26 U.S.C. § 832 — Insurance company taxable income

Page 1925 TITLE 26—INTERNAL REVENUE CODE § 832 Subsecs. (c), (d). Pub. L. 89–809, § 104(i)(6)(B), redesig- nated subsec. (d) as (c) and added item (2). Former sub- sec. (c) redesignated (b). 1962—Pub. L. 87–834, § 8(g)(4)(B), substituted ‘‘and cer- tain mutual fire or flood insurance companies’’ for ‘‘and mutual fire insurance companies issuing per- petual policies’’ in section catchline. Subsec. (a). Pub. L. 87–834, § 8(e)(1), included flood in- surance companies, and substituted provisions author- izing imposition of the tax on those companies whose principal business is the issuance of policies for which the premium deposits are the same, regardless of the length of the term for which the policies are written, if the unabsorbed portion of such premium deposits not required for losses, expenses, or establishment of re- serves is returned or credited to the policyholder on cancellation or expiration of the policy for provisions which authorized imposition of tax on those companies which issued policies for which the sole premium charged is a single deposit which (except for such de- duction of underwriting costs as may be provided) is re- fundable on cancellation or expiration of the policy. Subsecs. (c), (d). Pub. L. 87–834, § 8(f), added subsec. (c) and redesignated former subsec. (c) as (d). Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 2018 AMENDMENT Amendment by section 101(r) of Pub. L. 115–141 effec- tive as if included in the provision of the Protecting Americans from Tax Hikes Act of 2015, div. Q of Pub. L. 114–113, to which such amendment relates, see section 101(s) of Pub. L. 115–141, set out as a note under section 24 of this title. EFFECTIVE DATE OF 2017 AMENDMENT Amendment by section 11002(d)(1)(AA) of Pub. L. 115–97 applicable to taxable years beginning after Dec. 31, 2017, see section 11002(e) of Pub. L. 115–97, set out as a note under section 1 of this title. Amendment by section 13001(b)(2)(H) of Pub. L. 115–97 applicable to taxable years beginning after Dec. 31, 2017, see section 13001(c)(1) of Pub. L. 115–97, set out as a note under section 11 of this title. Amendment by section 13511(b)(2)(B) of Pub. L. 115–97 applicable to losses arising in taxable years beginning after Dec. 31, 2017, see section 13511(c) of Pub. L. 115–97, set out as a note under section 381 of this title. EFFECTIVE DATE OF 2015 AMENDMENT Pub. L. 114–113, div. Q, title III, § 333(c), Dec. 18, 2015, 129 Stat. 3108, provided that: ‘‘The amendments made by this section [amending this section] shall apply to taxable years beginning after December 31, 2016.’’ EFFECTIVE DATE OF 2004 AMENDMENT Amendment by Pub. L. 108–218 applicable to taxable years beginning after Dec. 31, 2003, with exception for companies in receivership or liquidation, see section 206(e) of Pub. L. 108–218, set out as a note under section 501 of this title. 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 Pub. L. 99–514, title X, § 1024(e), Oct. 22, 1986, 100 Stat. 2409, provided that: ‘‘The amendments made by this section [amending this section and sections 501, 832, 834, 835, 841, 842, 844, 891, 1201, 1504, and 1563 of this title, re- designating former sections 822 and 826 of this title as sections 834 and 835 of this title, respectively, and re- pealing sections 821, 823, 824, and 825 of this title] (and the provisions of subsection (d) [set out below]) shall apply to taxable years beginning after December 31, 1986.’’ EFFECTIVE DATE OF 1976 AMENDMENT Amendment by section 1901(a)(107) of Pub. L. 94–455 effective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94–455, set out as a note under section 2 of this title. EFFECTIVE DATE OF 1966 AMENDMENT Amendment by Pub. L. 89–809 applicable with respect to taxable years beginning after Dec. 31, 1966, see sec- tion 104(n) of Pub. L. 89–809, set out as a note under sec- tion 11 of this title. EFFECTIVE DATE OF 1962 AMENDMENT Amendment by Pub. L. 87–834 applicable with respect to taxable years beginning after Dec. 31, 1962, see sec- tion 8(h) of Pub. L. 87–834, set out as a note under sec- tion 501 of this title. TRANSITIONAL RULES FOR 1984 AMENDMENT Pub. L. 99–514, title X, § 1024(d), Oct. 22, 1986, 100 Stat. 2408, as amended by Pub. L. 100–647, title I, § 1010(f)(8), Nov. 10, 1988, 102 Stat. 3454, provided that: ‘‘(1) TREATMENT OF AMOUNTS IN PROTECTION AGAINST LOSS ACCOUNT.—In the case of any insurance company which had a protection against loss account for its last taxable year beginning before January 1, 1987, there shall be included in the gross income of such company for any taxable year beginning after December 31, 1986, the amount which would have been included in gross income for such taxable year under section 824 of the Internal Revenue Code of 1954 [now 1986] (as in effect on the day before the date of the enactment of this Act [Oct. 22, 1986]). For purposes of the preceding sentence, no addition to such account shall be made for any tax- able year beginning after December 31, 1986. In the case of a company taxable under section 831(b) of the Inter- nal Revenue Code of 1986 (as amended by subsection (a)), any amount included in gross income under this paragraph shall be treated as gross investment income. ‘‘(2) TRANSITIONAL RULE FOR UNUSED LOSS CARRYOVER UNDER SECTION 825.—Any unused loss carryover under section 825 of the Internal Revenue Code of 1954 (as in effect on the day before the date of the enactment of this Act [Oct. 22, 1986]) which— ‘‘(A) is from a taxable year beginning before Janu- ary 1, 1987, and ‘‘(B) could have been carried under such section to a taxable year beginning after December 31, 1986, but for the repeal made by subsection (a)(1) [repealing sections 821 and 823 to 825 of this title], shall be included in the net operating loss deduction under section 832(c)(10) of such Code without regard to the limitations of [former] section 844(b) of such Code.’’ § 832. Insurance company taxable income (a) Definition of taxable income In the case of an insurance company subject to the tax imposed by section 831, the term ‘‘tax- able income’’ means the gross income as defined in subsection (b)(1) less the deductions allowed by subsection (c). (b) Definitions In the case of an insurance company subject to the tax imposed by section 831— (1) Gross income The term ‘‘gross income’’ means the sum of— (A) the combined gross amount earned during the taxable year, from investment in- come and from underwriting income as pro- vided in this subsection, computed on the Page 1926 TITLE 26—INTERNAL REVENUE CODE § 832 basis of the underwriting and investment ex- hibit of the annual statement approved by the National Association of Insurance Com- missioners, (B) gain during the taxable year from the sale or other disposition of property, (C) all other items constituting gross in- come under subchapter B, except that, in the case of a mutual fire insurance company ex- clusively issuing perpetual policies, the amount of single deposit premiums paid to such company shall not be included in gross income, (D) in the case of a mutual fire or flood in- surance company whose principal business is the issuance of policies— (i) for which the premium deposits are the same (regardless of the length of the term for which the policies are written), and (ii) under which the unabsorbed portion of such premium deposits not required for losses, expenses, or establishment of re- serves is returned or credited to the pol- icyholder on cancellation or expiration of the policy, an amount equal to 2 percent of the pre- miums earned on insurance contracts during the taxable year with respect to such poli- cies after deduction of premium deposits re- turned or credited during the same taxable year, and (E) in the case of a company which writes mortgage guaranty insurance, the amount required by subsection (e)(5) to be subtracted from the mortgage guaranty account. (2) Investment income The term ‘‘investment income’’ means the gross amount of income earned during the tax- able year from interest, dividends, and rents, computed as follows: To all interest, divi- dends, and rents received during the taxable year, add interest, dividends, and rents due and accrued at the end of the taxable year, and deduct all interest, dividends, and rents due and accrued at the end of the preceding tax- able year. (3) Underwriting income The term ‘‘underwriting income’’ means the premiums earned on insurance contracts dur- ing the taxable year less losses incurred and expenses incurred. (4) Premiums earned The term ‘‘premiums earned