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.