(B) Distributions in 1958. There shall be subtracted from the shareholders surplus account (to the extent thereof) for any taxable year beginning in 1958 the amount of distributions to shareholders made during 1958. (c) Policyholders surplus account. (1) In general. Each stock life insurance company shall, for purposes of this part, establish and maintain a policyholders surplus account. The amount in such account on January 1, 1959, shall be zero. (2) Additions to account. The amount added to the policyholders surplus account for any taxable year beginning after December 31, 1958, shall be the sum of— (A) an amount equal to 50 percent of the amount by which the gain from operations exceeds the taxable investment income, (B) the deduction for certain nonparticipating contracts provided by section 809 (d) (5) (as limited by section 809 (f)), and (C) the deduction for accident and health insurance and group life insurance contracts provided by section 809 (d) (6) (as limited by section 809(f)). (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 (determined without regard to section 802(a)(3)) by which the tax imposed for the taxable year by section 802(a) is increased by reason of section 802(b) (3). (d) Special rules. (1) Election to transfer amounts from policyholders surplus account to shareholders surplus account. (A) In general. A taxpayer may elect for any taxable year for which it is a life insurance company to subtract from its policyholders surplus account any amount in such account as of the close of such taxable year. The amount so subtracted, less the amount of the tax imposed with respect to such amount by reason of section 802(b) (3), shall be added to the shareholders surplus account as of the beginning of the succeeding taxable year. (B) Manner and effect of election. The election provided by subparagraph (A) shall be made (in such manner and in such form as the Secretary or his delegate may by regulations prescribe) after the close of the taxable year and not later than the time prescribed by law for filing the return (including extensions thereof) for the taxable year. Such an election, once made, may not be revoked. (2) Termination as life insurance company. (A) Effect of termination. Except as provided in section 381(c) (22) (relating to carryovers in certain corporate readjustments), if (i) for any taxable year the taxpayer is not an insurance company, or (ii) for any two successive taxable years the taxpayer is not a life insurance company, then the amount taken into account under section 802(b) (3) for the last preceding taxable year for which it was a life insurance company shall be increased (after the application of subparagraph (B)) by the amount remaining in its policyholders surplus account at the close of such last preceding taxable year. (B) Effect of certain distributions. If for any taxable year the taxpayer is an insurance company but not a life insurance company, then any distribution to shareholders during such taxable year shall be treated as made on the last day of the last preceding taxable year for which the taxpayer was a life insurance company. (3) Treatment of certain indebtedness. If (A) the taxpayer makes any payment in discharge of its indebtedness, and (B) such indebtedness is attributable to a distribution by the taxpayer to its shareholders after February 9, 1959, then the amount of such payment shall, for purposes of this section and section 802(b)(3), be treated as a distribution in cash to shareholders, but only to the extent that the distribution referred to in subparagraph (B) was treated as made out of accounts other than the shareholders and policyholders surplus accounts. (4) Limitation on amount in policyholders surplus account. There shall be treated as a subtraction from the policyholders surplus account for a taxable year for which the taxpayer is a life insurance company the amount by which the policyholders surplus account (computed at the end of the taxable year without regard to this paragraph) exceeds whichever of the following is the greatest (A) 15 percent of life insurance reserves at the end of the taxable year, (B) 25 percent of the amount by which the life insurance reserves at the end of the taxable year exceed the life insurance reserves at the end of 1958, or (C) 50 percent of the net amount of the premiums and other consideration taken into account for the taxable year under section 809 (c) (1). The amount so treated as subtracted, less the amount of the tax imposed with respect to such amount by reason of section 802(b) (3), shall be added to the shareholders surplus account as of the beginning of the succeeding taxable year. (5) Reduction of policyholders surplus account for certain unused deductions. If (A) an amount added to the policyholders surplus account for any taxable year increased (or created) a loss from operations for such year, and (B) any portion of the increase (or amount created) in the loss from operations referred to in subparagraph (A) did not reduce the life insurance company taxable income for any taxable year to which such loss was carried, the policyholders surplus account for the taxable year referred to in subparagraph (A) shall be reduced by the amount described in subparagraph (B). (e) Special rule for certain mutualizations. (1) In general. For purposes of this section and section 802 (b) (3), any distribution to shareholders after December 31, 1958, in acquisition of stock pursuant to a plan of mutualization shall be treated (A) first, as made out of paid-in capital and paid-in surplus, to the extent thereof, (B) thereafter, as made in two allocable parts (i) one part