to tax under section 821 (c)1 (as so in effect), or
(II) described in section 501 (c) (as so in effect) and exempt from tax under section 501 (a).
(ii) Phase-in beginning at later date for companies not 1st taxable under section 831 (a) in 1987 In the case of an insurance company
(I) which was not subject to the tax imposed by section 831 (a) for its 1st taxable year beginning after December 31, 1986, by reason of being subject to tax under section 831 (b), or described in section 501 (c) and exempt from tax under section 501 (a), and
(II) which, for any taxable year beginning before January 1, 1987, was subject to the tax imposed by section 821 (a)1 or 831 (a) (as in effect on the day before the date of the enactment of the Tax Reform Act of 1986),

subparagraph (C) of paragraph (4) shall apply beginning with the 1st taxable year beginning after December 31, 1986, for which such company is subject to the tax imposed by section 831 (a) and shall be applied by substituting the last day of the preceding taxable year for December 31, 1986 and the 1st day of the 7th succeeding taxable year for January 1, 1993.

(E) Treatment of certain reciprocal insurers 
In the case of a reciprocal (within the meaning of section 835 (a)) which reports (as required by State law) on its annual statement reserves on unearned premiums net of premium acquisition expenses
(i) subparagraph (B) of paragraph (4) shall be applied by treating unearned premiums as including an amount equal to such expenses, and
(ii) appropriate adjustments shall be made under subparagraph (c) of paragraph (4) to reflect the amount by which
(I) such reserves at the close of the most recent taxable year beginning before January 1, 1987, are greater or less than,
(II) 80 percent of the sum of the amount under subclause (I) plus such premium acquisition expenses,[2]
(8) Special rules for applying paragraph (4) to title insurance premiums 

(A) In general 
In the case of premiums attributable to title insurance
(i) subparagraph (B) of paragraph (4) shall be applied by substituting the discounted unearned premiums for 80 percent of the unearned premiums each place it appears, and
(ii) subparagraph (C) of paragraph (4) shall not apply.
(B) Method of discounting 
For purposes of subparagraph (A), the amount of the discounted unearned premiums as of the end of any taxable year shall be the present value of such premiums (as of such time and separately with respect to premiums received in each calendar year) determined by using
(i) the amount of the undiscounted unearned premiums at such time,
(ii) the applicable interest rate, and
(iii) the applicable statutory premium recognition pattern.
(C) Determination of applicable factors 
In determining the amount of the discounted unearned premiums as of the end of any taxable year
(i) Undiscounted unearned premiums The term undiscounted unearned premiums means the unearned premiums shown in the yearly statement filed by the taxpayer for the year ending with or within such taxable year.
(ii) Applicable interest rate The term applicable interest rate means the annual rate determined under 846(c)(2) for the calendar year in which the premiums are received.
(iii) Applicable statutory premium recognition pattern The term applicable statutory premium recognition pattern means the statutory premium recognition pattern
(I) which is in effect for the calendar year in which the premiums are received, and
(II) which is based on the statutory premium recognition pattern which applies to premiums received by the taxpayer in such calendar year.

For purposes of the preceding sentence, premiums received during any calendar year shall be treated as received in the middle of such year.

(c) Deductions allowed 
In computing the taxable income of an insurance company subject to the tax imposed by section 831, there shall be allowed as deductions:
(1) all ordinary and necessary expenses incurred, as provided in section 162 (relating to trade or business expenses);
(2) all interest, as provided in section 163;
(3) taxes, as provided in section 164;
(4) losses incurred, as defined in subsection (b)(5) of this section;
(5) capital losses to the extent provided in subchapter P (sec. 1201 and following, relating to capital gains and losses) plus losses from capital assets sold or exchanged in order to obtain funds to meet abnormal insurance losses and to provide for the payment of dividends and similar distributions to policyholders. Capital assets shall be considered as sold or exchanged in order to obtain funds to meet abnormal insurance losses and to provide for the payment of dividends and similar distributions to policyholders to the extent that the gross receipts from their sale or exchange are not greater than the excess, if any, for the taxable year of the sum of dividends and similar distributions paid to policyholders in their capacity as such, losses paid, and expenses paid over the sum of the items described in section 834 (b) (other than paragraph (1)(D) thereof) and net premiums received. In the application of section 1212 for purposes of this section, the net capital loss for the taxable year shall be the amount by which losses for such year from sales or exchanges of capital assets exceeds the sum of the gains from such sales or exchanges and whichever of the following amounts is the lesser:
(A) the taxable income (computed without regard to gains or losses from sales or exchanges of capital assets; or
(B) losses from the sale or exchange of capital assets sold or exchanged to obtain funds to meet abnormal insurance losses and to provide for the payment of dividends and similar distributions to policyholders;
(6) debts in the nature of agency balances and bills receivable which become worthless within the taxable year;
(7) the amount of interest earned during the taxable year which under section 103 is excluded from gross income;
(8) the depreciation deduction allowed by section 167 and the deduction allowed by section 611 (relating to depletion);
(9) charitable, etc., contributions, as provided in section 170;
(10) deductions (other than those specified in this subsection) as provided in part VI of subchapter B (sec. 161 and following, relating to itemized deductions for individuals and corporations) and in part I of subchapter D (sec. 401 and following, relating to pension, profit-sharing, stock bonus plans, etc.);
(11) dividends and similar distributions paid or declared to policyholders in their capacity as such, except in the case of a mutual fire insurance company described in subsection (b)(1)(C). For purposes of the preceding sentence, the term dividends and similar distributions includes amounts returned or credited to policyholders on cancellation or expiration of policies described in subsection (b)(1)(D). For purposes of this paragraph, the term paid or declared shall be construed according to the method of accounting regularly employed in keeping the books of the insurance company;
(12) the special deductions allowed by part VIII of subchapter B (sec. 241 and following, relating to dividends received); and
(13) in the case of a company which writes mortgage guaranty insurance, the deduction allowed by subsection (e).
(d) Double deductions 
Nothing in this section shall permit the same item to be deducted more than once.
(e) Special deduction and income account 
In the case of taxable years beginning after December 31, 1966, of a company which writes mortgage guaranty insurance
(1) Additional deduction 
There shall be allowed as a deduction for the taxable year, if bonds are purchased as required by paragraph (2), the sum of
(A) an amount representing the amount required by State law or regulation to be set aside in a reserve for mortgage guaranty insurance losses resulting from adverse economic cycles; and
(B) an amount representing the aggregate of amounts so set aside in such reserve for the 8 preceding taxable years to the extent such amounts were not deducted under this paragraph in such preceding taxable years,

except that the deduction allowable for the taxable year under this paragraph shall not exceed the taxable income for the taxable year computed without regard to this paragraph or to any carryback of a net operating loss. For purposes of this paragraph, the amount required by State law or regulation to be so set aside in any taxable year shall not exceed 50 percent of premiums earned on insurance contracts (as defined in subsection (b)(4)) with respect to mortgage guaranty insurance for such year. For purposes of this subsection, all amounts shall be taken into account on a first-in-time basis. The computation and deduction under this section of losses incurred (including losses resulting from adverse economic cycles) shall not be affected by the provisions of this subsection. For purposes of this subsection, the terms preceding taxable years and preceding taxable year shall not include taxable years which began before January 1, 1967.

