26 USC Subtitle A, CHAPTER 1, Subchapter L, PART I, Subpart E: Definitions and Special Rules
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26 USC Subtitle A, CHAPTER 1, Subchapter L, PART I, Subpart E: Definitions and Special Rules
From Title 26—INTERNAL REVENUE CODESubtitle A—Income TaxesCHAPTER 1—NORMAL TAXES AND SURTAXESSubchapter L—Insurance CompaniesPART I—LIFE INSURANCE COMPANIES

Subpart E—Definitions and Special Rules

Sec.
816.
Life insurance company defined.
817.
Treatment of variable contracts.
817A.
Special rules for modified guaranteed contracts.
818.
Other definitions and special rules.

        

Editorial Notes

Amendments

1996Pub. L. 104–188, title I, §1612(b), Aug. 20, 1996, 110 Stat. 1847, added item 817A.

§816. Life insurance company defined

(a) Life insurance company defined

For purposes of this subtitle, the term "life insurance company" means an insurance company which is engaged in the business of issuing life insurance and annuity contracts (either separately or combined with accident and health insurance), or noncancellable contracts of health and accident insurance, if—

(1) its life insurance reserves (as defined in subsection (b)), plus

(2) unearned premiums, and unpaid losses (whether or not ascertained), on noncancellable life, accident, or health policies not included in life insurance reserves,


comprise more than 50 percent of its total reserves (as defined in subsection (c)). For purposes of the preceding sentence, the term "insurance company" means any company more than half of the business of which during the taxable year is the issuing of insurance or annuity contracts or the reinsuring of risks underwritten by insurance companies.

(b) Life insurance reserves defined

(1) In general

For purposes of this part, the term "life insurance reserves" means amounts—

(A) which are computed or estimated on the basis of recognized mortality or morbidity tables and assumed rates of interest, and

(B) which are set aside to mature or liquidate, either by payment or reinsurance, future unaccrued claims arising from life insurance, annuity, and noncancellable accident and health insurance contracts (including life insurance or annuity contracts combined with noncancellable accident and health insurance) involving, at the time with respect to which the reserve is computed, life, accident, or health contingencies.

(2) Reserves must be required by law

Except—

(A) in the case of policies covering life, accident, and health insurance combined in one policy issued on the weekly premium payment plan, continuing for life and not subject to cancellation, and

(B) as provided in paragraph (3),


in addition to the requirements set forth in paragraph (1), life insurance reserves must be required by law.

(3) Assessment companies

In the case of an assessment life insurance company or association, the term "life insurance reserves" includes—

(A) sums actually deposited by such company or association with State officers pursuant to law as guaranty or reserve funds, and

(B) any funds maintained, under the charter or articles of incorporation or association (or bylaws approved by a State insurance commissioner) of such company or association, exclusively for the payment of claims arising under certificates of membership or policies issued on the assessment plan and not subject to any other use.

(4) Amount of reserves

For purposes of this subsection, subsection (a), and subsection (c), the amount of any reserve (or portion thereof) for any taxable year shall be the mean of such reserve (or portion thereof) at the beginning and end of the taxable year.

(c) Total reserves defined

For purposes of subsection (a), the term "total reserves" means—

(1) life insurance reserves,

(2) unearned premiums, and unpaid losses (whether or not ascertained), not included in life insurance reserves, and

(3) all other insurance reserves required by law.

(d) Adjustments in reserves for policy loans

For purposes only of determining under subsection (a) whether or not an insurance company is a life insurance company, the life insurance reserves, and the total reserves, shall each be reduced by an amount equal to the mean of the aggregates, at the beginning and end of the taxable year, of the policy loans outstanding with respect to contracts for which life insurance reserves are maintained.

(e) Guaranteed renewable contracts

For purposes of this part, guaranteed renewable life, accident, and health insurance shall be treated in the same manner as noncancellable life, accident, and health insurance.

(f) Amounts not involving life, accident, or health contingencies

For purposes only of determining under subsection (a) whether or not an insurance company is a life insurance company, amounts set aside and held at interest to satisfy obligations under contracts which do not contain permanent guarantees with respect to life, accident, or health contingencies shall not be included in reserves described in paragraph (1) or (3) of subsection (c).

(g) Burial and funeral benefit insurance companies

A burial or funeral benefit insurance company engaged directly in the manufacture of funeral supplies or the performance of funeral services shall not be taxable under this part but shall be taxable under section 831.

(h) Treatment of deficiency reserves

For purposes of this section and section 842(b)(2)(B)(i), the terms "life insurance reserves" and "total reserves" shall not include deficiency reserves.

(Added Pub. L. 98–369, div. A, title II, §211(a), July 18, 1984, 98 Stat. 748; amended Pub. L. 99–514, title XVIII, §1821(l), Oct. 22, 1986, 100 Stat. 2841; Pub. L. 100–203, title X, §10242(c)(2), Dec. 22, 1987, 101 Stat. 1330–423; Pub. L. 100–647, title I, §1010(f)(6), title II, §2004(q)(1), Nov. 10, 1988, 102 Stat. 3454, 3608.)


Editorial Notes

Prior Provisions

A prior section 816, act Aug. 16, 1954, ch. 736, §816, as added Mar. 13, 1956, ch. 83, §2, 70 Stat. 46, related to taxation of foreign life insurance companies, prior to the general revision of this part by Pub. L. 86–69, §2(a).

Amendments

1988—Subsec. (g). Pub. L. 100–647, §1010(f)(6), substituted "section 831" for "section 821 or section 831".

Subsec. (h). Pub. L. 100–647, §2004(q)(1), substituted "section 842(b)(2)(B)(i)" for "section 842(c)(1)(A)".

1987—Subsec. (h). Pub. L. 100–203 substituted "section 842(c)(1)(A)" for "section 813(a)(4)(B)".

1986—Subsec. (h). Pub. L. 99–514 added subsec. (h).


Statutory Notes and Related Subsidiaries

Effective Date of 1988 Amendment

Amendment by section 1010(f)(6) of Pub. L. 100–647 effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, Pub. L. 99–514, to which such amendment relates, see section 1019(a) of Pub. L. 100–647, set out as a note under section 1 of this title.

