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 partially tax-exempt interest and dividends received allowed by paragraph (7)), exceeds 34 percent of the book value of the mean of the invested assets held at the beginning and end of the taxable year.

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 to the deduction provided in section 242 for partially tax-exempt interest); 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 partially tax-exempt interest and 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 821 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, the deduction provided in subsection (c) (1), and the deduction allowed by section 242 (relating to partially tax-exempt interest) 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 821. 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.

For taxable years beginning after December 31, 1962, no accrual of discount shall be required under this paragraph on any bond (as defined in section 171(d)).

(3) Double deductions.

Nothing in this part shall permit the same item to be deducted more than once.

(e) Foreign mutual insurance companies other than life or marine.

In the case of a foreign mutual insurance company (other than a life or marine insurance company or a fire insurance company subject to the tax imposed by section 831), the taxable investment income shall be the taxable income from sources within the United States (computed without regard to the deductions allowed by subsection (c) (7)), and the gross amount of income from the items described in subsection (b) (other than paragraph (1) (D) thereof) and net premiums shall be the amount of such income from sources within the United States. In the case of a company to which the preceding sentence applies, the deductions allowed in this section shall be allowed to the extent provided in subpart B of part II of subchapter N (sec. 881 and following) in the case of a foreign corporation engaged in trade or business within the United States.

(f) 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.

(Aug. 16, 1954, ch. 736, 68A Stat. 261; Mar. 13, 1956, ch. 83, § 3(a) (3)—(8), 70 Stat. 47, 48; Oct. 16, 1962, Pub. L. 87-834, § 8(b), 76 Stat. 991; Feb. 26, 1964, Pub. L. 88-272, title II, § 228 (b) (2), 78 Stat. 99.)

AMENDMENTS

1964 Subsec. (d) (2). Pub. L. 88-272 provided that for taxable years beginning after Dec. 31, 1962, no accrual of discount shall be required under par. (2) on any bond. 1962-Pub. L. 87-834, § 8(b) (1), substituted "Determination of taxable investment income" for "Determination of mutual insurance company taxable income" in the section catchline.

Subsec. (a). Pub. L. 87-834, § 8(b) (1), defined "taxable investment income" and "investment loss" for purposes of this part, and eliminated provisions which defined "mutual insurance company taxable income" for purposes of section 821 of this title, which provisions are now contained in section 821(b) of this title.

Subsec. (c). Pub. L. 87-834, § 8(b) (2), (3), substituted "taxable investment income" for "mutual insurance company taxable income" in the opening provisions and in pars. (2) and (6) (A), and inserted sentence in par. (7) ·

providing that in applying section 246 (b) (relating to limitations on aggregate amount of deductions for dividends received) for purposes of par. (7), the reference in such section to "taxable income" shall be treated as a reference to "taxable investment income."

Subsec. (e). Pub. L. 87-834, § 8(b) (2), substituted "taxable investment income" for "mutual insurance company taxable income."

Subsec. (f). Pub. L. 87-834, § 8(b) (4), added subsec. (f). Provisions of subsec. (1) were formerly contained in section 823 of this title.

1956 Subsec. (b). Act Mar. 13, 1956, § 3(a) (3), principally included royalties, and the income from a trade or business other than the insurance business carried on by the insurance company in "gross investment income."

Subsec. (c). Act Mar. 13, 1956, § 3(a)(4), (5), (6), clarified the deduction for real estate expenses in par. (3), substituted in par. (6) "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 "the sum of interest, dividends, rents, and net premiums received. In the application of section 1211", and inserted pars. (8) and (9).

Subsec. (d) (1). Act Mar. 13, 1956, § 3(a) (7), substituted "subsection (c)(3) or (4)" for "subsection (e) (3) or (4)".

Subsec. (e). Act Mar. 13, 1956, § 3(a) (8), substituted "items described in subsection (b) (other than paragraph (1) (D) thereof" for "interest, dividends, rents,".

EFFECTIVE DATE OF 1962 AMENDMENT

Amendment of subsecs. (a), (c) and (e) of this section, and addition of subsec. (f) of this section, by Pub. L. 87-834 applicable with respect to taxable years beginning after Dec. 31, 1962, see section 8(h) of Pub. L. 87-834, set out as a note under section 821 of this title. EFFECTIVE DATE OF 1956 AMENDMENT

Amendment by act Mar. 13, 1956 applicable only to taxable years beginning after Dec. 31, 1954, see note set out under section 821 of this title.

