
From the U.S. Code Online via GPO Access
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[Laws in effect as of January 2, 2001]
[Document not affected by Public Laws enacted between
  January 2, 2001 and January 28, 2002]
[CITE: 26USC832]

 
                     TITLE 26--INTERNAL REVENUE CODE
 
                        Subtitle A--Income Taxes
 
                  CHAPTER 1--NORMAL TAXES AND SURTAXES
 
                    Subchapter L--Insurance Companies
 
                   PART II--OTHER INSURANCE COMPANIES
 
Sec. 832. Insurance company taxable income


(a) Definition of taxable income

    In the case of an insurance company subject to the tax imposed by 
section 831, the term ``taxable income'' means the gross income as 
defined in subsection (b)(1) less the deductions allowed by subsection 
(c).

(b) Definitions

    In the case of an insurance company subject to the tax imposed by 
section 831--

                          (1) Gross income

        The term ``gross income'' means the sum of--
            (A) the combined gross amount earned during the taxable 
        year, from investment income and from underwriting income as 
        provided in this subsection, computed on the basis of the 
        underwriting and investment exhibit of the annual statement 
        approved by the National Association of Insurance Commissioners,
            (B) gain during the taxable year from the sale or other 
        disposition of property, and
            (C) all other items constituting gross income under 
        subchapter B, except that, in the case of a mutual fire 
        insurance company exclusively issuing perpetual policies, the 
        amount of single deposit premiums paid to such company shall not 
        be included in gross income,
            (D) in the case of a mutual fire or flood insurance company 
        whose principal business is the issuance of policies--
                (i) for which the premium deposits are the same 
            (regardless of the length of the term for which the policies 
            are written), and
                (ii) under which the unabsorbed portion of such premium 
            deposits not required for losses, expenses, or establishment 
            of reserves is returned or credited to the policyholder on 
            cancellation or expiration of the policy,

        an amount equal to 2 percent of the premiums earned on insurance 
        contracts during the taxable year with respect to such policies 
        after deduction of premium deposits returned or credited during 
        the same taxable year, and
            (E) in the case of a company which writes mortgage guaranty 
        insurance, the amount required by subsection (e)(5) to be 
        subtracted from the mortgage guaranty account.

                        (2) Investment income

        The term ``investment income'' means the gross amount of income 
    earned during the taxable year from interest, dividends, and rents, 
    computed as follows: To all interest, dividends, and rents received 
    during the taxable year, add interest, dividends, and rents due and 
    accrued at the end of the taxable year, and deduct all interest, 
    dividends, and rents due and accrued at the end of the preceding 
    taxable year.

                       (3) Underwriting income

        The term ``underwriting income'' means the premiums earned on 
    insurance contracts during the taxable year less losses incurred and 
    expenses incurred.

                         (4) Premiums earned

        The term ``premiums earned on insurance contracts during the 
    taxable year'' means an amount computed as follows:
            (A) From the amount of gross premiums written on insurance 
        contracts during the taxable year, deduct return premiums and 
        premiums paid for reinsurance.
            (B) To the result so obtained, add 80 percent of the 
        unearned premiums on outstanding business at the end of the 
        preceding taxable year and deduct 80 percent of the unearned 
        premiums on outstanding business at the end of the taxable year.
            (C) To the result so obtained, in the case of a taxable year 
        beginning after December 31, 1986, and before January 1, 1993, 
        add an amount equal to 3\1/3\ percent of unearned premiums on 
        outstanding business at the end of the most recent taxable year 
        beginning before January 1, 1987.

    For purposes of this subsection, unearned premiums shall include 
    life insurance reserves, as defined in section 816(b) but determined 
    as provided in section 807. For purposes of this subsection, 
    unearned premiums of mutual fire or flood insurance companies 
    described in paragraph (1)(D) means (with respect to the policies 
    described in paragraph (1)(D)) the amount of unabsorbed premium 
    deposits which the company would be obligated to return to its 
    policyholders at the close of the taxable year if all of its 
    policies were terminated at such time; and the determination of such 
    amount shall be based on the schedule of unabsorbed premium deposit 
    returns for each such company then in effect. Premiums paid by the 
    subscriber of a mutual flood insurance company described in 
    paragraph (1)(D) or issuing exclusively perpetual policies shall be 
    treated, for purposes of computing the taxable income of such 
    subscriber, in the same manner as premiums paid by a policyholder to 
    a mutual fire insurance company described in subparagraph (C) or (D) 
    of paragraph (1).