Amendment by section 2004(q)(1) of Pub. L. 100–647 effective, except as otherwise provided, as if included in the provisions of the Revenue Act of 1987, Pub. L. 100–203, title X, to which such amendment relates, see section 2004(u) of Pub. L. 100–647, set out as a note under section 56 of this title.

Effective Date of 1987 Amendment

Pub. L. 100–203, title X, §10242(d), Dec. 22, 1987, 101 Stat. 1330–423, provided that: "The amendments made by this section [amending this section and sections 842, 864, and 4371 of this title and repealing section 813 of this title] shall apply to taxable years beginning after December 31, 1987."

Effective Date of 1986 Amendment

Amendment by Pub. L. 99–514 effective, except as otherwise provided, as if included in the provisions of the Tax Reform Act of 1984, Pub. L. 98–369, div. A, to which such amendment relates, see section 1881 of Pub. L. 99–514, set out as a note under section 48 of this title.

Effective Date

Section applicable to taxable years beginning after Dec. 31, 1983, see section 215 of Pub. L. 98–369, set out as a note under section 801 of this title.

Plan Amendments Not Required Until January 1, 1989

For provisions directing that if any amendments made by subtitle A or subtitle C of title XI [§§1101–1147 and 1171–1177] or title XVIII [§§1800–1899A] of Pub. L. 99–514 require an amendment to any plan, such plan amendment shall not be required to be made before the first plan year beginning on or after Jan. 1, 1989, see section 1140 of Pub. L. 99–514, as amended, set out as a note under section 401 of this title.

Special Election To Treat Individual Noncancellable Accident and Health Contracts as Cancellable

Pub. L. 98–369, div. A, title II, §217(i), July 18, 1984, 98 Stat. 764, as amended by Pub. L. 99–514, §2, Oct. 22, 1986, 100 Stat. 2095; Pub. L. 100–647, title I, §1010(h)(1), Nov. 10, 1988, 102 Stat. 3455, provided that:

"(1) In general.—A mutual life insurance company may elect to treat all individual noncancellable (or guaranteed renewable) accident and health insurance contracts as though they were cancellable for purposes of section 816 of subchapter L of chapter 1 of the Internal Revenue Code of 1986 [formerly I.R.C. 1954].

"(2) Effect of election on subsidiaries of electing parent.—For purposes of determining the amount of the small life insurance company deduction of any controlled group which includes a mutual company which made an election under paragraph (1), the taxable income of such electing company shall be taken into account under [former] section 806(b)(2) of the Internal Revenue Code of 1986 (relating to phaseout of small life insurance company deduction).

"(3) Election.—An election under paragraph (1) shall apply to the company's first taxable year beginning after December 31, 1983, and all taxable years thereafter.

"(4) Time and manner.—An election under paragraph (1) shall be made—

"(A) on the return of the taxpayer for its first taxable year beginning after December 31, 1983, and

"(B) in such manner as the Secretary of the Treasury or his delegate may prescribe."

[Pub. L. 100–647, title I, §1010(h)(2), (3), Nov. 10, 1988, 102 Stat. 3455, provided that:

["(2) Effective date.—The amendment made by this subsection [amending section 217(i) of Pub. L. 98–369, set out above] shall apply to taxable years beginning after December 31, 1986, and before January 1, 1992.

["(3) Revenue loss limited.—The decrease in the amount of Federal revenue by reason of the amendment made by this subsection shall not exceed $300,000 per taxable year."]

§817. Treatment of variable contracts

(a) Increases and decreases in reserves

For purposes of subsections (a) and (b) of section 807, the sum of the items described in section 807(c) taken into account as of the close of the taxable year with respect to any variable contract shall, under regulations prescribed by the Secretary, be adjusted—

(1) by subtracting therefrom an amount equal to the sum of the amounts added from time to time (for the taxable year) to the reserves separately accounted for in accordance with subsection (c) by reason of appreciation in value of assets (whether or not the assets have been disposed of), and

(2) by adding thereto an amount equal to the sum of the amounts subtracted from time to time (for the taxable year) from such reserves by reason of depreciation in value of assets (whether or not the assets have been disposed of).


The deduction allowable for items described in paragraphs (1) and (6) of section 805(a) with respect to variable contracts shall be reduced to the extent that the amount of such items is increased for the taxable year by appreciation (or increased to the extent that the amount of such items is decreased for the taxable year by depreciation) not reflected in adjustments under the preceding sentence.

(b) Adjustment to basis of assets held in segregated asset account

In the case of variable contracts, the basis of each asset in a segregated asset account shall (in addition to all other adjustments to basis) be—

(1) increased by the amount of any appreciation in value, and

(2) decreased by the amount of any depreciation in value,


to the extent such appreciation and depreciation are from time to time reflected in the increases and decreases in reserves or other items referred to in subsection (a) with respect to such contracts.

(c) Separate accounting

For purposes of this part, a life insurance company which issues variable contracts shall separately account for the various income, exclusion, deduction, asset, reserve, and other liability items properly attributable to such variable contracts. For such items as are not accounted for directly, separate accounting shall be made—

(1) in accordance with the method regularly employed by such company, if such method is reasonable, and

(2) in all other cases, in accordance with regulations prescribed by the Secretary.

(d) Variable contract defined

For purposes of this part, the term "variable contract" means a contract—

(1) which provides for the allocation of all or part of the amounts received under the contract to an account which, pursuant to State law or regulation, is segregated from the general asset accounts of the company,

(2) which—

(A) provides for the payment of annuities,

(B) is a life insurance contract, or

(C) provides for funding of insurance on retired lives as described in section 807(c)(6), and


(3) under which—

(A) in the case of an annuity contract, the amounts paid in, or the amount paid out, reflect the investment return and the market value of the segregated asset account,

(B) in the case of a life insurance contract, the amount of the death benefit (or the period of coverage) is adjusted on the basis of the investment return and the market value of the segregated asset account, or

(C) in the case of funds held under a contract described in paragraph (2)(C), the amounts paid in, or the amounts paid out, reflect the investment return and the market value of the segregated asset account.


If a contract ceases to reflect current investment return and current market value, such contract shall not be considered as meeting the requirements of paragraph (3) after such cessation. Paragraph (3) shall be applied without regard to whether there is a guarantee, and obligations under such guarantee which exceed obligations under the contract without regard to such guarantee shall be accounted for as part of the company's general account.

