[Federal Register Volume 62, Number 1 (Thursday, January 2, 1997)]
[Proposed Rules]
[Pages 72-76]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-32520]


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DEPARTMENT OF THE TREASURY
26 CFR Part 1

[REG-209839-96]
RIN 1545-AU60


Determination of Earned Premiums

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: This document contains proposed regulations relating to the 
requirement that insurance companies other than life insurance 
companies reduce by 20 percent their deductions for increases in 
unearned premiums. This requirement was enacted as part of the Tax 
Reform Act of 1986. These regulations are necessary in order to provide 
guidance to nonlife insurance companies that are subject to the 20 
percent reduction rule. This document also contains a notice of a 
public hearing on the proposed regulations.

DATES: Written comments must be received by April 2, 1997. Requests to 
speak and outlines of oral comments to be discussed at the public 
hearing scheduled for April 30, 1997 at 10:00 a.m. must be received by 
April 2, 1997.

ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG-209839-96), room 
5226, Internal Revenue Service, POB 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand delivered between the 
hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (REG-209839-96), Courier's 
Desk, Internal Revenue Service, 1111 Constitution Avenue NW, 
Washington, DC. Alternatively, taxpayers may submit comments 
electronically via the internet by selecting the ``Tax Regs'' option on 
the IRS Home Page, or by submitting

