26 U.S.C. § 848 — Capitalization of certain policy acquisition

Page 1948 TITLE 26—INTERNAL REVENUE CODE [§ 847 unpaid by using the interest rate and loss payment pat- terns applicable to accident years ending with calendar year 1987. ‘‘(3) FRESH START.— ‘‘(A) IN GENERAL.—Except as otherwise provided in this paragraph, any difference between— ‘‘(i) the amount determined to be the unpaid losses and expenses unpaid for the year preceding the 1st taxable year of an insurance company begin- ning after December 31, 1986, determined without regard to paragraph (2), and ‘‘(ii) such amount determined with regard to paragraph (2), shall not be taken into account for purposes of the Internal Revenue Code of 1986. ‘‘(B) RESERVE STRENGTHENING IN YEARS AFTER 1985.— Subparagraph (A) shall not apply to any reserve strengthening in a taxable year beginning in 1986, and such strengthening shall be treated as occurring in the taxpayer’s 1st taxable year beginning after De- cember 31, 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. ‘‘(4) APPLICATION OF FRESH START TO COMPANIES WHICH BECOME SUBJECT TO SECTION 831(a) TAX IN LATER TAXABLE YEAR.—If— ‘‘(A) an insurance company was not subject to tax under section 831(a) of the Internal Revenue Code of 1986 for its 1st taxable year beginning after December 31, 1986, by reason of being— ‘‘(i) subject to tax under section 831(b) of such Code, or ‘‘(ii) described in section 501(c) of such Code and exempt from tax under section 501(a) of such Code, and ‘‘(B) such company becomes subject to tax under such section 831(a) for any later taxable year, paragraph (2) and subparagraphs (A) and (C) of para- graph (3) shall be applied by treating such later taxable year as its 1st taxable year beginning after December 31, 1986, and by treating the calendar year in which such later taxable year begins as 1987; and paragraph (3)(B) shall not apply.’’ TRANSITIONAL RULE Pub. L. 115–97, title I, § 13523(e), Dec. 22, 2017, 131 Stat. 2152, provided that: ‘‘For the first taxable year begin- ning after December 31, 2017— ‘‘(1) the unpaid losses and the expenses unpaid (as defined in paragraphs (5)(B) and (6) of section 832(b) of the Internal Revenue Code of 1986) at the end of the preceding taxable year, and ‘‘(2) the unpaid losses as defined in sections 807(c)(2) and 805(a)(1) of such Code at the end of the preceding taxable year, shall be determined as if the amendments made by this section [amending this section] had applied to such un- paid losses and expenses unpaid in the preceding tax- able year and by using the interest rate and loss pay- ment patterns applicable to accident years ending with calendar year 2018, and any adjustment shall be taken into account ratably in such first taxable year and the 7 succeeding taxable years. For subsequent taxable years, such amendments shall be applied with respect to such unpaid losses and expenses unpaid by using the interest rate and loss payment patterns applicable to accident years ending with calendar year 2018.’’ [§ 847. Repealed. Pub. L. 115–97, title I, § 13516(a), Dec. 22, 2017, 131 Stat. 2144] Section, added Pub. L. 100–647, title VI, § 6077(a), Nov. 10, 1988, 102 Stat. 3707; amended Pub. L. 101–239, title VII, § 7816(n), Dec. 19, 1989, 103 Stat. 2422; Pub. L. 115–97, title I, § 12001(b)(8)(B), Dec. 22, 2017, 131 Stat. 2093, re- lated to special estimated tax payments. Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF REPEAL Pub. L. 115–97, title I, § 13516(b), Dec. 22, 2017, 131 Stat. 2144, provided that: ‘‘The amendments made by this section [repealing this section] shall apply to taxable years beginning after December 31, 2017.’’ § 848. Capitalization of certain policy acquisition expenses (a) General rule In the case of an insurance company— (1) specified policy acquisition expenses for any taxable year shall be capitalized, and (2) such expenses shall be allowed as a deduc- tion ratably over the 180-month period begin- ning with the first month in the second half of such taxable year. (b) 5-year amortization for first $5,000,000 of specified policy acquisition expenses (1) In general Paragraph (2) of subsection (a) shall be ap- plied with respect to so much of the specified policy acquisition expenses of an insurance company for any taxable year as does not ex- ceed $5,000,000 by substituting ‘‘60-month’’ for ‘‘180-month’’. (2) Phase-out If the specified policy acquisition expenses of an insurance company exceed $10,000,000 for any taxable year, the $5,000,000 amount under