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SUBPART Y-INSURANCE COMPANIES

CROSS REFERENCES

Additional exclusions from gross income: See §§ 3.116-1 to 3.116-3.
Capital gains and losses: See §§ 3.117-1 to 3.117-6.

Credits against income: See 88 3.25-1 to 3.27 (h)-1.

Credits against tax; supplemental: See §§ 3.131-1 to 3.131-8.
Deductions from gross income: See §§ 3.23 (a)-1 to 3.24-8.

Foreign corporations: See 88 3.231-1 to 3.236-1.

General provisions; definitions: See §§ 3.1001-1 to 3.1003-1.

Gross income; net income: See §§ 3.21-1 to 3.22 (c)-8.

Income from sources within the United States: See §§ 3.119-1 to 3.119-14. Interests and additions to tax: See § 3.291-1.

Nonresident aliens: See §§ 3.211-1 to 3.219-1.

Rates of tax: See 88 3.11-1 to 3.14-3.

Returns and payments of tax: See §§ 3.51-1 to 3.57-2, 3.141-1 to 3.150-1.

SUPPLEMENT G-INSURANCE COMPANIES

SEC. 201. TAX ON LIFE INSURANCE COMPANIES.

(a) Definition. When used in this title the term "life insurance company" means an insurance company engaged in the business of issuing life insurance and annuity contracts (including contracts of combined life, health, and accident insurance), the reserve funds of which held for the fulfillment of such contracts comprise more than 50 per centum of its total reserve funds.

3.201 (a)-1 Life insurance companies: definition. The term "life insurance company" as used in title I of the Act is defined in section 201 (a). In determining whether an insurance company is a "life insurance company" as defined in section 201 (a), no reserve shall be regarded as held for the fulfillment of an insurance contract unless it conforms to the definition of "reserve" contained in § 3.203 (a) (2)-1.*+

[SEC. 201. TAX ON LIFE INSURANCE COMPANIES.]

(b) Imposition of tax.

(1) IN GENERAL. In lieu of the tax imposed by sections 13 and 14, there shall be levied, collected, and paid for each taxable year upon the normal-tax net income of every life insurance company a tax of 15 per centum of the amount thereof. (2) NORMAL-TAX NET INCOME OF FOREIGN LIFE INSURANCE COMPANIES. In the case of a foreign life insurance company, the normal-tax net income shall be an amount which bears the same ratio to the normal-tax net income, computed without regard to this paragraph, as the reserve funds required by law and held by it at the end of the taxable year upon business transacted within the United States bear to the reserve funds held by it at the end of the taxable year upon all business transacted. (3) No UNITED STATES INSURANCE BUSINESS. Foreign life insurance companies not carrying on an insurance business within the United States and holding no reserve funds upon business transacted within the United States, shall not be taxable under this section but shall be taxable as other foreign corporations.

3.201 (b)-1 Life insurance companies: rate of tax. Life insurance companies are subject to the tax imposed by section 201 (b) of the Act, in lieu of the tax imposed by sections 13 and 14. The rate for 1936 and for subsequent years is 15 percent, and the net income upon which the tax is imposed differs from the net income of other corporations. Life insurance companies are entitled to the credits provided in section 26 (a) and (b) of the Act and are not subject to the provisions of section 117 (capital gains and losses).

All provisions of the Act and of the regulations in this subpart not inconsistent with the specific provisions of sections 201-203 of the Act

**For statutory and source citations, see note to § 3.1-1.

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are applicable to the assessment and collection of the tax imposed by section 201 (b), and life insurance companies are subject to the same penalties as are provided in the case of returns and payment of income tax by other corporations. The return shall be on Form 1120L.*†

3.201 (b)-2 Foreign life insurance companies: net income. The normal-tax net income of a foreign life insurance company carrying on an insurance business within the United States or holding reserve funds upon business transacted within the United States shall consist of that proportion of its net income from all sources, within and without the United States, computed under the provisions of sections 202 and 203 of the Act minus the credits provided in section 26 (a) and (b), which the reserve funds required by law and held by it at the end of the taxable year upon business transacted within the United States bear to the reserve funds held by it at the end of the taxable year upon all business transacted. Other foreign life insurance companies are not taxable under section 201 (b) of the Act, but are taxable the same as other foreign corporations. See section 231 of the Act.*t

SEC. 202. GROSS INCOME OF LIFE INSURANCE COMPANIES.

(a) In the case of a life insurance company the term "gross income" means the gross amount of income received during the taxable year from interest, dividends, and rents.

(b) The term "reserve funds required by law" includes, in the case of assessment insurance, sums actually deposited by any company or association with State or Territorial officers pursuant to law as guaranty or reserve funds, and any funds maintained under the charter or articles of incorporation of the company or association exclusively for the payment of claims arising under certificates of membership or policies issued upon the assessment plan and not subject to any other use.

SEC. 203. NET INCOME OF LIFE INSURANCE COMPANIES.