                         (5) Losses incurred

        (A) In general

            The term ``losses incurred'' means losses incurred during 
        the taxable year on insurance contracts computed as follows:
                (i) To losses paid during the taxable year, deduct 
            salvage and reinsurance recovered during the taxable year.
                (ii) To the result so obtained, add all unpaid losses on 
            life insurance contracts plus all discounted unpaid losses 
            (as defined in section 846) outstanding at the end of the 
            taxable year and deduct all unpaid losses on life insurance 
            contracts plus all discounted unpaid losses outstanding at 
            the end of the preceding taxable year.
                (iii) To the results so obtained, add estimated salvage 
            and reinsurance recoverable as of the end of the preceding 
            taxable year and deduct estimated salvage and reinsurance 
            recoverable as of the end of the taxable year.

        The amount of estimated salvage recoverable shall be determined 
        on a discounted basis in accordance with procedures established 
        by the Secretary.

        (B) Reduction of deduction

            The amount which would (but for this subparagraph) be taken 
        into account under subparagraph (A) shall be reduced by an 
        amount equal to 15 percent of the sum of--
                (i) tax-exempt interest received or accrued during such 
            taxable year,
                (ii) the aggregate amount of deductions provided by 
            sections 243, 244, and 245 for--
                    (I) dividends (other than 100 percent dividends) 
                received during the taxable year, and
                    (II) 100 percent dividends received during the 
                taxable year to the extent attributable (directly or 
                indirectly) to prorated amounts, and

                (iii) the increase for the taxable year in policy cash 
            values (within the meaning of section 805(a)(4)(F)) of life 
            insurance policies and annuity and endowment contracts to 
            which section 264(f) applies.

        In the case of a 100 percent dividend paid by an insurance 
        company, the portion attributable to prorated amounts shall be 
        determined under subparagraph (E)(ii).

        (C) Exception for investments made before August 8, 1986

            (i) In general

                Except as provided in clause (ii), subparagraph (B) 
            shall not apply to any dividend or interest received or 
            accrued on any stock or obligation acquired before August 8, 
            1986.
            (ii) Special rule for 100 percent dividends

                For purposes of clause (i), the portion of any 100 
            percent dividend which is attributable to prorated amounts 
            shall be treated as received with respect to stock acquired 
            on the later of--
                    (I) the date the payor acquired the stock or 
                obligation to which the prorated amounts are 
                attributable, or
                    (II) the 1st day on which the payor and payee were 
                members of the same affiliated group (as defined in 
                section 243(b)(2)).

        (D) Definitions

            For purposes of this paragraph--
            (i) Prorated amounts

                The term ``prorated amounts'' means tax-exempt interest 
            and dividends with respect to which a deduction is allowable 
            under section 243, 244, or 245 (other than 100 percent 
            dividends).
            (ii) 100 percent dividend

                (I) In general

                    The term ``100 percent dividend'' means any dividend 
                if the percentage used for purposes of determining the 
                deduction allowable under section 243, 244, or 245(b) is 
                100 percent.
                (II) Certain dividends received by foreign 
                        corporations

                    A dividend received by a foreign corporation from a 
                domestic corporation which would be a 100 percent 
                dividend if section 1504(b)(3) did not apply for 
                purposes of applying section 243(b)(2) shall be treated 
                as a 100 percent dividend.

        (E) Special rules for dividends subject to proration at 
                subsidiary level

            (i) In general

                In the case of any 100 percent dividend paid to an 
            insurance company to which this part applies by any 
            insurance company, the amount of the decrease in the 
            deductions of the payee company by reason of the portion of 
            such dividend attributable to prorated amounts shall be 
            reduced (but not below zero) by the amount of the decrease 
            in the deductions (or increase in income) of the payor 
            company attributable to the application of this section or 
            section 805(a)(4)(A) to such amounts.
            (ii) Portion of dividend attributable to prorated 
                    amounts

                For purposes of this subparagraph, in determining the 
            portion of any dividend attributable to prorated amounts--
                    (I) any dividend by the paying corporation shall be 
                treated as paid first out of earnings and profits 
                attributable to prorated amounts (to the extent 
                thereof), and
                    (II) by determining the portion of earnings and 
                profits so attributable without any reduction for the 
                tax imposed by this chapter.

                        (6) Expenses incurred

        The term ``expenses incurred'' means all expenses shown on the 
    annual statement approved by the National Association of Insurance 
    Commissioners, and shall be computed as follows: To all expenses 
    paid during the taxable year, add expenses unpaid at the end of the 
    taxable year and deduct expenses unpaid at the end of the preceding 
    taxable year. For purposes of this subchapter, the term ``expenses 
    unpaid'' shall not include any unpaid loss adjustment expenses shown 
    on the annual statement, but such unpaid loss adjustment expenses 
    shall be included in unpaid losses. For the purpose of computing the 
    taxable income subject to the tax imposed by section 831, there 
    shall be deducted from expenses incurred (as defined in this 
    paragraph) all expenses incurred which are not allowed as deductions 
    by subsection (c).