paragraph (1) shall be reduced (but not below zero) by the amount of such excess. (3) Special rule for members of controlled group In the case of any controlled group— (A) all insurance companies which are members of such group shall be treated as 1 company for purposes of this subsection, and (B) the amount to which paragraph (1) ap- plies shall be allocated among such compa- nies in such manner as the Secretary may prescribe. For purposes of the preceding sentence, the term ‘‘controlled group’’ means any controlled group of corporations as defined in section 1563(a); except that subsections (a)(4) and (b)(2)(D) of section 1563 shall not apply, and subsection (b)(2)(C) of section 1563 shall not apply to the extent it excludes a foreign cor- poration to which section 842 applies. (4) Exception for acquisition expenses attrib- utable to certain reinsurance contracts Paragraph (1) shall not apply to any speci- fied policy acquisition expenses for any tax- able year which are attributable to premiums or other consideration under any reinsurance contract. (c) Specified policy acquisition expenses For purposes of this section— (1) In general The term ‘‘specified policy acquisition ex- penses’’ means, with respect to any taxable year, so much of the general deductions for such taxable year as does not exceed the sum of— Page 1949 TITLE 26—INTERNAL REVENUE CODE § 848 (A) 2.09 percent of the net premiums for such taxable year on specified insurance contracts which are annuity contracts, (B) 2.45 percent of the net premiums for such taxable year on specified insurance contracts which are group life insurance contracts, and (C) 9.2 percent of the net premiums for such taxable year on specified insurance contracts not described in subparagraph (A) or (B). (2) General deductions The term ‘‘general deductions’’ means the deductions provided in part VI of subchapter B (sec. 161 and following, relating to itemized de- ductions) and in part I of subchapter D (sec. 401 and following, relating to pension, profit sharing, stock bonus plans, etc.). (d) Net premiums For purposes of this section— (1) In general The term ‘‘net premiums’’ means, with re- spect to any category of specified insurance contracts set forth in subsection (c)(1), the ex- cess (if any) of— (A) the gross amount of premiums and other consideration on such contracts, over (B) return premiums on such contracts and premiums and other consideration incurred for reinsurance of such contracts. The rules of section 803(b) shall apply for pur- poses of the preceding sentence. (2) Amounts determined on accrual basis In the case of an insurance company subject to tax under part II of this subchapter, all computations entering into determinations of net premiums for any taxable year shall be made in the manner required under section 811(a) for life insurance companies. (3) Treatment of certain policyholder divi- dends and similar amounts Net premiums shall be determined without regard to section 808(e) and without regard to other similar amounts treated as paid to, and returned by, the policyholder. (4) Special rules for reinsurance (A) Premiums and other consideration in- curred for reinsurance shall be taken into ac- count under paragraph (1)(B) only to the ex- tent such premiums and other consideration are includible in the gross income of an insur- ance company taxable under this subchapter or are subject to tax under this chapter by rea- son of subpart F of part III of subchapter N. (B) The Secretary shall prescribe such regu- lations as may be necessary to ensure that premiums and other consideration with re- spect to reinsurance are treated consistently by the ceding company and the reinsurer. (e) Classification of contracts For purposes of this section— (1) Specified insurance contract (A) In general Except as otherwise provided in this para- graph, the term ‘‘specified insurance con- tract’’ means any life insurance, annuity, or noncancellable accident and health insur- ance contract (or any combination thereof). (B) Exceptions The term ‘‘specified insurance contract’’ shall not include— (i) any pension plan contract (as defined in section 818(a)), (ii) any flight insurance or similar con- tract, (iii) any qualified foreign contract (as defined in section 807(e)(3) without regard to paragraph (5) of this subsection), (iv) any contract which is an Archer MSA (as defined in section 220(d)), and (v) any contract which is a health sav- ings account (as defined in section 223(d)). (2) Group life