[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: 26CFR1.806-4]

[Page 623-624]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
Determination of Tax Liability--Table of Contents
 
Sec. 1.806-4  Change of basis in computing reserves.

    (a) In general. For purposes of subpart B, part I, subchapter L, 
chapter 1 of the Code, section 806(b) provides that if the basis for 
determining the amount of any item referred to in section 810(c) 
(relating to items taken into account) as of the close of the taxable 
year differs from the basis for such determination as of the beginning 
of the taxable year, then in determining taxable investment income the 
amount of the item as of the close of the taxable year shall be the 
amount computed on the old basis, and the amount of the item as of the 
beginning of the next taxable year shall be the amount computed on the 
new basis. For purposes of the preceding sentence, an election under 
section 818(c) shall not be treated as a change in basis for determining 
the amount of an item referred to in section 810(c). A change of basis 
in computing any of the items referred to in section 810(c) is not a 
change of accounting method requiring the consent of the Secretary or 
his delegate under section 446(e).
    (b) Illustration of change of basis in computing reserves. The 
application of section 806(b) and paragraph (a) of this section may be 
illustrated by the following examples:

    Example 1. Assume that the life insurance reserves of Y, a life 
insurance company, at the beginning of the taxable year 1959 are $100 
and that during such taxable year a portion of the reserves is 
strengthened (by reason of a change in mortality or interest 
assumptions, or otherwise), so that at the end of the taxable year 1959 
the reserves (computed on the new basis) are $130 but computed on the 
old basis would be $120. Assume further that at the close of the next 
taxable year, 1960, the reserves (computed on the new basis) are $142. 
Under the provisions of section 806(b) and paragraph (a) of this 
section, the mean of such reserves for the taxable year of the reserve 
strengthening, namely 1959, is $110 (the mean of $100, the balance at 
the beginning of the taxable year 1959, and $120, the balance at the end 
of the taxable year 1959 computed on the old basis). The mean of such 
reserves for the next taxable year, 1960, is $136 (the mean of $130, the 
balance at the beginning of the taxable year 1960 computed on the new 
basis, and $142, the balance at the end of the taxable year 1960 
computed on the new basis).
    Example 2. The life insurance reserves of S, a life insurance 
company, computed with respect to contracts for which such reserves are 
determined on a recognized preliminary term basis amount to $50 on 
January 1, 1959, and $80 on December 31, 1959. For the taxable year 
1959, S elects to revalue such reserves on a net level premium basis 
under section 818(c). Such reserves computed under section 818(c) amount 
to $60 on January 1, 1959, and $96 on December 31, 1959. Under the 
provisions of paragraph (a) of this section, the mean of such reserves 
for the taxable year 1959 is $78 (the mean of $60, the balance at

[[Page 624]]

the beginning of the taxable year 1959 computed under section 818(c), 
and $96, the balance at the end of the taxable year 1959 computed under 
section 818(c).

[T.D. 6513, 25 FR 12669, Dec. 10, 1960]