§ 823. Determination of statutory underwriting income or loss.

(a) In general.

For purposes of this part

(1)

The term "statutory underwriting income" means the amount by which

(A) the gross income which would be taken into account in computing taxable income under section 832 if the taxpayer were subject to the tax imposed by section 831, reduced by the gross investment income, exceeds

(B) the sum of (i) the deductions which would be taken into account in computing taxable income if the taxpayer were subject to the tax imposed by section 831, reduced by the deductions provided in section 822(c), plus (ii) the deductions provided in subsection (c) and section 824 (a).

(2) The term "statutory underwriting loss" means the excess of the amount referred to in paragraph (1) (B) over the amount referred to in paragraph (1) (A).

(b) Modifications.

In applying subsection (a) —

(1) Net operating loss deduction.

The deduction for net operating losses provided in section 172 shall not be allowed. (2) Interinsurers.

In the case of a mutual insurance company which is an interinsurer or reciprocal underwriter

(A) there shall be allowed as a deduction the increase for the taxable year in savings credited to subscriber accounts, or

(B) 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 third 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 company's 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.

(c) Special deduction for small company having gross amount of less than $1,100,000.

(1) In general.

If the gross amount received during the taxable year by a taxpayer subject to the tax imposed by section 821 (a) from the items described in section 822(b) (other than paragraph (1) (D) thereof) and premiums (including deposits and assessments) does not equal or exceed $1,100,000, then in determining the statutory underwriting income or loss for the taxable year there shall be allowed an additional deduction of $6,000; except that if such gross amount exceeds $500,000, such additional deduction shall be equal to 1 percent of the amount by which $1,100,000 exceeds such gross amount.

(2) Limitation.

The amount of the deduction allowed under paragraph (1) shall not exceed the statutory underwriting income for the taxable year, computed without regard to any deduction under this subsection or section 824 (a).

(Added Pub. L. 87-834, § 8(c), Oct. 16, 1962, 76 Stat. 992.)

PRIOR PROVISIONS

A prior section 823, act Aug. 16, 1954, ch. 736, 68A Stat. 263, which defined "net premiums" and "dividends to policyholders", was redesignated section 822(f) of this title by section 8(b) (4) of Pub. L. 87-834.

EFFECTIVE DATE

Section applicable with respect to taxable years beginning after Dec. 31, 1962, see section 8(h) of Pub. L. 87-834, set out as a note under section 821 of this title. § 824. Adjustments to provide protection against losses.

(a) Allowance of deduction.

(1) In general.

In determining the statutory underwriting income or loss for any taxable year there shall be allowed as a deduction the sum of

(A) an amount equal to 1 percent of the losses incurred during the taxable year (as determined under section 832(b) (5)), plus

(B) an amount equal to 25 percent of the underwriting gain for the taxable year, plus

(C) if the concentrated windstorm, etc., premium percentage for the taxable year exceeds 40 percent, an amount determined by applying so much of such percentage as ex

ceeds 40 percent to the underwriting gain for the taxable year.

For purposes of this paragraph, the term "underwriting gain" means statutory underwriting income, computed without any deduction under this subsection.

(2) Special rule for companies having concentrated windstorm, etc., risks.

For purposes of paragraph (1)(C), the term "concentrated windstorm, etc., premium percentage" means, with respect to any taxable year, the percentage obtained by dividing

(A) the amount of the premiums earned on insurance contracts during the taxable year (as defined in section 832(b) (4)), to the extent attributable to insuring against losses arising, either in any one State or within 200 miles of any fixed point selected by the taxpayer, from windstorm, hail, flood, earthquake, or similar hazards, by

(B) the amount of the premiums earned on insurance contracts during the taxable year (as so defined).

(b) Protection against loss account.

Each insurance company subject to the tax imposed by section 821 (a) for any taxable year shall, for purposes of this part, establish and maintain a protection against loss account.

(c) Additions to account.

There shall be added to the protection against loss account for each taxable year an amount equal to the amount allowable as a deduction for the taxable year under subsection (a)(1).