            (7) Special rules for applying paragraph (4)

        (A) Reduction not to apply to life insurance reserves

            Subparagraph (B) of paragraph (4) shall be applied with 
        respect to insurance contracts described in section 816(b)(1)(B) 
        by substituting ``100 percent'' for ``80 percent'' each place it 
        appears in such subparagraph (B), and subparagraph (C) of 
        paragraph (4) shall be applied by not taking such contracts into 
        account.

        (B) Special treatment of premiums attributable to insuring 
                certain securities

            In the case of premiums attributable to insurance against 
        default in the payment of principal or interest on securities 
        described in section 165(g)(2)(C) with maturities of more than 5 
        years--
                (i) subparagraph (B) of paragraph (4) shall be applied 
            by substituting ``90 percent'' for ``80 percent'' each place 
            it appears, and
                (ii) subparagraph (C) of paragraph (4) shall be applied 
            by substituting ``1\2/3\ percent'' for ``3\1/3\ percent''.

        (C) Termination as insurance company taxable under section 
                831(a)

            Except as provided in section 381(c)(22) (relating to 
        carryovers in certain corporate readjustments), if, for any 
        taxable year beginning before January 1, 1993, the taxpayer 
        ceases to be an insurance company taxable under section 831(a), 
        the aggregate adjustments which would be made under paragraph 
        (4)(C) for such taxable year and subsequent taxable years but 
        for such cessation shall be made for the taxable year preceding 
        such cessation year.

        (D) Treatment of companies which become taxable under section 
                831(a)

            (i) Exception to phase-in for companies which were 
                    not taxable, etc., before 1987

                Subparagraph (C) of paragraph (4) shall not apply to any 
            insurance company which, for each taxable year beginning 
            before January 1, 1987, was not subject to the tax imposed 
            by section 821(a) \1\ or 831(a) (as in effect on the day 
            before the date of the enactment of the Tax Reform Act of 
            1986) by reason of being--
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    \1\ See References in Text note below.
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                    (I) subject to tax under section 821(c) \1\ (as so 
                in effect), or
                    (II) described in section 501(c) (as so in effect) 
                and exempt from tax under section 501(a).
            (ii) Phase-in beginning at later date for companies 
                    not 1st taxable under section 831(a) in 1987

                In the case of an insurance company--
                    (I) which was not subject to the tax imposed by 
                section 831(a) for its 1st taxable year beginning after 
                December 31, 1986, by reason of being subject to tax 
                under section 831(b), or described in section 501(c) and 
                exempt from tax under section 501(a), and
                    (II) which, for any taxable year beginning before 
                January 1, 1987, was subject to the tax imposed by 
                section 821(a) \1\ or 831(a) (as in effect on the day 
                before the date of the enactment of the Tax Reform Act 
                of 1986),

          subparagraph (C) of paragraph (4) shall apply beginning with 
            the 1st taxable year beginning after December 31, 1986, for 
            which such company is subject to the tax imposed by section 
            831(a) and shall be applied by substituting the last day of 
            the preceding taxable year for ``December 31, 1986'' and the 
            1st day of the 7th succeeding taxable year for ``January 1, 
            1993''.

        (E) Treatment of certain reciprocal insurers

            In the case of a reciprocal (within the meaning of section 
        835(a)) which reports (as required by State law) on its annual 
        statement reserves on unearned premiums net of premium 
        acquisition expenses--
                (i) subparagraph (B) of paragraph (4) shall be applied 
            by treating unearned premiums as including an amount equal 
            to such expenses, and
                (ii) appropriate adjustments shall be made under 
            subparagraph (c) of paragraph (4) to reflect the amount by 
            which--
                    (I) such reserves at the close of the most recent 
                taxable year beginning before January 1, 1987, are 
                greater or less than,
                    (II) 80 percent of the sum of the amount under 
                subclause (I) plus such premium acquisition expenses,\2\
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    \2\ So in original. The comma probably should be a period.
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       (8) Special rules for applying paragraph (4) to title 
                             insurance premiums

        (A) In general

            In the case of premiums attributable to title insurance--
                (i) subparagraph (B) of paragraph (4) shall be applied 
            by substituting ``the discounted unearned premiums'' for 
            ``80 percent of the unearned premiums'' each place it 
            appears, and
                (ii) subparagraph (C) of paragraph (4) shall not apply.

        (B) Method of discounting

            For purposes of subparagraph (A), the amount of the 
        discounted unearned premiums as of the end of any taxable year 
        shall be the present value of such premiums (as of such time and 
        separately with respect to premiums received in each calendar 
        year) determined by using--
                (i) the amount of the undiscounted unearned premiums at 
            such time,
                (ii) the applicable interest rate, and
                (iii) the applicable statutory premium recognition 
            pattern.