on insurance contracts during the taxable year’’ means an amount computed as follows: (A) From the amount of gross premiums written on insurance contracts during the taxable year, deduct return premiums and premiums paid for reinsurance. (B) To the result so obtained, add 80 per- cent of the unearned premiums on out- standing business at the end of the preceding taxable year and deduct 80 percent of the un- earned premiums on outstanding business at the end of the taxable year. (C) To the result so obtained, in the case of a taxable year beginning after December 31, 1986, and before January 1, 1993, add an amount equal to 31⁄3 percent of unearned pre- miums on outstanding business at the end of the most recent taxable year beginning be- fore January 1, 1987. For purposes of this subsection, unearned pre- miums shall include life insurance reserves, as defined in section 816(b) but determined as provided in section 807. For purposes of this subsection, unearned premiums of mutual fire or flood insurance companies described in paragraph (1)(D) means (with respect to the policies described in paragraph (1)(D)) the amount of unabsorbed premium deposits which the company would be obligated to re- turn to its policyholders at the close of the taxable year if all of its policies were termi- nated at such time; and the determination of such amount shall be based on the schedule of unabsorbed premium deposit returns for each such company then in effect. Premiums paid by the subscriber of a mutual flood insurance company described in paragraph (1)(D) or issuing exclusively perpetual policies shall be treated, for purposes of computing the taxable income of such subscriber, in the same manner as premiums paid by a policyholder to a mu- tual fire insurance company described in sub- paragraph (C) or (D) of paragraph (1). (5) Losses incurred (A) In general The term ‘‘losses incurred’’ means losses incurred during the taxable year on insur- ance contracts computed as follows: (i) To losses paid during the taxable year, deduct salvage and reinsurance re- covered during the taxable year. (ii) To the result so obtained, add all un- paid losses on life insurance contracts plus all discounted unpaid losses (as defined in section 846) outstanding at the end of the taxable year and deduct all unpaid losses on life insurance contracts plus all dis- counted unpaid losses outstanding at the end of the preceding taxable year. (iii) To the results so obtained, add esti- mated salvage and reinsurance recoverable as of the end of the preceding taxable year and deduct estimated salvage and reinsur- ance recoverable as of the end of the tax- able year. The amount of estimated salvage recover- able shall be determined on a discounted basis in accordance with procedures estab- lished by the Secretary. (B) Reduction of deduction The amount which would (but for this sub- paragraph) be taken into account under sub- paragraph (A) shall be reduced by an amount equal to the applicable percentage of the sum of— (i) tax-exempt interest received or ac- crued during such taxable year, (ii) the aggregate amount of deductions provided by sections 243 and 245 for— (I) dividends (other than 100 percent dividends) received during the taxable year, and (II) 100 percent dividends received dur- ing the taxable year to the extent attrib- Page 1927 TITLE 26—INTERNAL REVENUE CODE § 832 utable (directly or indirectly) to pro- rated amounts, and (iii) the increase for the taxable year in policy cash values (within the meaning of section 805(a)(4)(F)) of life insurance poli- cies and annuity and endowment contracts to which section 264(f) applies. In the case of a 100 percent dividend paid by an insurance company, the portion attrib- utable to prorated amounts shall be deter- mined under subparagraph (E)(ii). For pur- poses of this subparagraph, the applicable percentage is 5.25 percent divided by the highest rate in effect under section 11(b). (C) Exception for investments made before August 8, 1986 (i) In general Except as provided in clause (ii), sub- paragraph (B) shall not apply to any divi- dend or interest received or accrued on any stock or obligation acquired before August 8, 1986. (ii) Special rule for 100 percent dividends For purposes of clause (i), the portion of any 100 percent dividend which is attrib- utable to prorated amounts shall be treat- ed as received with respect to stock ac- quired on the later of— (I) the date the payor acquired the stock or obligation to which the pro- rated amounts are attributable, or (II) the 1st day on which the payor and payee were members of the same affili- ated group (as defined in section 243(b)(2)). (D) Definitions For purposes of this paragraph— (i) Prorated amounts The term ‘‘prorated amounts’’ means tax-exempt interest and dividends with re- spect to which a deduction is allowable under section 243 or 245 (other than 100 per- cent dividends). (ii) 100 percent dividend (I) In general The term ‘‘100 percent dividend’’ means any dividend if the percentage used for purposes of determining the deduction allowable under section 243 or 245(b) is 100 percent. (II) Certain dividends received by foreign corporations A dividend received by a foreign cor- poration from a domestic corporation which would be a 100 percent dividend if section 1504(b)(3) did not apply for pur- poses of applying section 243(b)(2) shall be treated as a 100 percent dividend. (E) Special rules for dividends subject to pro- ration at subsidiary level (i) In general In the case of any 100 percent dividend paid to an insurance company to which this part applies by any insurance com- pany, the amount of the decrease in the deductions of the payee company by rea- son of the portion of such dividend attrib- utable to prorated amounts shall be re- duced (but not below zero) by the amount of the decrease in the deductions (or in- crease in income) of the payor company attributable to the application of this sec- tion or section 805(a)(4)(A) to such amounts. (ii) Portion of dividend attributable to pro- rated amounts For purposes of this subparagraph, in de- termining the portion of any dividend at- tributable to prorated amounts— (I) any dividend by the paying corpora- tion shall be treated as paid first out of earnings and profits attributable to pro- rated amounts (to the extent thereof), and (II) by determining the portion of earn- ings and profits so attributable without any reduction for the tax imposed by this chapter. (6) Expenses incurred The term ‘‘expenses incurred’’ means all ex- penses shown on the annual statement ap- proved by the National Association of Insur- ance Commissioners, and shall be computed as follows: To all expenses paid during the tax- able year, add expenses unpaid at the end of the taxable year and deduct expenses unpaid at the end of the preceding taxable year. For purposes of this subchapter, the term ‘‘ex- penses unpaid’’ shall not include any unpaid loss adjustment expenses shown on the annual statement, but such unpaid loss adjustment expenses shall be included in unpaid losses. For the purpose of computing the taxable in- come subject to the tax imposed by section 831, there shall be deducted from expenses in- curred (as defined in this paragraph) all ex- penses incurred which are not allowed as de- ductions by subsection (c). (7) Special rules for applying paragraph (4) (A) Reduction not to apply to life insurance reserves Subparagraph (B) of paragraph (4) shall be applied with respect to insurance contracts described in section 816(b)(1)(B) by sub- stituting ‘‘100 percent’’ for ‘‘80 percent’’ each place it appears in such subparagraph (B), and subparagraph (C) of paragraph (4) shall be applied by not taking such contracts into account. (B) Special treatment of premiums attrib- utable to insuring certain securities In the case of premiums attributable to in- surance against default in the payment of principal or interest on securities described in section 165(g)(2)(C) with maturities of more than 5 years— (i) subparagraph (B) of paragraph (4) shall be applied by substituting ‘‘90 per- cent’’ for ‘‘80 percent’’ each place it ap- pears, and (ii) subparagraph (C) of paragraph (4) shall be applied by substituting ‘‘12⁄3 per- cent’’ for ‘‘31⁄3 percent’’. Page 1928 TITLE 26—INTERNAL REVENUE CODE § 832 1 See References in Text note below. (C) Termination as insurance company tax- able under section 831(a) Except as provided in section 381(c)(22) (re- lating to carryovers in certain corporate re- adjustments), if, for any taxable year begin- ning before January 1, 1993, the