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comments directly to the IRS internet site at http://
www.irs.ustreas.gov/prod/tax__regs/comments.html. The public hearing 
will be held in the Auditorium, Internal Revenue Service Building, 1111 
Constitution Avenue NW, Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Gary 
Geisler, (202) 622-3970; concerning submissions and the hearing, 
Evangelista Lee, (202) 622-7190 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    A nonlife insurance company's underwriting income equals its 
premiums earned on insurance contracts during the taxable year less its 
losses incurred and its expenses incurred. For taxable years beginning 
on or after January 1, 1993, a company's premiums earned on insurance 
contracts during the taxable year is an amount equal to the gross 
premiums written on insurance contracts during the taxable year, less 
return premiums and premiums paid for reinsurance, plus 80 percent of 
unearned premiums at the end of the prior taxable year, less 80 percent 
of unearned premiums at the end of the current taxable year.
    The gross premiums written for an insurance or reinsurance contract 
is the total amount charged by the insurance company for the insurance 
coverage provided under the contract, including amounts charged 
covering the company's expenses and overhead. Written premiums are 
generally recorded for the full term of coverage for the year in which 
the contract is issued. Upon recording a written premium, the company 
establishes an unearned premium liability to reflect the portion of the 
written premium which relates to the unexpired portion of the insurance 
coverage.
    The term ``unearned premium'' historically referred to the portion 
of the gross premiums written that would have to be returned to the 
policyholder upon cancellation of the policy and that was in direct 
proportion to the unexpired term of the policy. See, e.g., Buckeye 
Union Casualty Co. v. Commissioner, 448 F.2d 228, 230 (6th Cir. 1971), 
aff'g 54 T.C. 13, 20 n.5 (1970). Cases and rulings expanded this 
definition to include premiums paid for a future benefit, the cost of 
which was fixed when the policy was issued. See, e.g., Massachusetts 
Protective Ass'n. v. United States, 114 F.2d 304 (1st Cir. 1940); 
C.P.A. Co. v. Commissioner, 7 T.C. 912 (1946) (nonlife company), acq. 
1947-1 C.B. 1; Rev. Rul. 55-705, 1955-2 C.B. 280. But cf. Bituminous 
Casualty Corp. v. Commissioner, 57 T.C. 58 (1971), acq. in result 1973-
2 C.B. 1 (stating in dictum that ``unearned premiums'' had a 
substantially broader definition than the one developed in the cases 
and rulings cited above).
    Prior to 1987, the increase in unearned premiums during the taxable 
year was deducted from gross premiums written in the computation of 
premiums earned. For example, if a company on September 1st issued a 
one-year fire insurance policy with a premium of $1,200, the company on 
that date would record a gross written premium of $1,200 and establish 
a $1,200 unearned premium reserve. On December 31st, the company would 
have earned one-third of the premium, $400, but would have an $800 
unearned premium reserve liability for the remaining eight months of 
coverage to be provided in periods after the close of the taxable year. 
The subtraction of the full amount of unearned premiums from the gross 
written premium ``generally reflect[ed]'' the accounting conventions 
(often referred to as ``statutory accounting principles'') used to 
prepare the annual statement for state insurance regulatory purposes. 2 
H.R. Conf. Rep. No. 841, 99th Cong., 2d Sess. II-354 (1986), 1986-3 
C.B. (Vol. 4) 354; S. Rep. No. 313, 99th Cong., 2d Sess. 495 (1986), 
1986-3 C.B. (Vol. 3) 495; H.R. Rep. No. 426, 99th Cong., 1st Sess. 668 
(1985), 1986-3 C.B. (Vol. 2) 668.
    A nonlife company generally deducts expenses incurred in the 
taxable year in which the expenses are reported on the company's annual 
statement. These expenses include premium acquisition expenses 
attributable to unearned premiums.
    In 1986, Congress determined that the combination of deferring 
unearned premiums and currently deducting premium acquisition expenses 
attributable to unearned premiums under the accounting conventions used 
to prepare a nonlife insurance company's annual statement resulted in a 
mismatch of income and expense. Congress decided to require a better 
measurement of income for Federal income tax purposes. H.R. Rep. No. 
426, 1986-3 C.B. (Vol. 2) at 669; S. Rep. No. 313, 1986-3 C.B. (Vol. 3) 
at 496. Rather than require a nonlife company to capitalize and 
amortize premium acquisition expenses, Congress reduced by 20 percent 
the current deduction for unearned premiums. See section 832(b)(4)(B); 
2 H.R. Conf. Rep. No. 841, 1986-3 C.B. (Vol. 4) at 354-55; S. Rep. No. 
313, 1986-3 C.B. (Vol. 3) at 495-98; H.R. Rep. No. 426, 1986-3 C.B. 
(Vol. 2) at 668-70. This reduction in unearned premiums is sometimes 
referred to as the ``20 percent haircut.'' The acceleration of income 
as a result of the 20 percent haircut is intended to be roughly 
equivalent to denying current deductibility for a portion of the 
premium acquisition expenses.
    Congress intended the 20 percent haircut to apply to all amounts 
(other than life insurance reserves and title insurance reserves) that 
were considered unearned premiums for Federal income tax purposes as of 
1986. The House Report states that ``[a]ll items which are included in 
unearned premiums under section 832(b) of present law are subject to 
this reduction in the deduction.'' H.R. Rep. No. 426, 1986-3 C.B. (Vol. 
2) at 669. In describing the House bill, the Conference Report 
reiterates that ``[a]ll items which are included in unearned premiums 
under section 832(b) of present law are subject to this reduction in 
the deduction'' and describes the Senate amendment as ``the same as the 
House bill, except that life insurance reserves which are included in 
unearned premium reserves under section 832(b)(4) are not subject to 
this reduction.'' 2 H.R. Conf. Rep. No. 841, 1986-3 C.B. (Vol. 4) at 
354-55. The Report's description of the Conference agreement states 
that the agreement ``follows the Senate amendment'' but ``provides 
special treatment of title insurance unearned premium reserves.'' Id. 
See sections 832(b) (7) and (8) for the rules applicable to life 
insurance and title insurance reserves.
    Following the imposition of the 20 percent haircut on unearned 
premiums, the National Association of Insurance Commissioners (NAIC) 
revised the statutory accounting principles used to prepare a nonlife 
insurance company's annual statement. In general, these changes 
permitted a nonlife company to defer recording written premiums and/or 
to reduce the amount of unearned premiums reported on the company's 
annual statement. The affected items included advance premiums, 
additional premiums on retrospectively rated insurance policies, and 
the reporting of written premiums for workers' compensation policies 
and certain other casualty policies where the covered risk varies over 
the policy term.
    Prior to 1989, advance premiums were required to be reported in 
written premiums and unearned premiums on the annual statement for the 
year in which the advance premiums were received. However, statutory 
accounting principles now permit advance premiums to be accumulated in 
a suspense account and reported as a write-in liability on the annual

