APPENDIX II-LIFE INSURANCE COMPANY TAX ACT FOR 1955

Sec. 801. Definition of life insurance company.

Sec. 802. Tax imposed for 1955.

Sec. 803. Income and deductions.

Sec. 804. Reserve and other policy liability deduction.

Sec. 805. Special interest deduction.

SEC. 801. DEFINITION OF LIFE INSURANCE COMPANY.

(a) LIFE INSURANCE COMPANY DEFINED.-For purposes of this subtitle, the term "life insurance company" means an insurance company which is engaged in the business of issuing life insurance and annuity contracts (either separately or combined with health and accident insurance), or noncancellable contracts of health and accident insurance, if—

(1) its life insurance reserves (as defined in subsection (b)), plus

(2) unearned premiums and unpaid losses on noncancellable life, health, or accident policies not included in life insurance reserves,

comprise more than 50 percent of its total reserves (as defined in subsection (c)).

(b) LIFE INSURANCE RESERVES DEFINED.

(1) IN GENERAL.-For purposes of this part, the term "life insurance reserves" means amounts(A) which are computed or estimated on the basis of recognized mortality or morbidity tables and assumed rates of interest, and

(B) which are set aside to mature or liquidate, either by payment or reinsurance, future unaccrued claims arising from life insurance, annuity, and noncancellable health and accident insurance contracts (including life insurance or annuity contracts combined with noncancellable health and accident insurance) involving, at the time with respect to which the reserve is computed, life, health, or accident contingencies. (2) RESERVES MUST BE REQUIRED BY LAW.-Except

(A) in the case of policies covering life, health, and accident insurance combined in one policy issued on the weekly premium payment plan, continuing for life and not subject to cancellation and,

(B) as provided in paragraph (3),

in addition to the requirements set forth in paragraph (1), life insurance reserves must be required by law.

(3) ASSESSMENT COMPANIES.-In the case of an assessment life insurance company or association, the term “life insurance reserves" includes―

(A) sums actually deposited by such company or association with State or Territorial officers pursuant to law as guaranty or reserve funds, and

(B) any funds maintained, under the charter or articles of incorporation or association (or bylaws approved by a State insurance commissioner) of such company or association, exclusively for the payment of claims arising under certificates of membership or policies issued on the assessment plan and not subject to any other use.

(4) AMOUNT OF RESERVE.-For purposes of this subsection, subsection (a), and subsection (c), the amount of any reserve (or portion thereof) for any taxable year shall be the mean of such reserve (or portion thereof) at the beginning and end of the taxable year.

(c) TOTAL RESERVES DEFINED.-For purposes of subsection (a), the term "total reserves"

means

(1) life insurance reserves,

(2) unearned premiums and unpaid losses not included in life insurance reserves, and (3) all other insurance reserves required by law.

(d) ADJUSTMENTS IN RESERVES FOR POLICY LOANS.-For purposes only of determining under subsection (a) whether or not an insurance company is a life insurance company, the life insurance reserves, and the total reserves, shall each be reduced by an amount equal to the mean of the

1 For the revision of Part I of Subchapter L of Chapter 1 by P.L. 84-429, § 2, and for amendments to such Part I prior to its subsequent revision by P.L. 86-69, § 2, see pages 337 and following above.

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aggregates, at the beginning and end of the taxable year, of the policy loans outstanding with respect to contracts for which life insurance reserves are maintained.

(e) BURIAL AND FUNERAL BENEFIT INSURANCE COMPANIES.-A burial or funeral benefit insurance company engaged directly in the manufacture of funeral supplies or the performance of funeral services shall not be taxable under this part but shall be taxable under section 821 or section 831.

SEC. 802. TAX IMPOSED FOR 1955.

(a) TAX IMPOSED.-A tax is hereby imposed for each taxable year beginning in 1955 on the income of every life insurance company. Except as provided in subsection (c), such tax shall consist of a normal tax (computed under section 11(b)) and a surtax (computed under section 11(e)) on the sum of

(1) the life insurance taxable income (as defined in subsection (b)), plus

(2) the non-life insurance taxable income (as defined in subsection (f)).

(b) LIFE INSURANCE TAXABLE INCOME DEFINED.-For purposes of this subpart, the term "life insurance taxable income" means the net investment income (as defined in section 803(c)), minus the sum of

(1) the net investment income allocable to non-life insurance reserves (determined under section 804(d)),

(2) the reserve and other policy liability deduction (determined under section 804), and (3) the special interest deduction, if any, allowed by section 805.

