96-32855. Recomputation of Life Insurance Reserves  

  • [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
    
    
    

Document Information

Published:
01/02/1997
Department:
Internal Revenue Service
Entry Type:
Proposed Rule
Action:
Notice of proposed rulemaking and notice of public hearing.
Document Number:
96-32855
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.
Pages:
71-72 (2 pages)
Docket Numbers:
REG-246018-96
RINs:
1545-AU49: Recomputation of Life Insurance Reserves
RIN Links:
https://www.federalregister.gov/regulations/1545-AU49/recomputation-of-life-insurance-reserves
PDF File:
96-32855.pdf
CFR: (1)
26 CFR 1.801-4