Example. For the taxable year 1960, the life insurance company taxable income of S, a stock life insurance company, computed without regard to section 802(b)(3), exceeds $25,000. Assume that S elects to subtract $20,000 from its policyholders surplus account under section 815(d)(1) for the taxable year. Since S is subject to a 52 percent tax rate, the tax on the amount elected to be subtracted from the policyholders surplus account (as of the close of the taxable year 1960) is $10,400 ($20,000 * 52 percent). Thus, the amount to be added to the shareholders surplus account as of January 1, 1961, is $9,600 (the amount subtracted from the policyholders surplus account by virtue of the section 815(d)(1) election, less the tax imposed upon such amount by reason of section 802(b)(3), or $20,000 minus $10,400).
then such excess shall be treated as a subtraction from the policyholders surplus account as of the end of such taxable year. The amount so treated as subtracted, less the amount of tax imposed with respect to such amount by reason of section 802(b)(3), shall be added to the shareholders surplus account at the beginning of the succeeding taxable year.
Example. The books of S, a stock life insurance company, reflect the following items for the taxable year 1960:
Balance in policyholders surplus account, computed without regard to sec. 815(d)(4), as of 12-31-60 | $175 | |
Life insurance reserves (as defined in sec. 801(b)) as of 12-31-60 | 4,500 | |
Life insurance reserves (as defined in sec. 801(b)) as of 12-31-58 | 3,900 | |
Premiums and other consideration taken into account for the taxable year under sec. 809(c)(1) | 310 |
In order to determine the limitations on the amount that it may accumulate in its policyholders surplus account at the end of the taxable year under section 815(d)(4), S would make up the following schedule:
(1) 15 percent of life insurance reserves at the end of the taxable year (15% * $4,500) | $675 | |
(2) 25 percent of amount by which life insurance reserves at the end of the taxable year ($4,500) exceed life insurance reserves as of 12-31-58 ($3,900) (25% * $600) | 150 | |
(3) 50 percent of premiums and other consideration taken into account under sec. 809(c)(1) for the taxable year (50% * $310) | 155 | |
(4) Limitation on policyholders surplus account (the greatest of items (1), (2), or (3)) | 675 |
Since the balance in the policyholders surplus account at the end of the taxable year 1960, $175, does not exceed the limitation provided by section 815(d)(4), $675, S is not required to make any further adjustment to its policyholders surplus account at the end of the taxable year.
Example. Assume that for the taxable years 1959 through 1961, the books of S, a stock life insurance company subject to a 30 percent tax rate for all taxable years involved, reflect the following items:
1959 | 1960 | 1961 | |
Taxable investment income | $40.00 | $40.00 | $40.00 |
Gain from operations | 60.00 | 60.00 | 60.00 |
Tax base (sec. 802(b)(1) and (2)) | 50.00 | 50.00 | 50.00 |
Tax (sec. 802(b)(1) and (2) base) | 15.00 | 15.00 | 15.00 |
Shareholders surplus account- | |||
At beginning of year | 0 | 35.00 | 37.00 |
Added at beginning of year by reason of election under sec. 815(d)(1) | 0 | 7.00 | 0 |
Added for year (without regard to election under sec. 815(d)(1)) | 35.00 | 35.00 | 35.00 |
Subtracted (distributions) | 0 | 40.00 | 40.00 |
Policyholders surplus account- | |||
At beginning of year | 0 | 0 | 10.00 |
Added for year | 10.00 | 10.00 | 10.00 |
Subtracted (distributions) | 0 | 0 | 0 |
Subtracted (by reason of election under sec. 815(d)(1)) | 10.00 | 0 | 0 |
Tax base (sec. 802(b)(3)) | 10.00 | 0 | 0 |
Tax (sec. 802(b)(3) base) | 3.00 | 0 | 0 |
Assume further that S has a loss from operations for the taxable year 1962 of $25. Under the provisions of section 812, the $25 loss from operations would be carried back to the taxable year 1959 and would reduce the 1959 tax base under section 802(b)(1) and (2) to $35 ($60 minus $25). After adjustments reflecting the 1962 loss from operations, the results for the taxable years 1959 through the beginning of 1962 would be as follows:
1959 | 1960 | 1961 | 1962 | |
Taxable investment income | $40.00 | $40.00 | $40.00 | |
Gain from operations | 35.00 | 60.00 | 60.00 | |
Tax base (sec. 802(b)(1) and (2)) | 35.00 | 50.00 | 50.00 | |
Tax (sec. 802(b)(1) and (2) base) | 10.50 | 15.00 | 15.00 | |
Shareholders surplus account- | ||||
At beginning of year | 0 | 24.50 | 19.50 | $14.50 |
Added for year (without regard to election under sec. 815(d)(1)) | 24.50 | 35.00 | 35.00 | |
Added by reason of election under sec. 815(d)(1) | 0 | 0 | 0 | |
Subtracted (distributions) | 0 | 40.00 | 40.00 | |
Policyholders surplus account- | ||||
At beginning of year | 0 | 0 | 10.00 | 20.00 |
Added for year | 0 | 10.00 | 10.00 | |
Subtracted (distributions) | 0 | 0 | 0 | |
Subtracted (by reason of election under sec. 815(d)(1)) | 0 | 0 | 0 | |
Tax base (sec. 802(b)(3)) | 0 | 0 | 0 | |
Tax (sec. 802(b)(3) base) | 0 | 0 | 0 |
As a result of the loss from operations for 1962, the election under section 815(d)(1) for the taxable year 1959 has become inapplicable in its entirety since the balance in the policyholders surplus account at the end of 1959, as recomputed, is zero. Thus, S would be entitled to a total refund of $7.50 for the taxable year 1959. Of this amount, $4.50 is due to the recomputation of the section 802(b)(1) and (2) tax base and $3 to the amount of tax paid by reason of the election under section 815(d)(1).
26 C.F.R. §1.815-6