(a) Election to transfer amounts from policyholders surplus account to shareholders surplus account—(1) In general. Section 815(d)(1) permits a life insurance company to elect, after the close of any taxable year for which it is a life insurance company, to subtract any amount (or any portion thereof) in its policyholders surplus account as of the close of the taxable year. The effect of such election is to subject the company to tax on the amounts elected to be subtracted for the taxable year for which the election applies. The amount so subtracted, less the amount of tax imposed with respect to such amount by reason of section 802(b)(3), shall be added to the shareholders surplus account as of the beginning of the taxable year following the taxable year for which the election applies and no further tax shall be imposed upon the company if the amount elected to be transferred to the shareholders surplus account is subsequently distributed to shareholders.
(2) Manner and effect of election.
(i) The election provided by section 815(d)(1) and this section shall be made in a statement attached to the life insurance company's income tax return for any taxable year for which the company desires the election to apply. The statement shall include the name and address of the taxpayer, shall be signed by the taxpayer (or his duly authorized representative), and shall be filed not later than the date prescribed by law (including extensions thereof) for filing the return for such taxable year. In addition, the statement shall indicate that the company has made the election provided under section 815(d)(1) for the taxable year and the amount elected to be subtracted from the policyholders surplus account.
(ii) An election made under section 815(d)(1)(B) and subdivision (i) of this subparagraph shall be effective only with respect to the taxable year for which the election is made. Thus, the company must make a new election for each taxable year for which it desires the election to apply. Once such an election has been made for any taxable year it may not be revoked.
(3) The application of subparagraph (1) of this paragraph may be illustrated by the following example:
(b) Termination as life insurance company—(1) Effect of termination. Except as provided in section 381(c)(22) (relating to carryovers in certain corporate readjustments), section 815(d)(2)(A) provides that if for any taxable year the taxpayer is not an insurance company (as defined in paragraph (a) of §1.801-3), or if for any two successive taxable years the taxpayer is not a life insurance company (as defined in section 801(a) and paragraph (b) of §1.801-3), the amount taken into account under section 802(b)(3) for the last preceding year for which the company was a life insurance company shall be increased (after the application of section 815(d)(2)(B)) by the entire balance in the policyholders surplus account at the close of such last preceding taxable year.
(2) Effect of certain distributions. If for any taxable year the taxpayer is an insurance company (as defined in paragraph (a) of §1.801-3) but is not a life insurance company (as defined in section 801(a) and paragraph (b) of §1.801-3), section 815(d)(2)(B) provides that any distribution to shareholders during such taxable year shall be treated as having been made on the last day of the last preceding taxable year for which the company was a life insurance company.
(3) Examples. The application of section 815(d)(2) and this paragraph may be illustrated by the following examples:
(c) Treatment of certain indebtedness. Section 815(d)(3) provides that if a taxpayer makes any payment in discharge of its indebtedness and such indebtedness is attributable to a distribution by the taxpayer to its shareholders after February 9, 1959, the amount of such payment shall be treated as a distribution in cash to shareholders both for purposes of section 802(b)(3) and section 815. However, this paragraph shall only apply to the extent that the distribution of such indebtedness to shareholders was treated as being out of accounts other than the shareholders and policyholders surplus accounts at the time of distribution.
(d) Limitation on amount in policyholders surplus account—(1) In general. Section 815(d)(4) provides a limitation on the amount that any life insurance company may accumulate in its policyholders surplus account. If the policyholders surplus account at the end of any taxable year (computed without regard to this paragraph) exceeds whichever of the following is the greatest:
(i) 15 percent of life insurance reserves (as defined in section 801(b) and paragraph (a) of §1.801-4) at the end of the taxable year.
(ii) 25 percent of the amount by which the life insurance reserves at the end of the taxable year exceed the life insurance reserves at the end of 1958, or
(iii) 50 percent of the net amount of the premiums and other consideration taken into account for the taxable year under section 809(c)(1),
then such excess shall be treated as a subtraction from the policyholders surplus account as of the end of such taxable year. The amount so treated as subtracted, less the amount of tax imposed with respect to such amount by reason of section 802(b)(3), shall be added to the shareholders surplus account at the beginning of the succeeding taxable year.
