[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: 26CFR1.815-2]

[Page 654-655]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
Determination of Tax Liability--Table of Contents
 
Sec. 1.815-2  Distributions to shareholders.

    (a) In general. Section 815 provides that every stock life insurance 
company subject to the tax imposed by section 802 shall establish and 
maintain two special surplus accounts for Federal income tax purposes. 
These special accounts are the shareholders surplus account (as defined 
in section 815(b) and Sec. 1.815-3) and the policyholders surplus 
account (as defined in section 815(c) and Sec. 1.815-4). To the extent 
that a distribution to shareholders (as defined in paragraph (c) of this 
section) is treated as being made out of the shareholders surplus 
account, no tax is imposed on the company with respect to such 
distribution. However, to the extent that a distribution to shareholders 
is treated as being made out of the policyholders surplus account, the 
amount subtracted from the policyholders surplus account by reason of 
such distribution shall be taken into account in determining life 
insurance company taxable income under section 802(b).
    (b) Priority system for distributions to shareholders. (1) For 
purposes of section 815 (other than subsection (e) thereof relating to 
certain mutualizations) and section 802(b)(3) (relating to the 
determination of life insurance company taxable income), any 
distribution made to shareholders after December 31, 1958, shall be 
treated in the following manner:
    (i) Distributions shall be treated as first being made out of the 
shareholders surplus account (as defined in section 815(b) and Sec. 
1.815-3);
    (ii) Once the shareholders surplus account has been reduced to zero, 
distributions shall then be treated as being made out of the 
policyholders surplus account (as defined in section 815(c) and Sec. 
1.815-4) until that account has been reduced to zero; and
    (iii) Finally, any distributions in excess of the amounts in the 
shareholders surplus account and the policyholders surplus account shall 
be treated as being made out of other accounts (as defined in Sec. 
1.815-5).
    (2) For purposes of subparagraph (1) of this paragraph, in order to 
determine whether a distribution (or any portion thereof) shall be 
treated as being made out of the shareholders surplus account, 
policyholders surplus account, or other accounts, the amount in such 
accounts at the end of any taxable year shall be the cumulative balance 
in such accounts at the end of the taxable year, computed without 
diminution by reason of a distribution (or any portion thereof) during 
the taxable year which is treated as being made out of such accounts. 
For example, on January 1, 1960, S, a stock life insurance company, had 
$1,000 in its shareholders surplus account and $3,000 in its 
policyholders surplus account. On November 1, 1960, S distributed $4,000 
to its shareholders. Under the provisions of section 815(b)(2) and 
paragraph (b) of Sec. 1.815-3, S added $5,000 to its shareholders 
surplus account for the taxable year 1960. Since the distributions to 
shareholders during the taxable year 1960, $4,000, does not exceed the 
cumulative balance in the shareholders surplus account at the end of the 
taxable year, computed without diminution by reason of distributions 
treated as made out of such account during the taxable year, $6,000 
($1,000 plus $5,000), the entire distribution is treated as being made 
out of the shareholders surplus account.
    (3) Except in the case of a distribution in cash and as otherwise 
provided herein, the amount to be charged to the special surplus 
accounts referred to in subparagraph (1) of this paragraph with respect 
to any distributions to shareholders (as defined in section 815(a) and 
paragraph (c) of this section) shall be the fair market value of the 
property distributed, determined as of the date of distribution. 
However, for the amount of the adjustment to earnings and profits 
reflecting such distributions, see section 312 and the regulations 
thereunder. For a special rule relating to the determination of the 
amount to be charged to such special surplus accounts in the case of a 
distribution by a foreign life insurance company carrying on a life 
insurance business within the United States, see section 819(c)(1) and 
the regulations thereunder.
    (c) Distributions to shareholders defined. (1) Except as otherwise 
provided in section 815(f) and subparagraph (2) of this paragraph, the 
term distribution, as used in section 815(a) and paragraph (b)

[[Page 655]]

of this section, means any distribution of property made by a life 
insurance company to its shareholders. For purposes of the preceding 
sentence, the term property means any property (including money, 
securities, and indebtedness to the company) other than stock, or rights 
to acquire stock, in the company making the distribution. Thus, for 
example, the term includes a distribution which is considered a dividend 
under section 316, but is not limited to the extent that such 
distribution must be made out of the accumulated or current earnings and 
profits of the company making the distribution. For example, except as 
otherwise provided in section 815(f) and subparagraph (2) of this 
paragraph, there is a distribution within the meaning of this paragraph 
in any case in which a corporation acquires the stock of a shareholder 
in exchange for property in a redemption treated as a distribution in 
exchange for stock under section 302(a) or treated as a distribution of 
property under section 302(d). For special rules relating to 
distributions to shareholders in acquisition of stock pursuant to a plan 
of mutualization, see section 815(e) and paragraph (e) of Sec. 1.815-6.
    (2) The term distribution, as used in section 815(a) and paragraph 
(b) of this section, does not (except for purposes of section 815(a)(3) 
and (e)(2)(B)) include any distribution in redemption of stock issued 
prior to January 1, 1958, where such stock was at all times on and after 
the date of its issuance and on and before the date of its redemption 
limited as to the amount of dividends payable and was callable, at the 
option of the issuer, at a price not in excess of 105 percent of the sum 
of its issue price plus the amount of contribution to surplus (if any) 
made by the original purchaser at the time of his purchase.

[T.D. 6535, 26 FR 542, Jan. 20, 1961, as amended by T.D. 7189, 37 FR 
12793, June 29, 1972]