26 U.S.C. § 832: Insurance company 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). 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, gain during the taxable year from the sale or other disposition of property, 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, for which the premium deposits are the same (regardless of the length of the term for which the policies are written), and 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, 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. 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. The term “underwriting income” means the premiums earned on insurance contracts during the taxable year less losses incurred and expenses incurred. From the amount of gross premiums written on insurance contracts during the taxable year, deduct return premiums and premiums paid for reinsurance. 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. 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 3⅓ percent of unearned premiums on outstanding business at the end of the most recent taxable year beginning before January 1, 1987 . To losses paid during the taxable year, deduct salvage and reinsurance recovered during the taxable year. 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. 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. tax-exempt interest received or accrued during such taxable year, dividends (other than 100 percent dividends) received during the taxable year, and 100 percent dividends received during the taxable year to the extent attributable (directly or indirectly) to prorated amounts, and 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. 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 . the date the payor acquired the stock or obligation to which the prorated amounts are attributable, or the 1st day on which the payor and payee were members of the same affiliated group (as defined in section 243(b)(2)). The term “prorated amounts” means tax-exempt interest and dividends with respect to which a deduction is allowable under section 243 or 245 (other than 100 percent dividends). The term “100 percent dividend” means any dividend if the percentage used for purposes of determining the deduction allowable under section 243 or 245(b) is 100 percent. 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. 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. 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 by determining the portion of earnings and profits so attributable without any reduction for the tax imposed by this chapter. 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). 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. subparagraph (B) of paragraph (4) shall be applied by substituting “90 percent” for “80 percent” each place it appears, and subparagraph (C) of paragraph (4) shall be applied by substituting “1⅔ percent” for “3⅓ percent”. 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. subject to tax under section 821(c) 1 (as so in effect), or described in section 501(c) (as so in effect) and exempt from tax under section 501(a). 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 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 (B) of paragraph (4) shall be applied by treating unearned premiums as including an amount equal to such expenses, and such reserves at the close of the most recent taxable year beginning before January 1, 1987 , are greater or less than, 80 percent of the sum of the amount under subclause (I) plus such premium acquisition expenses. 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 subparagraph (C) of paragraph (4) shall not apply. the amount of the undiscounted unearned premiums at such time, the applicable interest rate, and the applicable statutory premium recognition pattern. 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. The term “applicable interest rate” means the annual rate determined under 846(c)(2) for the calendar year in which the premiums are received. which is in effect for the calendar year in which the premiums are received, and which is based on the statutory premium recognition pattern which applies to premiums received by the taxpayer in such calendar year. all ordinary and necessary expenses incurred, as provided in section 162 (relating to trade or business expenses); all interest, as provided in section 163; taxes, as provided in section 164; losses incurred, as defined in subsection (b)(5) of this section; the taxable income (computed without regard to gains or losses from sales or exchanges of capital assets); or 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; debts in the nature of agency balances and bills receivable which become worthless within the taxable year; the amount of interest earned during the taxable year which under section 103 is excluded from gross income; the depreciation deduction allowed by section 167 and the deduction allowed by section 611 (relating to depletion); charitable, etc., contributions, as provided in section 170; 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.); 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; the special deductions allowed by part VIII of subchapter B (sec. 241 and following, relating to dividends received); and in the case of a company which writes mortgage guaranty insurance, the deduction allowed by subsection (e). Nothing in this section shall permit the same item to be deducted more than once. 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 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, 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. Each company which writes mortgage guaranty insurance shall, for purposes of this part, establish and maintain a mortgage guaranty 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). the amount (if any) remaining which was added to the account for the tenth preceding taxable year, 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 , an amount (if any) equal to the net operating loss for the taxable year computed without regard to this subparagraph, and 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. 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. there shall be allowed as a deduction the increase for the taxable year in savings credited to subscriber accounts, or there shall be included as an item of gross income the decrease for the taxable year in savings credited to subscriber accounts. 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. The amendments made by this section [amending this section] shall apply to taxable years beginning on or after September 30, 1990 . such change shall be treated as a change in a method of accounting, such change shall be treated as initiated by the taxpayer, such change shall be treated as having been made with the consent of the Secretary, and the net adjustments which are required by section 481 of the Internal Revenue Code of 1986 to be taken into account by the taxpayer shall be taken into account over a period not to exceed 4 taxable years beginning with the taxpayer’s first taxable year beginning on or after September 30, 1990 . The amendments made by this section shall not affect the application of section 832(b)(4)(C) of the Internal Revenue Code of 1986.” The amendments made by this section [amending this section and section 846 of this title ] shall apply to taxable years beginning after December 31, 1989 . such change shall be treated as a change in a method of accounting, such change shall be treated as initiated by the taxpayer, and such change shall be treated as having been made with the consent of the Secretary. only 13 percent of the net amount of adjustments (otherwise required by such section 481 to be taken into account by the taxpayer) shall be taken into account, and the portion of such net adjustments which is required to be taken into account by the taxpayer (after the application of clause (i)) shall be taken into account over a period not