(2) Purchase of bonds 
The deduction under paragraph (1) shall be allowed only to the extent that tax and loss bonds are purchased in an amount equal to the tax benefit attributable to such deduction, as determined under regulations prescribed by the Secretary, on or before the date that any taxes (determined without regard to this subsection) due for the taxable year for which the deduction is allowed are due to be paid. If a deduction would be allowed but for the fact that tax and loss bonds were not timely purchased, such deduction shall be allowed to the extent such purchases are made within a reasonable time, as determined by the Secretary, if all interest and penalties, computed as if this sentence did not apply, are paid.
(3) Mortgage guaranty account 
Each company which writes mortgage guaranty insurance shall, for purposes of this part, establish and maintain a mortgage guaranty account.
(4) Additions to account 
There shall be added to the mortgage guaranty account for each taxable year an amount equal to the amount allowed as a deduction for the taxable year under paragraph (1).
(5) Subtractions from account and inclusion in gross income 
After applying paragraph (4), there shall be subtracted for the taxable year from the mortgage guaranty account and included in gross income
(A) the amount (if any) remaining which was added to the account for the tenth preceding taxable year,
(B) the excess (if any) of the aggregate amount in the mortgage guaranty account over the aggregate amount in the reserve referred to in paragraph (1)(A). For purposes of determining such excess, the aggregate amount in the mortgage guaranty account shall be determined after applying subparagraph (A), and the aggregate amount in the reserve referred to in paragraph (1)(A) shall be determined by disregarding any amounts remaining in such reserve added for taxable years beginning before January 1, 1967,
(C) an amount (if any) equal to the net operating loss for the taxable year computed without regard to this subparagraph, and
(D) any amount improperly subtracted from the account under subparagraph (A), (B), or (C) to the extent that tax and loss bonds were redeemed with respect to such amount.

If a company liquidates or otherwise terminates its mortgage guaranty insurance business and does not transfer or distribute such business in an acquisition of assets referred to in section 381 (a), the entire amount remaining in such account shall be subtracted. Except in the case where a company transfers or distributes its mortgage guaranty insurance in an acquisition of assets referred to in section 381 (a), if the company is not subject to the tax imposed by section 831 for any taxable year, the entire amount in the account at the close of the preceding taxable year shall be subtracted from the account in such preceding taxable year.

(6) Lease guaranty insurance; insurance of State and local obligations 
In the case of any taxable year beginning after December 31, 1970, the provisions of this subsection shall also apply in all respects to a company which writes lease guaranty insurance or insurance on obligations the interest on which is excludable from gross income under section 103. In applying this subsection to such a company, any reference to mortgage guaranty insurance contained in this section shall be deemed to be a reference also to lease guaranty insurance and to insurance on obligations the interest on which is excludable from gross income under section 103; and in the case of insurance on obligations the interest on which is excludable from gross income under section 103, the references in paragraph (1) to losses resulting from adverse economic cycles include losses from declining revenues related to such obligations (as well as losses resulting from adverse economic cycles), and the time specified in subparagraph (A) of paragraph (5) shall be the twentieth preceding taxable year.
(f) Interinsurers 
In the case of a mutual insurance company which is an interinsurer or reciprocal underwriter
(1) there shall be allowed as a deduction the increase for the taxable year in savings credited to subscriber accounts, or
(2) there shall be included as an item of gross income the decrease for the taxable year in savings credited to subscriber accounts.

For purposes of the preceding sentence, the term savings credited to subscriber accounts means such portion of the surplus as is credited to the individual accounts of subscribers before the 16th day of the 3rd month following the close of the taxable year, but only if the company would be obligated to pay such amount promptly to such subscriber if he terminated his contract at the close of the companys taxable year. For purposes of determining his taxable income, the subscriber shall treat any such savings credited to his account as a dividend paid or declared.

(g) Dividends within group 
In the case of an insurance company subject to tax under section 831 (a) filing or required to file a consolidated return under section 1501 with respect to any affiliated group for any taxable year, any determination under this part with respect to any dividend paid by one member of such group to another member of such group shall be made as if such group were not filing a consolidated return.
[1] See References in Text note below.
[2] So in original. The comma probably should be a period.

26 USC 833 - Treatment of Blue Cross and Blue Shield organizations, etc.

(a) General rule 
In the case of any organization to which this section applies
(1) Treated as stock company 
Such organization shall be taxable under this part in the same manner as if it were a stock insurance company.
(2) Special deduction allowed 
The deduction determined under subsection (b) for any taxable year shall be allowed.
(3) Reductions in unearned premium reserves not to apply 
Subparagraph (B) of paragraph (4) of section 832 (b) shall be applied by substituting 100 percent for 80 percent, and subparagraph (C) of such paragraph (4) shall not apply.
(b) Amount of deduction 

(1) In general 
Except as provided in paragraph (2), the deduction determined under this subsection for any taxable year is the excess (if any) of
(A) 25 percent of the sum of
(i) the claims incurred during the taxable year and liabilities incurred during the taxable year under cost-plus contracts, and
(ii) the expenses incurred during the taxable year in connection with the administration, adjustment, or settlement of claims or in connection with the administration of cost-plus contracts, over
(B) the adjusted surplus as of the beginning of the taxable year.
(2) Limitation 
The deduction determined under paragraph (1) for any taxable year shall not exceed taxable income for such taxable year (determined without regard to such deduction).
(3) Adjusted surplus 
For purposes of this subsection
(A) In general 
The adjusted surplus as of the beginning of any taxable year is an amount equal to the adjusted surplus as of the beginning of the preceding taxable year
(i) increased by the amount of any adjusted taxable income for such preceding taxable year, or
(ii) decreased by the amount of any adjusted net operating loss for such preceding taxable year.
(B) Special rule 
The adjusted surplus as of the beginning of the organizations 1st taxable year beginning after December 31, 1986, shall be its surplus as of such time. For purposes of the preceding sentence and subsection (c)(3)(C), the term surplus means the excess of the total assets over total liabilities as shown on the annual statement.
(C) Adjusted taxable income 
The term adjusted taxable income means taxable income determined
(i) without regard to the deduction determined under this subsection,
(ii) without regard to any carryforward or carryback to such taxable year, and
(iii) by increasing gross income by an amount equal to the net exempt income for the taxable year.
(D) Adjusted net operating loss 
The term adjusted net operating loss means the net operating loss for any taxable year determined with the adjustments set forth in subparagraph (C).
(E) Net exempt income 
The term net exempt income means
(i) any tax-exempt interest received or accrued during the taxable year, reduced by any amount (not otherwise deductible) which would have been allowable as a deduction for the taxable year if such interest were not tax-exempt, and
(ii) the aggregate amount allowed as a deduction for the taxable year under sections 243, 244, and 245.

