[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: 26CFR1.818-2]

[Page 677-680]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
Determination of Tax Liability--Table of Contents
 
Sec. 1.818-2  Accounting provisions.

    (a) Method of accounting. (1) Section 818(a)(1) provides the general 
rule that all computations entering into the determination of taxes 
imposed by part I, subchapter L, chapter 1 of the Code, shall be made 
under an accrual method of accounting. Thus, the over-all method of 
accounting for life insurance companies shall be the accrual method. 
Except as otherwise provided in part I, the term ``accrual method'' 
shall have the same meaning and application in section 818 as it does 
under section 446 (relating to general rule for methods of accounting) 
and the regulations thereunder. For general rules relating to the 
taxable year for inclusion of income and deduction of expenses under an 
accrual method of accounting, see sections 451 and 461 and the 
regulations thereunder.
    (2) Section 818(a)(2) provides that, to the extent permitted under 
this section, a life insurance company's method of accounting may be a 
combination of the accrual method with any other method of accounting 
permitted by chapter 1 of the Internal Revenue Code of 1954, other than 
the cash receipts and disbursements method. Thus, section 818(a)(2) 
specifically prohibits the use by a life insurance company of the cash 
receipts and disbursements method either separately or in combination 
with a permissible method of accounting. The term ``method of 
accounting'' includes not only the over-all method of accounting of the 
taxpayer but also the accounting treatment of any item.

[[Page 678]]

For purposes of section 818(a)(2), a life insurance company may elect to 
compute its taxable income under an over-all method of accounting 
consisting of the accrual method combined with the special methods of 
accounting for particular items of income and expense provided under 
other sections of chapter 1 of the Internal Revenue Code of 1954, other 
than the cash receipts and disbursements method. These methods of 
accounting for special items include the accounting treatment provided 
for depreciation (section 167), research and experimental expenditures 
(section 174), soil and water conservation expenditures (section 175), 
organizational expenditures (section 248), etc. In addition, a life 
insurance company may, where applicable, use the crop method of 
accounting (as provided in the regulations under sections 61 and 162), 
and the installment method of accounting for sales of realty and casual 
sales of personalty (as provided in section 453(b)). To the extent not 
inconsistent with the provisions of the Internal Revenue Code of 1954 or 
the regulations thereunder and the method of accounting adopted by the 
taxpayer pursuant to this section, all computations entering into the 
determination of taxes imposed by part I shall be made in a manner 
consistent with the manner required for purposes of the annual statement 
approved by the National Association of Insurance Commissioners.
    (3)(i) An election to use any of the special methods of accounting 
referred to in subparagraph (2) of this paragraph which was made 
pursuant to any provisions of the Internal Revenue Code of 1954 or prior 
revenue laws for purposes of determining a company's tax liabilities for 
prior years, shall have the same force and effect in determining the 
items of gross investment income under section 804(b) and the items of 
deduction under section 804(c) of the Life Insurance Company Income Tax 
Act of 1959 (73 Stat. 112) as if such Act had not been enacted.
    (ii) For purposes of determining gain or loss from operations under 
section 809(b), in computing the life insurance company's share of 
investment yield under section 809(b) (1)(A) and (2)(A), an election 
with respect to any of the special methods of accounting referred to in 
subparagraph (2) of this paragraph which was made pursuant to any 
provision of the Internal Revenue Code of 1954 or prior revenue laws, 
shall not be affected in any way by the enactment of the Life Insurance 
Company Income Tax Act of 1959 (73 Stat. 112).
    (iii) For purposes of determining gain or loss from operations under 
section 809(b), in computing the items of gross amount under section 
809(c) and the deduction items under section 809(d), an election to use 
any of the special methods of accounting referred to in subparagraph (2) 
of this paragraph must be made in accordance with the specific statutory 
provisions of the sections containing such elections and the regulations 
thereunder. However, where a particular election may be made only with 
the consent of the Commissioner (either because the time for making the 
election without the consent of the Commissioner has expired or because 
the particular section contained no provision for making an election 
without consent), and the time prescribed by the applicable regulations 
for submitting a request for permission to make such an election for the 
taxable year 1958 has expired, a life insurance company may make such an 
election for the year 1958 at the time of filing its return for that 
year (including extensions thereof). For example, a life insurance 
company may elect any of the methods of depreciation prescribed in 
section 167 (to the extent permitted under that section and the 
regulations thereunder) with respect to those assets, or any portion 
thereof, for which no depreciation was allowable under prior revenue 
laws, for example, furniture and fixtures used in the underwriting 
department. Similarly, a life insurance company shall be permitted to 
make an election under section 461(c) (relating to the accrual of real 
property taxes) with respect to real property for which no deduction was 
allowable under prior revenue laws. Any such election shall be made in 
the manner and form prescribed in the applicable regulations.
    (iv) For purposes of subdivision (ii) of this subparagraph, the 
method used under section 1016(a)(3)(C) (relating to adjustments to 
basis) in determining the amount of exhaustion, wear and

