[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: 26CFR1.822-8]

[Page 711-714]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
Determination of Tax Liability--Table of Contents
 
Sec. 1.822-8  Determination of taxable investment income.

    (a) In general--(1) Taxable investment income defined. Section 
822(a)(1) defines the term ``taxable investment income'' for purposes of 
part II, subchapter L, chapter 1 of the Code as the gross investment 
income (as defined in section 822(b) and paragraph (b) of this section), 
less the deductions provided in section 822(c) and paragraph (c) of this 
section for wholly tax-exempt interest, investment expenses, real estate 
expenses, depreciation, interest paid or accrued, capital losses, 
special deductions, trade or business (other than an insurance business) 
expenses, and depletion. However, such expenses are deductible only to 
the extent that they relate to investment income and the deduction of 
such expenses is not disallowed by any other provision of subtitle A of 
the Code.

For example, investment expenses are not allowable unless they are 
ordinary and necessary expenses within the meaning of section 162. In 
addition to the limitations on deductions relating to real estate owned 
and occupied by a mutual insurance company subject to the tax imposed by 
section 821 provided in section 822(d)(1), the adjustment for 
amortization of premium and accrual of discount provided in section 
822(d)(2), and the limitation on the deduction for investment expenses 
where general expenses are allocated to investment income provided in 
section 822(c)(2), mutual insurance companies subject to the tax imposed 
by section 821 (a) or (c) are subject to the limitation on deductions 
relating to wholly tax-exempt income provided in section 265. Such 
companies are not entitled to the net operating loss deduction provided 
in section 172. See, however, section 825 and paragraph (a) of Sec. 
1.825-1 for unused loss deduction allowed companies taxable under 
section 821(a). A deduction shall not be permitted with respect to the 
same item more than once.
    (2) Investment loss defined. The term ``investment loss'' is defined 
by section 822(a)(2) as the amount by which the deductions allowable 
under section 822(c) and paragraph (c) of this section exceed the gross 
investment income (as defined in section 822(b) and paragraph (b) of 
this section).
    (b) Gross investment income defined. For purposes of part II, 
subchapter L, chapter 1 of the Code, section 822(b) defines the term 
``gross investment income'' of a mutual insurance company subject to the 
tax imposed by section 821 (a) or (c) as the sum of the following:
    (1) The gross amount of income during the taxable year from:
    (i) Interest (including tax-exempt interest and partially tax-exempt 
interest), as described in Sec. 1.61-7. Interest shall be adjusted for 
amortization of premium and accrual of discount in accordance with the 
rules prescribed in section 822(d)(2) and Sec. 1.822-10;
    (ii) Dividends, as described in Sec. 1.61-9;
    (iii) Rents and royalties, as described in Sec. 1.61-8;
    (iv) The entering into of any lease, mortgage or other instrument or 
agreement from which the company may derive interest, rents, or 
royalties;
    (v) The alteration or termination of any instrument or agreement 
described

[[Page 712]]

in subdivision (iv) of this subparagraph;
    (vi) Gains from sales or exchanges of capital assets to the extent 
provided in subchapter P (section 1201 and following, relating to 
capital gains and losses) chapter 1 of the Code.
    (2) The gross income from any trade or business (other than an 
insurance business) carried on by a mutual insurance company subject to 
the tax imposed by section 821 (a) or (c), or by a partnership of which 
the insurance company is a partner.