The amount determined under clause (ii) shall be reduced by the amount of any decrease in deductions allowable for the taxable year by reason of section 832 (b)(5)(B) to the extent such decrease is attributable to deductions under sections 243, 244, and 245.

(4) Only health-related items taken into account 
Any determination under this subsection shall be made by only taking into account items attributable to the health-related business of the taxpayer.
(c) Organizations to which section applies 

(1) In general 
This section shall apply to
(A) any existing Blue Cross or Blue Shield organization, and
(B) any other organization meeting the requirements of paragraph (3).
(2) Existing Blue Cross or Blue Shield organization 
The term existing Blue Cross or Blue Shield organization means any Blue Cross or Blue Shield organization if
(A) such organization was in existence on August 16, 1986,
(B) such organization is determined to be exempt from tax for its last taxable year beginning before January 1, 1987, and
(C) no material change has occurred in the operations of such organization or in its structure after August 16, 1986, and before the close of the taxable year.

To the extent permitted by the Secretary, any successor to an organization meeting the requirements of the preceding sentence, and any organization resulting from the merger or consolidation of organizations each of which met such requirements, shall be treated as an existing Blue Cross or Blue Shield organization.

(3) Other organizations 

(A) In general 
An organization meets the requirements of this paragraph for any taxable year if
(i) substantially all the activities of such organization involve the providing of health insurance,
(ii) at least 10 percent of the health insurance provided by such organization is provided to individuals and small groups (not taking into account any medicare supplemental coverage),
(iii) such organization provides continuous full-year open enrollment (including conversions) for individuals and small groups,
(iv) such organizations policies covering individuals provide full coverage of pre-existing conditions of high-risk individuals without a price differential (with a reasonable waiting period), and coverage is provided without regard to age, income, or employment status of individuals under age 65,
(v) at least 35 percent of its premiums are determined on a community rated basis, and
(vi) no part of its net earnings inures to the benefit of any private shareholder or individual.
(B) Small group defined 
For purposes of subparagraph (A), the term small group means the lesser of
(i) 15 individuals, or
(ii) the number of individuals required for a small group under applicable State law.
(C) Special rule for determining adjusted surplus 
For purposes of subsection (b), the adjusted surplus of any organization meeting the requirements of this paragraph as of the beginning of the 1st taxable year for which it meets such requirements shall be its surplus as of such time.
(4) Treatment as existing Blue Cross or Blue Shield organization 

(A) In general 
Paragraph (2) shall be applied to an organization described in subparagraph (B) as if it were a Blue Cross or Blue Shield organization.
(B) Applicable organization 
An organization is described in this subparagraph if it
(i) is organized under, and governed by, State laws which are specifically and exclusively applicable to not-for-profit health insurance or health service type organizations, and
(ii) is not a Blue Cross or Blue Shield organization or health maintenance organization.

26 USC 834 - Determination of taxable investment income

(a) General rule 
For purposes of section 831 (b), the term taxable investment income means the gross investment income, minus the deductions provided in subsection (c).
(b) Gross investment income 
For purposes of subsection (a), the term gross investment income means the sum of the following:
(1) The gross amount of income during the taxable year from
(A) interest, dividends, rents, and royalties,
(B) the entering into of any lease, mortgage, or other instrument or agreement from which the insurance company derives interest, rents, or royalties,
(C) the alteration or termination of any instrument or agreement described in subparagraph (B), and
(D) gains from sales or exchanges of capital assets to the extent provided in subchapter P (sec. 1201 and following, relating to capital gains and losses).
(2) The gross income during the taxable year from any trade or business (other than an insurance business) carried on by the insurance company, or by a partnership of which the insurance company is a partner. In computing gross income under this paragraph, there shall be excluded any item described in paragraph (1).
(c) Deductions 
In computing taxable investment income, the following deductions shall be allowed:
(1) Tax-free interest 
The amount of interest which under section 103 is excluded for the taxable year from gross income.
(2) Investment expenses 
Investment expenses paid or accrued during the taxable year. If any general expenses are in part assigned to or included in the investment expenses, the total deduction under this paragraph shall not exceed one-fourth of 1 percent of the mean of the book value of the invested assets held at the beginning and end of the taxable year plus one-fourth of the amount by which taxable investment income (computed without any deduction for investment expenses allowed by this paragraph, for tax-free interest allowed by paragraph (1), or for dividends received allowed by paragraph (7)), exceeds 33/4 percent of the book value of the mean of the invested assets held at the beginning and end of the taxable year.
(3) Real estate expenses 
Taxes (as provided in section 164), and other expenses, paid or accrued during the taxable year exclusively on or with respect to the real estate owned by the company. No deduction shall be allowed under this paragraph for any amount paid out for new buildings, or for permanent improvements or betterments made to increase the value of any property.
(4) Depreciation 
The depreciation deduction allowed by section 167.
(5) Interest paid or accrued 
All interest paid or accrued within the taxable year on indebtedness, except on indebtedness incurred or continued to purchase or carry obligations the interest on which is wholly exempt from taxation under this subtitle.
(6) Capital losses 
Capital losses to the extent provided in subchapter P (sec. 1201 and following) plus losses from capital assets sold or exchanged in order to obtain funds to meet abnormal insurance losses and to provide for the payment of dividends and similar distributions to policyholders. Capital assets shall be considered as sold or exchanged in order to obtain funds to meet abnormal insurance losses and to provide for the payment of dividends and similar distributions to policyholders to the extent that the gross receipts from their sale or exchange are not greater than the excess, if any, for the taxable year of the sum of dividends and similar distributions paid to policyholders, losses paid, and expenses paid over the sum of the items described in subsection (b) (other than paragraph (1)(D) thereof) and net premiums received. In the application of section 1212 for purposes of this section, the net capital loss for the taxable year shall be the amount by which losses for such year from sales or exchanges of capital assets exceeds the sum of the gains from such sales or exchanges and whichever of the following amounts is the lesser:
(A) the taxable investment income (computed without regard to gains or losses from sales or exchanges of capital assets); or
(B) losses from the sale or exchange of capital assets sold or exchanged to obtain funds to meet abnormal insurance losses and to provide for the payment of dividends and similar distributions to policyholders.
(7) Special deductions 
The special deductions allowed by part VIII (except section 248) of subchapter B (sec. 241 and following, relating to dividends received). In applying section 246 (b) (relating to limitation on aggregate amount of deductions for dividends received) for purposes of this paragraph, the reference in such section to taxable income shall be treated as a reference to taxable investment income.
(8) Trade or business deductions 
The deductions allowed by this subtitle (without regard to this part) which are attributable to any trade or business (other than an insurance business) carried on by the insurance company, or by a partnership of which the insurance company is a partner; except that for purposes of this paragraph
(A) any item, to the extent attributable to the carrying on of the insurance business, shall not be taken into account, and
(B) the deduction for net operating losses provided in section 172 shall not be allowed.
(9) Depletion 
The deduction allowed by section 611 (relating to depletion).
(d) Other applicable rules 

(1) Rental value of real estate 
The deduction under subsection (c)(3) or (4) on account of any real estate owned and occupied in whole or in part by a mutual insurance company subject to the tax imposed by section 831 shall be limited to an amount which bears the same ratio to such deduction (computed without regard to this paragraph) as the rental value of the space not so occupied bears to the rental value of the entire property.
(2) Amortization of premium and accrual of discount 
The gross amount of income during the taxable year from interest and the deduction provided in subsection (c)(1) shall each be decreased to reflect the appropriate amortization of premium and increased to reflect the appropriate accrual of discount attributable to the taxable year on bonds, notes, debentures, or other evidences of indebtedness held by a mutual insurance company subject to the tax imposed by section 831. Such amortization and accrual shall be determined
(A) in accordance with the method regularly employed by such company, if such method is reasonable, and
(B) in all other cases, in accordance with regulations prescribed by the Secretary.

