In addition, there shall be subtracted from the policyholders surplus account for the taxable year those amounts which, at the close of the taxable year, are subtracted or treated as subtracted from the policyholders surplus account under section 815(d) (1) and (4) and paragraphs (a) and (d) of § 1.815-6 . For purposes of this paragraph, the subtractions from the policyholders surplus account shall be treated as made in the following order:
$9,600 * 100 / (100 - 52) = $9,600 * 100 / 48 = $20,000
Of this amount, $9,600 is due to the application of section 815(c)(3)(A) and $10,400 to the application of section 815(c)(3)(B).
$3,500 * 100 / (100 - 30) = $3,500 * 100 / 70 = $5,000
Of this amount, $3,500 is due to the application of section 815(c)(3)(A), and $1,500 to the application of section 815(c)(3)(B).
(1) $25,000 minus life insurance company taxable income, computed without regard to sec. 802(b)(3) ($25,000 minus $10,000 | $15,000 | |
(2) Item (1) multiplied by 100 percent minus the normal tax rate as in effect for 1960, over 100 percent | ||
($15,000 * (100-30) ÷ 100) | 10,500 | |
(3) Amount by which the amount treated as distributed out of policyholders surplus account ($12,000) exceeds item (2) ($10,500), multiplied by 100 percent over 100 percent minus the sum of the normal tax rate and the surtax rate as in effect for 1960 | ||
($1,500 * 100 ÷ (100-52)) | 3,125 | |
(4) Item (1) plus item (3) ($15,000 plus $3,125) | 18,125 |
For the taxable year 1960, S shall subtract $18,125 from its policyholders surplus account. Of this amount, $10,500 represents the distribution from the policyholders surplus account which is taxed at a 30 percent tax rate and $1,500 the distribution from the policyholders surplus account which is taxed at a 52 percent tax rate. Thus, of the amount subtracted from the policyholders surplus account for the taxable year 1960, $12,000 is due to the application of section 815(c)(3) (A), and $6,125 to the application of section 815(c)(3)(B).
Example. The books of S, a stock life insurance company, reflect the following items for the taxable year 1960:
Taxable investment income | $25,000 | |
Gain from operations | 30,000 | |
Tax base (sec. 802(b)(1) and (2)) | 27,500 | |
Deduction for certain nonparticipating policies provided by sec. 809(d)(5) (as limited by sec. 809(f)) | 600 | |
Deduction for group policies provided by sec. 809(d)(6) (as limited by sec. 809(f)) | 400 | |
Amount distributed to shareholders | 60,000 | |
Cumulative balance in shareholders surplus account as of 12-31-60 | 36,000 | |
Balance in policyholders surplus account as of 1-1-60 | 48,000 |
For purposes of determining the amount to be subtracted from its policyholders surplus account for the taxable year, S would first make up the following schedule in order to determine the cumulative balance in the policyholders surplus account at the end of the taxable year, computed without diminution by reason of distributions made during the taxable year:
(1) Balance in policyholders surplus account as of 1-1-60 | $48,000 | |
(2) Additions to account: | ||
(a) 50 percent of the amount by which the gain from operations ($30,000) exceeds the taxable investment income ($25,000) (1/2 * $5,000) | $2,500 | |
(b) The deduction for certain nonparticipating contracts provided by sec. 809(d)(5) (as limited by sec. 809(f)) | 600 | |
(c) The deduction for group contracts provided by sec. 809(d)(6) (as limited by sec. 809(f)) | 400 | |
---- | 3,500 | |
(3) Cumulative balance in policyholders account as of 12-31-60 (item (1) plus item (2)) | 51,500 |
Under the provisions of section 815(a), since the amount distributed to shareholders during the taxable year, $60,000, exceeds the cumulative balance in the shareholders surplus at the end of the taxable year, computed without diminution by reason of distributions during the taxable year, $36,000, the shareholders surplus account shall first be reduced to zero. The remaining $24,000 ($60,000 minus $36,000) of the distribution shall then be treated as made out of the policyholders surplus account. Thus, since the tax base under section 802(b)(1) and (2) is in excess of $25,000, the total amount to be subtracted from the policyholders surplus account at the end of the taxable year would be $50,000 ($24,000 * 100 ÷ (100-52)). Of this amount $26,000 ($50,000 minus $24,000) represents the tax on the portion of the distribution to shareholders which is treated as being out of the policyholders surplus account.
26 C.F.R. §1.815-4