[[Page 679]]

tear, obsolescence, and amortization actually sustained shall not 
preclude a taxpayer from electing any of the methods prescribed in 
section 167 in accordance with the provisions of that section and the 
regulations thereunder for determining the amount of such exhaustion, 
wear and tear, obsolescence, and amortization for the year 1958. For 
example, if the amount of depreciation actually sustained, under section 
1016(a)(3)(C), on a life insurance company's home office building (other 
than that portion for which depreciation was allowable under prior 
revenue laws) is determined on the straight line method, the life 
insurance company may elect for the year 1958 to use any of the methods 
prescribed in section 167 for determining its depreciation allowance for 
1958. However, such election shall be binding for 1958, and for all 
subsequent taxable years, unless consent to change such election, if 
required, is obtained from the Commissioner in accordance with the 
provisions of section 167 and the regulations thereunder.
    (4)(i) For purposes of section 805(b)(3)(B)(i) (relating to the 
determination of the current earnings rate for any taxable year 
beginning before January 1, 1958), the determination for any year of the 
investment yield and the assets shall be made as though the taxpayer had 
been on the accrual method prescribed in subparagraph (1) of this 
paragraph for such year, or the accrual method in combination with the 
other methods of accounting prescribed in subparagraph (2) of this 
paragraph, if these other methods of accounting are used by the taxpayer 
in determining the investment yield and assets for the taxable year 
1958. However, where the method used for determining the deduction under 
section 167 for the year 1958 differs from the method used in prior 
years, the amount of the deduction actually allowed or allowable for 
such prior years for purposes of section 1016(a)(2) (relating to 
adjustments to basis) shall be the amount to be taken into account in 
determining the current earnings rate under section 805(b)(3)(B)(i).
    (ii) For purposes of section 812(b)(1)(C) (relating to operations 
loss carrybacks and carryovers for years prior to 1958), the 
determination for those years of the gain or loss from operations shall 
be made as though the taxpayer had been on the accrual method of 
accounting prescribed in subparagraph (1) of this paragraph for such 
year, or the accrual method in combination with the other methods of 
accounting prescribed in subparagraph (2) of this paragraph, if these 
other methods of accounting are used by the taxpayer in the 
determination of gain or loss from operations for the taxable year 1958. 
However, where any adjustment to basis is required under section 
1016(a)(3)(C) on account of exhaustion, wear and tear, obsolescence, 
amortization, and depletion sustained, the amount actually sustained as 
determined under section 1016(a)(3)(C) for each of the years involved 
shall be the amount allowed in the determination of gain or loss from 
operations for purposes of section 812(b)(1)(C).
    (b) Adjustments required if accrual method of accounting was not 
used in 1957. The items of gross amount taken into account under section 
809(c) and the items of deductions allowed under section 809(d) for the 
taxable year 1958 shall be determined as though the taxpayer had been on 
the accrual method of accounting prescribed in paragraph (a) of this 
section for all prior years. Thus, life insurance companies not on the 
accrual method for the year 1957 shall accrue, as of December 31, 1957, 
those items of gross amount which would have been properly taken into 
account for the year 1957 if the company had been on the accrual method 
described in section 818(a). Likewise, life insurance companies not on 
the accrual method for the year 1957 shall accrue, as of December 31, 
1957, those items of deductions which would have been properly allowed 
for the year 1957 if the company had been on the accrual method 
described in section 818(a). For example, if certain premium amounts 
were received during the year 1958 but such amounts would have been 
properly taken into account for the year 1957 if the taxpayer had been 
on the accrual method for the year 1957, then the taxpayer will not be 
required to take such premium amounts into account for the year 1958. 
If, for example, certain claims, benefits, and losses

