26 U.S.C. § 832 : US Code - Section 832: Insurance company taxable income

Search 26 U.S.C. § 832 : US Code - Section 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 3 1/3  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 "1 2/3  percent" for "3 1/3  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 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.
    (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.