of which is made out of the other accounts referred to in subsection (a) (3), and (ii) the remainder of which is a distribution to which subsection (a) applies. (2) Special rules. (A) Allocation ratio. The part referred to in paragraph (1) (B) (i) is the amount which means the same ratio to the amount to which paragraph (1)(B) applies as (i) the excess (determined as of December 31, 1958, and adjusted to the beginning of the year of the distribution as provided in subparagraph (B)) of the assets over the total liabilities, bears to (ii) the sum (determined as of the beginning of the year of the distribution) of the excess described in clause (i), the amount in the shareholders surplus account, plus the amount in the policyholders surplus account. (B) Adjustment for certain distributions. The excess described in subparagraph (A) (1) shall be reduced by the aggregate of the prior distributions which have been treated under subsection (a) (3) as made out of accounts other than the shareholders surplus account and the policyholders surplus account. (f) Distribution defined. For purposes of this section, the term "distribution" includes any distribution in redemption of stock or in partial or complete liquidation of the corporation, but does not include (1) any distribution made by the corporation in its stock or in rights to acquire its stock; (2) except for purposes of subsection (a) (3) and subsection (e) (2) (B), any distribution in redemption of stock issued before 1958 which at all times on and after the date of issuance and on and before the date of redemption is limited as to dividends and is callable, at the option of the issuer, at a price not in excess of 105 percent of the sum of the issue price and the amount of any contribution to surplus made by the original purchaser at the time of his purchase; or (3) any distribution after December 31, 1963, of the stock of a controlled corporation to which section 355 applies, if such controlled corporation is an insurance company subject to the tax imposed by section 831 and if— (A) control was acquired prior to January 1, 1958, or (B) control has been acquired after December 31, 1957 (i) in a transaction qualifying as a reorganization under section 368 (a) (1) (B), if the distributing corporation has at all times since December 31, 1957, owned stock representing not less than 50 percent of the total combined voting power of all classes of stock entitled to vote, and not less than 50 percent of the value of all classes of stock, of the controlled corporation, or (ii) solely in exchange for stock of the distributing corporation which stock is immediately exchanged by the controlled corporation in a transaction qualifying as a reorganization under section 368 (a) (1) (A) or (C), if the controlled corporation has at all times since its organization been wholly owned by the distributing corporation and the distributing corporation has at all times since December 31, 1957, owned stock representing not less than 50 percent of the total combined voting power of all classes of stock entitled to vote, and not less than 50 percent of the value of all classes of stock, of the corporation the assets of which have been transferred to the controlled corporation in the section 368 (a) (1) (A) or (C) reorganization. Paragraph (3) shall not apply to that portion of the distribution of stock of the controlled corporation equal to the increase in the aggregate adjusted basis of such stock after December 31, 1957, except to the extent such increase results from an acquisition of stock in the controlled corporation in a transaction described in subparagraph (B) of such paragraph. If any part of the increase in the aggregate adjusted basis of stock of the controlled corporation after December 31, 1957, results from the transfer (other than as part of a transaction described in paragraph (3) (B)) by the distributing corporation to the controlled corporation of property which has a fair market value in excess of its adjusted basis at the time of the transfer, paragraph (3) also shall not apply to that portion of the distribution equal to such excess. (Added Pub. L. 86-69, § 2(a), June 25, 1959, 73 Stat. 129, and amended Pub. L. 87-790, § 3(b), Oct. 10, 1962, 76 Stat. 808; Pub. L. 87-858, § 3 (b) (4), (e), Oct. 23, 1962, 76 Stat. 1137; Pub. L. 88-571, §§ 2, 3(a), 4(a), Sept. 2, 1964, 78 Stat. 857, 859.) AMENDMENT 1964 Subsec. (a). Pub. 88-571, § 4(a) (1), eliminated definitions of "distribution." See subsec. (f) of this section. Subsec. (b) (2) (A) (ii). Pub. L. 88-571, § 2, inserted "reduced (in the case of a taxable year beginning after December 31, 1961) by the amount referred to in clause (1)." Subsec. (d) (5). Pub. L. 88-571, § 3(a), added par. (5). Subsec. (f). Pub. L. 88-571, § 4(a)(2), added subsec. (f). 