§809. Reduction in certain deductions of mutual life insurance companies

(a) General rule

(1) Policyholder dividends

In the case of any mutual life insurance company, the amount of the deduction allowed under section 808 shall be reduced (but not below zero) by the differential earnings amount.

(2) Reduction in reserve deduction in certain cases

In the case of any mutual life insurance company, if the differential earnings amount exceeds the amount allowable as a deduction under section 808 for the taxable year (determined without regard to this section), such excess shall be taken into account under subsections (a) and (b) of section 807.

(3) Differential earnings amount

For purposes of this section, the term "differential earnings amount" means, with respect to any taxable year, an amount equal to the product of-

(A) the life insurance company's average equity base for the taxable year, multiplied by

(B) the differential earnings rate for such taxable year.

(b) Average equity base

For purposes of this section-

(1) In general

The term "average equity base" means, with respect to any taxable year, the average of-

(A) the equity base determined as of the close of the taxable year, and

(B) the equity base determined as of the close of the preceding taxable year.

(2) Equity base

The term "equity base" means an amount determined in the manner prescribed by regulations equal to-

(A) the surplus and capital,

(B) adjusted as provided in paragraphs (3), (4), (5), and (6) of this subsection.

No item shall be taken into account more than once in determining equity base.

(3) Increase for nonadmitted financial assets

(A) In general

The amount of the surplus and capital shall be increased by the amount of the nonadmitted financial assets.

(B) Nonadmitted financial assets

For purposes of subparagraph (A), the term "nonadmitted financial asset" means any nonadmitted asset of the company which is-

(i) a bond,

(ii) stock,

(iii) real estate,

(iv) a mortgage loan on real estate, or

(v) any other invested asset.

(4) Increase where statutory reserves exceed tax reserves

(A) In general

If-

(i) the aggregate amount of statutory reserves, exceeds

(ii) the aggregate amount of tax reserves,

the amount of the surplus and capital shall be increased by the amount of such excess.

(B) Definitions

For purposes of this paragraph-

(i) Statutory reserves

The term "statutory reserves" means the aggregate amount set forth in the annual statement with respect to items described in section 807(c). Such term shall not include any reserve attributable to a deferred and uncollected premium if the establishment of such reserve is not permitted under section 811(c(.

(ii) Tax reserves

The term "tax reserves" means the aggregate of the items described in section 807(c) as determined for purposes of section 807.

(5) Increase by amount of certain other reserves

The amount of the surplus and capital shall be increased by the sum of-

(A) the amount of any mandatory securities valuation reserve,

(B) the amount of any deficiency reserve, and

(C) the amount of any voluntary reserve or similar liability not described in subparagraph (A) or (B).

(6) Adjustment for next year's policyholder dividends

The amount of the surplus and capital shall be increased by 50 percent of the amount of any provision for policyholder dividends (or other similar liability) payable in the following taxable year.

(c) Differential earnings rate

(1) In general

For purposes of this section, the differential earnings rate for any taxable year is the excess of-

(A) the imputed earnings rate for the taxable year, over

(B) the average mutual earnings rate for the second calendar year preceding the calendar year in which the taxable year begins.

(2) Transitional rule

The differential earnings rate-

(A) for any taxable year beginning in 1984, or

(B) for purposes of computing the amount of underpayment under section 6655 (including the application of section 6655(d)(3)) ¹ for any taxable year beginning in 1985,

shall be equal to 7.8 percent.

(3) Coordination with estimated tax payments

For purposes of applying section 6655 with respect to any installment of estimated tax, the amount of tax shall be determined by using the lesser of-

(A) the differential earnings rate of the second tax year preceding the taxable year for which the installment is made, or

(B) the differential earnings rate for the taxable year for which the installment is made.

(d) Imputed earnings rate

(1) In general

For purposes of this section, the imputed earnings rate for any taxable year is-

(A) 16.5 percent in the case of taxable years beginning in 1984, and

(B) in the case of taxable years beginning after 1984, an amount which bears the same ratio to 16.5 percent as the current stock earnings rate for the taxable year bears to the base period stock earnings rate.

(2) Current stock earnings rate

For purposes of this subsection, the term "current stock earnings rate" means, with respect to any taxable year, the average of the stock earnings rates determined under paragraph (4) for the 3 calendar years preceding the calendar year in which the taxable year begins.

(3) Base period stock earnings rate

For purposes of this subsection, the base period stock earnings rate is the average of the stock earnings rates determined under paragraph (4) for calendar years 1981, 1982, and 1983.

(4) Stock earnings rate

(A) In general

For purposes of this subsection, the stock earnings rate for any calendar year is the numerical average of the earnings rates of the 50 largest stock companies.