insurance contract The term ‘‘group life insurance contract’’ means any life insurance contract— (A) which covers a group of individuals de- fined by reference to employment relation- ship, membership in an organization, or similar factor, (B) the premiums for which are determined on a group basis, and (C) the proceeds of which are payable to (or for the benefit of) persons other than the employer of the insured, an organization to which the insured belongs, or other similar person. (3) Treatment of annuity contracts combined with noncancellable accident and health insurance Any annuity contract combined with noncancellable accident and health insurance shall be treated as a noncancellable accident and health insurance contract and not as an annuity contract. (4) Treatment of guaranteed renewable con- tracts The rules of section 816(e) shall apply for purposes of this section. (5) Treatment of reinsurance contract A contract which reinsures another contract shall be treated in the same manner as the re- insured contract. (6) Treatment of certain qualified long-term care insurance contract arrangements An annuity or life insurance contract which includes a qualified long-term care insurance contract as a part of or a rider on such annu- ity or life insurance contract shall be treated as a specified insurance contract not described in subparagraph (A) or (B) of subsection (c)(1). (f) Special rule where negative net premiums (1) In general If for any taxable year there is a negative capitalization amount with respect to any cat- egory of specified insurance contracts set forth in subsection (c)(1)— (A) the amount otherwise required to be capitalized under this section for such tax- able year with respect to any other category of specified insurance contracts shall be re- duced (but not below zero) by such negative capitalization amount, and Page 1950 TITLE 26—INTERNAL REVENUE CODE § 848 (B) such negative capitalization amount (to the extent not taken into account under subparagraph (A))— (i) shall reduce (but not below zero) the unamortized balance (as of the beginning of such taxable year) of the amounts pre- viously capitalized under subsection (a) (beginning with the amount capitalized for the most recent taxable year), and (ii) to the extent taken into account as such a reduction, shall be allowed as a de- duction for such taxable year. (2) Negative capitalization amount For purposes of paragraph (1), the term ‘‘negative capitalization amount’’ means, with respect to any category of specified insurance contracts, the percentage (applicable under subsection (c)(1) to such category) of the amount (if any) by which— (A) the amount determined under subpara- graph (B) of subsection (d)(1) with respect to such category, exceeds (B) the amount determined under subpara- graph (A) of subsection (d)(1) with respect to such category. (g) Treatment of certain ceding commissions Nothing in any provision of law (other than this section or section 197) shall require the cap- italization of any ceding commission incurred on or after September 30, 1990, under any con- tract which reinsures a specified insurance con- tract. (h) Secretarial authority to adjust capitalization amounts (1) In general Except as provided in paragraph (2), the Sec- retary may provide that a type of insurance contract will be treated as a separate category for purposes of this section (and prescribe a percentage applicable to such category) if the Secretary determines that the deferral of ac- quisition expenses for such type of contract which would otherwise result under this sec- tion is substantially greater than the deferral of acquisition expenses which would have re- sulted if actual acquisition expenses (includ- ing indirect expenses) and the actual useful life for such type of contract had been used. (2) Adjustment to other contracts If the Secretary exercises his authority with respect to any type of contract under para- graph (1), the Secretary shall adjust the per- centage which would otherwise have applied under subsection (c)(1) to the category which includes such type of contract so that the ex- ercise of such authority does not result in a decrease in the amount of revenue received under this chapter by reason of this section for any fiscal year. (Added Pub. L. 101–508, title XI, § 11301(a), Nov. 5, 1990, 104 Stat. 1388–445; amended Pub. L. 103–66, title XIII, § 13261(d), Aug. 10, 1993, 107 Stat. 539; Pub. L. 104–191, title III, § 301(h), Aug. 21, 1996, 110 Stat. 2052; Pub. L. 