[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: 26CFR1.817-4]

[Page 667-669]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
Determination of Tax Liability--Table of Contents
 
Sec. 1.817-4  Special rules.

    (a) Limitation on capital loss carryovers. Section 817(c) provides 
that a net capital loss (as defined in section 1222(10)) for any taxable 
year beginning before January 1, 1959, shall not be taken into account. 
For any taxable year beginning after December 31, 1958, the provisions 
of part II, subchapter P, chapter 1 of the Code (relating to the 
treatment of capital losses) shall be applicable to life insurance 
companies for purposes of determining the tax imposed by section 802(a) 
and Sec. 1.802-3 (relating to the imposition of tax in case of capital 
gains).
    (b) Gain on transactions occurring prior to January 1, 1959. For 
purposes of part I, subchapter L, chapter 1 of the Code, section 817(d) 
provides that:
    (1) There shall be excluded from tax any gain from the sale or 
exchange of a capital asset, and any gain considered as gain from sale 
or exchange of a capital asset, which results from sales or other 
dispositions of property prior to January 1, 1959; and
    (2) Any gain after December 31, 1958, resulting from the sale or 
other disposition of property prior to January 1, 1959, which, but for 
this subparagraph would be taken into account under section 1231, shall 
not be taken into account under section 1231.

For example, if a life insurance company makes an installment sale of a 
capital asset prior to January 1, 1959, and payments are received after 
such date, any capital gain attributable to such sale shall not be taken 
into account for purposes of section 802(a). Furthermore, any gain 
referred to in subparagraphs (1) and (2) and the preceding sentence 
shall not be taken into account in determining the excess of the net 
short-term capital gain over the net long-term capital loss (and for 
taxable years beginning after December 31, 1961, the excess of the net 
long-term capital gain over the net short-term capital loss) for 
purposes of computing taxable investment income under section 804(a)(2) 
or gain or loss from operations under section 809(b).
    (c) Certain reinsurance transactions in 1958. For purposes of part 
I, section 817(e) provides that where a life insurance company reinsures 
(or sells) all of its insurance contracts of a particular type, such as 
an entire industrial department, in either a single transaction, or in a 
series of related transactions, all of which occurred during 1958, and 
the reinsuring (or purchasing) company or companies assume all 
liabilities under such contracts, such reinsurance (or sale) shall be 
treated as the sale of a capital asset. However, such transaction shall 
be subject to the provisions of section 806(a) and Sec. 1.806-3 
(relating to adjustments for certain changes in reserves and assets).
    (d) Certain other reinsurance transactions. (1) For any taxable year 
beginning after December 31, 1958, the reinsurance of all or a part of 
the insurance contracts of a particular type by a life insurance 
company, in either a single transaction, or in a series of related 
transactions, occurring in any such taxable year, whereby the reinsuring 
company or companies assume all liabilities under such contracts, shall 
not be treated as the sale or exchange of a capital asset but shall be 
subject to the provisions of section 806(a) and 809 and the regulations 
thereunder. However, if in connection with a transaction described in 
the preceding sentence the reinsured or reinsurer transfers an asset 
which is a capital asset within the meaning of section 1221 (as modified 
by section 817(a)(2)), such transfer shall be treated as the sale or 
exchange of a capital asset by the transferor.

[[Page 668]]

    (2)(i) The consideration paid by the reinsured to the reinsurer in 
connection with a transaction described in subparagraph (1) of this 
paragraph shall be treated as an item of deduction under section 
809(d)(7). However any amount received by the reinsured from the 
reinsurer shall be applied against and reduce (but not below zero) the 
amount of such consideration, and to the extent that it exceeds such 
consideration, shall be treated as an item of gross amount under section 
809(c)(3).
    (ii) In connection with an assumption reinsurance (as defined in 
paragraph (a)(7)(ii) of Sec. 1.809-5) transaction, a reinsurer shall in 
any taxable year beginning after December 31, 1957:
    (A) Treat the consideration received from the reinsured in any such 
taxable year as an item of gross amount under section 809(c)(1), and
    (B) Treat any amount paid to the reinsured for the purchase of such 
contracts, to the extent such amount meets the requirements of section 
162, as a deferred expense that may be amortized over the reasonably 
estimated life (as defined in paragraph (d)(2)(iv) of this section) of 
the contracts reinsured and treat the portion of the expense so 
amortized in each taxable year as a deduction under section 809(d)(12) 
irrespective of the taxable year in which such amount was paid to the 
reinsured.
    (iii) For purposes of paragraph (d)(2)(ii) of this section where the 
reinsured transfers to the reinsurer in connection with the assumption 
reinsurance transaction a net amount which is less than the increase in 
the reinsurer's reserves resulting from the transaction, the reinsurer 
shall be treated as:
    (A) Having received from the reinsured consideration in an amount 
equal to the net amount of the increase in the reinsurer's reserves 
resulting from the transaction, and
    (B) Having paid the reinsured an amount for the purchase of the 
contracts equal to the excess of the amount of such increase in the 
reinsurer's reserves over the net amount received from the reinsured.
    (iv) For purposes of this subparagraph, the term reasonably 
estimated life means the period during which the contract reinsured 
remains in force. Such period shall be based on the facts in each case 
(such as age, health, and sex of the insured, type of contract 
reinsured, etc.) and the assuming company's experience (such as 
mortality, lapse rate, etc.) with similar risks.
    (3) The provisions of this paragraph may be illustrated by the 
following examples:

