[Federal Register Volume 62, Number 1 (Thursday, January 2, 1997)]
[Proposed Rules]
[Pages 71-72]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-32855]



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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-246018-96]
RIN 1545-AU49


Recomputation of Life Insurance Reserves

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 
definition of life insurance reserves. The proposed regulations permit 
the taxpayer or the IRS to recompute certain reserves if those reserves 
were initially computed or estimated on other than an actuarial basis. 
The proposed regulations affect both life insurance companies and 
property and casualty insurance companies. 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 Thursday, April 17, 1997, at 10 a.m. must be 
received by Thursday, March 27, 1997.

ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG-246018-96), 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-246018-96), 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 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 Commissioner's 
conference room, room 3313, Internal Revenue Service Building, 1111 
Constitution Avenue, N.W. Washington, D.C.

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

SUPPLEMENTARY INFORMATION:

Background

    To qualify as a life insurance reserve for purposes of Part I of 
subchapter L of the Internal Revenue Code, a reserve must satisfy 
various requirements, including the requirement in section 816(b)(1)(A) 
and Sec. 1.801-4(a)(1) that it be ``computed or estimated on the basis 
of recognized mortality or morbidity tables and assumed rates of 
interest.'' Qualifying as a life reserve under section 816(b) has 
various consequences. Life reserves are included in the numerator and 
denominator of the reserve ratio test of section 816(a), which is used 
to determine when an insurance company is taxed as a life insurance 
company under Part I of subchapter L. Increases in life reserves as 
defined in section 816(b) are taken into account under section 
807(c)(1). In addition, life reserves as defined in section 816(b) are 
considered part of a nonlife company's unearned premiums under section 
832(b)(4).
    Two circuits have construed former section 801(b)(1)(A), which was 
recodified as section 816(b)(1)(A) in 1984, to prevent reserves held 
with respect to life, annuity or noncancellable accident and health 
policies but not computed or estimated using actuarial tables from 
qualifying as life reserves. The IRS also has held that life reserves 
must be computed or estimated using actuarial tables under former 
section 801(b)(1)(A). See, e.g., Rev. Rul. 69-302 (1969-2 C.B. 186). 
The Claims Court, in contrast, has concluded that the statute and 
regulation do not necessarily require the insurance company to compute 
its life reserves using actuarial tables, when a different method 
results in reserves that ``reasonably approximate'' actuarial reserves.
    Rev. Rul. 69-302 held that not only were life reserves required to 
be computed or estimated on the basis of recognized mortality or 
morbidity tables and assumed rates of interest, but that reserves for 
credit life insurance contracts could not be retroactively recomputed 
in a manner that would enable them to qualify as life reserves. Neither 
of the cases cited in Rev. Rul. 69-302, however, addressed the question 
of whether taxpayers or the Commissioner could recompute reserves based 
on information that was available at the end of the applicable taxable 
year. Two subsequent cases came to opposite conclusions on this issue.
    The reserve ratio test of section 816(a) was intended to 
distinguish between life and nonlife insurance companies based on the 
nature of each company's business, as measured by its reserves. This 
purpose is not achieved, however, if a company that only issues life 
insurance, annuity or noncancellable accident and health contracts can 
elect to be taxed as a nonlife company by failing to use mortality and 
morbidity tables and assumed rates of interest in computing or 
estimating its reserves for some of those contracts.