No accrual of discount shall be required under this paragraph on any bond (as defined in section 171 (d)) except in the case of discount which is original issue discount (as defined in section 1273).

(3) Double deductions 
Nothing in this part shall permit the same item to be deducted more than once.
(e) Definitions 
For purposes of this part
(1) Net premiums 
The term net premiums means gross premiums (including deposits and assessments) written or received on insurance contracts during the taxable year less return premiums and premiums paid or incurred for reinsurance. Amounts returned where the amount is not fixed in the insurance contract but depends on the experience of the company or the discretion of the management shall not be included in return premiums but shall be treated as dividends to policyholders under paragraph (2).
(2) Dividends to policyholders 
The term dividends to policyholders means dividends and similar distributions paid or declared to policyholders. For purposes of the preceding sentence, the term paid or declared shall be construed according to the method regularly employed in keeping the books of the insurance company.

26 USC 835 - Election by reciprocal

(a) In general 
Except as otherwise provided in this section, any mutual insurance company which is an interinsurer or reciprocal underwriter (hereinafter in this section referred to as a reciprocal) subject to the taxes imposed by section 831 (a) may, under regulations prescribed by the Secretary, elect to be subject to the limitation provided in subsection (b). Such election shall be effective for the taxable year for which made and for all succeeding taxable years, and shall not be revoked except with the consent of the Secretary.
(b) Limitation 
The deduction for amounts paid or incurred in the taxable year to the attorney-in-fact by a reciprocal making the election provided in subsection (a) shall be limited to, but in no case increased by, the deductions of the attorney-in-fact allocable, in accordance with regulations prescribed by the Secretary, to the income received by the attorney-in-fact from the reciprocal.
(c) Exception 
An election may not be made by a reciprocal under subsection (a) unless the attorney-in-fact of such reciprocal
(1) is subject to the tax imposed by section 11;
(2) consents in such manner as the Secretary shall prescribe by regulations to make available such information as may be required during the period in which the election provided in subsection (a) is in effect, under regulations prescribed by the Secretary;
(3) reports the income received from the reciprocal and the deductions allocable thereto under the same method of accounting under which the reciprocal reports deductions for amounts paid to the attorney-in-fact; and
(4) files its return on the calendar year basis.
(d) Credit 
Any reciprocal electing to be subject to the limitation provided in subsection (b) shall be credited with so much of the tax paid by the attorney-in-fact as is attributable, under regulations prescribed by the Secretary, to the income received by the attorney-in-fact from the reciprocal in such taxable year.
(e) Benefits of graduated rates denied 
Any increase in the taxable income of a reciprocal attributable to the limits provided in subsection (b) shall be taxed at the highest rate of tax specified in section 11 (b).
(f) Adjustment for refund 
If for any taxable year an attorney-in-fact is allowed a credit or refund for taxes paid with respect to which credit or refund to the reciprocal resulted under subsection (d), the taxes of such reciprocal for such taxable year shall be properly adjusted under regulations prescribed by the Secretary.
(g) Taxes of attorney-in-fact unaffected 
Nothing in this section shall increase or decrease the taxes imposed by this chapter on the income of the attorney-in-fact.

TITLE 26 - US CODE - PART III - PROVISIONS OF GENERAL APPLICATION

26 USC 841 - Credit for foreign taxes

The taxes imposed by foreign countries or possessions of the United States shall be allowed as a credit against the tax of a domestic insurance company subject to the tax imposed by section 801 or 831, to the extent provided in the case of a domestic corporation in section 901 (relating to foreign tax credit). For purposes of the preceding sentence (and for purposes of applying section 906 with respect to a foreign corporation subject to tax under this subchapter), the term taxable income as used in section 904 means
(1) in the case of the tax imposed by section 801, the life insurance company taxable income (as defined in section 801 (b)), and
(2) in the case of the tax imposed by section 831, the taxable income (as defined in section 832 (a)).

26 USC 842 - Foreign companies carrying on insurance business

(a) Taxation under this subchapter 
If a foreign company carrying on an insurance business within the United States would qualify under part I or II of this subchapter for the taxable year if (without regard to income not effectively connected with the conduct of any trade or business within the United States) it were a domestic corporation, such company shall be taxable under such part on its income effectively connected with its conduct of any trade or business within the United States. With respect to the remainder of its income which is from sources within the United States, such a foreign company shall be taxable as provided in section 881.
(b) Minimum effectively connected net investment income 

(1) In general 
In the case of a foreign company taxable under part I or II of this subchapter for the taxable year, its net investment income for such year which is effectively connected with the conduct of an insurance business within the United States shall be not less than the product of
(A) the required United States assets of such company, and
(B) the domestic investment yield applicable to such company for such year.
(2) Required U.S. assets 

(A) In general 
For purposes of paragraph (1), the required United States assets of any foreign company for any taxable year is an amount equal to the product of
(i) the mean of such foreign companys total insurance liabilities on United States business, and
(ii) the domestic asset/liability percentage applicable to such foreign company for such year.
(B) Total insurance liabilities 
For purposes of this paragraph
(i) Companies taxable under part I In the case of a company taxable under part I, the term total insurance liabilities means the sum of the total reserves (as defined in section 816 (c)) plus (to the extent not included in total reserves) the items referred to in paragraphs (3), (4), (5), and (6) of section 807 (c).
(ii) Companies taxable under part II In the case of a company taxable under part II, the term total insurance liabilities means the sum of unearned premiums and unpaid losses.
(C) Domestic asset/liability percentage 
The domestic asset/liability percentage applicable for purposes of subparagraph (A)(ii) to any foreign company for any taxable year is a percentage determined by the Secretary on the basis of a ratio
(i) the numerator of which is the mean of the assets of domestic insurance companies taxable under the same part of this subchapter as such foreign company, and
(ii) the denominator of which is the mean of the total insurance liabilities of the same companies.
(3) Domestic investment yield 
The domestic investment yield applicable for purposes of paragraph (1)(B) to any foreign company for any taxable year is the percentage determined by the Secretary on the basis of a ratio
(A) the numerator of which is the net investment income of domestic insurance companies taxable under the same part of this subchapter as such foreign company, and
(B) the denominator of which is the mean of the assets of the same companies.
(4) Election to use worldwide yield 