For example, gross investment income includes amounts received as 
commitment fees, or as a bonus for the entering into of a lease, or as a 
penalty for the early payment of a mortgage. In computing the gross 
income from any trade or business (other than an insurance business) 
carried on by the insurance company, or by a partnership of which the 
insurance company is a partner, any item described in section 822(b)(1) 
and paragraph (b)(1) of this section shall not be considered as gross 
income arising from the conduct of such trade or business, but shall be 
taken into account under section 822(b)(1) and paragraph (b)(1) of this 
section.
    (c) Deductions from gross investment income--(1) Wholly tax-exempt 
interest. Interest which in the case of other taxpayers is excluded from 
gross income by section 103 but included in the gross investment income 
by section 822(b) is allowed as a deduction from gross investment income 
by section 822(c)(1).
    (2) Investment expenses. (i) The deduction for investment expenses 
under section 822(c)(2) includes only those expenses of the taxable year 
which are fairly chargeable against gross investment income. For 
example, investment expenses include salaries and expenses paid 
exclusively for work in looking after investments, and amounts expended 
for printing, stationery, postage, and stenographic work incident to the 
collection of interest. An itemized schedule of such expenses shall be 
attached to the return.
    (ii) Any assignment of general expenses to the investment department 
of a mutual insurance company subject to the tax imposed by section 821 
(a) or (c) subjects the entire deduction for investment expenses to the 
limitation provided in section 822(c)(2) and subdivision (iii) of this 
subparagraph. As used in section 822(c)(2), the term ``general 
expenses'' means any expense paid or incurred for the benefit of more 
than one department of the company rather than for the benefit of a 
particular department thereof. For example, if an expense, such as a 
salary, is attributable to more than one department, including the 
investment department, such expense may be properly allocated among 
these departments. If such expense is allocated, the amount properly 
allocable to the investment department shall be deductible as general 
expenses assigned to or included in investment expenses and as such 
shall be subject to the limitation of section 822(c)(2) and subdivision 
(iii) of this subparagraph. However, a company subject to the tax 
imposed by section 821 (a) or (c) shall not deduct under section 
822(c)(2) its real estate taxes, depreciation, or other expenses with 
respect to any portion of the real estate which it owns, irrespective of 
whether such items are properly allocable to its investment department. 
For the rules relating to the deductibility of these items, see section 
822(c) (3) and (4) and subparagraphs (3) and (4) of this paragraph. If 
general expenses are in part assigned to or included in investment 
expenses, the maximum allowance (as determined under section 822(c)(2)) 
shall not be granted unless it is shown to the satisfaction of the 
district director that such allowance is justified by a reasonable 
assignment of actual expenses. The accounting procedure employed is not 
conclusive as to whether any assignment has in fact been made. 
Investment expenses do not include Federal income and excess profits 
taxes, if any.
    (iii) If any general expenses are in part assigned to or included in 
investment expenses, the total deduction under section 822(c)(2) shall 
not exceed the sum of:
    (a) One-fourth of 1 percent of the mean of the book value of the 
invested assets held at the beginning and end of the taxable year, plus
    (b) One-fourth of the amount by which taxable investment income 
(computed without any deduction for

[[Page 713]]

investment expenses, tax-free interest, partially tax-exempt interest, 
or dividends received) exceeds 33/4 percent of the book value of the 
mean of the invested assets held at the beginning and end of the taxable 
year.

For purposes of section 822(c)(2) and this paragraph, the term 
``invested assets'' means only those assets which are owned and used, 
and to the extent used, for the purpose of producing the income 
specified in section 822(b). See paragraph (b) of this section. The term 
does not include real estate owned and occupied, and to the extent owned 
and occupied, by the company.
    (3) Real estate expenses and taxes. The deduction for real estate 
expenses and taxes under section 822(c)(3) includes taxes (as defined in 
section 164) and other expenses for the taxable year exclusively on or 
with respect to real estate owned by the company. For example, no 
deduction shall be allowed under section 822(c)(3) for amounts allowed 
as a deduction under section 164(e) (relating to taxes of shareholders 
paid by a corporation). No deduction shall be allowed under section 
822(c)(3) for any amount paid out for new buildings, or for permanent 
improvements or betterments made to increase the value of any property. 
An itemized schedule of such taxes and expenses shall be attached to the 
return. See Sec. 1.822-9 for limitation of such deduction.
    (4) Depreciation. The deduction allowed by section 822(c)(4) for 
depreciation is, except as provided in section 822(d)(1) and Sec. 
1.822-9, identical to that allowed other corporations by section 167. 
Such amount allowed as a deduction from gross investment income in 
determining taxable investment income is limited to depreciation 
sustained on the property used, and to the extent used, for the purpose 
of producing the income specified in section 822(b).
    (5) Interest paid or accrued. The deduction allowed by section 
822(c)(5) for interest on indebtedness is the same as that allowed other 
corporations by section 163. See Sec. 1.163-1.
    (6) Capital losses. (i) The deduction for capital losses under 
section 822(c)(6) includes not only capital losses to the extent 
provided in subchapter P, chapter 1 of the Code but in addition thereto 
losses from capital assets sold or exchanged to provide funds to meet 
abnormal insurance losses and to provide for the payment of dividends 
and similar distributions to policyholders. Losses in the latter case 
may be deducted from ordinary income while the deduction for losses 
under subchapter P is limited to the gains. See section 1211.
    (ii) Capital assets are considered as sold or exchanged to provide 
for the funds or payments specified in section 822(c)(6), to the extent 
that the gross receipts from the sale or exchange of such assets are not 
greater than the excess, if any, for the taxable year of the sum of 
dividends and similar distributions paid to policyholders, and losses 
and expenses paid over the sum of the items described in section 822(b) 
(other than paragraph (1)(D) thereof) and net premiums received. If, by 
reason of a particular sale or exchange of a capital asset, gross 
receipts are greater than such excess, the gross receipts and the 
resulting loss should be apportioned and the excess included in capital 
losses subject to the provisions of subchapter P. Capital losses 
actually used to reduce net income in any taxable year may not again be 
used in a succeeding taxable year as an offset against capital gains in 
that year and for that purpose a special rule is set forth for the 
application of section 1212.
    (iii) The application of section 822(c)(6) may be illustrated by the 
following examples:

