Regs on Computation of Mutual Insurer's Equity Base

 [4830-01-u]

 ACTION: Temporary regulations.

 SUMMARY: This document contains temporary regulations that provide guidance to life insurance companies in determining the equity base for purposes of computing the differential earnings amount and recomputed differential earnings amount. Section 809 of the Internal Revenue Code, enacted as part of the Tax Reform Act of 1984, provides that these amounts are used in determining the deduction for policyholder dividends of a mutual life insurance company.

 In response to certain changes in state regulatory requirements, the temporary regulations provide that the equity base includes the amount of any asset valuation reserve and the amount of any interest maintenance reserve reported on the annual statement prescribed by the National Association of Insurance Commissioners (NAIC) for filing with the insurance regulatory authorities of a state. The text of the temporary regulations set forth in this document also serves as the text of proposed regulations cross-referenced in the notice of proposed rulemaking in the Proposed Rules section of this issue of the Federal Register.

 DATES: These temporary regulations are effective September 7, 1993.

 For dates of applicability of these temporary regulations, see section 1.809-10T(b) of these regulations.

 FOR FURTHER INFORMATION CONTACT: Katherine Ann Hossofsky, (202) 622-3477 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

BACKGROUND

This document contains amendments to the Income Tax Regulations (26 CFR part 1) to provide guidance relating to the determination of the equity base under section 809 of the Internal Revenue Code (Code). Section 809 was added to the Code by section 211(a) of the Tax Reform Act of 1984 (Pub. L. 98-369, 98 Stat. 733).

NEED FOR TEMPORARY REGULATIONS

 Immediate guidance is necessary for life insurance companies that file 1992 Form 1120L, U.S. Life Insurance Company Income Tax Return, and 1992 Form 8390, Information Return for Determination of Life Insurance Company Earnings Rate Under Section 809. Therefore, good cause is found to dispense with the public notice requirement of 5 U.S.C. 553(b) and the delayed effective date requirement of 5 U.S.C. 553(d).

EXPLANATION OF PROVISION

 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 is reduced (but not below zero) by the differential earnings amount. For purposes of the computations under section 809, a life insurance company must determine its equity base. The equity base of a life insurance company includes the capital and surplus of the company as well as the reserves specified in section 809(b)(5). The first reserve listed in section 809(b)(5) is the mandatory securities valuation reserve. From the time section 809 was enacted through 1991, the mandatory securities valuation reserve was required to be reported on the NAIC annual statement filed by all life insurance companies. During these years, the NAIC annual statement required insurers to allocate surplus from capital gains on securities (stocks and bonds) to fund the mandatory securities valuation reserve. Thus, the mandatory securities valuation reserve was not a true actuarial reserve; rather, it represented a fund of allocated surplus, earmarked as a contingency reserve against particular types of unexpected catastrophic losses, or expected capital losses on securities owned by an insurer.

 For NAIC annual statements covering 1992 and later years, the NAIC replaced the mandatory securities valuation reserve with the asset valuation reserve and interest maintenance reserve. This change reflected the recognition by the NAIC that it was necessary to protect against fluctuations in value in mortgages, real estate, and other investments as well as fluctuations in value in stocks and bonds and that interest-related changes in asset values might appropriately be differentiated from other changes. Accordingly, these new reserves cover an expanded class of assets and differentiate between (1) equity and credit-related capital gains and losses, and (2) interest-related capital gains and losses.

 The asset valuation reserve reflects changes in the value of equity investments and also changes in the value of debt investments where the changes are credit-related. Both realized and unrealized capital gains and losses are reflected in the asset valuation reserve.

 The interest maintenance reserve reflects realized capital gains and losses from bonds, mortgages, and other fixed-income obligations to the extent that they are interest-related. Because the value of U.S. Government securities, together with the value of securities of agencies backed by the full faith and credit of the U.S. Government, are safe from credit-related risks and are only subject to interest- related risks, the capital gains and losses on those securities are allocated solely to the interest maintenance reserve.

 To carry out Congressional intent in enacting section 809, it is essential to preserve the integrity of the equity base computation under that provision. Because the NAIC annual statement no longer includes the mandatory securities valuation reserve, it is necessary to compute the equity base with reference to the reserves set forth in the current NAIC annual statement. Thus, the temporary regulations provide that, for section 809 purposes, the equity base includes both the amount of any asset valuation reserve and the amount of any interest maintenance reserve.

 In connection with the publication of the temporary regulations, the Service is publishing Announcement 93-117, 1993-29 I.R.B., to provide guidance regarding filing of 1992 Form 1120L, U.S. Life Insurance Company Income Tax Return.

SPECIAL ANALYSES

 It has been determined that these regulations are not major rules as defined in Executive Order 12291. Therefore, a Regulatory Impact Analysis is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to these regulations, and, therefore, a Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Internal Revenue Code, the regulations will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business.

DRAFTING INFORMATION

 The principal author of these proposed regulations is Katherine Ann Hossofsky of the Office of the Assistant Chief Counsel (Financial Institutions and Products), IRS. However, other personnel from the Internal Revenue Service and Treasury Department participated in their development.

LIST OF SUBJECTS IN 26 CFR PART 1

 Income taxes, Reporting and recordkeeping requirements.

Treasury Decision 8484

ADOPTION OF AMENDMENTS TO THE REGULATIONS

Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

Paragraph 1. The authority citation for part 1 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 1.809-10T is added to read as follows:

SECTION 1.809-10T COMPUTATION OF EQUITY BASE (TEMPORARY).

(a) IN GENERAL. For purposes of section 809, the equity base of a life insurance company includes the amount of any asset valuation reserve and the amount of any interest maintenance reserve.

(b) EFFECTIVE DATE. This section is effective for taxable years ending after December 31, 1991.