(A) In general 
If the foreign company makes an election under this paragraph, such companys worldwide current investment yield shall be taken into account in lieu of the domestic investment yield for purposes of paragraph (1)(B).
(B) Worldwide current investment yield 
For purposes of subparagraph (A), the term worldwide current investment yield means the percentage obtained by dividing
(i) the net investment income of the company from all sources, by
(ii) the mean of all assets of the company (whether or not held in the United States).
(C) Election 
An election under this paragraph shall apply to the taxable year for which made and all subsequent taxable years unless revoked with the consent of the Secretary.
(5) Net investment income 
For purposes of this subsection, the term net investment income means
(A) gross investment income (within the meaning of section 834 (b)), reduced by
(B) expenses allocable to such income.
(c) Special rules for purposes of subsection (b) 

(1) Coordination with small life insurance company deduction 
In the case of a foreign company taxable under part I, subsection (b) shall be applied before computing the small life insurance company deduction.
(2) Reduction in section 881 taxes 

(A) In general 
The tax under section 881 (determined without regard to this paragraph) shall be reduced (but not below zero) by an amount which bears the same ratio to such tax as
(i) the amount of the increase in effectively connected income of the company resulting from subsection (b), bears to
(ii) the amount which would be subject to tax under section 881 if the amount taxable under such section were determined without regard to sections 103 and 894.
(B) Limitation on reduction 
The reduction under subparagraph (A) shall not exceed the increase in taxes under part I or II (as the case may be) by reason of the increase in effectively connected income of the company resulting from subsection (b).
(3) Data used in determining domestic asset/liability percentages and domestic investment yields 
Each domestic asset/liability percentage, and each domestic investment yield, for any taxable year shall be based on such representative data with respect to domestic insurance companies for the second preceding taxable year as the Secretary considers appropriate.
(d) Regulations 
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section, including regulations
(1) providing for the proper treatment of segregated asset accounts,
(2) providing for proper adjustments in succeeding taxable years where the companys actual net investment income for any taxable year which is effectively connected with the conduct of an insurance business within the United States exceeds the amount required under subsection (b)(1),
(3) providing for the proper treatment of investments in domestic subsidiaries, and
(4) which may provide that, in the case of companies taxable under part II of this subchapter, determinations under subsection (b) will be made separately for categories of such companies established in such regulations.

26 USC 843 - Annual accounting period

For purposes of this subtitle, the annual accounting period for each insurance company subject to a tax imposed by this subchapter shall be the calendar year. Under regulations prescribed by the Secretary, an insurance company which joins in the filing of a consolidated return (or is required to so file) may adopt the taxable year of the common parent corporation even though such year is not a calendar year.

26 USC 844 - Special loss carryover rules

(a) General rule 
If an insurance company
(1) is subject to the tax imposed by part I or II of this subchapter for the taxable year, and
(2) was subject to the tax imposed by a different part of this subchapter for a prior taxable year,

then any operations loss carryover under section 810 (or the corresponding provisions of prior law) or net operating loss carryover under section 172 (as the case may be) arising in such prior taxable year shall be included in its operations loss deduction under section 810 (a) or net operating loss deduction under section 832 (c)(10), as the case may be.

(b) Limitation 
The amount included under section 810 (a) or 832 (c)(10) (as the case may be) by reason of the application of subsection (a) shall not exceed the amount that would have constituted the loss carryover under such section if for all relevant taxable years the company had been subject to the tax imposed by the part referred to in subsection (a)(1) rather than the part referred to in subsection (a)(2). For purposes of applying the preceding sentence, section 810 (b)(1)(C) (relating to additional years to which losses may be carried by new life insurance companies) shall not apply.
(c) Regulations 
The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this section.

26 USC 845 - Certain reinsurance agreements

(a) Allocation in case of reinsurance agreement involving tax avoidance or evasion 
In the case of 2 or more related persons (within the meaning of section 482) who are parties to a reinsurance agreement (or where one of the parties to a reinsurance agreement is, with respect to any contract covered by the agreement, in effect an agent of another party to such agreement or a conduit between related persons), the Secretary may
(1) allocate between or among such persons income (whether investment income, premium, or otherwise), deductions, assets, reserves, credits, and other items related to such agreement,
(2) recharacterize any such items, or
(3) make any other adjustment,

if he determines that such allocation, recharacterization, or adjustment is necessary to reflect the proper amount, source, or character of the taxable income (or any item described in paragraph (1) relating to such taxable income) of each such person.

(b) Reinsurance contract having significant tax avoidance effect 
If the Secretary determines that any reinsurance contract has a significant tax avoidance effect on any party to such contract, the Secretary may make proper adjustments with respect to such party to eliminate such tax avoidance effect (including treating such contract with respect to such party as terminated on December 31 of each year and reinstated on January 1 of the next year).

26 USC 846 - Discounted unpaid losses defined

(a) Discounted losses determined 

(1) Separately computed for each accident year 
The amount of the discounted unpaid losses as of the end of any taxable year shall be the sum of the discounted unpaid losses (as of such time) separately computed under this section with respect to unpaid losses in each line of business attributable to each accident year.
(2) Method of discounting 
The amount of the discounted unpaid losses as of the end of any taxable year attributable to any accident year shall be the present value of such losses (as of such time) determined by using
(A) the amount of the undiscounted unpaid losses as of such time,
(B) the applicable interest rate, and
(C) the applicable loss payment pattern.
(3) Limitation on amount of discounted losses 
In no event shall the amount of the discounted unpaid losses with respect to any line of business attributable to any accident year exceed the aggregate amount of unpaid losses with respect to such line of business for such accident year included on the annual statement filed by the taxpayer for the year ending with or within the taxable year.
(4) Determination of applicable factors 
In determining the amount of the discounted unpaid losses attributable to any accident year
(A) the applicable interest rate shall be the interest rate determined under subsection (c) for the calendar year with which such accident year ends, and
(B) the applicable loss payment pattern shall be the loss payment pattern determined under subsection (d) which is in effect for the calendar year with which such accident year ends.
(b) Determination of undiscounted unpaid losses 
For purposes of this section
(1) In general 
Except as otherwise provided in this subsection, the term undiscounted unpaid losses means the unpaid losses shown in the annual statement filed by the taxpayer for the year ending with or within the taxable year of the taxpayer.
(2) Adjustment if losses discounted on annual statement 
If
(A) the amount of unpaid losses shown in the annual statement is determined on a discounted basis, and
(B) the extent to which the losses were discounted can be determined on the basis of information disclosed on or with the annual statement,

the amount of the unpaid losses shall be determined without regard to any reduction attributable to such discounting.