    Example 1. The X Company, a mutual fire insurance company subject to 
tax under section 821, in the taxable year 1963 sells capital assets in 
order to obtain funds to meet abnormal insurance losses and to provide 
for the payment of dividends and similar distributions to policyholders. 
The gross receipts from the sale are $60,000, resulting in losses of 
$20,000. It pays dividends to policyholders of $150,000. It sustains 
losses of $25,000, and pays expenses of $25,000. It receives interest of 
$50,000, dividends of $5,000, royalties of $4,000, and net premiums of 
$66,000. The excess of the sum of dividends, losses, and expenses paid 
($200,000) over the sum of the items described in section 822(b) (other 
than paragraph (1)(D) thereof) and net premiums received ($125,000) is 
$75,000. Since the gross receipts from the sale of capital assets 
($60,000) do not exceed such excess

[[Page 714]]

($75,000), the losses of $20,000 are allowable as a deduction from gross 
investment income in computing taxable investment income under section 
822.
    Example 2. If in example 1 the gross receipts were $76,000 and the 
last capital asset sold, for the purpose therein specified, resulted in 
gross receipts of $2,000 and a loss of $500, the losses allowable as a 
deduction from gross investment income would be $19,750. The last sale 
made the gross receipts of $76,000 exceed by $1,000 the excess ($75,000) 
of the sum of dividends, losses, and expenses paid ($200,000) over the 
sum of the items described in section 822(b) (other than paragraph 
(1)(D) thereof) and net premiums received ($125,000). The gross receipts 
and the resulting loss from the last sale are apportioned on the basis 
of the ratio of the excess of $1,000 to the gross receipts of $2,000, or 
50 percent. Fifty percent of the loss of $500 is deducted from the total 
loss of $20,000. The remaining gross receipts of $1,000 and the 
proportionate loss of $250 should be reported as capital losses under 
subchapter P.
    Example 3. If in example 1 the X Company had taxable investment 
income for purposes of the surtax of $9,750 and, under the provisions of 
subchapter P, chapter 1 of the Code, had capital losses of $18,000 and 
capital gains of $10,000, the net capital loss for the taxable year 
1963, in applying section 1212 for the purposes of section 822(c)(6), 
would be $8,000. This is determined by subtracting from total losses of 
$38,000 ($18,000 capital losses under subchapter P plus $20,000 other 
capital losses under section 822(c)(6)) the sum of capital gains of 
$10,000 and losses from the sale or exchange of capital assets sold or 
exchanged to obtain funds to meet abnormal insurance losses and to 
provide for the payment of dividends and similar distributions to 
policyholders of $20,000. Such losses of $20,000 are added to capital 
gains of $10,000, since they are less than taxable investment income for 
purposes of the surtax, computed without regard to gains or losses from 
sales or exchanges of capital assets, of $29,750 ($9,750 taxable 
investment income for purposes of the surtax plus $20,000 other capital 
losses under section 822(c)(6) plus the portion of capital losses 
allowable under subchapter P of $10,000 minus capital gains under 
subchapter P of $10,000).

    (7) Special deductions. Section 822(c)(7) allows a mutual insurance 
company the special deductions provided by part VIII (section 241 and 
following), except section 248, subchapter B, chapter 1 of the Code, 
relating to partially tax-exempt interest and to dividends received. In 
applying section 246(b) (relating to limitation on aggregate amount of 
deductions for dividends received) for purposes of this subparagraph, 
the reference in such section to ``taxable income'' shall be treated as 
a reference to ``taxable investment income''.
    (8) Trade or business deductions. (i) Under section 822(c)(8), the 
deductions allowed by subtitle A of the Code (without regard to this 
part) which are attributable to any trade or business (other than an 
insurance business) carried on by the insurance company, or by a 
partnership of which the company is a partner are, subject to the 
limitations in subdivision (ii) of this subparagraph, allowable as 
deductions from gross investment income in computing taxable investment 
income. Such deductions are allowable, however, only to the extent that 
they relate to income which is included in the company's gross 
investment income by reason of section 822(b)(2). Thus, a deduction 
shall not be allowed under section 822(c)(8) with respect to any item 
described in section 822(b)(1). The allowable deductions may exceed the 
gross income from such business.
    (ii) In computing the deductions under section 822(c)(8):
    (a) Any item, to the extent attributable to the carrying on of the 
insurance business, shall not be taken into account. For example, if the 
company operates a radio station primarily to advertise its own 
insurance services, a portion of the expenses of the radio station shall 
not be allowed as a deduction. The portion disallowed shall be an amount 
which bears the same ratio to the total expenses of the station as the 
value of advertising furnished to the insurance company bears to the 
total value of services rendered by the station.
    (b) The deduction for net operating losses provided in section 172 
shall not be allowed.
    (9) Depletion. The deduction allowed by section 822(c)(9) for 
depletion is the same as that allowed life insurance companies under 
section 804(c)(4). See paragraph (b)(5) of Sec. 1.804-4.

[T.D. 6681, 28 FR 11113, Oct. 17, 1963]