[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: 26CFR1.832-1]

[Page 735-736]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
Determination of Tax Liability--Table of Contents
 
Sec. 1.832-1  Gross income.

    (a) Gross income as defined in section 832(b)(1) means the gross 
amount of income earned during the taxable year from interest, 
dividends, rents, and premium income, computed on the basis of the 
underwriting and investment exhibit of the annual statement approved by 
the National Convention of Insurance Commissioners, as well as the gain 
derived from the sale or other disposition of property, and all other 
items constituting gross income under section 61, except that in the 
case of a mutual fire insurance company described in Sec. 1.831-1 the 
amount of single deposit premiums received, but not assessments, shall 
be excluded from gross income. Gross income does not include increase in 
liabilities during the year on account of reinsurance treaties, 
remittances from the home office of a foreign insurance company to the 
United States branch, borrowed money, or gross increase due to 
adjustments in book value of capital assets. The underwriting and 
investment exhibit is presumed to reflect the true net income of the 
company, and insofar as it is not inconsistent with the provisions of 
the Code will be recognized and used as a basis for that purpose. All 
items of the exhibit, however, do not reflect an insurance company's 
income as defined in the Code. By reason of the definition of investment 
income, miscellaneous items which are intended to reflect surplus but do 
not properly enter into the

[[Page 736]]

computation of income, such as dividends declared to shareholders in 
their capacity as such, home office remittances and receipts, and 
special deposits, are ignored. Gain or loss from agency balances and 
bills receivable not admitted as assets on the underwriting and 
investment exhibit will be ignored, excepting only such agency balances 
and bills receivable as have been allowed as deductions for worthless 
debts or, having been previously so allowed, are recovered during the 
taxable year. In computing ``premiums earned on insurance contracts 
during the taxable year'' the amount of the unearned premiums shall 
include (1) life insurance reserves as defined in section 803(b) and 
Sec. 1.803-1 pertaining to the life, burial, or funeral insurance, or 
annuity business of an insurance company subject to the tax imposed by 
section 831 and not qualifying as a life insurance company under section 
801, and (2) liability for return premiums under a rate credit or 
retrospective rating plan based on experience, such as the ``War 
Department Insurance Rating Plan,'' and which return premiums are 
therefore not earned premiums. In computing ``losses incurred'' the 
determination of unpaid losses at the close of each year must represent 
actual unpaid losses as nearly as it is possible to ascertain them.
    (b) Every insurance company to which this section applies must be 
prepared to establish to the satisfaction of the district director that 
the part of the deduction for ``losses incurred'' which represents 
unpaid losses at the close of the taxable year comprises only actual 
unpaid losses stated in amounts which, based upon the facts in each case 
and the company's experience with similar cases, can be said to 
represent a fair and reasonable estimate of the amount the company will 
be required to pay. Amounts included in, or added to, the estimates of 
such losses which, in the opinion of the district director are in excess 
of the actual liability determined as provided in the preceding sentence 
will be disallowed as a deduction. The district director may require any 
such insurance company to submit such detailed information with respect 
to its actual experience as is deemed necessary to establish the 
reasonableness of the deduction for ``losses incurred.''
    (c) That part of the deduction for ``losses incurred'' which 
represents an adjustment to losses paid for salvage and reinsurance 
recoverable shall, except as hereinafter provided, include all salvage 
in course of liquidation, and all reinsurance in process of collection 
not otherwise taken into account as a reduction of losses paid, 
outstanding at the end of the taxable year. Salvage in course of 
liquidation includes all property (other than cash), real or personal, 
tangible or intangible, except that which may not be included by reason 
of express statutory provisions (or rules and regulations of an 
insurance department) of any State or Territory or the District of 
Columbia in which the company transacts business. Such salvage in course 
of liquidation shall be taken into account to the extent of the value 
thereof at the end of the taxable year as determined from a fair and 
reasonable estimate based upon either the facts in each case or the 
company's experience with similar cases. Cash received during the 
taxable year with respect to items of salvage or reinsurance shall be 
taken into account in computing losses paid during such taxable year.