[[Page 680]]

were paid during the year 1958 but such items would have been properly 
taken into account for the year 1957 if the taxpayer had been on the 
accrual method for the year 1957, then the taxpayer will not be 
permitted to deduct such expense items for the year 1958. For a special 
transitional rule applicable with respect to changes in method of 
accounting required by section 818(a) and paragraph (a) of this section, 
see section 818(e) and Sec. 1.818-6.
    (c) Change of basis in computing reserves. (1) Section 806(b) 
provides that if the basis for determining the amount of any item 
referred to in section 810(c) as of the close of the taxable year 
differs from the basis for such determination as of the beginning of the 
taxable year, then for purposes of subpart B, part I, subchapter L, 
chapter 1 of the Code (relating to the determination of taxable 
investment income), the amount of such item shall be the amount computed 
on the old basis as of the close of the taxable year and the amount 
computed on the new basis as of the beginning of the next taxable year. 
Similarly, section 810(d)(1) provides rules for determining the amount 
of the adjustment to be made for purposes of subpart C, part I, 
subchapter L, chapter 1 of the Code (relating to the determination of 
gain or loss from operations), if the basis for determining any item 
referred to in section 810(c) as of the close of any taxable year 
differs from the basis for such determination as of the close of the 
preceding taxable year. Under an accrual method of accounting, a change 
in the basis or method of computing the amount of liability of any item 
referred to in section 810(c) occurs in the taxable year in which all 
the events have occurred which determine the change in the basis or 
method of computing the amount of such liability and, in which, the 
amount thereof (whether increased or decreased) can be determined with 
reasonable accuracy.
    (2) The application of subparagraph (1) of this paragraph may be 
illustrated by the following examples:

    Example 1. Assume that during the taxable year 1960, M, a life 
insurance company, determines that the amount of its life insurance 
reserves held with respect to a particular block of contracts is 
understated on the present basis being used in valuing such liability 
and that such liability can be more accurately reflected by changing 
from the present basis to a particular new basis. Assume that M uses 
such new basis in computing its reserves under such contracts at the end 
of the taxable year 1960. Under the provisions of section 818(a) and 
subparagraph (1) of this paragraph, the change in basis for purposes of 
sections 806(b) and 810(d) occurs during the taxable year 1960, the year 
in which all the events have occurred which determine the change in 
basis and the amount of any increase (or decrease) attributable to such 
change can be determined with reasonable accuracy. Such change shall be 
treated as having occurred during the taxable year 1960 whether M 
determines that its liability under such contracts was understated for 
the first time during 1960, or that its liability under such contracts 
has, in fact, been understated for a number of prior years.
    Example 2. Assume the facts are the same as in example 1, except 
that during the taxable year 1960 the insurance department of State X 
issues a ruling, pursuant to authority conferred by statute, requiring M 
to use the particular new basis which more accurately reflects its 
liability with respect to such contracts and that as a result of such 
ruling, M uses the new basis in computing its reserves under such 
contracts for the taxable years 1958, 1959, and 1960. Under the 
provisions of section 818(a) and subparagraph (1) of this paragraph, the 
change in basis for purposes of sections 806(b) and 810(d) occurs during 
the taxable year 1960, the year in which all the events have occurred 
which determine that a change in basis should be made and the amount of 
any increase (or decrease) attributable to such change can be determined 
with reasonable accuracy.

[T.D. 6558, 26 FR 2785, Apr. 4, 1961]