Example. Controlled foreign corporation A, incorporated under, and engaged in an insurance business subject to, the laws of foreign country X, is a wholly owned subsidiary of domestic corporation M. Both corporations use the calendar year as the taxable year. Corporation M is a life insurance company as defined in section 801(a); A Corporation would, if it were a domestic corporation, be taxable under part I of subchapter L of the Code. In 1963, A Corporation derives income from the insurance of United States risks as a result of reinsuring the life insurance policies issued by M Corporation on lives of residents of the United States. In 1963, A Corporation also issues policies of life insurance on individuals who are not residents of the United States, but its premiums from the reinsuring of United States risks exceed he 5-percent minimum premium requirement prescribed in paragraph (b) of § 1.953-1 . Based upon the facts set forth in paragraph (a) of this example, A Corporation for 1963 has taxable income under this section of $40,200, which is attributable to the reinsuring of life insurance contracts in connection with United States risks, determined in the manner provided in paragraphs (b), (c), and (d) of this example.
Item | Attributable to all insurance | Attributable to reinsuring U.S. risks | Attributable to insuring foreign risks |
Investment Income: | |||
(1) Investment yield under section 804(c) | $90,000 | Unallocable | Unallocable |
(2) Sum of the mean of each of the items described in section 810(c) at beginning and end of 1963 | 2,500,000 | $1,000,000 | $1,500,000 |
(3) Required interest under section 809(a)(2) | 60,000 | 25,000 | 35,000 |
(4) Deductions allowed under section 809(d)(8), (9), and (12) which relate to gross investment income | 10,000 | Unallocable | Unallocable |
Underwriting Income: | |||
(5) Premiums under section 809(c)(1) | 600,000 | 200,000 | 400,000 |
(6) Net decrease in reserves under section 809(c)(2) | 10,000 | None | 10,000 |
(7) Net increase in reserves under section 809(d)(2) | 40,000 | 40,000 | None |
(8) Deductions allowed under section 809(d) (other than deduction allowed under section 809(d)(2) and other than those deductions allowed under section 809(d)(8), (9), and (12) which relate to gross investment income): | |||
(i) Allocable | 330,000 | 110,000 | 220,000 |
(ii) Unallocable | 60,000 | Unallocable | Unallocable |
(1) Sum of the mean of each of the items described in section 810(c) at beginning and end of 1963, attributable to reinsuring U.S. risks (paragraph (a)(2)) | $1,000,000 |
(2) Sum of the mean of each of the items described in section 810(c) at beginning and end of 1963, attributable to all insurance (paragraph (a)(2)) | $2,500,000 |
(3) Ratio of amount under subparagraph (1) to amount under subparagraph (2) ($1,000,000/$2,500,000) | 40% |
(4) Amount of investment yield attributable to reinsuring of U.S. risks (40% of $90,000) | $36,000 |
(5) Amount of such deductions attributable to reinsuring of U.S. risks (40% of $10,000) | $4,000 |
(i) Premiums under section 809(c)(1) attributable to reinsuring U.S. risks (paragraph (a)(5)) | $200,000 | |
(ii) Plus: Net decrease in reserves under section 809(c)(2) attributable to reinsuring U.S. risks (paragraph (a)(6)) | $200,000 | |
(iii) Less: Net increase in reserves under section 809(d)(2) attributable to reinsuring U.S. risks (paragraph (a)(7)) | $40,000 | |
$160,000 |
(i) Premiums under section 809(c)(1) attributable to all insurance (paragraph (a)(5)) | $600,000 | |
(ii) Plus: Net decrease in reserves under section 809(c)(2) attributable to all insurance (paragraph (a)(6)) | 10,000 | |
$610,000 | ||
(iii) Less: Net increase in reserves under section 809(d)(2) attributable to all insurance (paragraph (a)(7)) | 40,000 | |
$570,000 |
Attributable to all insurance | Attributable to reinsuring U.S. risks | Attributable to insuring foreign risks | ||||
Item: | ||||||
(1) Investment yield under section 804(c) (paragraph (a)(1), unallocable but as apportioned under paragraph (b)(4) | $90,000 | $36,000 | $54,000 | |||
(2) Less: Required interest under section 809(a)(2) (paragraph (a)(3)) | 60,000 | 25,000 | 35,000 | |||
(3) Life insurance company's share of investment yield under section 809(b)(1)(A) | $30,000 | $11,000 | $19,000 | |||
Plus sum of: | ||||||
(4) Premiums under section 809(c)(1) (paragraph (a)(5)) | 600,000 | 200,000 | 400,000 | |||
(5) Net decrease in reserves under section 809(c)(2) (paragraph (a)(6)) | 10,000 | 610,000 | None | 200,000 | 10,000 | 410,000 |
Sum determined under section 809(b)(1) | 640,000 | 211,000 | 429,000 | |||
Less sum of: | ||||||
(6) Net increase in reserves under section 809(d)(2) (paragraph (a)(7)) | 40,000 | 40,000 | None | |||
(7) Deductions allowed under section 809(d)(8), (9), and (12) which relate to gross investment income (paragraph (a)(4)), unallocable but as apportioned under paragraph (b)(5) | 10,000 | 4,000 | 6,000 | |||
(8) Deductions allowed under section 809(d) (other than deduction allowed under section 809(d)(2) and other than those deductions allowed under section 809(d)(8), (9), and (12) which relate to gross investment income) (paragraph (a)(8)): | ||||||
(i) Allocable | 330,000 | 110,000 | 220,000 | |||
(ii) Unallocable, but as apportioned under paragraph (c)(4) | 60,000 | 440,000 | 16,800 | 170,800 | 43,200 | 269,200 |
Gain from operations | 200,000 | 40,200 | 159,800 |
26 C.F.R. §1.953-4