taxpayer ceases to be an insurance company taxable under section 831(a), the aggregate adjust- ments which would be made under paragraph (4)(C) for such taxable year and subsequent taxable years but for such cessation shall be made for the taxable year preceding such cessation year. (D) Treatment of companies which become taxable under section 831(a) (i) Exception to phase-in for companies which were not taxable, etc., before 1987 Subparagraph (C) of paragraph (4) shall not apply to any insurance company which, for each taxable year beginning be- fore January 1, 1987, was not subject to the tax imposed by section 821(a) 1 or 831(a) (as in effect on the day before the date of the enactment of the Tax Reform Act of 1986) by reason of being— (I) subject to tax under section 821(c) 1 (as so in effect), or (II) described in section 501(c) (as so in effect) and exempt from tax under sec- tion 501(a). (ii) Phase-in beginning at later date for companies not 1st taxable under sec- tion 831(a) in 1987 In the case of an insurance company— (I) which was not subject to the tax imposed by section 831(a) for its 1st tax- able year beginning after December 31, 1986, by reason of being subject to tax under section 831(b), or described in sec- tion 501(c) and exempt from tax under section 501(a), and (II) which, for any taxable year begin- ning before January 1, 1987, was subject to the tax imposed by section 821(a) 1 or 831(a) (as in effect on the day before the date of the enactment of the Tax Reform Act of 1986), subparagraph (C) of paragraph (4) shall apply beginning with the 1st taxable year beginning after December 31, 1986, for which such company is subject to the tax imposed by section 831(a) and shall be ap- plied by substituting the last day of the preceding taxable year for ‘‘December 31, 1986’’ and the 1st day of the 7th succeeding taxable year for ‘‘January 1, 1993’’. (E) Treatment of certain reciprocal insurers In the case of a reciprocal (within the meaning of section 835(a)) which reports (as required by State law) on its annual state- ment reserves on unearned premiums net of premium acquisition expenses— (i) subparagraph (B) of paragraph (4) shall be applied by treating unearned pre- miums as including an amount equal to such expenses, and (ii) appropriate adjustments shall be made under subparagraph (c) of paragraph (4) to reflect the amount by which— (I) such reserves at the close of the most recent taxable year beginning be- fore January 1, 1987, are greater or less than, (II) 80 percent of the sum of the amount under subclause (I) plus such premium acquisition expenses. (8) Special rules for applying paragraph (4) to title insurance premiums (A) In general In the case of premiums attributable to title insurance— (i) subparagraph (B) of paragraph (4) shall be applied by substituting ‘‘the dis- counted unearned premiums’’ for ‘‘80 per- cent of the unearned premiums’’ each place it appears, and (ii) subparagraph (C) of paragraph (4) shall not apply. (B) Method of discounting For purposes of subparagraph (A), the amount of the discounted unearned pre- miums as of the end of any taxable year shall be the present value of such premiums (as of such time and separately with respect to premiums received in each calendar year) determined by using— (i) the amount of the undiscounted un- earned premiums at such time, (ii) the applicable interest rate, and (iii) the applicable statutory premium recognition pattern. (C) Determination of applicable factors In determining the amount of the dis- counted unearned premiums as of the end of any taxable year— (i) Undiscounted unearned premiums The term ‘‘undiscounted unearned pre- miums’’ means the unearned premiums shown in the yearly statement filed by the taxpayer for the year ending with or with- in such taxable year. (ii) Applicable interest rate The term ‘‘applicable interest rate’’ means the annual rate determined under 846(c)(2) for the calendar year in which the premiums are received. (iii) Applicable statutory premium recogni- tion pattern The term ‘‘applicable statutory premium recognition pattern’’ means the statutory premium recognition pattern— (I) which is in effect for the calendar year in which the premiums are re- ceived, and (II) which is based on the statutory premium recognition pattern which ap- plies to premiums received by the tax- payer in such calendar year. For purposes of the preceding sentence, premiums received during any calendar year shall be treated as received in the middle of such year. Page 1929 TITLE 26—INTERNAL REVENUE CODE § 832 (c) Deductions allowed In computing the taxable income of an insur- ance company subject to the tax imposed by sec- tion 831, there shall be allowed as deductions: (1) all ordinary and necessary expenses in- curred, as provided in section 162 (relating to trade or business expenses); (2) all interest, as provided in section 163; (3) taxes, as provided in section 164; (4) losses incurred, as defined in subsection (b)(5) of this section; (5) capital losses to the extent provided in subchapter P (relating to capital gains and losses) plus losses from capital assets sold or exchanged in order to obtain funds to meet ab- normal insurance losses and to provide for the payment of dividends and similar distributions to policyholders. Capital assets shall be con- sidered as sold or exchanged in order to obtain funds to meet abnormal insurance losses and to provide for the payment of dividends and similar distributions to policyholders to the extent that the gross receipts from their sale or exchange are not greater than the excess, if any, for the taxable year of the sum of divi- dends and similar distributions paid to policy- holders in their capacity as such, losses paid, and expenses paid over the sum of the items described in section 834(b) (other than para- graph (1)(D) thereof) and net premiums re- ceived. In the application of section 1212 for purposes of this section, the net capital loss for the taxable year shall be the amount by which losses for such year from sales or ex- changes of capital assets exceeds the sum of the gains from such sales or exchanges and whichever of the following amounts is the lesser: (A) the taxable income (computed without regard to gains or losses from sales or ex- changes of capital assets); or (B) losses from the sale or exchange of cap- ital assets sold or exchanged to obtain funds to meet abnormal insurance losses and to provide for the payment of dividends and similar distributions to policyholders; (6) debts in the nature of agency balances and bills receivable which become worthless within the taxable year; (7) the amount of interest earned during the taxable year which under section 103 is ex- cluded from gross income; (8) the depreciation deduction allowed by section 167 and the deduction allowed by sec- tion 611 (relating to depletion); (9) charitable, etc., contributions, as pro- vided in section 170; (10) deductions (other than those specified in this subsection) as provided in part VI of sub- chapter B (sec. 161 and following, relating to itemized deductions for individuals and cor- porations) and in part I of subchapter D (sec. 401 and following, relating to pension, profit- sharing, stock bonus plans, etc.); (11) dividends and similar distributions paid or declared to policyholders in their capacity as such, except in the case of a mutual fire in- surance company described in subsection (b)(1)(C). For purposes of the preceding sen- tence, the term ‘‘dividends and similar dis- tributions’’ includes amounts returned or credited to policyholders on cancellation or expiration of policies described in subsection (b)(1)(D). For purposes of this paragraph, the term ‘‘paid or declared’’ shall be construed ac- cording to the method of accounting regularly employed in keeping the books of the insur- ance company; (12) the special deductions allowed by part VIII of subchapter B (sec. 241 and following, relating to dividends received); and (13) in the case of a company which writes mortgage guaranty insurance, the deduction allowed by subsection (e). (d) Double deductions Nothing in this section shall permit the same item to be deducted more than once. (e) Special deduction and income account In the case of a company which writes mort- gage guaranty insurance— (1) Additional deduction There shall be allowed as a deduction for the taxable year, if bonds are purchased as re- quired by paragraph (2), the sum of— (A) an amount representing the amount re- quired by State law or regulation to be set aside in a reserve for mortgage guaranty