(B) Earnings rate

For purposes of subparagraph (A), the earnings rate of any stock company is the percentage (determined by the Secretary) which-

(i) the statement gain or loss from operations for the calendar year of such company, is of

(ii) such company's average equity base for such year.

(C) 50 largest stock companies

For purposes of this paragraph, the term "50 largest stock companies" means a group (as determined by the Secretary) of stock life insurance companies which consists of the 50 largest domestic stock life insurance companies which are subject to tax under this part. The Secretary-

(i) shall, for purposes of determining the base period stock earnings rate, exclude from the group determined under the preceding sentence any company which had a negative equity base at any time during 1981, 1982, or 1983,

(ii) shall exclude from such group for any calendar year any company which has a negative equity base, and

(iii) may by regulations exclude any other company which otherwise would have been included in such group if the inclusion of the excluded company or companies would, by reason of the small equity base of such company, seriously distort the stock earnings rate.

The aggregate number of companies excluded by the Secretary under clause (iii) shall not exceed the excess of 2 over the number of companies excluded under clause (ii).

(D) Treatment of affiliated groups

For purposes of this paragraph, all stock life insurance companies which are members of the same affiliated group shall be treated as one stock life insurance company.

(e) Average mutual earnings rate

For purposes of this section, the average mutual earnings rate for any calendar year is the percentage (determined by the Secretary) which-

(1) the aggregate statement gain or loss from operations for such year of domestic mutual life insurance companies, is of

(2) their aggregate average equity bases for such year.

(f) Recomputation in subsequent year

(1) Inclusion in income where recomputed amount greater

In the case of any mutual life insurance company, if-

(A) the recomputed differential earnings amount for any taxable year, exceeds

(B) the differential earnings amount determined under this section for such taxable year,

such excess shall be included in life insurance gross income for the succeeding taxable year.

(2) Deduction where recomputed amount smaller

In the case of any mutual life insurance company, if-

(A) the differential earnings amount determined under this section for any taxable year, exceeds

(B) the recomputed differential earnings amount for such taxable year,

such excess shall be allowed as a life insurance deduction for the succeeding taxable year.

(3) Recomputed differential earnings amount

For purposes of this subsection, the term "recomputed differential earnings amount" means, with respect to any taxable year, the amount which would be the differential earnings amount for such taxable year if the average mutual earnings rate taken into account under subsection (c)(1)(B) were the average mutual earnings rate for the calendar year in which the taxable year begins.

(4) Special rule where company ceases to be mutual life insurance company

Except as provided in section 381(c)(22), if-

(A) a life insurance company is a mutual life insurance company for any taxable year, but

(B) such life insurance company is not a mutual life insurance company for the succeeding taxable year,

any adjustment under paragraph (1) or (2) by reason of the recomputed differential earnings amount for the first of such taxable years shall be taken into account for the first of such taxable years.

(5) Subsection not to apply for purposes of estimated tax

Section 6655 shall be applied to any taxable year without regard to any adjustments under this subsection for such year.

(g) Definitions and special rules

For purposes of this section-

(1) Statement gain or loss from operations

The term "statement gain or loss from operations" means the net gain or loss from operations required to be set forth in the annual statement, determined without regard to Federal income taxes, and-

(A) determined by substituting for the amount shown for policyholder dividends the amount of deduction for policyholder dividends determined under section 808 (without regard to section 808(c)(2)),

(B) determined on the basis of the tax reserves rather than statutory reserves, and

(C) properly adjusted for realized capital gains and losses and other relevant items.

(2) Other terms

Except as otherwise provided in this section, the terms used in this section shall have the same respective meanings as when used in the annual statement.

(3) Determinations based on amount set forth in annual statement

Except as otherwise provided in this section or in regulations, all determinations under this section shall be made on the basis of the amounts required to be set forth on the annual statement.

(4) Annual statement

The term "annual statement" means the annual statement for life insurance companies approved by the National Association of Insurance Commissioners.

(5) Reduction in equity base for portion of equity allocable to life insurance business in noncontiguous Western Hemisphere countries

The equity base of any mutual life insurance company shall be reduced by an amount equal to the portion of the equity base attributable to the life insurance business multiplied by a fraction-

(A) the numerator of which is the portion of the tax reserves which is allocable to life insurance contracts issued on the life of residents of countries in the Western Hemisphere which are not contiguous to the United States, and

(B) the denominator of which is the amount of the tax reserves allocable to life insurance contracts.

The preceding sentence shall not apply unless the fraction determined under the preceding sentence exceeds 1/20.

(6) Special rule for certain contracts issued before January 1, 1985

In determining the amount of tax reserves of a subsidiary of a mutual insurance company for purposes of subsection (b)(4), section 811(d) shall not apply with respect to any life insurance contract issued before January 1, 1985, under a plan of life insurance in existence on July 1, 1983.