(d) Subtractions.

(1) Annual subtractions.

After applying subsection (c), there shall be subtracted for the taxable year from the protection against loss account

(A) first, an amount equal to the excess (if any) of the deduction allowed under subsection (a) for the taxable year over the underwriting gain (within the meaning of subsection (a) (1) for the taxable year,

(B) then, the amount (if any) by which

(i) the sum of the investment loss for such year and the statutory underwriting loss (reduced by the amount referred to in subparagraph (A)) for such year, exceeds

(ii) the sum of the statutory underwriting income for such taxable year and the taxable investment income for such taxable year,

(C) next (in the order in which the losses occurred), amounts equal to the unused loss carryovers to such year,

(D) next, any amount remaining which was added to the account for the fifth preceding taxable year, minus one-half of the amount remaining in the account for such taxable year which was added by reason of subsection (a) (1) (B), and

(E) finally, the amount by which the total amount in the account exceeds which ever of the following is the greater:

(i) 10 percent of premiums earned on insurance contracts during the taxable year (as

defined in section 832(b)(4)) less dividends to policyholders (as defined in section 832(c) (11)), or

(ii) the total amount in the account at the close of the preceding taxable year.

(2) Rules for ceiling on protection against loss account.

For purposes of paragraph (1) (E), the total amount in the account shall be determined

(A) after the application of this section without regard to paragraph (1) (E), and

(B) without taking into consideration amounts remaining in the account which were added, with respect to all taxable years, by reason of subsection (a) (1) (C).

(3) Priorities.

The amounts required to be subtracted from the protection against loss account

(A) under subparagraphs (A), (B), and (C) of paragraph (1) shall be subtracted

(i) first (on a first-in, first-out, basis) from amounts in the account with respect to the five preceding taxable years and the taxable year, and

(ii) then from amounts in the account with respect to earlier years,

(B) under subparagraph (E) of paragraph (1) shall be subtracted only from amounts in the account with respect to the taxable year, and

(C) under paragraphs (A), (B), (C), and (E) of paragraph (1) shall, if the amount to be subtracted from the total amounts in the account with respect to any taxable year is less than such total, be subtracted from each of the amounts (referred to in subsection (a)(1)) in the account with respect to such year in the proportion which each bears to such total. (4) Termination of taxability under section 821.

If the taxpayer is not subject to tax under section 821 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.

(5) Election to subtract amount from account.

(A) A taxpayer may elect for any taxable year for which it is subject to tax under section 821 (a) to subtract from its protection against loss account any amount which, but for the application of this subparagraph, would be in such account as of the close of such taxable year.

(B) The election provided by subparagraph (A) for any taxable year shall be made (in such manner and in such form as the Secretary or his delegate may by regulations prescribe) after the close of such taxable year and not later than the time prescribed by law for filing the return (including extensions thereof) for the taxable year following such taxable year. Such an election, once made, may not be revoked.

(Added Pub. L. 87-834, § 8(c), Oct. 16, 1962, 76 Stat. 993.)

EFFECTIVE DATE

Section applicable with respect to taxable years beginning after Dec. 31, 1962, see section 8(h) of Pub. L. 87-834, set out as a note under section 821 of this title.

§ 825. Unused loss deduction. (a) Amount of deduction.

For purposes of this part, the unused loss deduction for the taxable year shall be an amount equal to the unused loss carryovers or carrybacks to the taxable year.

(b) Unused loss defined.

For purposes of this part, the term "unused loss" means, with respect to any taxable year, the amount (if any) by which

(1) the sum of the statutory underwriting loss and the investment loss, exceeds

(2) the sum of

(A) the taxable investment income,

(B) the statutory underwriting income, and (C) the amounts required by section 824 (d) to be subtracted from the protection against loss account.

(c) Loss year defined.

For purposes of this part, the term "loss year" means, with respect to any company subject to the tax imposed by section 821(a), any taxable year in which the unused loss (as defined in subsection (b)) of such taxpayer is more than zero.

(d) Years to which carried.

The unused loss for any loss year shall be

(1) an unused loss carryback to each of the 3 taxable years preceding the loss year, and

(2) an unused loss carryover to each of the 5 taxable years following the loss year.