Explanation of Provisions

    Proposed Sec. 1.801-4(g)(1) provides that if an insurance company 
does not compute or estimate its reserves for certain contracts on the 
basis of mortality or morbidity tables and assumed rates of interest, 
then the taxpayer or the Commissioner may recompute those reserves on 
the basis of mortality or morbidity tables and assumed rates of 
interest. This regulation will apply to reserves for contracts 
involving, at the time with respect to which the reserves are computed, 
life, accident or health contingencies, if such reserves were not 
initially computed in accordance with the requirements of section 
816(b)(1)(A).
    Proposed Sec. 1.801-4(g)(2) provides that if the taxpayer or the 
Commissioner recomputes reserves pursuant to Sec. 1.801-4(g)(1), the 
reserves satisfy the section 816(b)(1)(A) requirement that a life 
reserve be computed or estimated using actuarial tables and assumed 
rates of interest. Assuming that these amounts satisfy the other 
requirements of section 816(b), the recomputed amounts will be 
considered life insurance reserves under section 816(b), and the 
recomputed reserves will be included in both the numerator and the 
denominator of the reserve ratio test under section 816(a). In 
addition, the reserves for such contracts will be taken into account 
under section 807(c)(1) and will be used to compute a nonlife company's 
unearned premiums under section 832(b)(4).
    Proposed Sec. 1.801-4(g)(3) provides that for purposes of section 
816(b)(4) and Sec. 1.801-3(i), which provide that the mean of the 
beginning and end of year reserves will be used for purposes of section 
816 (a), (b) and (c), the reserves on a life insurance, annuity or 
noncancellable accident and health contract must be recomputed for both 
the beginning and the end of the year.
    Proposed Sec. 1.801-4(g)(4) requires that no information acquired 
after the date as of which the beginning of year reserves were 
initially computed or estimated may be taken into account in 
recomputing those reserves under paragraph (g)(1). It also requires 
that no information acquired after the date as of

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which the end of year reserves were initially computed or estimated may 
be taken into account in recomputing those reserves under paragraph 
(g)(1).
    The IRS is considering whether to issue guidance under section 816, 
including regulations regarding the definition of ``total reserves'' 
under section 816(c) as well as redesignating and revising the 
regulations issued under prior law section 801. The IRS invites 
comments on this matter.

Proposed Effective Date

    Proposed Sec. 1.801-4(g) would be effective with respect to returns 
filed for taxable years beginning after the publication of the final 
regulations.

Effect on Other Documents

    The IRS will modify, clarify, or obsolete publications as necessary 
to conform with this regulation as of the date of publication in the 
Federal Register of the final regulations. See e.g., Rev. Rul. 69-302 
(1969-2 C.B. 186). The IRS solicits comments as to whether other 
publications should be modified or obsoleted.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in EO 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 
entities, 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 Thursday, April 17, 1997 in 
the Commissioner's conference room, room 3313, Internal Revenue Service 
Building at 10:00 a.m. 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 March 27, 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 March 27, 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 Ann B. Cammack, 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, Reporting and recordkeeping requirements.

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 1.801-4 is amended by adding a new paragraph (g) to 
read as follows:


Sec. 1.801-4  Life insurance reserves.

* * * * *
    (g) Recomputation of life insurance reserves--(1) General. If an 
insurance company does not compute or estimate its reserves for 
contracts involving, at the time with respect to which the reserves are 
computed, life, accident or health contingencies, on the basis of 
mortality or morbidity tables and assumed rates of interest, then the 
taxpayer or the Commissioner may recompute reserves for those contracts 
on the basis of mortality or morbidity tables and assumed rates of 
interest.
    (2) Effect of recomputation. If reserves are recomputed pursuant to 
paragraph (g)(1) of this section, the recomputed reserves satisfy the 
requirements of section 816(b)(1)(A).
    (3) Mean reserve. For purposes of section 816(b)(4) and Sec. 1.801-
3(i), if reserves are recomputed pursuant to paragraph (g)(1) of this 
section for a taxable year, the reserves must be recomputed for both 
the beginning and the end of the taxable year.
    (4) Subsequently acquired information. No information acquired 
after the date as of which a reserve was initially computed or 
estimated may be taken into account in recomputing that reserve under 
paragraph (g)(1) of this section.
    (5) Effective date. This section is applicable with respect to 
returns filed for taxable years beginning after the date final 
regulations are filed with the Office of the Federal Register.
Michael P. Dolan,
Acting Commissioner of Internal Revenue.
[FR Doc. 96-32855 Filed 12-31-96; 8:45 am]
BILLING CODE 4830-01-U