(h) Treatment of stock companies owned by mutual life insurance companies

(1) Treatment as mutual life insurance companies for purposes of determining stock earnings rates and mutual earnings rates

Solely for purposes of subsections (d) and (e), a stock life insurance company shall be treated as a mutual life insurance company if stock possessing-

(A) at least 80 percent of the total combined voting power of all classes of stock of such stock life insurance company entitled to vote, or

(B) at least 80 percent of the total value of shares of all classes of stock of such stock life insurance company,

is owned at any time during the calendar year directly (or through the application of section 318) by one or more mutual life insurance companies.

(2) Treatment of affiliated group which includes mutual parent and stock subsidiary

In the case of an affiliated group of corporations which includes a common parent which is a mutual life insurance company and one or more stock life insurance companies, for purposes of determining the average equity base of such common parent (and the statement gain or loss from operations)-

(A) stock in such stock life insurance companies held by such common parent (and dividends on such stock) shall not be taken into account, and

(B) such common parent and such stock life insurance companies shall be treated as though they were one mutual life insurance company.

(3) Adjustment where stock company not member of affiliated group

In the case of any stock life insurance company which is described in paragraph (1) but is not a member of an affiliated group described in paragraph (2), under regulations, proper adjustments shall be made in the average equity bases (and statement gains or losses from operations) of mutual life insurance companies owning stock in such company as may be necessary or appropriate to carry out the purposes of this section.

(i) Transitional rule for certain high surplus mutual life insurance companies

(1) In general

For purposes of subsection (a)(3), the average equity base of a high surplus mutual life insurance company for any taxable year shall not include the applicable percentage of the excess equity base of such company for such taxable year.

(2) Definitions

For purposes of this subsection-

(A) Excess equity base

The term "excess equity base" means the excess of-

(i) the average equity base of the company for the taxable year, over

(ii) the amount which would be its average equity base if its equity percentage equaled the following percentage:

        

In no case shall the excess equity base for any taxable year be greater than the excess equity base for the company's first taxable year beginning in 1984.

(B) Applicable percentage

The term "applicable percentage" means the percentage determined in accordance with the following table:

        

(C) High surplus mutual life insurance company

The term "high surplus mutual life insurance company" means any mutual life insurance company if, for the taxable year beginning in 1984, its equity percentage exceeded 14.5 percent.

(D) Equity percentage

The term "equity percentage" means, with respect to any mutual life insurance company, the percentage which-

(i) the average equity base of such company (determined under this section without regard to this subsection) for a taxable year bears to

(ii) the average of-

(I) the assets of such company as of the close of the preceding taxable year, and

(II) the assets of such company as of the close of the taxable year.

For purposes of the preceding sentence, the assets of a company shall include all assets taken into account under this section in determining its equity base (after applying the principles of subsection (h)).

(Added Pub. L. 98–369, div. A, title II, §211(a), July 18, 1984, 98 Stat. 733 ; amended Pub. L. 99–514, title XVIII, §1821(d)–(h), (r), Oct. 22, 1986, 100 Stat. 2839 , 2840, 2843; Pub. L. 100–647, title I, §1018(u)(47), Nov. 10, 1988, 102 Stat. 3593 .)

References in Text

Section 6655(d) of this title, referred to in subsec. (c)(2)(B), was amended by Pub. L. 100–203, title X, §10301(a), Dec. 22, 1987, 101 Stat. 1330–424 , and, as so amended, did not contain a par. (3). Section 6655(d) was subsequently amended by Pub. L. 102–227, title II, §201(a), Dec. 11, 1991, 105 Stat. 1689 , which added a new par. (3), Pub. L. 102–318, title V, §512(a)(3), July 3, 1992, 106 Stat. 300 , which struck out the par. (3) added by Pub. L. 102–227 and added another new par. (3), and Pub. L. 103–66, title XIII, §13225(a)(2)(A)(i), Aug. 10, 1993, 107 Stat. 486 , which struck out the par. (3) added by Pub. L. 102–318.

Prior Provisions

A prior section 809, added Pub. L. 86–69, §2(a), June 25, 1959, 73 Stat. 121 ; amended Pub. L. 87–59, §2(a), (b), June 27, 1961, 75 Stat. 120 ; Pub. L. 87–790, §3(a), Oct. 10, 1962, 76 Stat. 808 ; Pub. L. 87–858, §3(b)(3), (c), Oct. 23, 1962, 76 Stat. 1137 ; Pub. L. 88–272, title II, §§214(b)(4), 228(a), Feb. 26, 1964, 78 Stat. 55 , 98; Pub. L. 91–172, title II, §201(a)(2)(C), title IX, §907(c)(2)(B), Dec. 30, 1969, 83 Stat. 558 , 717; Pub. L. 94–455, title XV, §1508(a), title XIX, §§1901(a)(98), (b)(1)(J)(iv), (L)–(N), 33(G), 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1741 , 1781, 1791, 1801, 1834; Pub. L. 97–248, title II, §§255(b)(2)–(4), 259(a), 264(c)(2), (3), Sept. 3, 1982, 96 Stat. 534 , 538, 544; Pub. L. 97–448, title I, §102(m)(1), Jan. 12, 1983, 96 Stat. 2374 , related to general provisions regarding gain and loss from operations, prior to the general revision of this part by Pub. L. 98–369, §211(a).

