[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: 26CFR1.823-5]

[Page 717-718]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
Determination of Tax Liability--Table of Contents
 
Sec. 1.823-5  Dividends to policyholders.

    (a) Dividends to policyholders is one of the deductions used, 
together with wholly tax-exempt interest, in determining tax liability 
under section 821(a)(2). They are also used in section 822(c)(6) in 
determining the limitation on certain capital losses and in the 
application of section 1212. The term ``dividends to policyholders'' is 
defined in section 823(2) as dividends and similar distributions paid or 
declared to policyholders. It includes amounts returned to policyholders 
where the amount is not fixed in the insurance contract but depends upon 
the experience of the company or the discretion of the management. Such 
amounts are not to be treated as return premiums under section 823(1). 
Similar distributions include such payments as the so-called unabsorbed 
premium deposits returned to policyholders by factory mutual fire 
insurance companies. The term ``paid or declared'' is to be construed 
according to the method of accounting regularly employed in keeping the 
books of the insurance company, and such method shall be consistently 
followed with respect to all

[[Page 718]]

deductions (including dividends and similar distributions to 
policyholders) and all items of income.
    (b) If the method of accounting so employed is the cash receipts and 
disbursements method, the deduction is limited to the dividends and 
similar distributions actually paid to policyholders in the taxable 
year. If, on the other hand, the method of accounting so employed is the 
accrual method, the deduction, or a reasonably accurate estimate 
thereof, for dividends and similar distributions declared to 
policyholders for any taxable year will, in general, be computed as 
follows: To dividends and similar distributions paid during the taxable 
year add the amount of dividends and similar distributions declared but 
unpaid at the end of the taxable year and deduct dividends and similar 
distributions declared but unpaid at the beginning of the taxable year. 
If an insurance company using the accrual method does not compute the 
deduction for dividends and similar distributions declared to 
policyholders in the manner stated, it must submit with its return a 
full and complete explanation of the manner in which the deduction is 
computed. For the rule as to when dividends are considered paid, see the 
regulations under section 561.

[T.D. 6610, 27 FR 8722, Aug. 31, 1962]