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statement. A company electing to use this alternative treatment would 
not report advance premiums in either written premiums or unearned 
premiums on the annual statement until the effective date of the 
underlying coverage.
    Statutory accounting principles also required a nonlife insurance 
company to record an estimated liability for payment of return premiums 
under retrospectively rated insurance policies (retro credits) as part 
of the unearned premium liability. Estimates of additional premiums due 
from insureds under these policies (retro debits) historically were not 
taken into account except as an offset to the company's estimated 
liability for payment of retro credits. Thus, retro debits were not 
permitted to be shown as assets on the annual statement, and generally 
were not included in written premiums prior to the year in which the 
company billed the policyholder for these additional premiums. 
Beginning in 1988, however, the NAIC permitted retro debits to be shown 
in an insurance company's admitted assets, subject to certain 
limitations. The NAIC currently has under consideration a proposal that 
would require retro credits to be recorded as a write-in liability on 
the annual statement, rather than as part of unearned premiums. This 
proposal would also permit retro credits and retro debits to be taken 
into account either as adjustments to written premiums or as 
adjustments to earned premiums for purposes of determining underwriting 
income on the annual statement.
    A nonlife insurance company ordinarily reports the full amount of 
premiums provided in a casualty insurance policy (including any 
deferred premium installments) in written premiums and unearned 
premiums for the year in which the policy is issued. However, for 
workers' compensation policies and certain other casualty policies 
where the covered risk varies over the policy term, some but not all 
state insurance regulators permit written premiums to be recorded based 
on installment billings to the policyholder. If the insurance company 
issues these policies throughout the year, and the premiums for the 
policies are billed monthly, the portion of the total written premiums 
that would be shown as unearned premiums is substantially smaller than 
would be the case if the written premiums and unearned premiums were 
determined based on the entire policy term. The NAIC currently has 
under consideration proposed guidance that would require the full 
amount of the premiums provided in all casualty insurance policies to 
be reported in written premiums and unearned premiums on the effective 
date of the related coverage.
    Section 832(b)(1)(A) provides that a nonlife insurance company's 
income is computed on the basis of the underwriting and investment 
exhibit of the annual statement approved by the NAIC. Some companies 
assert that section 832(b)(1)(A) limits application of the 20 percent 
haircut to the amount of unearned premiums reported on the annual 
statement. Under this approach, a company that elects for annual 
statement purposes to report advance premiums as a write-in liability, 
to offset unearned premiums by retro debits, or to include deferred 
premiums on policies covering fluctuating risks in written premiums 
only when billed to the insured, reduces the amount of unearned 
premiums subject to the 20 percent haircut.
    The existing regulations under Sec. 1.832-4(a)(2) state that 
``[t]he underwriting and investment exhibit[,] * * * insofar as it is 
not inconsistent with the provisions of the Code will be recognized and 
used as a basis for [computing the net income of a nonlife insurance 
company].'' However, the regulations recognize that not all items of 
the exhibit ``reflect * * * income as defined in the Code.'' Where 
statutory accounting principles permit a company to elect among 
alternative accounting practices, one or more of which do not clearly 
reflect income as defined by the Code, the company is required for 
Federal tax purposes to use a method that clearly reflects income. 
Section 446(b) and Sec. 1.446-1(a)(2). Furthermore, an accounting 
practice used on the annual statement, although specifically mandated 
by statutory accounting principles, is not used for purposes of 
computing taxable income if that practice is inconsistent with the 
Code.

Overview of Proposed Regulations

    The proposed regulations define gross premiums written, return 
premiums, and unearned premiums for tax purposes. The proposed 
regulations also provide rules for determining when gross premiums 
written, return premiums, and unearned premiums are taken into account 
for tax purposes. In this manner, the proposed regulations ensure that 
items such as advance premiums and retrospective premium adjustments 
are treated consistently for purposes of the 20 percent haircut on 
unearned premiums.