(c) Rate of interest 

(1) In general 
For purposes of this section, the rate of interest determined under this subsection shall be the annual rate determined by the Secretary under paragraph (2).
(2) Determination of annual rate 

(A) In general 
The annual rate determined by the Secretary under this paragraph for any calendar year shall be a rate equal to the average of the applicable Federal mid-term rates (as defined in section 1274 (d) but based on annual compounding) effective as of the beginning of each of the calendar months in the test period.
(B) Test period 
For purposes of subparagraph (A), the test period is the most recent 60-calendar-month period ending before the beginning of the calendar year for which the determination is made; except that there shall be excluded from the test period any month beginning before August 1, 1986.
(d) Loss payment pattern 

(1) In general 
For each determination year, the Secretary shall determine a loss payment pattern for each line of business by reference to the historical loss payment pattern applicable to such line of business. Any loss payment pattern determined by the Secretary shall apply to the accident year ending with the determination year and to each of the 4 succeeding accident years.
(2) Method of determination 
Determinations under paragraph (1) for any determination year shall be made by the Secretary
(A) by using the aggregate experience reported on the annual statements of insurance companies,
(B) on the basis of the most recent published aggregate data from such annual statements relating to loss payment patterns available on the 1st day of the determination year,
(C) as if all losses paid or treated as paid during any year are paid in the middle of such year, and
(D) in accordance with the computational rules prescribed in paragraph (3).
(3) Computational rules 
For purposes of this subsection
(A) In general 
Except as otherwise provided in this paragraph, the loss payment pattern for any line of business shall be based on the assumption that all losses are paid
(i) during the accident year and the 3 calendar years following the accident year, or
(ii) in the case of any line of business reported in the schedule or schedules of the annual statement relating to auto liability, other liability, medical malpractice, workers compensation, and multiple peril lines, during the accident year and the 10 calendar years following the accident year.
(B) Treatment of certain losses 
Except as otherwise provided in this paragraph
(i) in the case of any line of business not described in subparagraph (A)(ii), losses paid after the 1st year following the accident year shall be treated as paid equally in the 2nd and 3rd year following the accident year, and
(ii) in the case of a line of business described in subparagraph (A)(ii), losses paid after the close of the period applicable under subparagraph (A)(ii) shall be treated as paid in the last year of such period.
(C) Special rule for certain long-tail lines 
In the case of any long-tail line of business
(i) the period taken into account under subparagraph (A)(ii) shall be extended (but not by more than 5 years) to the extent required under clause (ii), and
(ii) the amount of losses which would have been treated as paid in the 10th year after the accident year shall be treated as paid in such 10th year and each subsequent year in an amount equal to the amount of the losses treated as paid in the 9th year after the accident year (or, if lesser, the portion of the unpaid losses not theretofore taken into account).

Notwithstanding clause (ii), to the extent such unpaid losses have not been treated as paid before the last year of the extension, they shall be treated as paid in such last year.

(D) Long-tail line of business 
For purposes of subparagraph (C), the term long-tail line of business means any line of business described in subparagraph (A)(ii) if the amount of losses which (without regard to subparagraph (C)) would be treated as paid in the 10th year after the accident year exceeds the losses treated as paid in the 9th year after the accident year.
(E) Special rule for international and reinsurance lines of business 
Except as otherwise provided by regulations, any determination made under subsection (a) with respect to unpaid losses relating to the international or reinsurance lines of business shall be made using, in lieu of the loss payment pattern applicable to the respective lines of business, a pattern determined by the Secretary under paragraphs (1) and (2) based on the combined losses for all lines of business described in subparagraph (A)(ii).
(F) Adjustments if loss experience information available for longer periods 
The Secretary shall make appropriate adjustments in the application of this paragraph if annual statement data with respect to payment of losses is available for longer periods after the accident year than the periods assumed under the rules of this paragraph.
(G) Special rule for 9th year if negative or zero 
If the amount of the losses treated as paid in the 9th year after the accident year is zero or a negative amount, subparagraphs (C)(ii) and (D) shall be applied by substituting the average of the losses treated as paid in the 7th, 8th, and 9th years after the accident year for the losses treated as paid in the 9th year after the accident year.
(4) Determination year 
For purposes of this section, the term determination year means calendar year 1987 and each 5th calendar year thereafter.
(e) Election to use company’s historical payment pattern 

(1) In general 
The taxpayer may elect to apply subsection (a)(2)(C) with respect to all lines of business by using a loss payment pattern determined by reference to the taxpayers loss payment pattern for the most recent calendar year for which an annual statement was filed before the beginning of the accident year. Any such determination shall be made with the application of the rules of paragraphs (2)(C) and (3) of subsection (d).
(2) Election 

(A) In general 
An election under paragraph (1) shall be made separately with respect to each determination year under subsection (d).
(B) Period for which election in effect 
Unless revoked with the consent of the Secretary, an election under paragraph (1) with respect to any determination year shall apply to accident years ending with the determination year and to each of the 4 succeeding accident years.
(C) Time for making election 
An election under paragraph (1) with respect to any determination year shall be made on the taxpayers return for the taxable year in which (or with which) the determination year ends.
(3) No election for international or reinsurance business 
No election under this subsection shall apply to any international or reinsurance line of business.
(4) Regulations 
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this subsection including
(A) regulations providing that a taxpayer may not make an election under this subsection if such taxpayer does not have sufficient historical experience for the line of business to determine a loss payment pattern, and
(B) regulations to prevent the avoidance (through the use of separate corporations or otherwise) of the requirement of this subsection that an election under this subsection applies to all lines of business of the taxpayer.
(f) Other definitions and special rules 
For purposes of this section
(1) Accident year 
The term accident year means the calendar year in which the incident occurs which gives rise to the related unpaid loss.
(2) Unpaid loss adjustment expenses 
The term unpaid losses includes any unpaid loss adjustment expenses shown on the annual statement.
(3) Annual statement 
The term annual statement means the annual statement approved by the National Association of Insurance Commissioners which the taxpayer is required to file with insurance regulatory authorities of a State.
(4) Line of business 
The term line of business means a category for the reporting of loss payment patterns determined on the basis of the annual statement for fire and casualty insurance companies for the calendar year ending with or within the taxable year, except that the multiple peril lines shall be treated as a single line of business.
(5) Multiple peril lines 
The term multiple peril lines means the lines of business relating to farmowners multiple peril, homeowners multiple peril, commercial multiple peril, ocean marine, aircraft (all perils) and boiler and machinery.
(6) Special rule for certain accident and health insurance lines of business 
Any determination under subsection (a) with respect to unpaid losses relating to accident and health insurance lines of businesses (other than credit disability insurance) shall be made
(A) in the case of unpaid losses relating to disability income, by using the general rules prescribed under section 807 (d) applicable to noncancellable accident and health insurance contracts and using a mortality or morbidity table reflecting the taxpayers experience; except that
(i) the prevailing State assumed interest rate shall be the rate in effect for the year in which the loss occurred rather than the year in which the contract was issued, and
(ii) the limitation of subsection (a)(3) shall apply in lieu of the limitation of the last sentence of section 807 (d)(1), and
(B) in all other cases, by using an assumption (in lieu of a loss payment pattern) that unpaid losses are paid in the middle of the year following the accident year.
(g) Regulations 
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section, including
(1) regulations providing proper treatment of allocated reinsurance, and
(2) regulations providing appropriate adjustments in the application of this section to a taxpayer having a taxable year which is not the calendar year.