(e) Pension plan contracts treated as paying annuity

A pension plan contract which is not a life, accident, or health, property, casualty, or liability insurance contract shall be treated as a contract which provides for the payments of annuities for purposes of subsection (d).

(f) Other special rules

(1) Life insurance reserves

For purposes of subsection (b)(1)(A) of section 816, the reflection of the investment return and the market value of the segregated asset account shall be considered an assumed rate of interest.

(2) Additional separate computations

Under regulations prescribed by the Secretary, such additional separate computations shall be made, with respect to the items separately accounted for in accordance with subsection (c), as may be necessary to carry out the purposes of this section and this part.

(g) Variable annuity contracts treated as annuity contracts

For purposes of this part, the term "annuity contract" includes a contract which provides for the payment of a variable annuity computed on the basis of—

(1) recognized mortality tables, and

(2)(A) the investment experience of a segregated asset account, or

(B) the company-wide investment experience of the company.


Paragraph (2)(B) shall not apply to any company which issues contracts which are not variable contracts.

(h) Treatment of certain nondiversified contracts

(1) In general

For purposes of subchapter L, section 72 (relating to annuities), and section 7702(a) (relating to definition of life insurance contract), a variable contract (other than a pension plan contract) which is otherwise described in this section and which is based on a segregated asset account shall not be treated as an annuity, endowment, or life insurance contract for any period (and any subsequent period) for which the investments made by such account are not, in accordance with regulations prescribed by the Secretary, adequately diversified.

(2) Safe harbor for diversification

A segregated asset account shall be treated as meeting the requirements of paragraph (1) for any quarter of a taxable year if as of the close of such quarter—

(A) it meets the requirements of section 851(b)(3), and

(B) no more than 55 percent of the value of the total assets of the account are assets described in section 851(b)(3)(A)(i).

(3) Special rule for investments in United States obligations

To the extent that any segregated asset account with respect to a variable life insurance contract is invested in securities issued by the United States Treasury, the investments made by such account shall be treated as adequately diversified for purposes of paragraph (1).

(4) Look-through in certain cases

For purposes of this subsection, if all of the beneficial interests in a regulated investment company or in a trust are held by 1 or more—

(A) insurance companies (or affiliated companies) in their general account or in segregated asset accounts, or

(B) fund managers (or affiliated companies) in connection with the creation or management of the regulated investment company or trust,


the diversification requirements of paragraph (1) shall be applied by taking into account the assets held by such regulated investment company or trust.

(5) Independent investment advisors permitted

Nothing in this subsection shall be construed as prohibiting the use of independent investment advisors.

(6) Government securities funds

In determining whether a segregated asset account is adequately diversified for purposes of paragraph (1), each United States Government agency or instrumentality shall be treated as a separate issuer.

(Added Pub. L. 98–369, div. A, title II, §211(a), July 18, 1984, 98 Stat. 750; amended Pub. L. 99–514, title XVIII, §1821(m), (t)(1), Oct. 22, 1986, 100 Stat. 2841, 2844; Pub. L. 100–647, title VI, §6080(a), Nov. 10, 1988, 102 Stat. 3710; Pub. L. 104–188, title I, §1611(a), Aug. 20, 1996, 110 Stat. 1845; Pub. L. 105–34, title XII, §1271(b)(8), Aug. 5, 1997, 111 Stat. 1037; Pub. L. 108–218, title II, §205(b)(5), Apr. 10, 2004, 118 Stat. 610.)


Editorial Notes

Prior Provisions

A prior section 817, added Pub. L. 86–69, §2(a), June 25, 1959, 73 Stat. 132; amended Pub. L. 94–455, title XIV, §1402(b)(1)(M), (2), title XIX, §§1901(a)(100), 1951(b)(11)(A), Oct. 4, 1976, 90 Stat. 1732, 1781, 1839, related to rules regarding certain gains and losses, prior to the general revision of this part by Pub. L. 98–369, §211(a).

Another prior section 817, act Aug. 16, 1954, ch. 736, §817, as added Mar. 13, 1956, ch. 83, §2, 70 Stat. 46, related to denial of double deductions, prior to the general revision of this part by Pub. L. 86–69, §2(a).

Amendments

2004—Subsec. (c). Pub. L. 108–218, in introductory provisions, struck out "(other than section 809)" after "For purposes of this part".

1997—Subsec. (h)(2)(A). Pub. L. 105–34, §1271(b)(8)(A), substituted "851(b)(3)" for "851(b)(4)".

Subsec. (h)(2)(B). Pub. L. 105–34, §1271(b)(8)(B), substituted "851(b)(3)(A)(i)" for "851(b)(4)(A)(i)".

1996—Subsec. (d)(2)(C). Pub. L. 104–188, §1611(a)(1), added subpar. (C).

Subsec. (d)(3)(C). Pub. L. 104–188, §1611(a)(2), added subpar. (C).

1988—Subsec. (h)(6). Pub. L. 100–647 added par. (6).

1986—Subsec. (d). Pub. L. 99–514, §1821(t)(1), inserted at end "Paragraph (3) shall be applied without regard to whether there is a guarantee, and obligations under such guarantee which exceed obligations under the contract without regard to such guarantee shall be accounted for as part of the company's general account."

Subsec. (h)(1). Pub. L. 99–514, §1821(m)(2), struck out last sentence which read as follows: "For purposes of this paragraph and paragraph (2), beneficial interests in a regulated investment company or in a trust shall not be treated as 1 investment if all of the beneficial interests in such company or trust are held by 1 or more segregated asset accounts of 1 or more insurance companies."

Subsec. (h)(3) to (5). Pub. L. 99–514, §1821(m)(1), added pars. (3) and (4), redesignated former par. (4) as (5), and struck out former par. (3) which read as follows: "In the case of a segregated asset account with respect to variable life insurance contracts, paragraph (1) shall not apply in the case of securities issued by the United States Treasury which are owned by a regulated investment company or by a trust all the beneficial interests in which are held by 1 or more segregated asset accounts of the company issuing the contract."


Statutory Notes and Related Subsidiaries

Effective Date of 2004 Amendment

Amendment by Pub. L. 108–218 applicable to taxable years beginning after Dec. 31, 2004, see section 205(c) of Pub. L. 108–218, set out as a note under section 807 of this title.