(2) Example. The application of the limitation contained in subparagraph (1) of this paragraph may be illustrated by the following example:
| Balance in policyholders surplus account, computed without regard to sec. 815(d)(4), as of 12-31-60 | $175 | |
| Life insurance reserves (as defined in sec. 801(b)) as of 12-31-60 | 4,500 | |
| Life insurance reserves (as defined in sec. 801(b)) as of 12-31-58 | 3,900 | |
| Premiums and other consideration taken into account for the taxable year under sec. 809(c)(1) | 310 | |
In order to determine the limitations on the amount that it may accumulate in its policyholders surplus account at the end of the taxable year under section 815(d)(4), S would make up the following schedule:
| (1) 15 percent of life insurance reserves at the end of the taxable year (15% × $4,500) | $675 | |
| (2) 25 percent of amount by which life insurance reserves at the end of the taxable year ($4,500) exceed life insurance reserves as of 12-31-58 ($3,900) (25% × $600) | 150 | |
| (3) 50 percent of premiums and other consideration taken into account under sec. 809(c)(1) for the taxable year (50% × $310) | 155 | |
| (4) Limitation on policyholders surplus account (the greatest of items (1), (2), or (3)) | 675 | |
Since the balance in the policyholders surplus account at the end of the taxable year 1960, $175, does not exceed the limitation provided by section 815(d)(4), $675, S is not required to make any further adjustment to its policyholders surplus account at the end of the taxable year.
(e) Special rule for certain mutualizations—(1) In general. Section 815(e) provides a rule for determining priorities which shall operate in place of section 815(a) and paragraph (b) of §1.815-2 where a life insurance company makes any distribution to its shareholders after December 31, 1958, in acquisition of stock pursuant to a plan of mutualization. Section 815(e)(1) provides that such a distribution shall first be treated as being made out of paid-in capital and paid-in surplus, and, to the extent thereof, no tax shall be imposed on the company with respect to such distribution. Thereafter, distributions made pursuant to such plan of mutualization shall be treated as made in two allocable parts. One part shall be treated as being made out of other accounts (as defined in §1.815-5) and the company shall incur no tax with respect to such portion of the distribution. The other part shall be treated as a distribution to which section 815(a) and paragraph (b) of §1.815-2 applies. Thus, such portion of the distribution shall be treated as first being made out of the shareholders surplus account (as defined in section 815(b) and §1.815-3), to the extent thereof, and then out of the policyholders surplus account (as defined in section 815(c) and §1.815-4), to the extent thereof. See paragraph (a) of §1.815-2. For purposes of this paragraph, a distribution shall be considered as being made pursuant to a plan of mutualization only if the requirements of applicable State law for the adoption of such plan (as, for example, approval by the requisite majority of the board of directors, shareholders, and policyholders) have been fulfilled.
(2) Allocation ratio. Section 815(e)(2)(A) provides an allocation ratio which when applied to the amount distributed under a plan of mutualization in excess of the balance in the paid-in capital and paid-in surplus accounts determines the portion of such excess to be treated as distributed out of the shareholders surplus account, policyholders surplus account, or other accounts. The numerator of this ratio is the excess of the assets of the company (as defined in section 805(b)(4) and paragraph (a)(4) of §1.805-5) over the total liabilities (including reserves), both determined as of December 31, 1958, and adjusted in the manner provided in subparagraph (3) of this paragraph. The denominator of this ratio is the amount included in the numerator plus the amounts in the shareholders surplus account and policyholders surplus account, all determined as of the beginning of the year of the distribution.
(3) Adjustment for certain distributions. Section 815(e)(2)(B) provides that if between 1958 and the year of distribution the taxpayer has been treated as having made a distribution (under a plan of mutualization or otherwise) which is treated as a return of paid-in capital and paid-in surplus or as out of other accounts (as defined in §1.815-5), the aggregate amount of any such prior distributions must be subtracted from the numerator and denominator in all cases where the allocation ratio provided by subparagraph (2) of this paragraph applies.