in- surance losses resulting from adverse eco- nomic cycles; and (B) an amount representing the aggregate of amounts so set aside in such reserve for the 8 preceding taxable years to the extent such amounts were not deducted under this paragraph in such preceding taxable years, except that the deduction allowable for the taxable year under this paragraph shall not exceed the taxable income for the taxable year computed without regard to this paragraph or to any carryback of a net operating loss. For purposes of this paragraph, the amount re- quired by State law or regulation to be so set aside in any taxable year shall not exceed 50 percent of premiums earned on insurance con- tracts (as defined in subsection (b)(4)) with re- spect to mortgage guaranty insurance for such year. For purposes of this subsection, all amounts shall be taken into account on a first-in-time basis. The computation and de- duction under this section of losses incurred (including losses resulting from adverse eco- nomic cycles) shall not be affected by the pro- visions of this subsection. For purposes of this subsection, the terms ‘‘preceding taxable years’’ and ‘‘preceding taxable year’’ shall not include taxable years which began before Jan- uary 1, 1967. (2) Purchase of bonds The deduction under paragraph (1) shall be allowed only to the extent that tax and loss bonds are purchased in an amount equal to the tax benefit attributable to such deduction, as determined under regulations prescribed by the Secretary, on or before the date that any taxes (determined without regard to this sub- section) due for the taxable year for which the deduction is allowed are due to be paid. If a de- duction would be allowed but for the fact that tax and loss bonds were not timely purchased, Page 1930 TITLE 26—INTERNAL REVENUE CODE § 832 such deduction shall be allowed to the extent such purchases are made within a reasonable time, as determined by the Secretary, if all in- terest and penalties, computed as if this sen- tence did not apply, are paid. (3) Mortgage guaranty account Each company which writes mortgage guar- anty insurance shall, for purposes of this part, establish and maintain a mortgage guaranty account. (4) Additions to account There shall be added to the mortgage guar- anty account for each taxable year an amount equal to the amount allowed as a deduction for the taxable year under paragraph (1). (5) Subtractions from account and inclusion in gross income After applying paragraph (4), there shall be subtracted for the taxable year from the mort- gage guaranty account and included in gross income— (A) the amount (if any) remaining which was added to the account for the tenth pre- ceding taxable year, (B) the excess (if any) of the aggregate amount in the mortgage guaranty account over the aggregate amount in the reserve re- ferred to in paragraph (1)(A). For purposes of determining such excess, the aggregate amount in the mortgage guaranty account shall be determined after applying subpara- graph (A), and the aggregate amount in the reserve referred to in paragraph (1)(A) shall be determined by disregarding any amounts remaining in such reserve added for taxable years beginning before January 1, 1967, (C) an amount (if any) equal to the net op- erating loss for the taxable year computed without regard to this subparagraph, and (D) any amount improperly subtracted from the account under subparagraph (A), (B), or (C) to the extent that tax and loss bonds were redeemed with respect to such amount. If a company liquidates or otherwise termi- nates its mortgage guaranty insurance busi- ness and does not transfer or distribute such business in an acquisition of assets referred to in section 381(a), the entire amount remaining in such account shall be subtracted. Except in the case where a company transfers or distrib- utes its mortgage guaranty insurance in an ac- quisition of assets referred to in section 381(a), if the company is not subject to the tax im- posed by section 831 for any taxable year, the entire amount in the account at the close of the preceding taxable year shall be subtracted from the account in such preceding taxable year. (6) Lease guaranty insurance; insurance of State and local obligations The provisions of this subsection shall also apply in all respects to a company which writes lease guaranty insurance or insurance on obligations the interest on which is exclud- able from gross income under section 103. In applying this subsection to such a company, any reference to mortgage guaranty insurance contained in this section shall be deemed to be a reference also to lease guaranty insurance and to insurance on obligations the interest on which is excludable from gross income under section 103; and in the case of insurance on ob- ligations the interest on which is excludable from gross income under section 103, the ref- erences in paragraph (1) to ‘‘losses resulting from adverse economic cycles’’ include losses from declining revenues related to such obli- gations (as well as losses resulting from ad- verse economic cycles), and the time specified in subparagraph (A) of paragraph (5) shall be the twentieth preceding taxable year. (f) Interinsurers In the case of a mutual insurance company which is an interinsurer or reciprocal under- writer— (1) there shall be allowed as a deduction the increase for the taxable year in savings cred- ited to subscriber accounts, or (2) there shall be included as an item of gross income the decrease for the taxable year in savings credited to subscriber accounts. For purposes of the preceding sentence, the term ‘‘savings credited to subscriber accounts’’ means such portion of the surplus as is credited to the individual accounts of subscribers before the 16th day of the 3rd month following the close of the taxable year, but only if the company would be obligated to pay such amount promptly to such subscriber if he terminated his contract at the close of the company’s taxable year. For purposes of determining his taxable income, the subscriber shall treat any such savings credited to his account as a dividend paid or declared. (g) Dividends within group In the case of an insurance company subject to tax under section 831(a) filing or required to file a consolidated return under section 1501 with re- spect to any affiliated group for any taxable year, any determination under this part with re- spect to any dividend paid by one member of such group to another member of such group shall be made as if such group were not filing a consolidated return. (Aug. 16, 1954, ch. 736, 68A Stat. 264; Mar. 13, 1956, ch. 83, § 3(b), 70 Stat. 48; Pub. L. 87–834, § 8(e)(2)–(5), Oct. 16, 1962, 76 Stat. 997, 998; Pub. L. 88–272, title II, § 228(c), Feb. 26, 1964, 78 Stat. 99; Pub. L. 89–809, title I, § 104(i)(7), Nov. 13, 1966, 80 Stat. 1562; Pub. L. 90–240, § 5(a)–(c), Jan. 2, 1968, 81 Stat. 776, 777; Pub. L. 93–483, § 5, Oct. 26, 1974, 88 Stat. 1458; Pub. L. 94–455, title XIX, §§ 1901(a)(108), (b)(1)(T), (U), 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1782, 1792, 1834; Pub. L. 97–248, title II, § 234(b)(2)(A), Sept. 3, 1982, 96 Stat. 503; Pub. L. 98–369, div. A, title II, § 211(b)(9), July 18, 1984, 98 Stat. 755; Pub. L. 99–514, title X, §§ 1021(a), (b), 1022(a), 1023(a), 1024(c)(1)–(6), Oct. 22, 1986, 100 Stat. 2395, 2397, 2399, 2406, 2407; Pub. L. 100–647, title I, § 1010(c), (d)(1), (2), Nov. 10, 1988, 102 Stat. 3451–3453; Pub. L. 101–508, title XI, §§ 11303(a), (b), 11305(a), Nov. 5, 1990, 104 Stat. 1388–450, 1388–451; Pub. L. 104–188, title I, §§ 1702(h)(3), 1704(t)(45), Aug. 20, 1996, 110 Stat. 1873, 1889; Pub. L. 105–34, title X, § 1084(b)(4), Aug. 5, 1997, 111 Stat. 955; Pub. L. 113–295, div. A, title II, § 221(a)(41)(G), (69), Dec. 19, 2014, 128 Stat. 4044, 4048; Pub. L. Page 1931 TITLE 26—INTERNAL REVENUE CODE § 832 115–97, title I, §§ 13001(b)(2)(I), 13515(a), Dec. 22, 2017, 131 Stat. 2096, 2144; Pub. L. 115–141, div. U, title IV, § 401(a)(143), Mar. 23, 2018, 132 Stat. 1191.) Editorial Notes REFERENCES IN TEXT Section 821, referred to in subsec. (b)(7)(D), was re- pealed by Pub. L. 99–514, title X, § 1024(a)(1), Oct. 22, 1986, 100 Stat. 2405. The date of the enactment of the Tax Reform Act of 1986, referred to in subsec. (b)(7)(D), is the date of en- actment of Pub. L. 99–514, which was approved Oct. 22, 1986. CODIFICATION Another section 1084(b) of Pub. L. 105–34 amended sec- tions 101 and 264 of this title. AMENDMENTS 2018—Subsec. (b)(7)(E)(ii)(II). Pub. L. 115–141 sub- stituted period for comma at end. 2017—Subsec. (b)(5)(B). Pub. L. 115–97, § 13515(a), sub- stituted ‘‘the applicable percentage’’ for ‘‘15 percent’’ in introductory provisions and inserted ‘‘For purposes of this subparagraph, the applicable percentage is 5.25 percent divided by the highest rate in effect under sec- tion 11(b).’’ at end of concluding provisions. Subsec. (c)(5). Pub. L. 115–97, § 13001(b)(2)(I), struck out ‘‘sec. 1201 and following,’’ before ‘‘relating to cap- ital gains and losses’’ in introductory provisions. 2014—Subsec. (b)(5)(B)(ii), (D)(i), (ii)(I). Pub. L. 113–295, § 221(a)(41)(G), struck out ‘‘, 244,’’after ‘‘sections 243’’ in subpar. (B)(ii) and after ‘‘section 243’’ in subpar. (D)(i), (ii)(I). Subsec. (e). Pub. L. 113–295, § 221(a)(69)(A), struck out ‘‘of taxable years beginning after December 31, 1966,’’ after ‘‘In the case’’ in introductory provisions. Subsec. (e)(6). Pub. L. 113–295, § 221(a)(69)(B), sub- stituted ‘‘The’’ for ‘‘In the case of any taxable year be- ginning after December 31, 1970, the’’. 1997—Subsec. (b)(5)(B)(iii). Pub. L. 105–34, which di- rected amendment of subpar. (B) by adding cl. (iii) at the end, was executed by adding cl. (iii) after cl. (ii) to reflect the probable intent of Congress. 1996—Subsec. (b)(5)(C)(ii)(II), (D)(ii)(II). Pub. L. 104–188, § 1702(h)(3), substituted ‘‘243(b)(2)’’ for ‘‘243(b)(5)’’. Subsec. (b)(7)(A). Pub. L. 104–188, § 1704(t)(45), provided that section 11303(b)(1) of Pub. L. 101–508 shall be ap- plied as if ‘‘paragraph’’ appeared instead of ‘‘subpara- graph’’ in the material proposed to be stricken. See 1990 Amendment note below. 1990—Subsec. (b)(4). Pub. L. 101–508, § 11303(a), sub- stituted ‘‘section 807.’’ for ‘‘section 807, pertaining to the life, burial, or funeral insurance, or annuity busi- ness of an insurance company subject to the tax im- posed by section 831 and not qualifying as a life insur- ance company under section 816.’’ in first sentence after subpar. (C). Subsec. (b)(5)(A). Pub. L. 101–508, § 11305(a), amended subpar. (A) generally. Prior to amendment, subpar. (A) read as follows: ‘‘The term ‘losses incurred’ means losses incurred during the taxable year on insurance contracts, computed as follows: ‘‘(i) To losses paid during the taxable year, add sal- vage and reinsurance recoverable outstanding at the end of the preceding taxable year and deduct salvage and reinsurance recoverable outstanding at the end of the taxable year. ‘‘(ii) To the result so obtained, add all unpaid losses on life insurance contracts plus all discounted unpaid losses (as defined in section 846) outstanding at the end of the taxable year and deduct unpaid losses on life insurance contracts plus all discounted unpaid losses outstanding at the end of the preceding taxable year.’’ Subsec. (b)(7)(A). Pub. L. 101–508, § 11303(b)(2), sub- stituted ‘‘such contracts into account’’ for ‘‘such amounts into account’’. Pub. L. 101–508, § 11303(b)(1), which directed the substi- tution of ‘‘insurance contracts described in section 816(b)(1)(B)’’ for ‘‘amounts included in unearned pre- miums under the 2nd sentence of such subparagraph’’, was executed by making the substitution for ‘‘amounts included in unearned premiums under the 2nd sentence of such paragraph’’. See 1996 Amendment note above. 1988—Subsec. (b)(5)(B)(ii)(II). Pub. L. 100–647, § 1010(d)(2), inserted ‘‘(directly or indirectly)’’ after ‘‘at- tributable’’. Subsec. (b)(7)(C). Pub. L. 100–647, § 1010(c)(1), sub- stituted ‘‘insurance company taxable under section 831(a)’’ for ‘‘nonlife insurance company’’ in heading and ‘‘section 831(a)’’ for ‘‘this part’’ in text. Subsec. (b)(7)(D), (E). Pub. L. 100–647, § 1010(c)(2), added subpars. (D) and (E). Subsec. (e)(5)(A). Pub. L. 100–647, § 1010(c)(3), struck out ‘‘and’’ after ‘‘preceding taxable year,’’. Subsec. (e)(5)(B). Pub. L. 100–647, § 1010(c)(3), which di- rected amendment of subpar. (B) by substituting a comma for the period at end, could not be executed be- cause there was no period at end of subpar. (B). Subsec. (g). Pub. L. 100–647, § 1010(d)(1), added subsec. (g). 1986—Subsec. (b)(1)(C). Pub. L. 99–514, § 1024(c)(1), sub- stituted ‘‘exclusively issuing perpetual policies’’ for ‘‘described in section 831(a)(3)(A)’’. Subsec. (b)(1)(D). Pub. L. 99–514, § 1024(c)(2), amended subpar. (D) generally. Prior to amendment, subpar. (D) read as follows: ‘‘in the case of a mutual fire or flood insurance company described in section 831(a)(3)(B), an amount equal to 2 percent of the premiums earned on insurance contracts during the taxable year with re- spect to policies described in section 831(a)(3)(B) after deduction of premium deposits returned or credited during the same taxable year, and’’. Subsec. (b)(4). Pub. L. 99–514, § 1024(c)(3), substituted ‘‘paragraph (1)(D)’’ for ‘‘section 831(a)(3)(B)’’ in two places and amended last sentence generally, sub- stituting ‘‘described in paragraph (1)(D) or issuing ex- clusively perpetual policies’’ for ‘‘referred to in para- graph (3) of section 831(a)’’ and ‘‘described in subpara- graph (C) or (D) of paragraph (1)’’ for ‘‘referred to in such paragraph (3)’’. Subsec. (b)(4)(B), (C). Pub. L. 99–514, § 1021(a), added subpars. (B) and (C) and struck out former subpar. (B) which read as follows: ‘‘To the result so obtained, add unearned premiums on outstanding business at the end of the preceding taxable year and deduct unearned pre- miums on outstanding business at the end of the tax- able year.’’ Subsec. (b)(5)(A). Pub. L. 99–514, § 1022(a), in amending par. (5) generally, designated existing provisions of par. (5) as subpar. (A), inserted subpar. heading ‘‘In gen- eral’’, and redesignated former subpars. (A) and (B) as cls. (i) and (ii). Subsec. (b)(5)(A)(ii). Pub. L. 99–514, § 1023(a)(1), amend- ed cl. (ii) generally, inserting ‘‘on life insurance con- tracts plus all discounted unpaid losses (as defined in section 846)’’ and ‘‘on life insurance contracts plus all discounted unpaid losses’’. Subsec. (b)(5)(B) to (E). Pub. L. 99–514, § 1022(a), in amending par. (5) generally, added subpars. (B) to (E). Former subpar. (B) redesignated (A)(ii). Subsec. (b)(6). Pub. L. 99–514, § 1023(a)(2), inserted sec- ond sentence defining ‘‘expenses unpaid’’. Subsec. (b)(7), (8). Pub. L. 99–514, § 1021(b), added pars. (7) and (8). Subsec. (c)(5). Pub. L. 99–514, § 1024(c)(4), substituted ‘‘section 834(b)’’ for ‘‘section 822(b)’’. Subsec. (c)(11). Pub. L. 99–514, § 1024(c)(5), substituted ‘‘subsection (b)(1)(C)’’ for ‘‘section 831(a)(3)(A)’’ and ‘‘subsection (b)(1)(D)’’ for ‘‘section 831(a)(3)(B)’’. Subsec. (f). Pub. L. 99–514, § 1024(c)(6), added subsec. (f). 1984—Subsec. (b)(4). Pub. L. 98–369, in provisions fol- lowing subpar. (B), substituted ‘‘section 816(b) but de- termined as provided in section 807’’ and ‘‘section 816’’ for ‘‘section 801(b)’’ and ‘‘section 801’’, respectively. 1982—Subsec. (e)(2). Pub. L. 97–248 struck out ‘‘, as if no election to make installment payments under sec- tion 6152 is made’’ after ‘‘due to be paid’’. Page 1932 TITLE 26—INTERNAL REVENUE CODE § 832 1976—Subsec. (b)(1), (6). Pub. L. 94–455, § 1901(a)(108), substituted ‘‘Association’’ for ‘‘Convention’’. Subsec. (c)(5)(A). Pub. L. 94–455, § 1901(b)(1)(T), struck out ‘‘or to the deductions provided in section 242 for partially tax-exempt interest’’ after ‘‘exchanges of cap- ital assets’’. Subsec. (c)(12). Pub. L. 94–455, § 1901(b)(1)(U), struck out ‘‘partially tax-exempt interest and to’’ after ‘‘and following, relating to’’. Subsec. (e)(2). Pub. L. 94–455, § 1906(b)(13)(A), struck out ‘‘or his delegate’’ after ‘‘Secretary’’. 1974—Subsec. (e)(6). Pub. L. 93–483 added par. (6). 1968—Subsec. (b)(1)(E). Pub. L. 90–240, § 5(a), added subpar. (E). Subsec. (c)(13). Pub. L. 90–240, § 5(b), added par. (13). Subsec. (e). Pub. L. 90–240, § 5(c), added subsec. (e). 1966—Subsec. (d). Pub. L. 89–809 redesignated subsec. (e) as (d). Former subsec. (d), having reference to the taxable income of foreign insurance companies other than life or mutual and foreign mutual marine, was struck out. Subsec. (e). Pub. L. 89–809 redesignated subsec. (e) as (d). 1964—Subsec. (c)(10). Pub. L. 88–272 inserted reference to part I of subchapter D. 1962—Subsec. (b)(1)(C). Pub. L. 87–834, § 8(e)(3), (5), sub- stituted ‘‘section 831(a)(3)(A)’’ for ‘‘section 831(a)’’. Subsec. (b)(1)(D). Pub. L. 87–834, § 8(e)(5), added sub- par. (D). Subsec. (b)(4). Pub. L. 87–834, § 8(e)(2), inserted provi- sions defining unearned premiums of mutual fire or flood insurance companies, and which require pre- miums paid by the subscriber of a mutual flood insur- ance company to be treated, for purposes of computing the taxable income of such subscriber, in the same manner as premiums paid by a policyholder to a mu- tual fire insurance company referred to in par. (3) of section 831(a) of this title. Subsec. (c)(11). Pub. L. 87–834, § 8(e)(4), substituted ‘‘section 831(a)(3)(A)’’ for ‘‘section 831(a)’’, and inserted definition of ‘‘dividends and similar distributions’’. 