(e) Amount of carrybacks and carryovers.

The entire amount of the unused loss for any loss year shall be carried to the earliest of the taxable years to which 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 (f)) for each of the prior taxable years to which such loss may be carried.

(f) Offset defined.

For purposes of subsection (e), the term "offset" means with respect to any taxable year(hereinafter referred to as the "offset year”).

(1) in the case of an unused loss carryback from the loss year to the offset year, the mutual insurance company taxable income for the offset year;

or

(2) in the case of an unused loss carryover from the loss year to the offset year, an amount equal to the sum of

(A) the amount required to be subtracted from the protection against loss account under section 824 (d) (1) (C) for the offset year, plus (B) the mutual insurance company taxable income for the offset year.

For purposes of paragraphs (1) and (2) (B), the mutual insurance company taxable income for the offset year shall be determined without regard to any unused loss carryback or carryover from the loss year or any taxable year thereafter.

(g) Limitations.

For purposes of this part, an unused loss shall not be carried

(1) to or from any taxable year beginning before January 1, 1963,

(2) to or from any taxable year for which the insurance company is not subject to the tax imposed by section 821(a), nor

(3) to any taxable year if, between the loss year and such taxable year, there is an intervening taxable year for which the insurance company was not subject to the tax imposed by section 821(a). (Added Pub. L. 87-834, § 8(c), Oct. 16, 1962, 76 Stat. 995.)

EFFECTIVE DATE

Section applicable with respect to taxable years beginning after Dec. 31, 1962, see section 8(h) of Pub. L. 87-834, set out as a note under section 821 of this title.

§ 826. 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 821 (a) may, under regulations prescribed by the Secretary or his delegate, 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 or his delegate.

(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 or his delegate, to the income received by the attorney-infact 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 taxes imposed by section 11 (b) and (c);

(2) consents in such manner as the Secretary or his delegate 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 or his delegate;

(3) reports the income received from the reciprocal and the deductions allocable thereto under the same method of accounting under which the the reciprocal reports deductions for amounts paid to the attorney-in-fact; and

(4) files its return on the calendar year basis.

(d) Special rule.

In applying section 824 (d) (1) (D), any amount which was added to the protection against loss account by reason of an election under this section shall be treated as having been added by reason of section 824 (a) (1) (A).

(e) 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 or his delegate, to the income received by the attorney-in-fact from the reciprocal in such taxable year.

(f) Surtax exemption denied.

Any increase in taxable income of a reciprocal attributable to the limitation provided in subsection (b) shall be taxed without regard to the surtax exemption provided in section 821(a)(2).

(g) 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 (e), the taxes of such reciprocal for such taxable year shall be properly adjusted under regulations prescribed by the Secretary or his delegate.

(h) 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. (Added Pub. L. 87-834, § 8(c), Oct. 16, 1962, 76 Stat. 996.)

EFFECTIVE DATE

Section applicable with respect to taxable years beginning after Dec. 31, 1962, see section 8(h) of Pub. L. 87-834, set out as a note under section 821 of this title. PART III.-OTHER INSURANCE COMPANIES

Sec.

831. Tax on insurance companies (other than life or mutual), mutual marine insurance companies, and certain mutual fire or flood insurance companies. 832. Insurance company taxable income.

AMENDMENTS

1962-Pub. L. 87-834, § 8(g) (4) (C), Oct. 16, 1962, 76 Stat. 999, substituted "and certain mutual fire or flood insurance companies" for "and mutual fire insurance companies issuing perpetual policies" in item 831.

§ 831. Tax on insurance companies (other than life or mutual), mutual marine insurance companies, and certain mutual fire or flood insurance companies issuing.

(a) Imposition of tax.

Taxes computed as provided in section 11 shall be imposed for each taxable year or the taxable income of

(1) every insurance company (other than a life or mutual insurance company),

(2) every mutual marine insurance company, and

(3) every mutual fire or flood insurance company

(A) exclusively issuing perpetual policies, or (B) whose principal business is the issuance of policies for which the premium deposits are the same, regardless of the length of the term for which the policies are written, if 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.

(b) No United States insurance business.

Foreign insurance companies (other than a life or mutual insurance company), foreign mutual