Effective Date of 1997 Amendment

Pub. L. 105–34, title XII, §1271(c), Aug. 5, 1997, 111 Stat. 1037, provided that: "The amendments made by this section [amending this section and sections 851 and 1092 of this title] shall apply to taxable years beginning after the date of the enactment of this Act [Aug. 5, 1997]."

Effective Date of 1996 Amendment

Pub. L. 104–188, title I, §1611(b), Aug. 20, 1996, 110 Stat. 1846, provided that: "The amendments made by this section [amending this section] shall apply to taxable years beginning after December 31, 1995."

Effective Date of 1988 Amendment

Pub. L. 100–647, title VI, §6080(b), Nov. 10, 1988, 102 Stat. 3710, provided that: "The amendment made by subsection (a) [amending this section] shall apply to taxable years beginning after December 31, 1987."

Effective Date of 1986 Amendment

Pub. L. 99–514, title XVIII, §1821(t)(2), Oct. 22, 1986, 100 Stat. 2844, provided that: "The amendment made by paragraph (1) [amending this section] shall apply—

"(A) to contracts issued after December 31, 1986, and

"(B) to contracts issued before January 1, 1987, if such contract was treated as a variable contract on the taxpayer's return."

Amendment by section 1821(m) of Pub. L. 99–514 effective, except as otherwise provided, as if included in the provisions of the Tax Reform Act of 1984, Pub. L. 98–369, div. A, to which such amendment relates, see section 1881 of Pub. L. 99–514, set out as a note under section 48 of this title.

Effective Date

Section applicable to taxable years beginning after Dec. 31, 1983, see section 215 of Pub. L. 98–369, set out as a note under section 801 of this title.

Delay in Effective Date for Diversification Requirements With Respect to Accounts for Certain Immediate Annuities

Pub. L. 100–647, title I, §1010(i), Nov. 10, 1988, 102 Stat. 3455, provided that: "Section 817(h) of the 1986 Code shall not apply until January 1, 1989, with respect to a variable contract (as defined in section 817(d) of the 1986 Code) if—

"(1) such contract provides for the payment of an immediate annuity (as defined in section 72(u)(4) of the 1986 Code),

"(2) such contract was outstanding on September 12, 1986, and

"(3) the segregated asset account on which such contract is based was, on September 12, 1986, wholly invested in deposits insured by the Federal Deposit Insurance Corporation or the Federal Savings and Loan Insurance Corporation."

Insurance-Dedicated Exchange-Traded Funds

Pub. L. 117–328, div. T, title II, §203, Dec. 29, 2022, 136 Stat. 5333, provided that:

"(a) In General.—Not later than the date which is 7 years after the date of the enactment of this Act [Dec. 29, 2022], the Secretary of the Treasury (or the Secretary's delegate) shall amend the regulation issued by the Department of the Treasury relating to 'Income Tax; Diversification Requirements for Variable Annuity, Endowment, and Life Insurance Contracts', 54 Fed. Reg. 8728 (March 2, 1989), and make any necessary corresponding amendments to other regulations, in order to facilitate the use of exchange-traded funds as investment options under variable contracts within the meaning of section 817(d) of the Internal Revenue Code of 1986, in accordance with subsections (b) and (c) of this section.

"(b) Designate Certain Authorized Participants and Market Makers as Eligible Investors.—The Secretary of the Treasury (or the Secretary's delegate) shall amend Treas. Reg. section 1.817–5(f)(3) to provide that satisfaction of the requirements in Treas. Reg. section 1.817–5(f)(2)(i) with respect to an exchange-traded fund shall not be prevented by reason of beneficial interests in such a fund being held by 1 or more authorized participants or market makers.

"(c) Define Relevant Terms.—In amending Treas. Reg. section 1.817–5(f)(3) in accordance with subsection (b), the Secretary of the Treasury (or the Secretary's delegate) shall provide definitions consistent with the following:

"(1) Exchange-traded fund.—The term 'exchange-traded fund' means a regulated investment company, partnership, or trust—

"(A) that is registered with the Securities and Exchange Commission as an open-end investment company or a unit investment trust;

"(B) the shares of which can be purchased or redeemed directly from the fund only by an authorized participant; and

"(C) the shares of which are traded throughout the day on a national stock exchange at market prices that may or may not be the same as the net asset value of the shares.

"(2) Authorized participant.—The term 'authorized participant' means a financial institution that is a member or participant of a clearing agency registered under section 17A(b) of the Securities Exchange Act of 1934 [15 U.S.C. 78q–1(b)] that enters into a contractual relationship with an exchange-traded fund pursuant to which the financial institution is permitted to purchase and redeem shares directly from the fund and to sell such shares to third parties, but only if the contractual arrangement or applicable law precludes the financial institution from—

"(A) purchasing the shares for its own investment purposes rather than for the exclusive purpose of creating and redeeming such shares on behalf of third parties; and

"(B) selling the shares to third parties who are not market makers or otherwise described in Treas. Reg. section 1.817–5(f) (1) and (3).

"(3) Market maker.—The term 'market maker' means a financial institution that is a registered broker or dealer under section 15(b) of the Securities Exchange Act of 1934 [15 U.S.C. 78o(b)] that maintains liquidity for an exchange-traded fund on a national stock exchange by being always ready to buy and sell shares of such fund on the market, but only if the financial institution is contractually or legally precluded from selling or buying such shares to or from persons who are not authorized participants or otherwise described in Treas. Reg. section 1.817–5(f) (2) and (3).

"(d) Effective Date.—This section shall apply to segregated asset account investments made on or after the date which is 7 years after the date of the enactment of this Act."

Plan Amendments Not Required Until January 1, 1989

For provisions directing that if any amendments made by subtitle A or subtitle C of title XI [§§1101–1147 and 1171–1177] or title XVIII [§§1800–1899A] of Pub. L. 99–514 require an amendment to any plan, such plan amendment shall not be required to be made before the first plan year beginning on or after Jan. 1, 1989, see section 1140 of Pub. L. 99–514, as amended, set out as a note under section 401 of this title.

§817A. Special rules for modified guaranteed contracts

(a) Computation of reserves

In the case of a modified guaranteed contract, clause (ii) of section 807(e)(1)(A) shall not apply.

(b) Segregated assets under modified guaranteed contracts marked to market

(1) In general

In the case of any life insurance company, for purposes of this subtitle—

(A) Any gain or loss with respect to a segregated asset shall be treated as ordinary income or loss, as the case may be.