Explanation of Provisions

    The starting point for determining a nonlife insurance company's 
premiums earned for tax purposes is the ``gross premiums written on 
insurance contracts during the taxable year.'' Proposed Sec. 1.832-
4(a)(4)(i) defines ``gross premiums written on insurance contracts'' as 
the total amounts charged by the insurance company for insurance 
coverage under insurance or reinsurance contracts issued or renewed 
during the taxable year. Thus, ``gross premiums written'' includes 
collected and uncollected premiums.
    Proposed Sec. 1.832-4(a)(4)(ii) addresses the treatment of retro 
debits, which reflect estimates of additional premiums to be received 
from the insured or the reinsured based on the insurance company's loss 
experience during expired coverage periods. Thus, retro debits 
represent additional gross premiums written rather than offsets to the 
unearned premium liability for unexpired coverage periods. Treating 
retro debits as offsets to unearned premiums would reduce the 
acceleration of income under the 20 percent haircut, and would allow 
some companies with retro debits exceeding their unearned premiums to 
report a lesser amount of earned premiums for Federal income tax 
purposes than for annual statement reporting purposes. This result is 
contrary to the Congressional intent to accelerate the rate at which 
premiums are earned for tax purposes in order to correct the 
mismatching of income and expenses on the annual statement. 
Accordingly, proposed Sec. 1.832-4(a)(4)(ii) requires retro debits to 
be included in gross premiums written regardless of the manner in which 
the retro debits are reported on the underwriting exhibit of the annual 
statement.
    Under section 832(b)(4)(A), an insurance company reduces the amount 
of gross premiums written on insurance contracts during the taxable 
year by return premiums and premiums paid for reinsurance. Proposed 
Sec. 1.832-4(a)(5)(i) defines return premiums as amounts paid or 
credited to the policyholder in accordance with the terms of an 
insurance contract, other than policyholder dividends or claims and 
benefit payments. Thus, return premiums include amounts paid or 
credited to the policyholder with respect to endorsements and 
modifications of the terms of coverage of an insurance contract. Return 
premiums also include amounts returned or credited to the policyholder 
on cancellation of an insurance contract, including the unearned 
portion of any deferred or uncollected premiums previously included by 
the company in gross premiums written and unearned premiums. Finally, 
return premiums

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include amounts contractually required to be returned to the ceding 
company under a reinsurance contract.
    The proposed regulations modify the treatment of retro credits 
under existing law for purposes of determining earned premiums. Since 
1943, Sec. 1.832-4(a)(3)(ii) has provided that the liability for return 
premiums under a retrospectively rated policy is included in a nonlife 
company's unearned premiums for tax purposes. Although retro credits 
were included in unearned premiums in 1986, these amounts are based on 
an insured's loss experience during expired coverage periods, for which 
the company has already earned the premium. For this reason, proposed 
Sec. 1.832-4(a)(5)(ii) provides that a nonlife company's provision for 
payment of a retro credit generally is included in return premiums that 
reduce gross premiums written. However, proposed Sec. 1.832-4(a)(6)(iv) 
gives a company the option to include retro credits in unearned 
premiums to which the 20 percent haircut applies.
    The proposed regulations provide timing rules with respect to when 
a company reports gross premiums written and unearned premiums for tax 
purposes. Proposed Sec. 1.832-4(a)(7) requires a company to report 
gross premiums written with respect to an insurance or reinsurance 
contract for the earlier of the taxable year which includes the 
effective date of the contract or the taxable year in which all or a 
part of the gross premium for the contract is received. Thus, the 
company must report gross premiums written with respect to an insurance 
contract for the year in which it collects an advance premium. By 
requiring advance premiums to be included in gross premiums written and 
unearned premiums, regardless of the manner in which the advance 
premiums are recorded on the annual statement, the proposed regulations 
ensure that the treatment of a nonlife insurance company's advance 
premiums conforms with the treatment of advance premiums of a life 
insurance company under section 807(e)(7).
    The NAIC is considering proposed guidance that would require the 
premium for the entire term of a property and casualty insurance 
contract to be recorded as written premium on the effective date of the 
contract. The proposed NAIC guidance rejects the previous NAIC position 
that permitted written premiums for workers' compensation policies and 
certain other casualty policies where the covered risk varies over the 
policy term to be recorded when billed. For this reason, the method of 
reporting gross premiums written for workers' compensation policies and 
certain other casualty insurance policies covering fluctuating risks is 
reserved in the proposed regulations.

Proposed Effective Date

    The proposed regulations are proposed to apply to the determination 
of premiums earned for insurance contracts issued or renewed in taxable 
years beginning after the date on which final regulations are published 
in the Federal Register.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866. Therefore, a regulatory assessment is not required. It also has 
been determined that section 553(b) of the Administrative Procedure Act 
(5 U.S.C. chapter 5) does not apply to these regulations, and because 
the regulations do not impose a collection of information on small 
entitles, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not 
apply. Pursuant to section 7805(f) of the Internal Revenue Code, this 
notice of proposed rulemaking will be submitted to the Chief Counsel 
for Advocacy of the Small Business Administration for comment on its 
impact on small business.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written comments (a signed original 
and 8 copies) that are submitted timely to the IRS. All comments will 
be available for public inspection and copying.
    A public hearing has been scheduled for Wednesday, April 30, 1997 
in the Auditorium, Internal Revenue Service Building, 1111 Constitution 
Avenue NW, Washington DC. Because of access restrictions, visitors will 
not be admitted beyond the Internal Revenue Building lobby more than 15 
minutes before the hearing starts.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing.
    Persons that wish to present oral comments at the hearing must 
submit written comments by April 2, 1997 and submit an outline of the 
topics to be discussed and the time to be devoted to each topic (a 
signed original and 8 copies) by April 2, 1997.
    A period of 10 minutes will be allotted to each person for making 
comments.
    An agenda showing the scheduling of the speakers will be prepared 
after the deadline for receiving outlines has passed. Copies of the 
agenda will be available free of charge at the hearing.