26 USC 847 - Special estimated tax payments

In the case of taxable years beginning after December 31, 1987, of an insurance company required to discount unpaid losses (as defined in section 846)
(1) Additional deduction 
There shall be allowed as a deduction for the taxable year, if special estimated tax payments are made as required by paragraph (2), an amount not to exceed the excess of
(A) the amount of the undiscounted, unpaid losses (as defined in section 846 (b)) attributable to losses incurred in taxable years beginning after December 31, 1986, over
(B) the amount of the related discounted, unpaid losses determined under section 846,

to the extent such amount was not deducted under this paragraph in a preceding taxable year. Section 6655 shall be applied to any taxable year without regard to the deduction allowed under the preceding sentence.

(2) Special estimated tax payments 
The deduction under paragraph (1) shall be allowed only to the extent that such deduction would result in a tax benefit for the taxable year for which such deduction is allowed or any carryback year and only to the extent that special estimated tax payments are made in an amount equal to the tax benefit attributable to such deduction on or before the due date (determined without regard to extensions) for filing the return for the taxable year for which the deduction is allowed. If a deduction would be allowed but for the fact that special estimated tax payments were not timely made, such deduction shall be allowed to the extent such payments are made within a reasonable time, as determined by the Secretary, if all interest and penalties, computed as if this sentence did not apply, are paid. If amounts are included in gross income under paragraph (5) or (6) for any taxable year and an additional tax is due for such year (or any other year) as a result of such inclusion, an amount of special estimated tax payments equal to such additional tax shall be applied against such additional tax. If, after any such payment is so applied, there is an adjustment reducing the amount of such additional tax, in lieu of any credit or refund for such reduction, a special estimated tax payment shall be treated as made in an amount equal to the amount otherwise allowable as a credit or refund. To the extent that a special estimated tax payment is not used to offset additional tax due for any of the first 15 taxable years beginning after the year for which the payment was made, such special estimated tax payment shall be treated as an estimated tax payment made under section 6655 for the 16th year after the year for which the payment was made.
(3) Special loss discount account 
Each company which is allowed a deduction under paragraph (1) shall, for purposes of this part, establish and maintain a special loss discount account.
(4) Additions to special loss discount account 
There shall be added to the special loss discount account for each taxable year an amount equal to the amount allowed as a deduction for the taxable year under paragraph (1).
(5) Subtractions from special loss discount account and inclusion in gross income 
After applying paragraph (4), there shall be subtracted for the taxable year from the special loss discount account and included in gross income:
(A) The excess (if any) of the amount in the special loss discount account with respect to losses incurred in each taxable year over the amount of the excess referred to in paragraph (1) with respect to losses incurred in that year, and
(B) Any amount improperly subtracted from the special loss discount account under subparagraph (A) to the extent special estimated tax payments were used with respect to such amount.

To the extent that any amount added to the special loss discount account is not subtracted from such account before the 15th year after the year for which the amount was so added, such amount shall be subtracted from such account for such 15th year and included in gross income for such 15th year.

(6) Rules in the case of liquidation or termination of taxpayer’s insurance business 

(A) In general 
If a company liquidates or otherwise terminates its insurance business and does not transfer or distribute such business in an acquisition of assets referred to in section 381 (a), the entire amount remaining in such special loss discount account shall be subtracted and included in gross income. Except in the case where a company transfers or distributes its insurance business in an acquisition of assets, referred to in section 381 (a), if the company is not subject to the tax imposed by section 801 or section 831 for any taxable year, the entire amount in the account at the close of the preceding taxable year shall be subtracted from the account in such preceding taxable year and included in gross income.
(B) Elimination of balance of payments 
In any case to which subparagraph (A) applies, any special estimated tax payment remaining after the credit attributable to the inclusion under subparagraph (A) shall be voided.
(7) Modification of the amount of special estimated tax payments in the event of subsequent marginal rate reduction or increase 
In the event of a reduction in any tax rate provided under section 11 for any tax year after the enactment of this section, the Secretary shall prescribe regulations providing for a reduction in the amount of any special estimated tax payments made for years before the effective date of such section 11 rate reductions. Such reduction in the amount of such payments shall reduce the amount of such payments to the amount that they would have been if the special deduction permitted under paragraph (1) had occurred during a year that the lower marginal rate under section 11 applied. Similar rules shall be applied in the event of a marginal rate increase.
(8) Tax benefit determination 
The tax benefit attributable to the deduction under paragraph (1) shall be determined under regulations prescribed by the Secretary, by taking into account tax benefits that would arise from the carryback of any net operating loss for the year, as well as current year tax benefits. Tax benefits for the current year and carryback years shall include those that would arise from the filing of a consolidated return with another insurance company required to determine discounted, unpaid losses under section 846 without regard to the limitations on consolidation contained in section 1503 (c). The limitations on consolidation contained in section 1503 (c) shall not apply to the deduction allowed under paragraph (1).
(9) Effect on earnings and profits 
In determining the earnings and profits
(A) any special estimated tax payment made for any taxable year shall be treated as a payment of income tax imposed by this title for such taxable year, and
(B) any deduction or inclusion under this section shall not be taken into account.

Nothing in the preceding sentence shall be construed to affect the application of section 56 (g) (relating to adjustments based on adjusted current earnings).

(10) Regulations 
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section, including regulations
(A) providing for the separate application of this section with respect to each accident year,
(B) such adjustments in the application of this section as may be necessary to take into account the tax imposed by section 55, and
(C) providing for the application of this section in cases where the deduction allowed under paragraph (1) for any taxable year is less than the excess referred to in paragraph (1) for such year.

26 USC 848 - Capitalization of certain policy acquisition expenses

(a) General rule 
In the case of an insurance company
(1) specified policy acquisition expenses for any taxable year shall be capitalized, and
(2) such expenses shall be allowed as a deduction ratably over the 120-month period beginning with the first month in the second half of such taxable year.
(b) 5-year amortization for first $5,000,000 of specified policy acquisition expenses 

(1) In general 
Paragraph (2) of subsection (a) shall be applied with respect to so much of the specified policy acquisition expenses of an insurance company for any taxable year as does not exceed $5,000,000 by substituting 60-month for 120-month.
(2) Phase-out 
If the specified policy acquisition expenses of an insurance company exceed $10,000,000 for any taxable year, the $5,000,000 amount under paragraph (1) shall be reduced (but not below zero) by the amount of such excess.
(3) Special rule for members of controlled group 
In the case of any controlled group
(A) all insurance companies which are members of such group shall be treated as 1 company for purposes of this subsection, and
(B) the amount to which paragraph (1) applies shall be allocated among such companies in such manner as the Secretary may prescribe.

For purposes of the preceding sentence, the term controlled group means any controlled group of corporations as defined in section 1563 (a); except that subsections (a)(4) and (b)(2)(D) of section 1563 shall not apply, and subsection (b)(2)(C) of section 1563 shall not apply to the extent it excludes a foreign corporation to which section 842 applies.

