[Code of Federal Regulations]
[Title 26, Volume 8]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.803-3]

[Page 613-614]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
Determination of Tax Liability--Table of Contents
 
Sec. 1.803-3  Interest paid or accrued.

    Interest paid or accrued is one of the elements to be used in 
computing the amount of ``required interest'' for purposes of 
determining the reserve interest credit provided in section 805. See

[[Page 614]]

Sec. 1.805-1. Interest paid or accrued consists of (a) interest paid or 
accrued on indebtedness (except indebtedness incurred or continued to 
purchase or carry tax-exempt securities as set forth in section 
803(f)(1)) and (b) amounts in the nature of interest paid or accrued on 
certain contracts, as provided in section 803(f)(2). Interest on 
indebtedness includes interest on dividends held on deposit and 
surrendered during the taxable year but does not include interest paid 
or accrued on deferred dividends. Life insurance reserves as defined in 
Sec. 1.803-1 are not indebtedness. Dividends left with the company to 
accumulate at interest are a debt and not a reserve liability. Amounts 
in the nature of interest include so-called excess-interest dividends as 
well as guaranteed interest paid or accrued within the taxable year on 
insurance or annuity contracts (or contracts arising out of insurance or 
annuity contracts) which, at the time of payment, do not involve life, 
health, or accident contingencies. It is immaterial whether the optional 
mode of settlement specified in the insurance or annuity contract arises 
from an option exercised by the insured during his or her lifetime or 
from an option exercised by a beneficiary after the policy has matured, 
frequently referred to as a supplementary contract not involving life 
contingencies; for example, a contract to pay the insurance benefit in 
10 annual installments. No distinction is made based on the person 
choosing the method of payment, and the full amount of the interest paid 
or accrued and not merely the guaranteed interest is considered as 
interest paid or accrued.