Drafting Information

    The principal author of this regulation is Gary Geisler, Office of 
Assistant Chief Counsel (Financial Institutions and Products). However, 
other personnel from the IRS and Treasury Department participated in 
their development.

List of Subjects in 26 CFR Part 1

    Income taxes.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *

    Par. 2. Section 1.832-4 is amended as follows:
    1. Paragraph (a)(3) is revised.
    2. Paragraphs (a)(4) and (a)(5) are redesignated as (a)(9) and 
(a)(10).
    3. New paragraphs (a)(4) through (a)(8) are added.
    The additions and revisions read as follows:


Sec. 1.832-4  Gross income.

    (a) * * *
    (3) Premiums earned. The determination of premiums earned on 
insurance contracts during the taxable year begins with the insurance 
company's gross premiums written on insurance contracts during the 
taxable year, reduced by return premiums and ceded reinsurance 
premiums. Subject to the exceptions in sections 832(b)(7), 832(b)(8), 
and 833(a)(3), this amount is increased by 80 percent of the unearned 
premiums at the end of the preceding taxable year, and is decreased by 
80 percent of the unearned premiums at the end of the taxable year.
    (4) Gross premiums written--(i) In general. An insurance company's 
``gross premiums written on insurance contracts during the taxable 
year'' are the total amounts charged by the insurance company for 
insurance coverage under insurance or reinsurance contracts issued or 
renewed by the company during the taxable year.
    (ii) Debits on retrospectively rated insurance policies. Gross 
premiums written include an insurance company's estimate of the gross 
additional premiums to be received from the insured or the reinsured 
with respect to the expired portion of a retrospectively rated 
insurance or reinsurance contract

[[Page 76]]