(B) If any segregated asset is held by such company as of the close of any taxable year—

(i) such company shall recognize gain or loss as if such asset were sold for its fair market value on the last business day of such taxable year, and

(ii) any such gain or loss shall be taken into account for such taxable year.


Proper adjustment shall be made in the amount of any gain or loss subsequently realized for gain or loss taken into account under the preceding sentence. The Secretary may provide by regulations for the application of this subparagraph at times other than the times provided in this subparagraph.

(2) Segregated asset

For purposes of paragraph (1), the term "segregated asset" means any asset held as part of a segregated account referred to in subsection (d)(1) under a modified guaranteed contract.

(c) Special rule in computing life insurance reserves

For purposes of applying section 816(b)(1)(A) to any modified guaranteed contract, an assumed rate of interest shall include a rate of interest determined, from time to time, with reference to a market rate of interest.

(d) Modified guaranteed contract defined

For purposes of this section, the term "modified guaranteed contract" means a contract not described in section 817—

(1) all or part of the amounts received under which are allocated to an account which, pursuant to State law or regulation, is segregated from the general asset accounts of the company and is valued from time to time with reference to market values,

(2) which—

(A) provides for the payment of annuities,

(B) is a life insurance contract, or

(C) is a pension plan contract which is not a life, accident, or health, property, casualty, or liability contract,


(3) for which reserves are valued at market for annual statement purposes, and

(4) which provides for a net surrender value or a policyholder's fund (as defined in section 807(e)(1)).


If only a portion of a contract is not described in section 817, such portion shall be treated for purposes of this section as a separate contract.

(e) Regulations

The Secretary may prescribe regulations—

(1) to provide for the treatment of market value adjustments under sections 72, 7702, 7702A, and 807(e)(1)(B),

(2) to determine the interest rates applicable under sections 807(c)(3) and 807(d)(2)(B) with respect to a modified guaranteed contract annually, in a manner appropriate for modified guaranteed contracts and, to the extent appropriate for such a contract, to modify or waive the applicability of section 811(d),

(3) to provide rules to limit ordinary gain or loss treatment to assets constituting reserves for modified guaranteed contracts (and not other assets) of the company,

(4) to provide appropriate treatment of transfers of assets to and from the segregated account, and

(5) as may be necessary or appropriate to carry out the purposes of this section.

(Added Pub. L. 104–188, title I, §1612(a), Aug. 20, 1996, 110 Stat. 1846; amended Pub. L. 115–97, title I, §13518(b), Dec. 22, 2017, 131 Stat. 2148.)


Editorial Notes

Amendments

2017—Subsec. (e)(2). Pub. L. 115–97 substituted "and 807(d)(2)(B)" for ", 807(d)(2)(B), and 812".


Statutory Notes and Related Subsidiaries

Effective Date of 2017 Amendment

Amendment by Pub. L. 115–97 applicable to taxable years beginning after Dec. 31, 2017, see section 13518(c) of Pub. L. 115–97, set out as a note under section 812 of this title.

Effective Date

Pub. L. 104–188, title I, §1612(c), Aug. 20, 1996, 110 Stat. 1847, provided that:

"(1) In general.—The amendments made by this section [enacting this section] shall apply to taxable years beginning after December 31, 1995.

"(2) Treatment of net adjustments.—Except as provided in paragraph (3), in the case of any taxpayer required by the amendments made by this section to change its calculation of reserves to take into account market value adjustments and to mark segregated assets to market for any taxable year—

"(A) such changes shall be treated as a change in method of accounting initiated by the taxpayer,

"(B) such changes shall be treated as made with the consent of the Secretary, and

"(C) the adjustments required by reason of section 481 of the Internal Revenue Code of 1986, shall be taken into account as ordinary income by the taxpayer for the taxpayer's first taxable year beginning after December 31, 1995.

"(3) Limitation on loss recognition and on deduction for reserve increases.—

"(A) Limitation on loss recognition.—

"(i) In general.—The aggregate loss recognized by reason of the application of section 481 of the Internal Revenue Code of 1986 with respect to section 817A(b) of such Code (as added by this section) for the first taxable year of the taxpayer beginning after December 31, 1995, shall not exceed the amount included in the taxpayer's gross income for such year by reason of the excess (if any) of—

"(I) the amount of life insurance reserves as of the close of the prior taxable year, over

"(II) the amount of such reserves as of the beginning of such first taxable year,

  to the extent such excess is attributable to subsection (a) of such section 817A. Notwithstanding the preceding sentence, the adjusted basis of each segregated asset shall be determined as if all such losses were recognized.

"(ii) Disallowed loss allowed over period.—The amount of the loss which is not allowed under clause (i) shall be allowed ratably over the period of 7 taxable years beginning with the taxpayer's first taxable year beginning after December 31, 1995.

"(B) Limitation on deduction for increase in reserves.—

"(i) In general.—The deduction allowed for the first taxable year of the taxpayer beginning after December 31, 1995, by reason of the application of section 481 of such Code with respect to section 817A(a) of such Code (as added by this section) shall not exceed the aggregate built-in gain recognized by reason of the application of such section 481 with respect to section 817A(b) of such Code (as added by this section) for such first taxable year.

"(ii) Disallowed deduction allowed over period.—The amount of the deduction which is disallowed under clause (i) shall be allowed ratably over the period of 7 taxable years beginning with the taxpayer's first taxable year beginning after December 31, 1995.

"(iii) Built-in gain.—For purposes of this subparagraph, the built-in gain on an asset is the amount equal to the excess of—

"(I) the fair market value of the asset as of the beginning of the first taxable year of the taxpayer beginning after December 31, 1995, over

"(II) the adjusted basis of such asset as of such time."

