[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: 26CFR1.809-3] [Page 626-627] TITLE 26--INTERNAL REVENUE CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY (CONTINUED) Determination of Tax Liability--Table of Contents Sec. 1.809-3 Gain and loss from operations defined. (a) Gain from operations. For purposes of part I, subchapter L, chapter 1 of the Code, section 809(b)(1) defines the term gain from operations as the excess of the sum of (1) the life insurance company's share of each and every item of investment yield (including tax-exempt interest, partially tax-exempt interest, and dividends received), (2) the items of gross amount taken into account under section 809(c) and paragraph (a) of Sec. 1.809-4, and (3) for taxable years beginning after December 31, 1961, the amount (if any) by which the net long-term capital gain exceeds the net short-term capital loss, over the sum of the deductions provided by section 809(d) and Sec. 1.809-5. (b) Loss from operations. For purposes of part I, section 809(b)(2) defines the term loss from operations as the excess of the sum of the deductions provided by section 809(d) and Sec. 1.809-5 over the sum of (1) the life insurance company's share of each and every item of investment yield (including tax-exempt interest, partially tax-exempt interest, and dividends received), (2) the items of gross amount taken into account under section 809(c) and paragraph (a) of Sec. 1.809-4, and (3) for taxable years beginning after December 31, 1961, the amount (if any) by which the net long-term capital gain exceeds the net short- term capital loss. (c) Illustration of principles. The provisions of section 809(b) (1) through (3) and paragraphs (a) and (b) of this section may be illustrated by the following example: Example. For the taxable year 1958, T, a life insurance company, had investment yield of $900,000, including $150,000 of dividends received from domestic corporations subject to taxation under chapter 1 of the Code, $10,000 of wholly tax-exempt interest, and $78,000 of partially tax-exempt interest. T also had items of gross amount under section 809(c) in the amount of $12,000,000 and deductions under section 809(d) of $6,963,500 (exclusive of any deductions for wholly tax-exempt interest, partially tax-exempt interest, and dividends received). For such taxable year, the [[Page 627]] share of each and every item of investment yield set aside for policyholders was 80 percent and the company's share of each and every item of investment yield was 20 percent. Based upon these figures, T had a gain from operations of $5,180,000 for the taxable year 1958, computed as follows: ------------------------------------------------------------------------ Col. 2 (80% x Col. 3 Col. 1) (20% x Col. 1 exclusion of Col. 1) policyholder's company's share share ------------------------------------------------------------------------ Interest wholly tax-exempt........ $10,000 $8,000 $2,000 Interest partially tax-exempt..... 78,000 62,400 15,600 Dividends received................ 50,000 120,000 30,000 Other items of investment yield... 662,000 529,600 132,400 Investment yield.............. 900,000 720,000 180,000 ------------------------------------------------------------------------ Gross amount (sum of items under Sec. ........... $12,000,000 809(c))................................... --------------- Total.................................. ........... 12,180,000 Less: Deductions under sec. 809(d)(8): Company's share of interest wholly tax- $2,000 exempt................................ 30/52 of company's share of interest 9,000 partially tax-exempt (30/52 x$15,600). 85% of company's share of dividends 25,500 received (but not to exceed 85% of gain from operations as computed under sec. 809(d)(8)(B)) (85%x$30,000)...... All other deductions under sec. 809(d) 6,963,500 ------------- ........... 7,000,000 --------------- Gain from operations.............................. 5,180,000 (d) Exception. (1) In accordance with section 809(b)(4), if it is established in any case to the satisfaction of the Commissioner, or by a determination of The Tax Court of the United States, or of any other court of competent jurisdiction, which has become final, that the application of the definition of gain from operations contained in section 809(b)(1) results in the imposition of tax on: (i) Any interest which under section 103 is excluded from gross income, (ii) Any amount of interest which under section 242 (as modified by section 804(a)(3)) is allowable as a deduction, or (iii) Any amount of dividends received which under sections 243, 244, and 245 (as modified by section 809(d)(8)(B)) is allowable as a deduction, adjustment shall be made to the extent necessary to prevent such imposition. (2) For the date upon which a decision by the Tax Court becomes final, see section 7481. For the date upon which a judgment of any other court becomes final, see paragraph (c) of Sec. 1.1313(a)-1. [T.D. 6535, 26 FR 526, Jan. 20, 1961, as amended by T.D. 6886, 31 FR 8687, June 28, 1966]