(c) ALTERNATIVE TAX IN THE CASE OF COMPANIES HAVING NON-LIFE INSURANCE Reserves.— (1) IN GENERAL.-In the case of a life insurance company which has non-life insurance reserves, the tax imposed by subsection (a) of this section for any taxable year beginning in 1955 shall be the tax computed under such subsection (or under section 1201 (a) if applicable) or the tax computed under paragraph (2) of this subsection, whichever is the greater.

(2) ALTERNATIVE 1 PERCENT TAX ON NON-LIFE INSURANCE BUSINESS.-The tax referred to in paragraph (1) is a tax equal to the sum of the following:

(A) A partial tax consisting of a normal tax (computed under section 11(b)) and a surtax (computed under section 11(c)) on the life insurance taxable income. (B) A partial tax consisting of

(i) 1 percent of the amount which bears the same ratio to the gross investment income (reduced by the deduction for wholly-exempt interest allowed by section 803 (c) (1)) as the non-life insurance reserves bear to the qualified reserves (determined under section 804 (c)), plus

(ii) 1 percent of the excess of the amount by which the net premiums on contracts meeting the requirements of section 804(d) (2) (A) exceed the dividends to policyholders on such contracts. For purposes of this clause, net premiums, and dividends to policyholders, shall be computed in the manner provided in section 823.

(d) DEDUCTIONS FOR PARTIALLY TAX-EXEMPT INTEREST.

(1) COMPUTATIONS UNDER SUBSECTION (a).-For purposes of computing the normal tax under subsection (a), there shall be allowed as a deduction an amount which bears the same ratio to the amount of the deduction provided by section 242 for partially tax-exempt interest as (A) the sum of the life insurance taxable income and the net investment income allocable to non-life insurance reserves bears to (B) the net investment income.

(2) COMPUTATIONS UNDER SUBSECTION (c) (2) (A).—In computing the normal tax for purposes of subsection (c) (2) (A), there shall be allowed as a deduction an amount which bears the same ratio to the amount of the deduction provided by section 242 for partially tax-exempt interest as (A) the life insurance taxable income bears to (B) the net investment income. (e) ALTERNATIVE TAX ON CAPITAL GAINS.-In the case of a life insurance company which has non-life insurance reserves, the term "excess" used in section 1201 (a) (relating to alternative tax on capital gains of corporations) means, for purposes of section 1201(a), an amount which bears the same ratio to the excess described in such section as the non-life insurance reserves (determined under section 804(d)) bear to the qualified reserves (determined under section 804(c)). For purposes of any such computation, a net capital loss for any taxable year beginning before January 1, 1955, shall not be taken into account.

(f) NON-LIFE INSURANCE TAXABLE INCOME DEFINED. For purposes of this subpart, the term "non-life insurance taxable income" means the net investment income allocable to non-life insurance reserves (determined under section 804(d))—

(1) increased by an amount which bears the same ratio to the net capital gain as the non-life insurance reserves bear to the qualified reserves; and

(2) decreased by an amount which bears the same ratio to the total of the deductions provided in sections 243, 244, and 245 as the non-life insurance reserves bear to the qualified

reserves.

In computing a net capital gain for purposes of paragraph (1) of this subsection, a net capital loss for any taxable year beginning before January 1, 1955, shall not be taken into account.

SEC. 803. INCOME AND DEDUCTIONS.

(a) APPLICATION OF SECTION.-The definitions and rules contained in this section shall apply only in the case of life insurance companies.

(b) GROSS INVESTMENT INCOME. For purposes of this part, the term "gross investment income" means the sum of the following:

(1) The gross amount of income received or accrued from

(A) interest, dividends, rents, and royalties,

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(B) the entering into of any lease, mortgage, or other instrument or agreement from which the life insurance company derives interest, rents, or royalties, and

(C) the alteration or termination of any instrument or agreement described in subparagraph (B). (2) The gross income from any trade or business (other than an insurance business) carried on by the life insurance company, or by a partnership of which the life insurance company is a partner. In computing gross income under this paragraph, there shall be excluded any item described in paragraph (1).

