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 


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(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

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(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.