(retro debits). The retro debits are reported for the taxable year in 
which the amounts can be reasonably estimated based on information used 
to compute the insurance company's loss reserves. An insurance company 
adjusts gross premiums written to reflect payments from the insured or 
the reinsured with respect to retro debits, as well as changes in the 
estimate of retro debits.
    (5) Return premiums--(i) In general. Return premiums are amounts 
paid or credited to the policyholder in accordance with the terms of an 
insurance contract, other than policyholder dividends or claims and 
benefit payments. For example, return premiums include amounts returned 
or credited to the policyholder based on modifications of the terms of 
an insurance contract. Return premiums also include amounts 
contractually required to be returned to the ceding company pursuant to 
a reinsurance contract.
    (ii) Credits on retrospectively rated insurance policies. Except as 
provided in paragraph (a)(6)(iv) of this section, return premiums 
include an insurance company's estimate of the gross liability for 
return premiums to be paid or credited to the insured or the reinsured 
with respect to the expired portion of a retrospectively rated 
insurance or reinsurance contract (retro credits). The retro credits 
are included in return premiums for the taxable year in which the 
insurance company's liability to pay or credit these amounts can be 
reasonably estimated based on information used to compute the company's 
loss reserves. An insurance company adjusts return premiums to reflect 
payments made or amounts credited to the insured or the reinsured with 
respect to retro credits, as well as changes in the estimate of retro 
credits.
    (iii) Unpaid premiums on cancelled policies. If an insurance 
contract is cancelled, an insurance company includes in return premiums 
the unearned portion of any deferred or uncollected premiums previously 
included in gross premiums written and unearned premiums.
    (6) Unearned premiums--(i) In general. The unearned premium for an 
insurance or reinsurance contract is the portion of the gross premiums 
written which is attributable to future insurance coverage to be 
provided under the contract. An insurance company makes an appropriate 
adjustment to its unearned premiums for an insurance or reinsurance 
contract if the contract is reinsured with, or retroceded to, another 
insurance company.
    (ii) Special rules. In computing ``premiums earned on insurance 
contracts during the taxable year,'' the amount of unearned premiums 
includes--
    (A) Life insurance reserves (as defined in section 816(b), but 
computed in accordance with section 807(d));
    (B) In the case of a mutual flood or fire insurance company 
described in section 832(b)(1)(D) (with respect to contracts described 
in that section) the amount of unabsorbed premium deposits which the 
company would be obligated to return to its policyholders at the close 
of the taxable year if all its policies were terminated at that time;
    (C) In the case of an interinsurer or reciprocal underwriter which 
reports unearned premiums on its annual statement net of premium 
acquisition expenses, the unearned premiums on the company's annual 
statement increased by the portion of premium acquisition expenses 
allocable to those unearned premiums;
    (D) In the case of a title insurance company, its discounted 
unearned premiums (computed in accordance with section 832(b)(8)); and
    (E) Amounts treated as unearned premiums pursuant to the optional 
treatment provided in paragraph (a)(6)(iv) of this section.
    (iii) Method of determining unearned premiums. If the risk of loss 
under an insurance or reinsurance contract arises uniformly over the 
contract period, the unearned premium attributable to the portion of 
the insurance coverage which has not expired is computed on a pro rata 
basis. If the risk of loss does not arise uniformly over the contract 
period, the insurance company may consider the pattern or incidence of 
the risk in determining the portion of the gross premium written which 
is attributable to the portion of the insurance coverage which has not 
yet expired.
    (iv) Option to include retro credits in unearned premiums. An 
insurance company may include retro credits in unearned premiums under 
section 832(b)(4) for its first taxable year beginning after the date 
on which final regulations are published in the Federal Register. Any 
company exercising this option must apply it consistently to all retro 
credits with respect to retrospectively rated insurance or reinsurance 
contracts issued or renewed during the taxable year and all subsequent 
years.
    (7) Method of reporting gross premiums written--(i) In general. An 
insurance company reports gross premiums written with respect to an 
insurance or reinsurance contract for the earlier of the taxable year 
which includes the effective date of the contract or the taxable year 
in which all or a part of the gross premium for the contract is 
received.
    (ii) Method of reporting gross premiums written on policies 
covering fluctuating risks. [Reserved]
    (iii) Examples. The provisions of this paragraph (a)(7) are 
illustrated by the following examples:

    Example 1. (i) IC is a nonlife insurance company which, pursuant 
to section 843, files its returns on a calendar year basis. On July 
1, 1998, IC issues a fire insurance policy to A, an individual. The 
policy provides coverage for a one-year term beginning on July 1, 
1998 and ending on June 30, 1999. The premium provided in the policy 
is $500, which may be paid either in full on the policy effective 
date or in quarterly installments of $125. A selects the installment 
payment option. As of December 31, 1998, the policy issued to A 
remains in force, and IC has collected a total of $250 of 
installment premiums from A. Assume IC has issued no other policies.
    (ii) For the taxable year ending December 31, 1998, IC reports 
the $500 premium provided in A's policy in gross premiums written 
under section 832(b)(4)(A). IC also claims a reduction under section 
832(b)(4)(B) for 80% of the $250 of unearned premiums ($200) 
associated with the policy at the end of the taxable year.
    Example 2. (i) The facts are the same as Example 1, except that 
the term of coverage for the fire insurance policy issued to A 
begins on January 1, 1999 and ends on December 31, 1999. On December 
15, 1998, IC receives $125 from A and agrees to apply this amount as 
the first premium installment due on the policy.
    (ii) Under paragraph (a)(7)(i) of this section, IC reports gross 
premiums written for the policy issued to A for the taxable year in 
which the advance premium is received. Thus, for the taxable year 
ending December 31, 1998, IC includes $500 in its gross premiums 
written under section 832(b)(4)(A). IC also claims a reduction under 
section 832(b)(4)(B) for 80% of the $500 of unearned premiums ($400) 
associated with the policy at the end of the taxable year.

    (8) Effective date. Paragraphs (a)(3) through (a)(7) of this 
section are applicable with respect to the determination of premiums 
earned for insurance contracts issued or renewed during taxable years 
beginning after the date on which final regulations are published in 
the Federal Register.
Michael P. Dolan,
Acting Commissioner of Internal Revenue.
[FR Doc. 96-32520 Filed 12-31-96; 8:45 am]
BILLING CODE 4830-01-U