(a) General rule. In the case of a life insurance company the term "net income" means the gross income less

3.203 (a)-1 General limitation on deductions. In addition to the limitations on deductions hereinafter specifically referred to, life insurance companies are subject to a general limitation on deductions. See section 24 (a) (5) of the Act.*t

[SEC. 203. NET INCOME OF LIFE INSURANCE COMPANIES.]

[(a) General rule. In the case of a life insurance company the term "net income" means the gross income less-]

(1) TAX-FREE INTEREST. The amount of interest received during the taxable year which under section 22 (b) (4) is excluded from gross income;

3.203 (a) (1)-1 Tax-free interest. Interest which in the case of other taxpayers is excluded from gross income by section 22 (b) (4) of the Act but included in the gross income of a life insurance company by section 202 (a) is allowed as a deduction from gross income by section 203 (a) (1).*+

[SEC. 203. NET INCOME OF LIFE INSURANCE COMPANIES.]

[(a) General rule. In the case of a life insurance company the term "net income" means the gross income less-]

(2) RESERVE FUNDS. An amount equal to 4 per centum of the mean of the reserve funds required by law and held at the beginning and end of the taxable year, except that in the case of any such reserve fund which is computed at a lower interest assumption rate, the rate of 34 per centum shall be substituted

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**For statutory and source citations, see note to § 3.1-1.

for 4 per centum. Life insurance companies issuing policies covering life, health, and accident insurance combined in one policy issued on the weekly premium payment plan, continuing for life and not subject to cancellation, shall be allowed, in addition to the above, a deduction of 34 per centum of the mean of such reserve funds (not required by law) held at the beginning and end of the taxable year, as the Commissioner finds to be necessary for the protection of the holders of such policies only;

3.203 (a) (2)-1 Reserve funds. In general, the reserve contemplated is a sum of money, variously computed or estimated, which, with accretions from interest, is set aside (reserved) as a fund with which to mature or liquidate, either by payment or reinsurance with other companies, future unaccrued and contingent claims. It must be required either by express statutory provisions or by rules and regulations of the insurance department of a State, Territory, or the District of Columbia when promulgated in the exercise of a power conferred by statute, but such requirement, without more, is not conclusive; for example, it does not include reserves required to be maintained to provide for the ordinary running expenses of a business definite in amount, and which must be currently paid by every company from its income if its business is to continue, such as taxes, calaries, reinsurance and unpaid brokerage; the reserve or net value of risks reinsured in other solvent companies to the extent of the reinsurance; reserve for premiums paid in advance; annual and deferred dividends; accrued but unsettled policy claims; losses incurred but unreported; liability on supplementary contracts not involving life contingencies; estimated value of future premiums which have been waived on policies after proof of total and permanent disability.

In any case where reserves are claimed, sufficient information must be filed with the return to enable the Commissioner to determine the validity of the claim. Reference should be made to the item in which the reserve appears in the annual statement and to the statute or insurance department ruling requiring that such reserves be held. Only reserves which are so required, which are peculiar to insurance companies, and which are dependent upon interest earnings for their maintenance will be considered. A company is permitted to make use of the highest aggregate reserve called for by any State or Territory or the District of Columbia in which it transacts business, but the reserve must have been actually held.

In the case of life insurance companies issuing policies covering life, health, and accident insurance combined in one policy issued on the weekly premium payment plan, continuing for life and not subject to cancellation, it is required that reserve funds thereon be based upon recognized tables of experience covering disability benefits of the kind contained in policies issued by this particular class of companies. The deduction in respect of such reserve funds (not required by law) is 334 percent of the mean of such reserve funds held at the beginning and end of the taxable year.*†

[SEC. 203. NET INCOME OF LIFE INSURANCE COMPANIES.]

[(a) General rule. In the case of a life insurance company the term "net income" means the gross income less-]

(3) RESERVE FOR DIVIDENDS. An amount equal to 2 per centum of any sums held at the end of the taxable year as a reserve for dividends (other than dividends payable during the year following the taxable year) the payment of

**For statutory and source citations, see note to § 3.1-1.

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which is deferred for a period of not less than five years from the date of the policy contract;

(4) INVESTMENT EXPENSES. Investment expenses paid during the taxable year: Provided, That if any general expenses are in part assigned to or included in the investment expenses, the total deduction under this paragraph shall not exceed one-fourth of 1 per centum of the book value of the mean of the invested assets held at the beginning and end of the taxable year;

3.203 (a) (4)-1 Investment expenses. The term "general expenses" as used in the Act means any expense incurred for the benefit of more than one department of the company rather than for the benefit of a particular department thereof. Any assignment of such expense to the investment department of the company for which a deduction is claimed under section 203 (a) (4) of the Act shall operate to subject the total investment expenses to the limitation provided in that section.

If no general expenses are assigned to or included in investment expenses the deduction may consist of investment expenses actually paid during the taxable year in which case an itemized schedule of such expenses must be appended to the return.

