[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: 26CFR1.803-6]

[Page 615-616]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
Determination of Tax Liability--Table of Contents
 
Sec. 1.803-6  Amortization of premium and accrual of discount.

    (a) Section 803(i) provides for certain adjustments on account of 
amortization of premium and accrual of discount on bonds, notes, 
debentures, or other evidences of indebtedness held by a life insurance 
company. Such adjustments are limited to the amount of appropriate 
amortization or accrual attributable to the taxable year with respect to 
such securities which are not in default as to principal or interest and 
which are amply secured. The question of ample security will be resolved 
according to the rules laid down from time to time by the National 
Association of Insurance Commissioners. The adjustment for amortization 
of premium decreases, and for accrual of discount increases, (1) the 
gross income, (2) the deduction for wholly tax-exempt interest, and (3) 
the deduction for partially tax-exempt interest.
    (b) The premium for any such security is the excess of its 
acquisition value over its maturity value and the discount is the excess 
of its maturity value over its acquisition value. The acquisition value 
of any such security is its cost (including buying commissions or 
brokerage but excluding any amounts paid for accrued interest) if 
purchased for cash, or if not purchased for cash, then its fair market 
value. The maturity value of any such security is the amount payable 
thereunder either at the maturity date or an earlier call date. The 
earlier call date of any such security may be the earliest call date 
specified therein as a day certain, the earliest interest payment date 
if it is callable or payable at such date, the earliest date at which it 
is callable at par, or such other call or payment date, prior to 
maturity, specified in the security as may be selected by the life 
insurance company. A life insurance company which adjusts amortization 
of premium or accrual of discount with reference to a particular call or 
payment date must make the adjustments with reference to the

[[Page 616]]

value on such date and may not, after selecting such date, use a 
different call or payment date, or value, in the calculation of such 
amortization or discount with respect to such security unless the 
security was not in fact called or paid on such selected date.
    (c) The adjustments for amortization of premium and accrual of 
discount will be determined:
    (1) According to the method regularly employed by the company, if 
such method is reasonable, or
    (2) According to the method prescribed by this section.

A method of amortization of premium or accrual of discount will be 
deemed ``regularly employed'' by a life insurance company if the method 
was consistently followed in prior taxable years, or if, in the case of 
a company which has never before made such adjustments, the company 
initiates in the first taxable year for which the adjustments are made a 
reasonable method of amortization of premium or accrual of discount and 
consistently follows such method thereafter. Ordinarily, a company 
regularly employs a method in accordance with the statute of some State, 
Territory, or the District of Columbia, in which it operates.
    (d) The method of amortization and accrual prescribed by this 
section is as follows:
    (1) The premium (or discount) shall be determined in accordance with 
this section; and
    (2) The appropriate amortization of premium (or accrual of discount) 
attributable to the taxable year shall be an amount which bears the same 
ratio to the premium (or discount) as the number of months in the 
taxable year during which the security was owned by the life insurance 
company bears to the number of months between the date of acquisition of 
the security and its maturity or earlier call date, determined in 
accordance with this section. For the purpose of this section, a 
fractional part of a month shall be disregarded unless it amounts to 
more than half a month, in which case it shall be considered as a month.