Example. The books of S, a stock life insurance company, reflect the following items for the taxable year 1960.
Balance in shareholders surplus account as of 1-1-60 | $5,000 | |
Life insurance company taxable income computed without regard to sec. 802(b)(3) | 4,000 | |
Excess of net long-term capital gain over net short-term capital loss | 1,700 | |
Tax-exempt interest included in gross investment income under sec. 804(b) | 100 | |
Small business deduction (determined under sec. 809(d)(10)) | 200 | |
Tax liability under sec. 802(a) (1) and (2) computed without regard to sec. 802(b)(3) | 1,625 | |
Amount distributed to shareholders | 9,000 |
For purposes of determining the amount to be subtracted from its shareholders surplus account for the taxable year, S would first make up the following schedule in order to determine the cumulative balance in the shareholders surplus account at the end of the taxable year, computed without diminution by reason of distributions made during the taxable year:
(1) Balance in shareholders surplus account as of 1-1-60 | $5,000 | |
(2) Additions to account: | ||
(a) Life insurance company taxable income computed without regard to sec. 802(b)(3) | $4,000 | |
(b) Excess of net long-term capital gain over net short-term capital loss | 1,700 | |
(c) Tax-exempt interest included in gross investment income under sec. 804(b) | 100 | |
(d) Small business deduction (determined under sec. 809(d)(10)) | 200 | |
Total | 6,000 | |
Less: | ||
Tax liability under sec. 802(a) (1) and (2) computed without regard to sec. 802(b)(3) | 1,625 | |
----- | 4,375 | |
(3) Cumulative balance in shareholders surplus account as of 12-31-60 (item (1) plus item (2)) | 9,375 |
Since the amount distributed to shareholders during the taxable year, $9,000, does not exceed the cumulative balance in the shareholders surplus account at the end of the taxable year, computed without diminution by reason of distributions made during the taxable year, $9,375, under the provisions of section 815(a), the entire distribution shall be treated as being made out of the shareholders surplus account. Thus, $9,000 shall be subtracted from the shareholders surplus account (leaving a balance of $375 in such account at the end of the taxable year) and S shall incur no additional tax liability by reason of the distribution to its shareholders during the taxable year 1960.
26 C.F.R. §1.815-3