§818. Other definitions and special rules

(a) Pension plan contracts

For purposes of this part, the term "pension plan contract" means any contract—

(1) entered into with trusts which (as of the time the contracts were entered into) were deemed to be trusts described in section 401(a) and exempt from tax under section 501(a) (or trusts exempt from tax under section 165 of the Internal Revenue Code of 1939 or the corresponding provisions of prior revenue laws);

(2) entered into under plans which (as of the time the contracts were entered into) were deemed to be plans described in section 403(a), or plans meeting the requirements of paragraphs (3), (4), (5), and (6) of section 165(a) of the Internal Revenue Code of 1939;

(3) provided for employees of the life insurance company under a plan which, for the taxable year, meets the requirements of paragraphs (3), (4), (5), (6), (7), (8), (11), (12), (13), (14), (15), (16), (17), (19), (20), (22), (26), and (27) of section 401(a);

(4) purchased to provide retirement annuities for its employees by an organization which (as of the time the contracts were purchased) was an organization described in section 501(c)(3) which was exempt from tax under section 501(a) (or was an organization exempt from tax under section 101(6) of the Internal Revenue Code of 1939 or the corresponding provisions of prior revenue laws), or purchased to provide retirement annuities for employees described in section 403(b)(1)(A)(ii) by an employer which is a State, a political subdivision of a State, or an agency or instrumentality of any one or more of the foregoing;

(5) entered into with trusts which (at the time the contracts were entered into) were individual retirement accounts described in section 408(a) or under contracts entered into with individual retirement annuities described in section 408(b); or

(6) purchased by—

(A) a governmental plan (within the meaning of section 414(d)) or an eligible deferred compensation plan (within the meaning of section 457(b)), or

(B) the Government of the United States, the government of any State or political subdivision thereof, or by any agency or instrumentality of the foregoing, or any organization (other than a governmental unit) exempt from tax under this subtitle, for use in satisfying an obligation of such government, political subdivision, agency or instrumentality, or organization to provide a benefit under a plan described in subparagraph (A).

(b) Treatment of capital gains and losses, etc.

In the case of a life insurance company—

(1) in applying section 1231(a), the term "property used in the trade or business" shall be treated as including only—

(A) property used in carrying on an insurance business, of a character which is subject to the allowance for depreciation provided in section 167, held for more than 1 year, and real property used in carrying on an insurance business, held for more than 1 year, which is not described in section 1231(b)(1)(A), (B), or (C), and

(B) property described in section 1231(b)(2), and


(2) in applying section 1221(a)(2), the reference to property used in trade or business shall be treated as including only property used in carrying on an insurance business.

(c) Gain on property held on December 31, 1958 and certain substituted property acquired after 1958

(1) Property held on December 31, 1958

In the case of property held by the taxpayer on December 31, 1958, if—

(A) the fair market value of such property on such date exceeds the adjusted basis for determining gain as of such date, and

(B) the taxpayer has been a life insurance company at all times on and after December 31, 1958,


the gain on the sale or other disposition of such property shall be treated as an amount (not less than zero) equal to the amount by which the gain (determined without regard to this subsection) exceeds the difference between the fair market value on December 31, 1958, and the adjusted basis for determining gain as of such date.

(2) Certain property acquired after December 31, 1958

In the case of property acquired after December 31, 1958, and having a substituted basis (within the meaning of section 1016(b))—

(A) for purposes of paragraph (1), such property shall be deemed held continuously by the taxpayer since the beginning of the holding period thereof, determined with reference to section 1223,

(B) the fair market value and adjusted basis referred to in paragraph (1) shall be that of that property for which the holding period taken into account includes December 31, 1958,

(C) paragraph (1) shall apply only if the property or properties the holding periods of which are taken into account were held only by life insurance companies after December 31, 1958, during the holding periods so taken into account,

(D) the difference between the fair market value and adjusted basis referred to in paragraph (1) shall be reduced (to not less than zero) by the excess of (i) the gain that would have been recognized but for this subsection on all prior sales or dispositions after December 31, 1958, of properties referred to in subparagraph (C), over (ii) the gain which was recognized on such sales or other dispositions, and

(E) the basis of such property shall be determined as if the gain which would have been recognized but for this subsection were recognized gain.

(3) Property defined

For purposes of paragraphs (1) and (2), the term "property" does not include insurance and annuity contracts and property described in paragraph (1) of section 1221(a).

(d) Insurance or annuity contract includes contracts supplementary thereto

For purposes of this part, the term "insurance or annuity contract" includes any contract supplementary thereto.

(e) Special rules for consolidated returns

(1) Items of companies other than life insurance companies

If an election under section 1504(c)(2) is in effect with respect to an affiliated group for the taxable year, all items of the members of such group which are not life insurance companies shall not be taken into account in determining the amount of the tentative LICTI of members of such group which are life insurance companies.

(2) Dividends within group

In the case of a life insurance company 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 was not filing a consolidated return.

(f) Allocation of certain items for purposes of foreign tax credit, etc.

(1) In general

Under regulations, in applying sections 861, 862, and 863 to a life insurance company, the deduction for policyholder dividends (determined under section 808(c)), reserve adjustments under subsections (a) and (b) of section 807, and death benefits and other amounts described in section 805(a)(1) shall be treated as items which cannot definitely be allocated to an item or class of gross income.

(2) Election of alternative allocation

(A) In general

On or before September 15, 1985, any life insurance company may elect to treat items described in paragraph (1) as properly apportioned or allocated among items of gross income to the extent (and in the manner) prescribed in regulations.

(B) Election irrevocable

Any election under subparagraph (A), once made, may be revoked only with the consent of the Secretary.

(3) Items described in section 807(c) treated as not interest for source rules, etc.

For purposes of part I of subchapter N, items described in any paragraph of section 807(c) shall be treated as amounts which are not interest.

(g) Qualified accelerated death benefit riders treated as life insurance

For purposes of this part—

(1) In general

Any reference to a life insurance contract shall be treated as including a reference to a qualified accelerated death benefit rider on such contract.

(2) Qualified accelerated death benefit riders

For purposes of this subsection, the term "qualified accelerated death benefit rider" means any rider on a life insurance contract if the only payments under the rider are payments meeting the requirements of section 101(g).

(3) Exception for long-term care riders

Paragraph (1) shall not apply to any rider which is treated as a long-term care insurance contract under section 7702B.

(Added and amended Pub. L. 98–369, div. A, title II, §211(a), title X, §1001(b)(10), (e), July 18, 1984, 98 Stat. 752, 1011, 1012; Pub. L. 99–514, title XI, §§1106(d)(3)(C), 1112(d)(4), 1136(b), title XVIII, §1821(n), (o), Oct. 22, 1986, 100 Stat. 2424, 2445, 2486, 2842; Pub. L. 100–647, title I, §§1010(k), 1011(e)(5)(A), Nov. 10, 1988, 102 Stat. 3456, 3461; Pub. L. 104–191, title III, §332(a), Aug. 21, 1996, 110 Stat. 2069; Pub. L. 106–170, title V, §532(c)(1)(D), (3), Dec. 17, 1999, 113 Stat. 1930, 1931.)