(4) Exception for acquisition expenses attributable to certain reinsurance contracts 
Paragraph (1) shall not apply to any specified policy acquisition expenses for any taxable year which are attributable to premiums or other consideration under any reinsurance contract.
(c) Specified policy acquisition expenses 
For purposes of this section
(1) In general 
The term specified policy acquisition expenses means, with respect to any taxable year, so much of the general deductions for such taxable year as does not exceed the sum of
(A) 1.75 percent of the net premiums for such taxable year on specified insurance contracts which are annuity contracts,
(B) 2.05 percent of the net premiums for such taxable year on specified insurance contracts which are group life insurance contracts, and
(C) 7.7 percent of the net premiums for such taxable year on specified insurance contracts not described in subparagraph (A) or (B).
(2) General deductions 
The term general deductions means the deductions provided in part VI of subchapter B (sec. 161 and following, relating to itemized deductions) and in part I of subchapter D (sec. 401 and following, relating to pension, profit sharing, stock bonus plans, etc.).
(d) Net premiums 
For purposes of this section
(1) In general 
The term net premiums means, with respect to any category of specified insurance contracts set forth in subsection (c)(1), the excess (if any) of
(A) the gross amount of premiums and other consideration on such contracts, over
(B) return premiums on such contracts and premiums and other consideration incurred for reinsurance of such contracts.

The rules of section 803 (b) shall apply for purposes of the preceding sentence.

(2) Amounts determined on accrual basis 
In the case of an insurance company subject to tax under part II of this subchapter, all computations entering into determinations of net premiums for any taxable year shall be made in the manner required under section 811 (a) for life insurance companies.
(3) Treatment of certain policyholder dividends and similar amounts 
Net premiums shall be determined without regard to section 808 (e) and without regard to other similar amounts treated as paid to, and returned by, the policyholder.
(4) Special rules for reinsurance 

(A) Premiums and other consideration incurred for reinsurance shall be taken into account under paragraph (1)(B) only to the extent such premiums and other consideration are includible in the gross income of an insurance company taxable under this subchapter or are subject to tax under this chapter by reason of subpart F of part III of subchapter N.
(B) The Secretary shall prescribe such regulations as may be necessary to ensure that premiums and other consideration with respect to reinsurance are treated consistently by the ceding company and the reinsurer.
(e) Classification of contracts 
For purposes of this section
(1) Specified insurance contract 

(A) In general 
Except as otherwise provided in this paragraph, the term specified insurance contract means any life insurance, annuity, or noncancellable accident and health insurance contract (or any combination thereof).
(B) Exceptions 
The term specified insurance contract shall not include
(i) any pension plan contract (as defined in section 818 (a)),
(ii) any flight insurance or similar contract,
(iii) any qualified foreign contract (as defined in section 807 (e)(4) without regard to paragraph (5) of this subsection),
(iv) any contract which is an Archer MSA (as defined in section 220 (d)), and
(v) any contract which is a health savings account (as defined in section 223 (d)).
(2) Group life insurance contract 
The term group life insurance contract means any life insurance contract
(A) which covers a group of individuals defined by reference to employment relationship, membership in an organization, or similar factor,
(B) the premiums for which are determined on a group basis, and
(C) the proceeds of which are payable to (or for the benefit of) persons other than the employer of the insured, an organization to which the insured belongs, or other similar person.
(3) Treatment of annuity contracts combined with noncancellable accident and health insurance 
Any annuity contract combined with noncancellable accident and health insurance shall be treated as a noncancellable accident and health insurance contract and not as an annuity contract.
(4) Treatment of guaranteed renewable contracts 
The rules of section 816 (e) shall apply for purposes of this section.
(5) Treatment of reinsurance contract 
A contract which reinsures another contract shall be treated in the same manner as the reinsured contract.
(6) Treatment of certain qualified long-term care insurance contract arrangements 
An annuity or life insurance contract which includes a qualified long-term care insurance contract as a part of or a rider on such annuity or life insurance contract shall be treated as a specified insurance contract not described in subparagraph (A) or (B) of subsection (c)(1).
(f) Special rule where negative net premiums 

(1) In general 
If for any taxable year there is a negative capitalization amount with respect to any category of specified insurance contracts set forth in subsection (c)(1)
(A) the amount otherwise required to be capitalized under this section for such taxable year with respect to any other category of specified insurance contracts shall be reduced (but not below zero) by such negative capitalization amount, and
(B) such negative capitalization amount (to the extent not taken into account under subparagraph (A))
(i) shall reduce (but not below zero) the unamortized balance (as of the beginning of such taxable year) of the amounts previously capitalized under subsection (a) (beginning with the amount capitalized for the most recent taxable year), and
(ii) to the extent taken into account as such a reduction, shall be allowed as a deduction for such taxable year.
(2) Negative capitalization amount 
For purposes of paragraph (1), the term negative capitalization amount means, with respect to any category of specified insurance contracts, the percentage (applicable under subsection (c)(1) to such category) of the amount (if any) by which
(A) the amount determined under subparagraph (B) of subsection (d)(1) with respect to such category, exceeds
(B) the amount determined under subparagraph (A) of subsection (d)(1) with respect to such category.
(g) Treatment of certain ceding commissions 
Nothing in any provision of law (other than this section or section 197) shall require the capitalization of any ceding commission incurred on or after September 30, 1990, under any contract which reinsures a specified insurance contract.
(h) Secretarial authority to adjust capitalization amounts 

(1) In general 
Except as provided in paragraph (2), the Secretary may provide that a type of insurance contract will be treated as a separate category for purposes of this section (and prescribe a percentage applicable to such category) if the Secretary determines that the deferral of acquisition expenses for such type of contract which would otherwise result under this section is substantially greater than the deferral of acquisition expenses which would have resulted if actual acquisition expenses (including indirect expenses) and the actual useful life for such type of contract had been used.
(2) Adjustment to other contracts 
If the Secretary exercises his authority with respect to any type of contract under paragraph (1), the Secretary shall adjust the percentage which would otherwise have applied under subsection (c)(1) to the category which includes such type of contract so that the exercise of such authority does not result in a decrease in the amount of revenue received under this chapter by reason of this section for any fiscal year.
(i) Treatment of qualified foreign contracts under adjusted current earnings preference 
For purposes of determining adjusted current earnings under section 56 (g), acquisition expenses with respect to contracts described in clause (iii) of subsection (e)(1)(B) shall be capitalized and amortized in accordance with the treatment generally required under generally accepted accounting principles as if this subsection applied to such contracts for all taxable years.
(j) Transitional rule 
In the case of any taxable year which includes September 30, 1990, the amount taken into account as the net premiums (or negative capitalization amount) with respect to any category of specified insurance contracts shall be the amount which bears the same ratio to the amount which (but for this subsection) would be so taken into account as the number of days in such taxable year on or after September 30, 1990, bears to the total number of days in such taxable year.