Invested assets for the purpose of section 203 (a) (4) of the Act and this section are those which are owned and used, and to the extent used, for the purpose of producing the income specified in section 202 (a) of the Act.

The maximum allowance of one-fourth of 1 percent will not be granted unless it is shown to the satisfaction of the Commissioner that such allowance is justified.**

[SEC. 203. NET INCOME OF LIFE INSURANCE COMPANIES.]

[(a) General rule. In the case of a life insurance company the term "net income" means the gross income less-]

(5) REAL ESTATE EXPENSES. Taxes and other expenses paid during the taxable year exclusively upon or with respect to the real estate owned by the company, not including taxes assessed against local benefits of a kind tending to increase the value of the property assessed, and not including any amount paid out for new buildings, or for permanent improvements or betterments made to increase the value of any property. The deduction allowed by this paragraph shall be allowed in the case of taxes imposed upon a shareholder of a company upon his interest as shareholder, which are paid by the company without reimbursement from the shareholder, but in such cases no deduction shall be allowed the shareholder for the amount of such taxes;

3.203 (a) (5)-1 Taxes and expenses with respect to real estate. The deduction for taxes and expenses under section 203 (a) (5) of the Act includes taxes and expenses paid during the taxable year exclusively upon or with respect to real estate owned by the company and any sum representing taxes imposed upon a shareholder of the company upon his interest as shareholder which is paid by the company without reimbursement from the shareholder. No deduction shall be allowed, however, for taxes, expenses, and depreciation upon or with respect to any real estate owned by the company except to the extent used for the purpose of producing investment income. (See § 3.203 (a) (4)-1.) As to real estate owned and occupied by the company see § 3.203 (b)-1.*†

[SEC. 203. NET INCOME OF LIFE INSURANCE COMPANIES.]

[(a) General rule. In the case of a life insurance company the term "net income" means the gross income less-]

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**For statutory and source citations, see note to § 3.1-1.

(6) DEPRECIATION. A reasonable allowance, as provided in section 23 (1), for the exhaustion, wear and tear of property, including a reasonable allowance for obsolescence; and

3.203 (a) (6)-1 Depreciation. The deduction allowed by section 203 (a) (6) of the Act for depreciation is, except as provided in § 3.203 (b)-1, identical with that allowed other corporations by section 23 (1) of the Act. The amount allowed by section 23 (1) in the case of life insurance companies is limited to depreciation sustained on the property used, and to the extent used, for the purpose of producing the income specified in section 202 (a).*t

[SEC. 203. NET INCOME OF LIFE INSURANCE COMPANIES.]

[(a) General rule. In the case of a life insurance company the term "net income" means the gross income less-]

(7) INTEREST. All interest paid within the taxable year on its indebtedness, except on indebtedness incurred or continued to purchase or carry obligations (other than obligations of the United States issued after September 24, 1917, and originally subscribed for by the taxpayer) the interest upon which is wholly exempt from taxation under this title.

3.203 (a) (7)-1 Interest. The deduction allowed by section 203 (a) (7) of the Act for interest on indebtedness is the same as that allowed other corporations by section 23 (b) but this deduction includes interest on dividends held on deposit and surrendered during the taxable year. Reserve funds as defined in § 3.203 (a) (2)-1 are not indebtedness. Dividends left with the company to accumulate at interest are a debt and not a reserve liability.

If a life insurance company pays interest on the proceeds of life insurance policies left with it pursuant to the provisions of supplementary contracts, not involving life contingencies, or similar contracts, the interest so paid shall be allowed as a deduction from gross income, except that such deduction shall not be allowed in respect of interest accrued in any prior taxable year to the extent that the company has had the benefit of a deduction of 4 percent or 334 percent, as the case may be, of the mean of the company's liability on such contracts, by the inclusion of such liability in its reserve funds.** [SEO. 203. NET INCOME OF LIFE INSURANCE COMPANIES.]

(b) Rental value of real estate. The deduction under subsection (a) (5) or (6) of this section on account of any real estate owned and occupied in whole or in part by a life insurance company, shall be limited to an amount which bears the same ratio to such deduction (computed without regard to this subsection) as the rental value of the space not so occupied bears to the rental value of the entire property.

3.203 (b)-1 Real estate owned and occupied. The amount allowable as a deduction for taxes, expenses, and depreciation upon or with respect to any real estate owned and occupied in whole or in part by a life insurance company is limited to an amount which bears the same ratio to such deduction (computed without regard to this limitation) as the rental value of the space not so occupied bears to the rental value of the entire property. For example, if the rental value of the space not occupied by the company is equal to one-half of the rental value of the entire property, the deduction for taxes, expenses, and depreciation is one-half of the taxes, expenses, and depreciation on account of the entire property. Where à deduction is claimed as provided in this section, the parts of the property occu

**For statutory and source citations, see note to § 3.1-1.

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