Editorial Notes

References in Text

Section 165 of the Internal Revenue Code of 1939, referred to in subsec. (a)(1), (2), was classified to section 165 of former Title 26, Internal Revenue Code. Section 101 of the Internal Revenue Code of 1939, referred to in subsec. (a)(4) was classified to section 101 of former Title 26, Internal Revenue Code. Sections 101 and 165 were repealed by section 7851(a)(1)(A) of this title. For table of comparisons of the 1939 Code to the 1986 Code, see Table I preceding section 1 of this title. See, also, section 7851(e) of this title for provision that references in the 1986 Code to a provision of the 1939 Code, not then applicable, shall be deemed a reference to the corresponding provision of the 1986 Code, which is then applicable.

Prior Provisions

A prior section 818, added Pub. L. 86–69, §2(a), June 25, 1959, 73 Stat. 133; amended Pub. L. 88–272, title II, §228(b)(1), Feb. 26, 1964, 78 Stat. 98; Pub. L. 91–688, §1(a), Jan. 12, 1971, 84 Stat. 2072; Pub. L. 94–455, title XIX, §§1901(a)(101), 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1781, 1834; Pub. L. 97–248, title II, §§258(a), 260(a), 262, 267(a), Sept. 3, 1982, 96 Stat. 538–540, 550, related to accounting provisions generally, prior to the general revision of this part by Pub. L. 98–369, §211(a).

Another prior section 818, act Aug. 16, 1954, ch. 736, §818, as added Mar. 13, 1956, ch. 83, §2, 70 Stat. 46, related to certain new insurance companies, prior to the general revision of this part by Pub. L. 86–69, §2(a).

A prior section 819, added Pub. L. 86–69, §2(a), June 25, 1959, 73 Stat. 136; amended Pub. L. 89–809, title I, §104(i)(3), Nov. 13, 1966, 80 Stat. 1561; Pub. L. 94–455, title XIX, §§1901(a)(102), 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1781, 1834, related to foreign life insurance companies, prior to the general revision of this part by Pub. L. 98–369, §211(a). See section 813 of this title.

A prior section 819A, added Pub. L. 94–455, title X, §1043(a), Oct. 4, 1976, 90 Stat. 1639, related to contiguous country branches of domestic life insurance companies, prior to the general revision of this part by Pub. L. 98–369, §211(a). See section 814 of this title.

A prior section 820, added Pub. L. 86–69, §2(a), June 25, 1959, 73 Stat. 137; amended Pub. L. 94–455, title XIX, §§1901(a)(103), 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1782, 1834, related to optional treatment of policies reinsured under modified coinsurance contracts, prior to repeal by Pub. L. 97–248, title II, §255(a), (c), Sept. 3, 1982, 96 Stat. 533, 534, applicable to taxable years beginning after Dec. 31, 1981, with exception.

A prior section 821, acts Aug. 16, 1954, ch. 736, 68A Stat. 260; Mar. 30, 1955, ch. 18, §2, 69 Stat. 14; Mar. 13, 1956, ch. 83, §3(a)(1), (2), 70 Stat. 47; Mar. 29, 1956, ch. 115, §2, 70 Stat. 66; Mar. 29, 1957, Pub. L. 85–12, §2, 71 Stat. 9; June 30, 1958, Pub. L. 85–475, §2, 72 Stat. 259; June 30, 1959, Pub. L. 86–75, §2, 73 Stat. 157; June 30, 1960, Pub. L. 86–564, title II, §201, 74 Stat. 290; June 30, 1961, Pub. L. 87–72, §2, 75 Stat. 193; June 28, 1962, Pub. L. 87–508, §2, 76 Stat. 114; Oct. 16, 1962, Pub. L. 87–834, §8(a), 76 Stat. 989; June 29, 1963 Pub. L. 88–52, §2, 77 Stat. 72; Feb. 26, 1964, Pub. L. 88–272, title I, §123(a), 78 Stat. 29; Nov. 13, 1966, Pub. L. 89–809, title I, §104(i)(4), 80 Stat. 1562; Oct. 4, 1976, Pub. L. 94–455, title IX, §901(b), title XV, §1507(b)(1), title XIX, §§1901(a)(104), 1906(b)(13)(A), 90 Stat. 1607, 1739, 1782, 1834; May 23, 1977, Pub. L. 95–30, title II, §201(3), (4), 91 Stat. 141; Nov. 6, 1978, Pub. L. 95–600, title III, §301(b)(9), 92 Stat. 2821; Aug. 13, 1981, Pub. L. 97–34, title II, §231(b)(1), (2), 95 Stat. 249, related to tax on mutual insurance companies to which former part II applied, prior to repeal by Pub. L. 99–514, title X, §1024(a)(1), Oct. 22, 1986, 100 Stat. 2405, effective for taxable years beginning after Dec. 31, 1986.

A prior section 822 was renumbered section 834 of this title by Pub. L. 99–514, title X, §1024(a)(3), Oct. 22, 1986, 100 Stat. 2405.

A prior section 823, added Pub. L. 87–834, §8(c), Oct. 16, 1962, 76 Stat. 992; amended Pub. L. 91–172, title IX, §907(c)(2)(B), Dec. 30, 1969, 83 Stat. 717, related to determination of statutory underwriting income or loss, prior to repeal by Pub. L. 99–514, title X, §1024(a)(1), Oct. 22, 1986, 100 Stat. 2405, effective for taxable years beginning after Dec. 31, 1986.

Another prior section 823, act Aug. 16, 1954, ch. 736, 68A Stat. 263, which defined "net premiums" and "dividends to policyholders", was redesignated section 822(f) of this title by section 8(b)(4) of Pub. L. 87–834.

A prior section 824, added Pub. L. 87–834, §8(c), Oct. 16, 1962, 76 Stat. 993; amended Pub. L. 94–455, title XIX, §1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1834, related to adjustments to provide protection against losses, prior to repeal by Pub. L. 99–514, title X, §1024(a)(1), Oct. 22, 1986, 100 Stat. 2405, effective for taxable years beginning after Dec. 31, 1986.

