DIFFERENTIAL EARNINGS RATE FOR 1987 AND RECOMPUTED 1986 DIFFERENTIAL EARNINGS RATE FOR MUTUAL LIFE INSURANCE COMPANIES ANNOUNCED.

Announcement 88-47

This announcement concerns the determination under section 809 of the Internal Revenue Code of the "differential earnings rate" for 1987 and the rate that is used to calculate the "recomputed differential earnings amount" for 1986. (The latter rate is referred to herein as the "recomputed differential earnings rate" for 1986.) These rates are used by mutual life insurance companies to calculate their federal income tax liability for taxable years beginning in 1987.

BACKGROUND

Section 809(a) of the Code provides that, in the case of any mutual life insurance company, the amount of the deduction allowable under section 808 for policyholder dividends shall be reduced (but not below zero) by the "differential earnings amount." Any excess of the differential earnings amount over the amount of the deduction allowable under section 808 shall be taken into account as a reduction in the closing balance of reserves under subsections (a) and (b) of section 807. The "differential earnings amount" for any taxable year is the amount equal to the product of (a) the life insurance company's average equity base for the taxable year multiplied by (b) the "differential earnings rate" for such taxable year. The "differential earnings rate" for the taxable year is the excess of (a) the "imputed earnings rate" for the taxable year over (b) the "average mutual earnings rate" for the second calendar year preceding the calendar year in which the taxable year begins. The "imputed earnings rate" for any taxable year is the amount that bears the same ratio to 16.5 percent as the "current stock earnings rate" for the taxable year bears to the "base period stock earnings rate."

Section 809(f) of the Code provides that, in the case of any mutual life insurance company, if the "recomputed differential earnings amount" for any taxable year exceeds the differential earnings amount for such taxable year, such excess shall be included in life insurance gross income for the succeeding taxable year. If the differential earnings amount for any taxable year exceeds the recomputed differential earnings amount for such taxable year, such excess shall be allowed as a life insurance deduction for the succeeding taxable year. The "recomputed differential earnings amount" for any taxable year is an amount calculated in the same manner as the differential earnings amount for such taxable year, except that the average mutual earnings rate for the calendar year in which the taxable year begins is substituted for the average mutual earnings rate for the second calendar year preceding the calendar year in which the taxable year begins.

As described above, the differential earnings rate for 1987 and the recomputed differential earnings rate for 1986 affect the income and deductions reported by mutual life insurance companies on their federal income tax returns for the 1987 taxable year.

Data necessary to determine the tentative differential earnings rate for 1987 and the tentative recomputed differential earnings rate for 1986 have been compiled from returns filed by mutual life insurance companies and certain stock life insurance companies. The Internal Revenue Service is currently examining these returns to verify the accuracy of the data reported on these returns. This examination will not be completed before the March 15, 1988, due date for filing 1987 calendar year returns.

ANNOUNCEMENT OF TENTATIVE RATES

This announcement publishes a tentative determination of the differential earnings rate for 1987 and of the recomputed differential earnings rate for 1986. This announcement also publishes a tentative determination of several rates on which the calculation of the differential earnings rate for 1987 and the recomputed differential earnings rate for 1986 are based. The final determination of these rates is expected to be published before September 1, 1988. The final determination of other rates on which the calculation of the differential earnings rate for 1987 and the recomputed differential earnings rate for 1986 are based was published in Rev. Rul. 87-92, 1987-36 I.R.B. 9.

The tentative determination of the differential earnings rate for 1987 and the tentative determination of the recomputed differential earnings rate for 1986 that are published in this announcement should be used by mutual life insurance companies to calculate the amount of tax liability for taxable years beginning in 1987 (in the case of companies that file returns before an announcement of the final determination of these rates) or to calculate the amount of properly estimated unpaid tax liability for taxable years beginning in 1987 (in the case of companies that are allowed an extension of time to file returns). Companies that file returns before an announcement of the final determination of these rates should file amended returns after the final determination of these rates is announced. Any failure to pay tax for the 1987 taxable year before September 15, 1988, that is attributable to a difference between (a) the tentative determination of the differential earnings rate for 1987 and recomputed differential earnings rate for 1986 and (b) the final determination of these rates will be treated as due to reasonable cause and will not give rise to any addition to tax under section 6651 of the Code.

The tentative determination of the rates is set forth in Table 1.

This document serves as an "administrative pronouncement" as that term is described in section 1.6661-3(b)(2) of the Income Tax Regulations and may be relied upon to the same extent as a revenue ruling or revenue procedure. See Rev. Rul. 87-138, 1987-52 I.R.B. 17.

                     Announcement 88-47 , Table 1