In computing gross investment income under this subsection, there shall be excluded any gain from the sale or exchange of a capital asset, and any gain considered as gain from the sale or exchange of a capital asset.

(c) NET INVESTMENT INCOME DEFINED. The term "net investment income" means the gross investment income less the following deductions:

(1) TAX-FREE INTEREST.-The amount of interest received or accrued during the taxable year which under section 103 is excluded from gross income.

(2) INVESTMENT EXPENSES.

(A) Investment expenses paid or accrued during the taxable year.

(B) If any general expenses are in part assigned to or included in the investment expenses, the total deduction under this paragraph shall not exceed―

(i) one-fourth of 1 percent of the mean of the book value of the invested assets held at the beginning and end of the taxable year, plus

(ii) one-fourth of the amount by which the net investment income (computed without any deduction for investment expenses allowed by this paragraph, or for tax-free interest allowed by paragraph (1)) exceeds 34 percent of the book value of the mean of the invested assets held at the beginning and end of the taxable year.

(3) REAL ESTATE EXPENSES.-Taxes (as provided in section 164), and other expenses, paid or accrued during the taxable year exclusively on or with respect to the real estate owned by the company. No deduction shall be allowed under this paragraph for any amount paid out for new buildings, or for permanent improvements or betterments made to increase the value of any property.

(4) DEPRECIATION. The depreciation deductions allowed by section 167.

(5) DEPLETION.-The deduction allowed by section 611 (relating to depletion).

(6) TRADE OR BUSINESS DEDUCTIONS.-The deductions allowed by this subtitle (without regard to this part) which are attributable to any trade or business (other than an insurance business) carried on by the life insurance company, or by a partnership of which the life insurance company is a partner; except that for purposes of this paragraph

(A) There shall be excluded losses from

(i) sales or exchanges of capital assets,

(ii) sales or exchanges of property used in the trade or business (as defined in section 1231 (b)), and

(iii) the compulsory or involuntary conversion (as a result of destruction, in whole or in part, theft or seizure, or an exercise of the power of requisition or condemnation or the threat or imminence thereof) of property used in the trade or business (as so defined). (B) Any item, to the extent attributable to the carrying on of the insurance business, shall not be taken into account.

(C) The deduction for net operating losses provided in section 172, and the special deductions for corporations provided in part VIII of subchapter B, shall not be allowed. (d) RENTAL VALUE OF REAL ESTATE.-The deduction under subsection (c) (3) and (4) on account of any real estate owned and occupied in whole or in part by a life insurance company shall be limited to an amount which bears the same ratio to such deduction (computed without regard to this subsection) as the rental value of the space not so occupied bears to the rental value of the entire property.

(e) AMORTIZATION OF PREMIUM AND ACCRUAL OF DISCOUNT.-The gross investment income, the deduction for wholly-exempt interest allowed by subsection (c) (1), and the deduction allowed by section 242 (relating to partially tax-exempt interest) shall each be decreased to reflect the appropriate amortization of premium and increased to reflect the appropriate accrual of discount attributable to the taxable year on bonds, notes, debentures, or other evidences of indebtedness held by a life insurance company. Such amortization and accrual shall be determined

(1) in accordance with the method regularly employed by such company, if such method is reasonable, and

(2) in all other cases, in accordance with regulations prescribed by the Secretary or his delegate.

SEC. 804. RESERVE AND OTHER POLICY LIABILITY DEDUCTION.

(a) GENERAL RULE.-Except as provided in subsection (b), for purposes of this subpart the term "reserve and other policy liability deduction" means the sum of the amounts determined by applying the following percentages to the excess of the net investment income over the net investment income allocable to non-life insurance reserves (determined under subsection (d)):

(1) 87.5 percent of so much of such excess as does not exceed $1,000,000; and

(2) 85 percent of so much of such excess as exceeds $1,000,000.

(b) MAXIMUM DEDUCTION.