1956—Subsec. (b)(4). Act Mar. 13, 1956, § 3(b)(1), sub- stituted ‘‘section 801(b)’’ for ‘‘section 806’’. Subsec. (c). Act Mar. 13, 1956, § 3(b)(2), (3), substituted ‘‘the items described in section 822(b) (other than para- graph (1)(D) thereof) and net premiums received. In the application of section 1212’’ for ‘‘interest, dividends, rents, and net premiums received. In the application of section 1211’’ in par. (5), and authorized the deduction for depletion in par. (8). Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 2017 AMENDMENT Amendment by section 13001(b)(2)(I) of Pub. L. 115–97 applicable to taxable years beginning after Dec. 31, 2017, see section 13001(c)(1) of Pub. L. 115–97, set out as a note under section 11 of this title. Pub. L. 115–97, title I, § 13515(b), Dec. 22, 2017, 131 Stat. 2144, provided that: ‘‘The amendments made by this section [amending this section] shall apply to taxable years beginning after December 31, 2017.’’ EFFECTIVE DATE OF 2014 AMENDMENT Amendment by section (a)(41)(G) of Pub. L. 113–295 not applicable to preferred stock issued before Oct. 1, 1942 (determined in the same manner as under section 247 of this title as in effect before its repeal by Pub. L. 113–295), see section 221(a)(41)(K) of Pub. L. 113–295, set out as a note under section 172 of this title. Except as otherwise provided in section 221(a) of Pub. L. 113–295, amendment by Pub. L. 113–295 effective Dec. 19, 2014, subject to a savings provision, see section 221(b) of Pub. L. 113–295, set out as a note under section 1 of this title. EFFECTIVE DATE OF 1997 AMENDMENT Amendment by Pub. L. 105–34 applicable to contracts issued after June 8, 1997, in taxable years ending after such date, with special provisions relating to changes in contracts to be treated as new contracts, see section 1084(d) of Pub. L. 105–34, set out as a note under section 101 of this title. EFFECTIVE DATE OF 1996 AMENDMENT Amendment by section 1702(h)(3) of Pub. L. 104–188 ef- fective, except as otherwise expressly provided, as if in- cluded in the provision of the Revenue Reconciliation Act of 1990, Pub. L. 101–508, title XI, to which such amendment relates, see section 1702(i) of Pub. L. 104–188, set out as a note under section 38 of this title. EFFECTIVE DATE OF 1990 AMENDMENT Pub. L. 101–508, title XI, § 11303(c), Nov. 5, 1990, 104 Stat. 1388–450, provided that: ‘‘(1) IN GENERAL.—The amendments made by this sec- tion [amending this section] shall apply to taxable years beginning on or after September 30, 1990. ‘‘(2) AMENDMENTS TREATED AS CHANGE IN METHOD OF ACCOUNTING.—In the case of any taxpayer who is re- quired by reason of the amendments made by this sec- tion to change his method of computing reserves— ‘‘(A) such change shall be treated as a change in a method of accounting, ‘‘(B) such change shall be treated as initiated by the taxpayer, ‘‘(C) such change shall be treated as having been made with the consent of the Secretary, and ‘‘(D) the net adjustments which are required by sec- tion 481 of the Internal Revenue Code of 1986 to be taken into account by the taxpayer shall be taken into account over a period not to exceed 4 taxable years beginning with the taxpayer’s first taxable year beginning on or after September 30, 1990. ‘‘(3) COORDINATION WITH SECTION 832(b)(4)(C).—The amendments made by this section shall not affect the application of section 832(b)(4)(C) of the Internal Rev- enue Code of 1986.’’ Pub. L. 101–508, title XI, § 11305(c), Nov. 5, 1990, 104 Stat. 1388–451, provided that: ‘‘(1) IN GENERAL.—The amendments made by this sec- tion [amending this section and section 846 of this title] shall apply to taxable years beginning after December 31, 1989. ‘‘(2) AMENDMENTS TREATED AS CHANGE IN METHOD OF ACCOUNTING.— ‘‘(A) IN GENERAL.—In the case of any taxpayer who is required by reason of the amendments made by this section to change his method of computing losses incurred— ‘‘(i) such change shall be treated as a change in a method of accounting, ‘‘(ii) such change shall be treated as initiated by the taxpayer, and ‘‘(iii) such change shall be treated as having been made with the consent of the Secretary. ‘‘(B) ADJUSTMENTS.—In applying section 481 of the Internal Revenue Code of 1986 with respect to the change referred to in subparagraph (A)— ‘‘(i) only 13 percent of the net amount of adjust- ments (otherwise required by such section 481 to be taken into account by the taxpayer) shall be taken into account, and ‘‘(ii) the portion of such net adjustments which is required to be taken into account by the taxpayer (after the application of clause (i)) shall be taken into account over a period not to exceed 4 taxable years beginning with the taxpayer’s 1st taxable year beginning after December 31, 1989. ‘‘(3) TREATMENT OF COMPANIES WHICH TOOK INTO AC- COUNT SALVAGE RECOVERABLE.—In the case of any insur- ance company which took into account salvage recov- erable in determining losses incurred for its last tax- able year beginning before January 1, 1990, 87 percent of the discounted amount of estimated salvage recover- able as of the close of such last taxable year shall be al- lowed as a deduction ratably over its 1st 4 taxable years beginning after December 31, 1989. Page 1933 TITLE 26—INTERNAL REVENUE CODE § 832 ‘‘(4) SPECIAL RULE FOR OVERESTIMATES.—If for any taxable year beginning after December 31, 1989— ‘‘(A) the amount of the section 481 adjustment which would have been required without regard to paragraph (2) and any discounting, exceeds ‘‘(B) the sum of the amount of salvage recovered taken into account under section 832(b)(5)(A)(i) for the taxable year and any preceding taxable year be- ginning after December 31, 1989, attributable to losses incurred with respect to any accident year beginning before 1990 and the undiscounted amount of estimated salvage recoverable as of the close of the taxable year on account of such losses, 87 percent of such excess (adjusted for discounting used in determining the amount of salvage recoverable as of the close of the last taxable year of the taxpayer begin- ning before January 1, 1990) shall be included in gross income for such taxable year. ‘‘(5) EFFECT ON EARNINGS AND PROFITS.—The earnings and profits of any insurance company for its 1st taxable year beginning after December 31, 1989, shall be in- creased by the amount of the section 481 adjustment which would have been required but for paragraph (2). For purposes of applying sections 56, [former] 902, 952(c)(1), and 960 of the Internal Revenue Code of 1986, earnings and profits of a corporation shall be deter- mined by applying the principles of paragraph (2)(B).’’ 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 Pub. L. 99–514, title X, § 1021(c), Oct. 22, 1986, 100 Stat. 2397, provided that: ‘‘(1) IN GENERAL.—The amendment made by this sec- tion [amending this section] shall apply to taxable years beginning after December 31, 1986. ‘‘(2) SPECIAL TRANSITIONAL RULE FOR TITLE INSURANCE COMPANIES.—For the 1st taxable year beginning after December 31, 1986, in the case of premiums attributable to title insurance— ‘‘(A) IN GENERAL.—The unearned premiums at the end of the preceding taxable year as defined in para- graph (4) of section 832(b) [of the Internal Revenue Code of 1986] shall be determined as if the amend- ments made by this section had applied to such un- earned premiums in the preceding taxable year and by using the interest rate and premium recognition pattern applicable to years ending in calendar year 1987. ‘‘(B) FRESH START.—Except as provided in subpara- graph (C), any difference between— ‘‘(i) the amount determined to be unearned pre- miums for the year preceding the first taxable year of a title insurance company beginning after De- cember 31, 1986, determined without regard to sub- paragraph (A), and ‘‘(ii) such amount determined with regard to sub- paragraph (A), shall not be taken into account for purposes of the Internal Revenue Code of 1986. ‘‘(C) EFFECT ON EARNINGS AND PROFITS.—The earn- ings and profits of any insurance company for its 1st taxable year beginning after December 31, 1986, shall be increased by the amount of the difference deter- mined under subparagraph (A) with respect to such company.’’ Pub. L. 99–514, title X, § 1022(b), Oct. 22, 1986, 100 Stat. 2399, provided that: ‘‘The amendment made by this sec- tion [amending this section] shall apply to taxable years beginning after December 31, 1986.’’ Amendment by section 1023(a) of Pub. L. 99–514 appli- cable to taxable years beginning after Dec. 31, 1986, ex- cept as otherwise provided, see section 1023(e) of Pub. L. 99–514, set out as an Effective Date note under sec- tion 846 of this title. Amendment by section 1024(c)(1)–(6) of Pub. L. 99–514 applicable to taxable years beginning after Dec. 31, 1986, see section 1024(e) of Pub. L. 99–514, set out as a note under section 831 of this title. EFFECTIVE DATE OF 1984 AMENDMENT Amendment by Pub. L. 98–369 applicable to taxable years beginning after Dec. 31, 1983, see section 215 of Pub. L. 98–369, set out as an Effective Date note under section 801 of this title. EFFECTIVE DATE OF 1982 AMENDMENT Amendment by Pub. L. 97–248 applicable to taxable years beginning after Dec. 31, 1982, see section 234(e) of Pub. L. 97–248, set out as a note under section 6655 of this title. EFFECTIVE DATE OF 1976 AMENDMENT Amendment by section 1901(a)(108), (b)(1)(T), (U) of Pub. L. 94–455 effective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94–455, set out as a note under section 2 of this title. EFFECTIVE DATE OF 1968 AMENDMENT Pub. L. 90–240, § 5(e), Jan. 2, 1968, 81 Stat. 778, as amended by Pub. L. 99–514, § 2, Oct. 22, 1986, 100 Stat. 2095, provided that: ‘‘The amendments made by sub- sections (a), (b), (c), and (d) [amending this section and section 381 of this title] shall apply to taxable years be- ginning after December 31, 1966, except that so much of section 832(e)(2) of the Internal Revenue Code of 1986 [formerly I.R.C. 1954] (as added by the amendment made by subsection (c)) as provides for payment of in- terest and penalties for failure to make a timely pur- chase of tax and loss bonds shall not apply with respect to any period during which such bonds are not avail- able for purchase.’’ EFFECTIVE DATE OF 1966 AMENDMENT Amendment by Pub. L. 89–809 applicable with respect to taxable years beginning after Dec. 31, 1966, see sec- tion 104(n) of Pub. L. 89–809, set out as a note under sec- tion 11 of this title. EFFECTIVE DATE OF 1964 AMENDMENT Pub. L. 88–272, title II, § 228(d), Feb. 26, 1964, 78 Stat. 99, provided that: ‘‘The amendment made by subsection (a) [amending former section 809 of this title] shall apply to taxable years beginning after December 31, 1961. The amendment made by subsection (c) [amending this section] shall apply to taxable years beginning after December 31, 1953, and ending after August 16, 1954.’’ EFFECTIVE DATE OF 1962 AMENDMENT Amendment by Pub. L. 87–834 applicable with respect to taxable years beginning after Dec. 31, 1962, see sec- tion 8(h) of Pub. L. 87–834, set out as a note under sec- tion 501 of this title. EFFECTIVE DATE OF 1956 AMENDMENT Amendment by act Mar. 13, 1956, applicable only to taxable years beginning after Dec. 31, 1954, see section 6 of act Mar. 13, 1956, set out as a note under section 316 of this title. DEDUCTION FROM EARNINGS AND PROFITS OF INSUR- ANCE COMPANIES TO WHICH SECTION 11305(c)(3) OF PUB. L. 101–508 APPLIES Pub. L. 104–188, title I, § 1702(c)(4), Aug. 20, 1996, 110 Stat. 1869, provided that: ‘‘The earnings and profits of any insurance company to which section 11305(c)(3) of the Revenue Reconciliation Act of 1990 [Pub. L. 101–508, set out above] applies shall be determined without re- gard to any deduction allowed under such section; ex- cept that, for purposes of applying sections 56 and [former] 902, and subpart F of part III of subchapter N of chapter 1 of the Internal Revenue Code of 1986, such deduction shall be taken into account.’’ Page 1934 TITLE 26—INTERNAL REVENUE CODE § 832 ACQUISITION DATE OF CERTAIN STOCKS OR OBLIGATIONS FOR PURPOSES OF SUBSECTION (b)(5)(C)(i) Pub. L. 100–647, title I, § 1010(d)(3), Nov. 10, 1988, 102 Stat. 3453, provided that: ‘‘For purposes of section 832(b)(5)(C)(i) of the 1986 Code, any stock or obligation acquired on or after August 8, 1986, by an insurance company subject to the tax imposed by section 831 of the 1986 Code (hereinafter in this paragraph referred to as the ‘acquiring company’) from another insurance company so subject (hereinafter in this paragraph re- ferred to as the ‘transferor company’) shall be treated as acquired on the date on which such stock or obliga- tion was acquired by the transferor company if— ‘‘(A) the transferor company acquired such stock or obligation before August 8, 1986, and ‘‘(B) at all times after the date on which such stock or obligation was acquired by the transferor company and before the date of the acquisition by the acquir- ing company, the transferor company and the acquir- ing company were members of the same affiliated group filing a consolidated return. For purposes of the preceding sentence, the date on which the stock or obligation was acquired by the transferor company shall be determined with regard to any prior application of the preceding sentence. For purposes of this paragraph, if the acquiring corporation or transferor corporation was a party to a reorganiza- tion described in section 368(a)(1)(F) of the 1986 Code, any reference to such corporation shall include a ref- erence to any predecessor thereof involved in such reor- ganization.’’ STUDY OF TREATMENT OF PROPERTY AND CASUALTY INSURANCE COMPANIES Pub. L. 99–514, title X, § 1025, Oct. 22, 1986, 100 Stat. 2409, directed Secretary of the Treasury or his delegate to conduct a study of the treatment of policyholder dividends by mutual property and casualty insurance companies, the treatment of property and casualty in- surance companies under the minimum tax, and the op- eration and effect of, and revenue raised by, the amend- ments made by this subtitle, and not later than Jan. 1, 1989 (due date extended to Jan. 1, 1992, by Pub. L. 101–508, title XI, § 11831(b), Nov. 5, 1990, 104 Stat. 1388–559), such Secretary to submit to Committee on Ways and Means of House of Representatives, Com- mittee on Finance of Senate, and Joint Committee on Taxation, the results of such study, together with such recommendations as he determined to be appropriate. PHYSICIANS’ AND SURGEONS’ MUTUAL PROTECTION AND INTERINDEMNITY ARRANGEMENTS OR ASSOCIATIONS Pub. L. 99–514, title X, § 1031, Oct. 22, 1986, 100 Stat. 2409, as amended by Pub. L. 100–647, title I, § 1010(g), Nov. 10, 1988, 102 Stat. 3455, provided that: ‘‘(a) CERTAIN PHYSICIANS’ AND SURGEONS’ MUTUAL PROTECTION AND INTERINDEMNITY ARRANGEMENTS OR AS- SOCIATIONS.— ‘‘(1) TREATMENT OF ARRANGEMENTS OR ASSOCIA- TIONS.— ‘‘(A) CAPITAL CONTRIBUTIONS.—There shall not be included in the gross income of any eligible physi- cians’ and surgeons’ mutual protection and inter- indemnity arrangement or association any initial payment (whether made in a lump sum or a series of substantially equal payments over a period of not more than 6 years) made during any taxable year to such arrangement or association by a mem- ber joining such arrangement or association which— ‘‘(i) does not release such member from obliga- tions to pay current or future dues, assessments, or premiums; and ‘‘(ii) is a condition precedent to receiving bene- fits of membership. Such initial payment shall be included in the gross income of such arrangement or association for such taxable year if it is reasonable to expect that such payment will be deductible pursuant to paragraph (2) by any member of such arrangement or associa- tion. ‘‘(B) RETURN OF CONTRIBUTIONS.— ‘‘(i) IN GENERAL.—The repayment to any mem- ber of any amount of any payment excluded under subparagraph (A) shall not be treated as policy- holder dividend, and is not deductible by the ar- rangement or association. ‘‘(ii) SOURCE OF RETURNS.—Except in the case of the termination of a member’s interest in the ar- rangement or association, any amount distrib- uted to any member shall be treated as paid out of surplus in excess of amounts excluded under subparagraph (A). ‘‘(2) DEDUCTION FOR MEMBERS OF ELIGIBLE ARRANGE- MENTS OR ASSOCIATIONS.— ‘‘(A) PAYMENT AS TRADE OR BUSINESS EXPENSES.