    Example 1. On June 30, 1959, X, a life insurance company, reinsured 
a portion of its insurance contracts with Y, a life insurance company, 
under an agreement whereby Y agreed to assume and to become solely 
liable under the contracts reinsured. The reserves on the contracts 
reinsured by X were $100,000. Under the reinsurance agreement X agreed 
to pay Y $100,000 for assuming such contracts and Y agreed to pay X 
$17,000 for the right to receive future premium payments under this 
block of contracts. Rather than exchange payments of money, X agreed to 
pay Y a net amount of $83,000 in cash. Assuming that the reasonably 
estimated life of the contracts reinsured is 17 years, that there are no 
other insurance transactions by X or Y during the taxable year, and 
assuming that X and Y compute the reserves on the contracts reinsured on 
the same basis, X has income of $100,000 under section 809(c)(2) as a 
result of the net decrease in its reserves. X has a net deduction of 
$83,000 ($100,000-$17,000) under section 809(d)(7). For the taxable year 
1959, Y has income of $100,000 under section 809(c)(1) as a result of 
the consideration received from X and a deduction of $100,000 under 
section 809(d)(2) for the net increase in reserves and $1,000 ($17,000 
divided by 17, the reasonably estimated life of the contracts 
reinsured), under section 809(d)(12). The remaining $16,000 shall be 
amortized over the next 16 succeeding taxable years (16x$1,000=$16,000) 
under section 809(d)(12) at the rate of $1,000 for each such taxable 
year.
    Example 2. The facts are the same as in example 1, except X agreed 
to pay Y a consideration of $100,000 in cash for assuming these 
contracts and Y paid X a bonus of $17,000 in cash and that this bonus 
meets the requirements of section 162. Assuming that the reasonably 
estimated life of the contracts reinsured is 17 years, X has income of 
$100,000 under section 809(c)(2) as a result of this net decrease in its 
reserves and a deduction of $83,000 under section 809(d)(7) for the 
amount of the consideration ($100,000) paid to Y for assuming these 
contracts, reduced by the bonus ($17,000) received from Y. For the 
taxable year 1959, Y has income of $100,000 under section 809(c)(1) as a 
result of the consideration received from X and deductions of $100,000 
under section 809(d)(2) for the net increase in reserves and $1,000 (the 
bonus of

[[Page 669]]

$17,000 divided by 17, the reasonably estimated life of the contracts 
reinsured), under section 809(d)(12). The remaining amount of the bonus 
($16,000) shall be amortized over the next 16 succeeding taxable years 
(16x$1,000=$16,000) under section 809(d)(12) at the rate of $1,000 for 
each such taxable year.
    Example 3. The facts are the same as in Example 1, except that the 
reinsurance agreement does not specifically provide that X agreed to pay 
Y $100,000 for assuming the contracts reinsured and Y agreed to pay X 
$17,000 for the right to receive future premium payments under such 
contracts. Instead, X agreed to pay Y a net amount of $83,000 in cash 
for assuming such contracts. Nevertheless, Y is treated as having 
received from X consideration equal to $100,000, the amount of the 
increase in Y's reserves, and as having paid $17,000 ($100,000 less 
$83,000) for the purchase of such contracts. Therefore, for the taxable 
year 1959, Y has income of $100,000 under section 809(c)(1). Y also has 
a deduction of $100,000 under section 809(d)(2) for the net increase in 
its reserves and an amortization deduction under section 809(d)(12) of 
$1,000 ($17,000 divided by 17, the reasonably estimated life of the 
contracts reinsured). The remaining $16,000 shall be amortized by Y over 
the next 16 succeeding years at the rate of $1,000 for each such year. 
For 1959, X has income of $100,000 under section 809(c)(2) as a result 
of the net decrease in its reserves and a deduction of $83,000 under 
section 809(d)(7) for the net amount of consideration paid to Y for 
assuming the contracts reinsured.
    Example 4. The facts are the same as in example 1, except that X 
agreed to pay Y a consideration of $130,000 in cash for assuming such 
contracts. Based upon these facts, X has income of $100,000 under 
section 809(c)(2) as a result of this net decrease in its reserves and a 
deduction of $130,000 under section 809(d)(7) for the amount of the 
consideration paid to Y for assuming these contracts. Y has income of 
$130,000 under section 809(c)(1) as a result of the consideration 
received from X and a deduction of $100,000 under section 809(d)(2) for 
the net increase in its reserves.
    Example 5. On August 1, 1960, R, a life insurance company, reinsured 
all of its insurance policies with S, a life insurance company, under an 
agreement whereby S agreed to assume and become solely liable under the 
contracts reinsured. The reserves on the contracts reinsured by R were 
$3,000,000. Under the reinsurance agreement, R agreed to pay S a 
consideration of $3,000,000 in stocks and bonds for assuming such 
contracts. Assuming no other insurance transactions by R or S during the 
taxable year, that R and S compute the reserves on the contracts 
reinsured on the same basis, and that R has a recognized gain (after the 
application of the limitation of section 817(b)(1)) of $20,000 due to 
appreciation in value of the assets transferred, the results to each 
company are as follows:

                          Company R (reinsured)
Net decrease in reserves (sec. 809(c) (2)).................   $3,000,000
Capital gain (as limited by sec. 817(b) (1)) to be taxed          20,000
 separately under sec. 802(a)(2)...........................
Consideration paid by R to S in respect of S's assuming       $3,000,000
 liabilities under contracts issued by R (sec. 809(d)(7))..
                                 Income
                          Company S (reinsurer)
Consideration received by S in respect of assuming            $3,000,000
 liabilities under contracts issued by R (sec. 809(c)(1))..
                               Deductions
Net increase in reserves (sec.809(d)(2))...................   $3,000,000



[T.D. 6558, 26 FR 2783, Apr. 4, 1961, as amended by T.D. 6625, 27 FR 
12543, Dec. 19, 1962; T.D. 6886, 31 FR 8689, June 23, 1966; T.D. 41 FR 
5100, Feb. 4, 1976]