Amendments

1988-Subsec. (d)(4)(C). Pub. L. 100–647 substituted "The Secretary" for "the Secretary".

1986-Subsec. (b)(2). Pub. L. 99–514, §1821(d), inserted at end "No item shall be taken into account more than once in determining equity base."

Subsec. (c)(3). Pub. L. 99–514, §1821(g), added par. (3).

Subsec. (d)(4)(C). Pub. L. 99–514, §1821(e)(1), (2)(A), substituted "largest domestic stock life insurance companies" for "largest stock life insurance companies", and substituted the provisions of cls. (i) to (iii) and closing provisions for "may by regulations provide for exclusion from the group determined under the preceding sentence of any stock life insurance company if (i) the equity of such company is not great enough for such company to be 1 of the 50 largest stock life insurance companies if the determination were made on the basis of equity, and (ii) by reason of the small equity base of such company, it has an earnings rate which would seriously distort the stock earnings rate".

Subsec. (e)(1). Pub. L. 99–514, §1821(e)(2)(B), substituted "domestic mutual" for "mutual".

Subsec. (f)(3). Pub. L. 99–514, §1821(r), substituted "subsection (c)(1)(B)" for "subsection (c)(2)".

Subsec. (f)(5). Pub. L. 99–514, §1821(h), added par. (5).

Subsec. (g)(1)(A). Pub. L. 99–514, §1821(f), substituted "determined without regard to Federal income taxes, and (A) determined by substituting for the amount shown for policyholder dividends the amount of deduction for policyholder dividends determined under section 808 (without regard to section 808(c)(2)" for "(A) determined with regard to policyholder dividends (as defined in section 808) but without regard to Federal income taxes".

Effective Date of 1988 Amendment

Amendment by 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 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 Rule for Application of High Surplus Mutual Rules

Section 1821(q) of Pub. L. 99–514 provided that: "In the case of any mutual life insurance company-

"(1) which was incorporated on February 23, 1888, and

"(2) which acquired a stock subsidiary during 1982,

the amount of such company's excess equity base for purposes of section 809(i) of such Code shall, notwithstanding the last sentence of section 809(i)(2)(D), equal $175,000,000."

Treatment of Reinsurance Agreements Required by National Association of Insurance Commissioners

For applicability of former provisions of subsecs. (c)(1)(F) and (d)(12) of this section to dividends to policyholders reimbursed to the taxpayer by a reinsurer in respect of accident and health policies reinsured under a reinsurance agreement entered into before June 30, 1955, pursuant to the direction of the National Association of Insurance Commissioners and approved by the State insurance commissioner of the taxpayer's State of domicile, see section 217(g) of Pub. L. 98–369, set out as a note under section 801 of this title.

Reduction in Equity Base for Mutual Successor of Fraternal Benefit Society

Section 217(j) of subtitle A (§§211–219) of title II of div. A of Pub. L. 98–369, as amended by Pub. L. 99–514, §2, Oct. 22, 1986, 100 Stat. 2095 , provided that: "In the case of any mutual life insurance company which-

"(1) is the successor to a fraternal benefit society, and

"(2) which assumed the surplus of such fraternal benefit society in 1950 or in March of 1961,

for purposes of section 809 of the Internal Revenue Code of 1986 [formerly I.R.C. 1954] (as amended by this subtitle), the equity base of such mutual life insurance company shall be reduced by the amount of the surplus so assumed plus earnings thereon, (i) for taxable years before 1984, at a 7 percent interest rate, and (ii) for taxable years 1984 and following, at the average mutual earnings rate for such year."

Clarification of Authority To Require Certain Information

Section 219 of title II of div. A of Pub. L. 98–369 provided that: "Nothing in any provision of law shall be construed to prevent the Secretary of the Treasury or his delegate from requiring (from time to time) life insurance companies to provide such data with respect to taxable years beginning before January 1, 1984, as may be necessary to carry out the provisions of section 809 of such Code (as added by this title)."

Section Referred to in Other Sections

This section is referred to in sections 807, 808, 812, 817, 842 of this title.

¹ See References in Text note below.