106–554, § 1(a)(7) [title II, § 202(a)(5), (b)(10)], Dec. 21, 2000, 114 Stat. 2763, 2763A–628, 2763A–629; Pub. L. 108–173, title XII, § 1201(h), Dec. 8, 2003, 117 Stat. 2479; Pub. L. 109–280, title VIII, § 844(e), Aug. 17, 2006, 120 Stat. 1013; Pub. L. 113–295, div. A, title II, § 221(a)(70), Dec. 19, 2014, 128 Stat. 4048; Pub. L. 115–97, title I, §§ 12001(b)(8)(C), 13517(b)(4), 13519(a), (b), Dec. 22, 2017, 131 Stat. 2093, 2147, 2148.) Editorial Notes AMENDMENTS 2017—Subsec. (a)(2). Pub. L. 115–97, § 13519(a)(1), sub- stituted ‘‘180-month’’ for ‘‘120-month’’. Subsec. (b)(1). Pub. L. 115–97, § 13519(b), substituted ‘‘180-month’’ for ‘‘120-month’’. Subsec. (c)(1)(A). Pub. L. 115–97, § 13519(a)(2), sub- stituted ‘‘2.09 percent’’ for ‘‘1.75 percent’’. Subsec. (c)(1)(B). Pub. L. 115–97, § 13519(a)(3), which di- rected substitution of ‘‘2.45 percent’’ for ‘‘2.05 percent’’ in par. (2), was executed to par. (1)(B) to reflect the probable intent of Congress. Subsec. (c)(1)(C). Pub. L. 115–97, § 13519(a)(4), which di- rected substitution of ‘‘9.2 percent’’ for ‘‘7.7 percent’’ in par. (3), was executed to par. (1)(C) to reflect the prob- able intent of Congress. Subsec. (c) does not contain a par. (3). Subsec. (e)(1)(B)(iii). Pub. L. 115–97, § 13517(b)(4), sub- stituted ‘‘807(e)(3)’’ for ‘‘807(e)(4)’’. Subsec. (i). Pub. L. 115–97, § 12001(b)(8)(C), struck out subsec. (i). Text read as follows: ‘‘For purposes of deter- mining adjusted current earnings under section 56(g), acquisition expenses with respect to contracts de- scribed in clause (iii) of subsection (e)(1)(B) shall be capitalized and amortized in accordance with the treat- ment generally required under generally accepted ac- counting principles as if this subsection applied to such contracts for all taxable years.’’ 2014—Subsec. (j). Pub. L. 113–295 struck out subsec. (j). Text read as follows: ‘‘In the case of any taxable year which includes September 30, 1990, the amount taken into account as the net premiums (or negative capitalization amount) with respect to any category of specified insurance contracts shall be the amount which bears the same ratio to the amount which (but for this subsection) would be so taken into account as the number of days in such taxable year on or after September 30, 1990, bears to the total number of days in such taxable year.’’ 2006—Subsec. (e)(6). Pub. L. 109–280 added par. (6). 2003—Subsec. (e)(1)(B)(v). Pub. L. 108–173 added cl. (v). 2000—Subsec. (e)(1)(B)(iv). Pub. L. 106–554, § 1(a)(7) [title II, § 202(b)(10)], substituted ‘‘an Archer MSA’’ for ‘‘a Archer MSA’’. Pub. L. 106–554, § 1(a)(7) [title II, § 202(a)(5)], sub- stituted ‘‘Archer MSA’’ for ‘‘medical savings account’’. 1996—Subsec. (e)(1)(B)(iv). Pub. L. 104–191 added cl. (iv). 1993—Subsec. (g). Pub. L. 103–66 substituted ‘‘this sec- tion or section 197’’ for ‘‘this section’’. Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 2017 AMENDMENT Amendment by section 12001(b)(8)(C) of Pub. L. 115–97 applicable to taxable years beginning after Dec. 31, 2017, see section 12001(c) of Pub. L. 115–97, set out as a note under section 11 of this title. Amendment by section 13517(b)(4) of Pub. L. 115–97 ap- plicable to taxable years beginning after Dec. 31, 2017, with transition rule and transition relief, see section 13517(c) of Pub. L. 115–97, set out as a note under section 807 of this title. Pub. L. 115–97, title I, § 13519(c), Dec. 22, 2017, 131 Stat. 2148, provided that: ‘‘(1) IN GENERAL.—The amendments made by this sec- tion [amending this section] shall apply to net pre- miums for taxable years beginning after December 31, 2017. ‘‘(2) TRANSITION RULE.—Specified policy acquisition expenses first required to be capitalized in a taxable year beginning before January 1, 2018, will continue to Page 1951 TITLE 26—INTERNAL REVENUE CODE § 851 be allowed as a deduction ratably over the 120-month period beginning with the first month in the second half of such taxable year.’’ EFFECTIVE DATE OF 2014 AMENDMENT 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 2006 AMENDMENT Amendment by Pub. L. 109–280 applicable to contracts issued after Dec. 31, 1996, but only with respect to tax- able years beginning after Dec. 31, 2009, and to specified policy acquisition expenses determined for taxable years beginning after Dec. 31, 2009, see section 844(g)(1), (4) of Pub. L. 109–280, set out as a note under section 72 of this title. EFFECTIVE DATE OF 2003 AMENDMENT Amendment by Pub. L. 108–173 applicable to taxable years beginning after Dec. 31, 2003, see section 1201(k) of Pub. L. 108–173, set out as a note under section 62 of this title. EFFECTIVE DATE OF 1996 AMENDMENT Amendment by Pub. L. 104–191 applicable to taxable years beginning after Dec. 31, 1996, see section 301(j) of Pub. L. 104–191, set out as a note under section 62 of this title. EFFECTIVE DATE OF 1993 AMENDMENT Amendment by Pub. L. 103–66 applicable, except as otherwise provided, with respect to property acquired after Aug. 10, 1993, see section 13261(g) of Pub. L. 103–66, set out as an Effective Date note under section 197 of this title. EFFECTIVE DATE Pub. L. 101–508, title XI, § 11301(d)(1), Nov. 5, 1990, 104 Stat. 1388–449, provided that: ‘‘The amendments made by subsections (a) and (c) [enacting this section] shall apply to taxable years ending on or after September 30, 1990. Any capitalization required by reason of such amendments shall not be treated as a change in method of accounting for purposes of the Internal Revenue Code of 1986.’’ Subchapter M—Regulated Investment Companies and Real Estate Investment Trusts Part I. Regulated investment companies. II. Real estate investment trusts. III. Provisions which apply to both regulated in- vestment companies and real estate invest- ment trusts. IV. Real estate mortgage investment conduits. [V. Repealed.] Editorial Notes AMENDMENTS 2004—Pub. L. 108–357, title VIII, § 835(b)(12), Oct. 22, 2004, 118 Stat. 1594, struck out item for part V ‘‘Finan- cial asset securitization investment trusts’’. 1996—Pub. L. 104–188, title I, § 1621(c), Aug. 20, 1996, 110 Stat. 1867, added item for part V. 1988—Pub. L. 100–647, title I, § 1018(u)(30), Nov. 10, 1988, 102 Stat. 3591, added item for part IV. 1978—Pub. L. 95–600, title III, § 362(d)(8), Nov. 6, 1978, 92 Stat. 2852, added item for part III. PART I—REGULATED INVESTMENT COMPANIES Sec. 851. Definition of regulated investment company. 852. Taxation of regulated investment companies and their shareholders. Sec. 853. Foreign tax credit allowed to shareholders. 853A. Credits from tax credit bonds allowed to shareholders. 854. Limitations applicable to dividends received from regulated investment company. 855. Dividends paid by regulated investment com- pany after close of taxable year. Editorial Notes AMENDMENTS 2009—Pub. L. 111–5, div. B, title I, § 1541(b)(3), Feb. 17, 2009, 123 Stat. 362, added item 853A. 1980—Pub. L. 96–223, title IV, § 404(b)(7), Apr. 2, 1980, 94 Stat. 307, inserted ‘‘and taxable interest’’ after ‘‘divi- dends’’ in item 854 for taxable years after Dec. 31, 1980, and before Jan. 1, 1982. 1960—Pub. L. 86–779, § 10(b)(1), Sept. 14, 1960, 74 Stat. 1008, inserted ‘‘and Real Estate Investment Trusts’’ in subchapter M heading, part I and part II designations thereunder and part I designation preceding table of sections numbered 851 to 855. § 851. Definition of regulated investment com- pany (a) General rule For purposes of this subtitle, the term ‘‘regu- lated investment company’’ means any domestic corporation— (1) which, at all times during the taxable year— (A) is registered under the Investment Company Act of 1940, as amended (15 U.S.C. 80a–1 to 80b–2) as a management company or unit investment trust, or (B) has in effect an election under such Act to be treated as a business development company, or (2) which is a common trust fund or similar fund excluded by section 3(c)(3) of such Act (15 U.S.C. 80a–3(c)) from the definition of ‘‘invest- ment company’’ and is not included in the def- inition of ‘‘common trust fund’’ by section 584(a). (b) Limitations A corporation shall not be considered a regu- lated investment company for any taxable year unless— (1) it files with its return for the taxable year an election to be a regulated investment company or has made such election for a pre- vious taxable year; (2) at least 90 percent of its gross income is derived from— (A) dividends, interest, payments with re- spect to securities loans (as defined in sec- tion 512(a)(5)), and gains from the sale or other disposition of stock or securities (as defined in section 2(a)(36) of the Investment Company Act of 1940, as amended) or foreign currencies, or other income (including but not limited to gains from options, futures or forward contracts) derived with respect to its business of investing in such stock, secu- rities, or currencies, and (B) net income derived from an interest in a qualified publicly traded partnership (as defined in subsection (h)); and (3) at the close of each quarter of the taxable year—