A prior section 825, added Pub. L. 87–834, §8(c), Oct. 16, 1962, 76 Stat. 995; amended Pub. L. 91–172 title IX, §907(c)(2)(C), (D), Dec. 30, 1969, 83 Stat. 717; Pub. L. 94–455, title VIII, §806(d)(2), title XIX, §1901(a)(106), Oct. 4, 1976, 90 Stat. 1599, 1782; Pub. L. 97–34, title II, §207(b), Aug. 13, 1981, 95 Stat. 225, related to unused loss deduction, prior to repeal by Pub. L. 99–514, title X, §1024(a)(1), Oct. 22, 1986, 100 Stat. 2405, effective for taxable years beginning after Dec. 31, 1986.

A prior section 826 was renumbered section 835 of this title by Pub. L. 99–514, title X, §1024(a)(3), Oct. 22, 1986, 100 Stat. 2405.

Amendments

1999—Subsec. (b)(2). Pub. L. 106–170, §532(c)(3), substituted "section 1221(a)(2)" for "section 1221(2)".

Subsec. (c)(3). Pub. L. 106–170, §532(c)(1)(D), substituted "section 1221(a)" for "section 1221".

1996—Subsec. (g). Pub. L. 104–191 added subsec. (g).

1988—Subsec. (a)(6). Pub. L. 100–647, §1011(e)(5)(A), in subpar. (A) substituted "eligible deferred compensation plan" for "eligible State deferred compensation plan", and in subpar. (B), inserted "or any organization (other than a governmental unit) exempt from tax under this subtitle," after "foregoing," and substituted "agency or instrumentality, or organization" for "or agency or instrumentality".

Subsec. (f)(3). Pub. L. 100–647, §1010(k), added par. (3).

1986—Subsec. (a)(3). Pub. L. 99–514, §1136(b), substituted "(26), and (27)" for "and (26)".

Pub. L. 99–514, §1112(d)(4), substituted "(22), and (26)" for "and (22)".

Pub. L. 99–514, §1106(d)(3)(C), inserted "(17)," after "(16),".

Subsec. (a)(6)(A). Pub. L. 99–514, §1821(n), in amending subpar. (A) generally, inserted "an eligible State deferred compensation plan (within the meaning of section 457(b)), or".

Subsec. (e). Pub. L. 99–514, §1821(o), amended subsec. (e) generally. Prior to amendment, subsec. (e) read as follows: "If an election under section 1504(c)(2) is in effect with respect to an affiliated group for the taxable year, all items of the members of such group which are not life insurance companies shall not be taken into account in determining the amount of the tentative LICTI of members of such group which are life insurance companies."

1984—Subsec. (b)(1)(A). Pub. L. 98–369, §1001(b)(10), (e), substituted "6 months" for "1 year" in two places, applicable to property acquired after June 22, 1984, and before Jan. 1, 1988. See Effective Date of 1984 Amendment note below.


Statutory Notes and Related Subsidiaries

Effective Date of 1999 Amendment

Amendment by Pub. L. 106–170 applicable to any instrument held, acquired, or entered into, any transaction entered into, and supplies held or acquired on or after Dec. 17, 1999, see section 532(d) of Pub. L. 106–170, set out as a note under section 170 of this title.

Effective Date of 1996 Amendment

Pub. L. 104–191, title III, §332(b), Aug. 21, 1996, 110 Stat. 2069, provided that:

"(1) In general.—The amendment made by this section [amending this section] shall take effect on January 1, 1997.

"(2) Issuance of rider not treated as material change.—For purposes of applying sections 101(f), 7702, and 7702A of the Internal Revenue Code of 1986 to any contract—

"(A) the issuance of a qualified accelerated death benefit rider (as defined in section 818(g) of such Code (as added by this Act)), and

"(B) the addition of any provision required to conform an accelerated death benefit rider to the requirements of such section 818(g),

shall not be treated as a modification or material change of such contract."

Effective Date of 1988 Amendment

Pub. L. 100–647, title I, §1011(e)(5)(B), Nov. 10, 1988, 102 Stat. 3461, provided that: "The amendments made by this paragraph [amending this section] shall apply to contracts issued after December 31, 1986."

Amendment by section 1010(k) of Pub. L. 100–647 effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, Pub. L. 99–514, to which such amendment relates, see section 1019(a) of Pub. L. 100–647, set out as a note under section 1 of this title.

Effective Date of 1986 Amendment

Amendment by section 1106(d)(3)(C) of Pub. L. 99–514 applicable to benefits accruing in years beginning after Dec. 31, 1988, except as otherwise provided, see section 1106(i)(5) of Pub. L. 99–514 set out as a note under section 415 of this title.

Amendment by section 1112(d)(4) of Pub. L. 99–514 applicable to plan years beginning after Dec. 31, 1988, with special rule regarding collective bargaining agreements ratified before Mar. 1, 1986, and with provision for waiver of the excise tax on reversions, see section 1112(e) of Pub. L. 99–514, set out as a note under section 401 of this title.

Amendment by section 1821(n), (o) of Pub. L. 99–514 effective, except as otherwise provided, as if included in the provisions of the Tax Reform Act of 1984, Pub. L. 98–369, div. A, to which such amendment relates, see section 1881 of Pub. L. 99–514, set out as a note under section 48 of this title.

Effective Date of 1984 Amendment

Amendment by Pub. L. 98–369 applicable to property acquired after June 22, 1984, and before Jan. 1, 1988, see section 1001(e) of Pub. L. 98–369, set out as a note under section 166 of this title.

Regulations

Secretary of the Treasury or his delegate to issue before Feb. 1, 1988, final regulations to carry out amendments made by section 1112 of Pub. L. 99–514, see section 1141 of Pub. L. 99–514, set out as a note under section 401 of this title.

Plan Amendments Not Required Until January 1, 1989

For provisions directing that if any amendments made by subtitle A or subtitle C of title XI [§§1101–1147 and 1171–1177] or title XVIII [§§1800–1899A] of Pub. L. 99–514 require an amendment to any plan, such plan amendment shall not be required to be made before the first plan year beginning on or after Jan. 1, 1989, see section 1140 of Pub. L. 99–514, as amended, set out as a note under section 401 of this title.