(f) Recomputation required as a result of a subsequent loss from operations under section 812—(1) In general. Any amounts added to or subtracted from the special surplus accounts referred to in section 815(a) and paragraph (b) of §1.815-2 for any taxable year shall be adjusted to the extent necessary to properly reflect a subsequent loss from operations which under section 812 is carried back to the taxable year for which such additions or subtractions were made.
(2) Example. The application of subparagraph (1) of this paragraph may be illustrated by the following example:
| 1959 | 1960 | 1961 | |
|---|---|---|---|
| Taxable investment income | $40.00 | $40.00 | $40.00 |
| Gain from operations | 60.00 | 60.00 | 60.00 |
| Tax base (sec. 802(b)(1) and (2)) | 50.00 | 50.00 | 50.00 |
| Tax (sec. 802(b)(1) and (2) base) | 15.00 | 15.00 | 15.00 |
| Shareholders surplus account— | |||
| At beginning of year | 0 | 35.00 | 37.00 |
| Added at beginning of year by reason of election under sec. 815(d)(1) | 0 | 7.00 | 0 |
| Added for year (without regard to election under sec. 815(d)(1)) | 35.00 | 35.00 | 35.00 |
| Subtracted (distributions) | 0 | 40.00 | 40.00 |
| Policyholders surplus account— | |||
| At beginning of year | 0 | 0 | 10.00 |
| Added for year | 10.00 | 10.00 | 10.00 |
| Subtracted (distributions) | 0 | 0 | 0 |
| Subtracted (by reason of election under sec. 815(d)(1)) | 10.00 | 0 | 0 |
| Tax base (sec. 802(b)(3)) | 10.00 | 0 | 0 |
| Tax (sec. 802(b)(3) base) | 3.00 | 0 | 0 |
Assume further that S has a loss from operations for the taxable year 1962 of $25. Under the provisions of section 812, the $25 loss from operations would be carried back to the taxable year 1959 and would reduce the 1959 tax base under section 802(b)(1) and (2) to $35 ($60 minus $25). After adjustments reflecting the 1962 loss from operations, the results for the taxable years 1959 through the beginning of 1962 would be as follows:
| 1959 | 1960 | 1961 | 1962 | |
|---|---|---|---|---|
| Taxable investment income | $40.00 | $40.00 | $40.00 | |
| Gain from operations | 35.00 | 60.00 | 60.00 | |
| Tax base (sec. 802(b)(1) and (2)) | 35.00 | 50.00 | 50.00 | |
| Tax (sec. 802(b)(1) and (2) base) | 10.50 | 15.00 | 15.00 | |
| Shareholders surplus account— | ||||
| At beginning of year | 0 | 24.50 | 19.50 | $14.50 |
| Added for year (without regard to election under sec. 815(d)(1)) | 24.50 | 35.00 | 35.00 | |
| Added by reason of election under sec. 815(d)(1) | 0 | 0 | 0 | |
| Subtracted (distributions) | 0 | 40.00 | 40.00 | |
| Policyholders surplus account— | ||||
| At beginning of year | 0 | 0 | 10.00 | 20.00 |
| Added for year | 0 | 10.00 | 10.00 | |
| Subtracted (distributions) | 0 | 0 | 0 | |
| Subtracted (by reason of election under sec. 815(d)(1)) | 0 | 0 | 0 | |
| Tax base (sec. 802(b)(3)) | 0 | 0 | 0 | |
| Tax (sec. 802(b)(3) base) | 0 | 0 | 0 |
As a result of the loss from operations for 1962, the election under section 815(d)(1) for the taxable year 1959 has become inapplicable in its entirety since the balance in the policyholders surplus account at the end of 1959, as recomputed, is zero. Thus, S would be entitled to a total refund of $7.50 for the taxable year 1959. Of this amount, $4.50 is due to the recomputation of the section 802(b)(1) and (2) tax base and $3 to the amount of tax paid by reason of the election under section 815(d)(1).
[T.D. 6535, 26 FR 545, Jan. 20, 1961]
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