to exceed 4 taxable years beginning with the taxpayer’s 1st taxable year beginning after December 31, 1989 . In the case of any insurance company which took into account salvage recoverable in determining losses incurred for its last taxable year beginning before January 1, 1990 , 87 percent of the discounted amount of estimated salvage recoverable as of the close of such last taxable year shall be allowed as a deduction ratably over its 1st 4 taxable years beginning after December 31, 1989 . the amount of the section 481 adjustment which would have been required without regard to paragraph (2) and any discounting, exceeds the sum of the amount of salvage recovered taken into account under section 832(b)(5)(A)(i) for the taxable year and any preceding taxable year beginning after December 31, 1989 , attributable to losses incurred with respect to any accident year beginning before 1990 and the undiscounted amount of estimated salvage recoverable as of the close of the taxable year on account of such losses, The earnings and profits of any insurance company for its 1st taxable year beginning after December 31, 1989 , shall be increased by the amount of the section 481 adjustment which would have been required but for paragraph (2). For purposes of applying sections 56, [former] 902, 952(c)(1), and 960 of the Internal Revenue Code of 1986, earnings and profits of a corporation shall be determined by applying the principles of paragraph (2)(B).” The amendment made by this section [amending this section] shall apply to taxable years beginning after December 31, 1986 . The unearned premiums at the end of the preceding taxable year as defined in paragraph (4) of section 832(b) [of the Internal Revenue Code of 1986] shall be determined as if the amendments made by this section had applied to such unearned premiums in the preceding taxable year and by using the interest rate and premium recognition pattern applicable to years ending in calendar year 1987. the amount determined to be unearned premiums for the year preceding the first taxable year of a title insurance company beginning after December 31, 1986 , determined without regard to subparagraph (A), and such amount determined with regard to subparagraph (A), The earnings and profits of any insurance company for its 1st taxable year beginning after December 31, 1986 , shall be increased by the amount of the difference determined under subparagraph (A) with respect to such company.” the transferor company acquired such stock or obligation before August 8, 1986 , and at all times after the date on which such stock or obligation was acquired by the transferor company and before the date of the acquisition by the acquiring company, the transferor company and the acquiring company were members of the same affiliated group filing a consolidated return. does not release such member from obligations to pay current or future dues, assessments, or premiums; and is a condition precedent to receiving benefits of membership. The repayment to any member of any amount of any payment excluded under subparagraph (A) shall not be treated as policyholder dividend, and is not deductible by the arrangement or association. Except in the case of the termination of a member’s interest in the arrangement or association, any amount distributed to any member shall be treated as paid out of surplus in excess of amounts excluded under subparagraph (A). To the extent not otherwise allowable under the Internal Revenue Code of 1986, any member of any eligible arrangement or association may treat any initial payment referred to in paragraph (1) made during a taxable year to such arrangement or association as an ordinary and necessary expense incurred in connection with a trade or business for purposes of the deduction allowable under section 162, to the extent such payment does not exceed the amount which would be payable to an independent insurance company for similar annual insurance coverage (as determined by the Secretary), and further reduced by any annual dues, assessments, or premiums paid during such taxable year. Such deduction shall not be allowable as to any initial payment referred to in paragraph (1) made to an eligible arrangement or association by any person who is a member of any other eligible arrangement or association on or after the effective date of the Tax Reform Act of 1986. Any excess amount not allowed as a deduction for the taxable year in which such payment was made pursuant to the limitation contained in the 1st sentence of this subparagraph shall, subject to such limitation, be allowable as a deduction in any of the 5 succeeding taxable years, in order of time, to the extent not previously allowed as a deduction under this sentence. Any amount attributable to any initial payment referred to in paragraph (1) to such arrangement or association described in paragraph (1) which is later refunded for any reason shall be included in the gross income of the recipient in the taxable year received, to the extent a deduction for such payment was allowed. Any amount refunded in excess of such payment shall be included in gross income except to the extent otherwise excluded from income by the Internal Revenue Code of 1986. was operative and was providing such protection, or had received a permit for the offer and sale of memberships, under the laws of any State before January 1, 1984 , is not subject to regulation by any State insurance department, has a right to make unlimited assessments against all members to cover current claims and losses, and is not a member of, nor subject to protection by, any insurance guaranty plan or association of any State. The provisions of subsection (a) shall apply to payments made to and receipts of physicians’ and surgeons’ mutual protection and interindemnity arrangements or associations, and refunds of payments by such arrangements or associations, after the date of the enactment of this Act [ Oct. 22, 1986 ], in taxable years ending after such date.” In the case of taxable years beginning before 1967, a company shall treat additions to a reserve, required by State law or regulations for mortgage guaranty insurance losses resulting from adverse economic cycles, as unearned premiums for purposes of section 832(b)(4) of the Internal Revenue Code of 1986 [formerly I.R.C. 1954], but the amount so treated as unearned premiums in a taxable year shall not exceed 50 percent of premiums earned on insurance contracts (as defined in section 832(b)(4) of such Code), determined without regard to amounts added to the reserve, with respect to mortgage guaranty insurance for such year. The amount of unearned premiums at the close of 1966 shall be determined without regard to the preceding sentence for the purpose of applying section 832(b)(4) of such Code to 1967. Additions to such a reserve shall not be treated as unearned premiums for any taxable year beginning after 1966. an amount (if any) equal to the excess of losses incurred (as defined in section 832(b)(5) of such Code) for the taxable year over 35 percent of premiums earned on insurance contracts during the taxable year (as defined in section 832(b)(4) of such Code), determined without regard to amounts added to the reserve referred to in paragraph (1), with respect to mortgage guaranty insurance, the amount (if any) remaining which was added to the reserve for the tenth preceding taxable year, and the aggregate of amounts so treated as unearned premiums for all taxable years beginning before 1967 less the total of the amounts included in gross income under this paragraph for prior taxable years and the amounts included in gross income under subparagraphs (A) and (B) for the taxable year, over the aggregate of the additions made for taxable years beginning before 1967 which remain in the reserve at the close of the taxable year. The provisions of this subsection shall apply to taxable years beginning after December 31, 1956 .”