(1) IN GENERAL.-The reserve and other policy liability deduction shall in no case exceed that amount which is equal to the sum of the following:

(A) the amount equal to 2 times the amount determined under paragraph (1) of section 805(c) (relating to required interest of life insurance reserves);

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(B) the amount determined under paragraph (2) of section 805(c) (relating to required interest on reserves for deferred dividends);

(C) the amount of the interest paid (as defined in section 805(d));

(D) the dividends to policyholders paid or declared (other than dividends on contracts meeting the requirements of subsection (d) (2) (A)); and

(E) in the case of a mutual assessment life insurance company or association, the amount equal to 2 times whichever of the following is the lesser: (i) the amount of the net investment income on life insurance reserves described in subparagraph (A) or (B) of section 801(b) (3), or (ii) 3 percent of the life insurance reserves so described,

reduced by the amount of the adjustment for policy loans provided in paragraph (2) of this subsection. For purposes of subparagraph (D) of the preceding sentence, the term "paid or declared" shall be construed according to the method of accounting regularly employed in keeping the books of the insurance company.

(2) REDUCTION FOR CERTAIN POLICY LOANS.-The adjustment described in paragraph (1) of this subsection shall be an amount equal to

(A) the mean of the aggregates, at the beginning and end of the taxable year, of the outstanding policy loans with respect to contracts for which life insurance reserves are maintained, multiplied by

(B) the average rate of interest applicable to life insurance reserves.

For purposes of subparagraph (B) of the preceding sentence, the term "average rate of interest applicable to life insurance reserves" means the ratio obtained by dividing the sum obtained under paragraph (1) of section 805(c) by the sum obtained under paragraph (1)(B) of section 805(c).

(3) DIVIDENDS RECEIVED DEDUCTION WHERE MAXIMUM LIMIT APPLIES.—

(A) If paragraph (1) of this subsection reduces the reserve and other policy liability deduetion allowed by this section or section 812 for the taxable year, then in computing life insurance taxable income under section 802(b), and in computing life insurance company taxable income under section 811(b), there shall be allowed an additional deduction in an amount determined under subparagraph (B).

(B) The amount of the additional deduction referred to in subparagraph (A) shall be the amount which bears the same ratio to the total of the deductions provided in sections 243, 244, and 245 as the net investment income reduced by the sum of

(i) the net investment income allocable to non-life insurance reserves (or, for purposes of section 811(b), the amount of the adjustment for certain reserves provided in section 813), and

(ii) 100/85 of the maximum limitation determined under paragraphs (1) and (2) of this subsection,

bears to the net investment income.

(c) QUALIFIED RESERVES DEFINED. For purposes of this subpart, the term "qualified reserves” means the sum of the following:

(1) The life insurance reserves (as defined in section 801(b)), plus 7 percent of that portion of such reserves as are computed on a preliminary term basis.

(2) The non-life insurance reserves (as defined in subsection (d) (2)).

(3) The amounts (discounted at the rates of interest assumed by the company) necessary to satisfy the obligations under insurance and annuity contracts (including contracts supplementary thereto), but only if (A) such obligations when satisfied will reflect an increment in the nature of interest, and (B) such obligations do not involve (at the time with respect to which the computation is made under this paragraph) life, health, or accident contingencies.

(4) The amounts held at the end of the taxable year as reserves for dividends to policyholders, the payment of which dividends is deferred for a period which expires not earlier than 5 years from the date of the policy contract. This pargraph does not apply to dividends payable during the year following the taxable year.

(5) Dividend accumulations, and other amounts, held at interest in connection with insurance or annuity contracts (including contracts supplementary thereto).

(6) Premiums received in advance, and liabilities for premium deposit funds.

In applying this subsection the same item shall be counted only once. For purposes of this section (other than paragraph (4) of this subsection), the amount of any reserve (or portion thereof) for any taxable year shall be the mean of such reserve (or portions thereof) at the beginning and end of the taxable year.

(d) NET INVESTMENT INCOME ALLOCABLE TO NON-LIFE INSURANCE RESERVES.

(1) ALLOCATION RATIO.-For purposes of this subpart, the net investment income allocable to non-life insurance reserves is that amount which bears the same ratio to the net investment income as such reserves bear to the qualified reserves.

(2) NON-LIFE INSURANCE RESERVES DEFINED.-For purposes of this subpart, the term "nonlife insurance reserves" means the sum of the unearned premiums and the unpaid losses (whether or not ascertained)—

(A) on contracts other than life insurance, annuity, and noncancellable health and accident insurance contracts (including life insurance or annuity contracts combined with noncancellable health and accident insurance), and

(B) which are not included in life insurance reserves (as defined in section 801(b)). For purposes of this paragraph, such unearned premiums shall not be considered to be less than 25 percent of the net premiums written during the taxable year on such other contracts.