1962 Subsec. (a). Pub. L. 87-858, § 3(e), added provision that "for purposes of this section, the term 'distribution' does not include any distribution before January 1, 1964, of the stock of a controlled corporation to which section 355 applies, if such controlled corporation is an insurance company subject to the tax imposed by section 831 and control has been acquired prior to January 1, 1963, in a transaction qualifying as a reorganization under section 368 (a) (1) (B).” Subsec. (c) (2). Pub. L. 87-790 substituted "accident and health insurance and group life insurance contracts" for "group life and group accident and health insurance contracts" in cl. (C). Subsec. (c)(3)(B). Pub. L. 87-858, § 3(b)(4), substituted "802 (a)" for "802(a)(1)." EFFECTIVE DATE OF 1964 AMENDMENT Section 3(f) of Pub. L. 88-571 provided that: "The amendments made by this section [to subsec. (d) of this section, and sections 6501, 6511, 6601 and 6611 of this title] shall apply with respect to amounts added to policyholders surplus accounts (within the meaning of section 815(c) of the Internal Revenue Code of 1954) for taxable years beginning after December 31, 1958." Section 4(b) of Pub. L. 88-571 provided that: "The amendments made by subsection (a) [adding subsec. (f) and amending subsec. (a) of this section] shall apply to taxable years beginning after December 31, 1963." EFFECTIVE DATE OF 1962 AMENDMENTS Amendment of this section by Pub. L. 87-858 applicable with respect to taxable years beginning after Dec. 31, 1961, see section 3 (f) of Pub. L. 87-858, set out as a note under section 801 of this title. Amendment of subsec. (c) (2) (C) of this section by Pub. L. 87-790 applicable to taxable years beginning after Dec. 31, 1962, see section 3(c) of Pub. L. 87-790, set out as a note under section 809 of this title. EFFECTIVE DATE Section applicable only with respect to taxable years beginning after December 31, 1957, see section 4 of Pub. L. 86-69, set out as a note under section 801 of this title. CODIFICATION Former section 816, act. Aug. 16, 1954, ch. 736, § 816, as added Mar. 13, 1956, ch. 83, § 2, 70 Stat. 46, which related to taxation of foreign life insurance companies, was omitted from this part by Pub. L. 86-69, § 2(a), June 25, 1959, 73 Stat. 112, which amended this part in its entirety. See section 819 (a), (d) of this title. Sec. 817. 818. SUBPART E.-MISCELLANEOUS PROVISIONS Rules relating to certain gains and losses. 819. Foreign life insurance companies. Optional treatment of policies reinsured under modified coinsurance contracts. § 817. Rules relating to certain gains and losses. (a) 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 6 months, and real property used in carrying on an insurance business, held for more than 6 months, 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(2), the reference to property used in trade or business shall be treated as including only property used in carrying on an insurance business. (b) 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 (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 that 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 contracts supplementary thereto) and property described in paragraph (1) of section 1221. (c) Limitation on capital loss carryovers. A net capital loss for any taxable year beginning before January 1, 1959, shall not be taken into account. (d) Gain on transactions occurring prior to January 1, 1959. For purposes of this part, 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, resulting from sales or other dispositions of property prior to January 1, 1959. Any gain after December 31, 1958, resulting from the sale or other disposition of property prior to January 1, 1959, which, but for this sentence, would be taken into account under section 1231, shall not be taken into account under section 1231 for purposes of this part. (e) Certain reinsurance transactions in 1958. For purposes of this part, the reinsurance in a single transaction, or in a series of related transactions, occurring in 1958, by a life insurance company of all of its insurance contracts of a particular type, through the assumption by another company or companies of all liabilities under such contracts, shall be treated as a sale of a capital asset. (Added Pub. L. 86-69, § 2(a), June 25, 1959, 73 Stat. 132.) PRIOR PROVISIONS A prior section 817, act Aug. 16, 1954, ch. 736, § 817, as added Mar. 13, 1956, ch. 83, § 2, 70 Stat. 46, related to denial of double deductions. See section 818(f) of this title. EFFECTIVE DATE Section applicable only with respect to taxable years beginning after Dec. 31, 1957, see section 4 of Pub. L. 86-69, set out as a note under section 801 of this title. § 818. 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 account, or (2) to the extent permitted under regulations prescribed by the Secretary or his delegate, 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). Except as provided in the preceding sentence, 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 or his delegate. (2) Special rules. (A) Amortization of bond premium. In the case of any bond (as defined in section 171(d)) acquired after December 31, 1957, 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 evidences 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. For taxable years beginning after December 31, 1962, 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 1232(b)). For purposes of section 805(b) (3) (A), the current earnings rate for any taxable year beginning before January 1, 1963, shall be determined as if the preceding sentence applied to such taxable year. (c) Life insurance reserves computed on preliminary term basis. For purposes of this part (other than section 801), at the election of the taxpayer the amount taken into account as life insurance reserves with respect to contracts for which such reserves are computed on a preliminary term basis may be determined on either of the following bases: (1) Exact revaluation. As if the reserves for all such contracts had been computed on a net level premium basis (using the same mortality assumptions and interest rates for both the preliminary term basis and the net level premium basis). (2) Approximate revaluation. The amount computed without regard to this subsection (A) increased by $21 per $1,000 of insurance in force (other than term insurance) under such contracts, less 2.1 percent of reserves under such contracts, and (B) increased by $5 per $1,000 of term insurance in force