— To the extent not otherwise allowable under the In- ternal Revenue Code of 1986, any member of any eli- gible arrangement or association may treat any ini- tial payment referred to in paragraph (1) made dur- ing a taxable year to such arrangement or associa- tion as an ordinary and necessary expense incurred in connection with a trade or business for purposes of the deduction allowable under section 162, to the extent such payment does not exceed the amount which would be payable to an independent insur- ance company for similar annual insurance cov- erage (as determined by the Secretary), and further reduced by any annual dues, assessments, or pre- miums paid during such taxable year. Such deduc- tion shall not be allowable as to any initial pay- ment referred to in paragraph (1) made to an eligi- ble arrangement or association by any person who is a member of any other eligible arrangement or association on or after the effective date of the Tax Reform Act of 1986. Any excess amount not allowed as a deduction for the taxable year in which such payment was made pursuant to the limitation con- tained in the 1st sentence of this subparagraph shall, subject to such limitation, be allowable as a deduction in any of the 5 succeeding taxable years, in order of time, to the extent not previously al- lowed as a deduction under this sentence. ‘‘(B) REFUNDS OF INITIAL PAYMENTS.—Any amount attributable to any initial payment referred to in paragraph (1) to such arrangement or association described in paragraph (1) which is later refunded for any reason shall be included in the gross income of the recipient in the taxable year received, to the extent a deduction for such payment was allowed. Any amount refunded in excess of such payment shall be included in gross income except to the ex- tent otherwise excluded from income by the Inter- nal Revenue Code of 1986. ‘‘(3) ELIGIBLE ARRANGEMENTS OR ASSOCIATIONS.—The terms ‘eligible physicans’ [sic] and surgeons’ mutual protection and interindemnity arrangement or asso- ciation’ and ‘eligible arrangement or association’ mean and are limited to any mutual protection and interindemnity arrangement or association that pro- vides only medical malpractice liability protection for its members or medical malpractice liability pro- tection in conjunction with protection against other liability claims incurred in the course of, or related to, the professional practice of a physician or surgeon and which— ‘‘(A) was operative and was providing such protec- tion, or had received a permit for the offer and sale of memberships, under the laws of any State before January 1, 1984, ‘‘(B) is not subject to regulation by any State in- surance department, ‘‘(C) has a right to make unlimited assessments against all members to cover current claims and losses, and ‘‘(D) is not a member of, nor subject to protection by, any insurance guaranty plan or association of any State. ‘‘(b) EFFECTIVE DATE.—The provisions of subsection (a) shall apply to payments made to and receipts of Page 1935 TITLE 26—INTERNAL REVENUE CODE § 833 physicians’ and surgeons’ mutual protection and inter- indemnity arrangements or associations, and refunds of payments by such arrangements or associations, after the date of the enactment of this Act [Oct. 22, 1986], in taxable years ending after such date.’’ TREATMENT AS UNEARNED PREMIUMS OF ADDITIONS TO RESERVES REQUIRED BY STATE LAW OR REGULATIONS FOR MORTGAGE GUARANTY INSURANCE LOSSES Pub. L. 90–240, § 5(g), Jan. 2, 1968, 81 Stat. 779, as amended by Pub. L. 99–514, § 2, Oct. 22, 1986, 100 Stat. 2095, provided that: ‘‘(1) In the case of taxable years beginning before 1967, a company shall treat additions to a reserve, required by State law or regulations for mortgage guaranty in- surance losses resulting from adverse economic cycles, as unearned premiums for purposes of section 832(b)(4) of the Internal Revenue Code of 1986 [formerly I.R.C. 1954], but the amount so treated as unearned premiums in a taxable year shall not exceed 50 percent of pre- miums earned on insurance contracts (as defined in section 832(b)(4) of such Code), determined without re- gard to amounts added to the reserve, with respect to mortgage guaranty insurance for such year. The amount of unearned premiums at the close of 1966 shall be determined without regard to the preceding sen- tence for the purpose of applying section 832(b)(4) of such Code to 1967. Additions to such a reserve shall not be treated as unearned premiums for any taxable year beginning after 1966. ‘‘(2) If a mortgage guaranty insurance company made additions to a reserve which were so treated as un- earned premiums described in paragraph (1), such com- pany, in taxable years beginning after 1966, shall in- clude in gross income (in addition to the items speci- fied in section 832(b)(1) of such Code) the sum of the fol- lowing amounts until there is included in gross income an amount equal to the aggregate additions to the re- serve described in paragraph (1) for taxable years begin- ning before 1967: ‘‘(A) an amount (if any) equal to the excess of losses incurred (as defined in section 832(b)(5) of such Code) for the taxable year over 35 percent of premiums earned on insurance contracts during the taxable year (as defined in section 832(b)(4) of such Code), de- termined without regard to amounts added to the re- serve referred to in paragraph (1), with respect to mortgage guaranty insurance, ‘‘(B) the amount (if any) remaining which was added to the reserve for the tenth preceding taxable year, and ‘‘(C) the excess (if any) of— ‘‘(i) the aggregate of amounts so treated as un- earned premiums for all taxable years beginning be- fore 1967 less the total of the amounts included in gross income under this paragraph for prior taxable years and the amounts included in gross income under subparagraphs (A) and (B) for the taxable year, over ‘‘(ii) the aggregate of the additions made for tax- able years beginning before 1967 which remain in the reserve at the close of the taxable year. Amounts shall be taken into account on a first-in-time basis. For purposes of section 832(e) of such Code and this paragraph, if part of the reserve is reduced under State law or regulation, such reduction shall first apply to the extent of amounts added to the reserve for taxable years beginning before 1967, and only then to amounts added thereafter. ‘‘(3) The provisions of this subsection shall apply to taxable years beginning after December 31, 1956.’’ § 833. Treatment of Blue Cross and Blue Shield organizations, etc. (a) General rule In the case of any organization to which this section applies— (1) Treated as stock company Such organization shall be taxable under this part in the same manner as if it were a stock insurance company. (2) Special deduction allowed The deduction determined under subsection (b) for any taxable year shall be allowed. (3) Reductions in unearned premium reserves not to apply Subparagraph (B) of paragraph (4) of section 832(b) shall be applied by substituting ‘‘100 per- cent’’ for ‘‘80 percent’’, and subparagraph (C) of such paragraph (4) shall not apply. (b) Amount of deduction (1) In general Except as provided in paragraph (2), the de- duction determined under this subsection for any taxable year is the excess (if any) of— (A) 25 percent of the sum of— (i) the claims incurred during the tax- able year and liabilities incurred during the taxable year under cost-plus contracts, and (ii) the expenses incurred during the tax- able year in connection with the adminis- tration, adjustment, or settlement of claims or in connection with the adminis- tration of cost-plus contracts, over (B) the adjusted surplus as of the begin- ning of the taxable year. (2) Limitation The deduction determined under paragraph (1) for any taxable year shall not exceed tax- able income for such taxable year (determined without regard to such deduction). (3) Adjusted surplus For purposes of this subsection— (A) In general The adjusted surplus as of the beginning of any taxable year is an amount equal to the adjusted surplus as of the beginning of the preceding taxable year— (i) increased by the amount of any ad- justed taxable income for such preceding taxable year, or (ii) decreased by the amount of any ad- justed net operating loss for such pre- ceding taxable year. (B) Special rule The adjusted surplus as of the beginning of the organization’s 1st taxable year beginning after December 31, 1986, shall be its surplus as of such time. For purposes of the pre- ceding sentence and subsection (c)(3)(C), the term ‘‘surplus’’ means the excess of the total assets over total liabilities as shown on the annual statement. (C) Adjusted taxable income The term ‘‘adjusted taxable income’’ means taxable income determined— (i) without regard to the deduction de- termined under this subsection, (ii) without regard to any carryforward or carryback to such taxable year, and (iii) by increasing gross income by an amount equal to the net exempt income for the taxable year.