under such contracts which at the time of issuance cover a period of more than 15 years, less 0.5 percent of reserves under such contracts. If the taxpayer makes an election under either paragraph (1) or (2) for any taxable year, the basis adopted shall be adhered to in making the computations under this part (other than section 801) for the taxable year and all subsequent taxable years unless a change in the basis of computing such re serves is approved by the Secretary or his delegate, except that if, pursuant to an election made for a taxable year beginning in 1958, the basis adopted is the basis provided in paragraph (2), the taxpayer may adopt the basis provided by paragraph (1) for its first taxable year beginning after 1958. (d) 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 of such period, but― (1) the taxable investment income and the gain or loss from operations shall be determined, under regulations prescribed by the Secretary or his delegate, on an annual basis by a ratable daily projection of the appropriate figures for the short period, (2) that portion of the life insurance company taxable income described in paragraphs (1) and (2) of section 802(b) shall be determined on an annual basis by treating the amounts ascertained under paragraph (1) as the taxable investment income and the gain or loss from operations for the taxable year, and (3) that portion of the life insurance company taxable income described in paragraphs (1) and (2) of section 802(b) for the short period shall be the amount which bears the same ratio to the amount ascertained under paragraph (2) as the number of days in the short period bears to the number of days in the entire calendar year. (e) Transitional rule for changes in method of accounting. (1) In general. If the method of accounting required to be used in computing the taxpayer's taxes under this part for the taxable year 1958 as different from the method used in computing its taxes under this part for 1957, then there shall be ascertained the net amount of those adjustments which are determined (as of the close of 1957) to be necessary solely by reason of the change to the method required by subsection (a) in order to prevent amounts from being duplicated or omitted. The amount of the taxpayer's tax for 1957 shall be recomputed (under the law applicable to 1957, modified as provided in paragraph (4)) taking into account an amount equal to % of the net amount of the adjustments determined under the preceding sentence. The amount of increase or decrease (as the case may be) referred to in paragraph (2) or (3) shall be the amount of the increase or decrease ascertained under the preceding sentence, multiplied by 10. (2) Treatment of decrease. For purposes of subtitle F, if the recomputation under paragraph (1) results in a decrease, the amount thereof shall be a decrease in the tax imposed for 1957; except that for purposes of computing the period of limitation on the making of refunds or the allowance of credits with respect to such overpayment, the amount of such decrease shall be treated as an overpayment of tax for 36-500 0-65-vol. 6 -32 1959. No interest shall be paid, for any period before March 16, 1960, on any overpayment of the tax imposed for 1957 which is attributable to such decrease. (3) Treatment of increase. (A) In general. For purposes of subtitle F (other than sections 6016 and 6655), if the recomputation under paragraph (1) results in an increase, the amount thereof shall be treated as a tax imposed by this subsection for 1959. Such tax shall be payable in 10 equal annual installments, beginning with March 15, 1960. (B) Special rules. For purposes of subparagraph (A)— (i) No interest shall be paid on any installment described in subparagraph (A) for any period before the time prescribed in such subparagraph for the payment of such installment. (ii) Section 6152(c) (relating to proration of deficiencies to installments) shall apply. (iii) In applying section 6502(a)(1) (relating to collection after assessment), the assessment of any installment described in subparagraph (A) shall be treated as made at the time prescribed by such subparagraph for the payment of such installment. (iv) Except as provided in section 381 (c) (22), if for any taxable year the taxpayer is not a life insurance company, the time for payment of any remaining installments described in subparagraph (A) shall be the date (determined without regard to any extension of time) for filing the return for such taxable year. (4) Modifications of 1957 tax computation. In recomputing the taxpayer's tax for 1957 for purposes of paragraph (1) — (A) section 804 (b) (as in effect for 1957) shall not apply with respect to any amount required to be taken into account by such paragraph, and (B) the amount of the deduction allowed by section 805 (as in effect for 1957) shall not be reduced by reason of any amount required to be taken into account by such paragraph. (f) Denial of double deductions. Nothing in this part shall permit the same item to be deducted more than once under subpart B and once under subpart C. (Added Pub. L. 86-69, § 2(a), June 25, 1959, 73 Stat. 133, and amended Pub. L. 88272, title II, § 228 (b) (1), Feb. 26, 1964, 78 Stat. 98.) PRIOR PROVISIONS A prior section 818, act Aug. 16, 1954, ch. 736, § 818, as added Mar. 13, 1956, ch. 83, § 2, 70 Stat. 46, related to certain new insurance companies. AMENDMENTS 1964-Subsec. (b) (3). Pub. L. 88-272 added par. (3). EFFECTIVE DATE Section applicable only with respect to taxable years beginning after Dec. 31, 1957, see section 4 of Pub. L. 86-69, set out as a note under section 801 of this title. |