        (C) Determination of applicable factors

            In determining the amount of the discounted unearned 
        premiums as of the end of any taxable year--
            (i) Undiscounted unearned premiums

                The term ``undiscounted unearned premiums'' means the 
            unearned premiums shown in the yearly statement filed by the 
            taxpayer for the year ending with or within such taxable 
            year.
            (ii) Applicable interest rate

                The term ``applicable interest rate'' means the annual 
            rate determined under 846(c)(2) for the calendar year in 
            which the premiums are received.
            (iii) Applicable statutory premium recognition 
                    pattern

                The term ``applicable statutory premium recognition 
            pattern'' means the statutory premium recognition pattern--
                    (I) which is in effect for the calendar year in 
                which the premiums are received, and
                    (II) which is based on the statutory premium 
                recognition pattern which applies to premiums received 
                by the taxpayer in such calendar year.

          For purposes of the preceding sentence, premiums received 
            during any calendar year shall be treated as received in the 
            middle of such year.

(c) Deductions allowed

    In computing the taxable income of an insurance company subject to 
the tax imposed by section 831, there shall be allowed as deductions:
        (1) all ordinary and necessary expenses incurred, as provided in 
    section 162 (relating to trade or business expenses);
        (2) all interest, as provided in section 163;
        (3) taxes, as provided in section 164;
        (4) losses incurred, as defined in subsection (b)(5) of this 
    section;
        (5) capital losses to the extent provided in subchapter P (sec. 
    1201 and following, relating to capital gains and losses) plus 
    losses from capital assets sold or exchanged in order to obtain 
    funds to meet abnormal insurance losses and to provide for the 
    payment of dividends and similar distributions to policyholders. 
    Capital assets shall be considered as sold or exchanged in order to 
    obtain funds to meet abnormal insurance losses and to provide for 
    the payment of dividends and similar distributions to policyholders 
    to the extent that the gross receipts from their sale or exchange 
    are not greater than the excess, if any, for the taxable year of the 
    sum of dividends and similar distributions paid to policyholders in 
    their capacity as such, losses paid, and expenses paid over the sum 
    of the items described in section 834(b) (other than paragraph 
    (1)(D) thereof) and net premiums received. In the application of 
    section 1212 for purposes of this section, the net capital loss for 
    the taxable year shall be the amount by which losses for such year 
    from sales or exchanges of capital assets exceeds the sum of the 
    gains from such sales or exchanges and whichever of the following 
    amounts is the lesser:
            (A) the taxable income (computed without regard to gains or 
        losses from sales or exchanges of capital assets; or
            (B) 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;

        (6) debts in the nature of agency balances and bills receivable 
    which become worthless within the taxable year;
        (7) the amount of interest earned during the taxable year which 
    under section 103 is excluded from gross income;
        (8) the depreciation deduction allowed by section 167 and the 
    deduction allowed by section 611 (relating to depletion);
        (9) charitable, etc., contributions, as provided in section 170;
        (10) deductions (other than those specified in this subsection) 
    as provided in part VI of subchapter B (sec. 161 and following, 
    relating to itemized deductions for individuals and corporations) 
    and in part I of subchapter D (sec. 401 and following, relating to 
    pension, profit-sharing, stock bonus plans, etc.);
        (11) dividends and similar distributions paid or declared to 
    policyholders in their capacity as such, except in the case of a 
    mutual fire insurance company described in subsection (b)(1)(C). For 
    purposes of the preceding sentence, the term ``dividends and similar 
    distributions'' includes amounts returned or credited to 
    policyholders on cancellation or expiration of policies described in 
    subsection (b)(1)(D). For purposes of this paragraph, the term 
    ``paid or declared'' shall be construed according to the method of 
    accounting regularly employed in keeping the books of the insurance 
    company;
        (12) the special deductions allowed by part VIII of subchapter B 
    (sec. 241 and following, relating to dividends received); and
        (13) in the case of a company which writes mortgage guaranty 
    insurance, the deduction allowed by subsection (e).

(d) Double deductions

    Nothing in this section shall permit the same item to be deducted 
more than once.

(e) Special deduction and income account

    In the case of taxable years beginning after December 31, 1966, of a 
company which writes mortgage guaranty insurance--

                      (1) Additional deduction

        There shall be allowed as a deduction for the taxable year, if 
    bonds are purchased as required by paragraph (2), the sum of--
            (A) an amount representing the amount required by State law 
        or regulation to be set aside in a reserve for mortgage guaranty 
        insurance losses resulting from adverse economic cycles; and
            (B) an amount representing the aggregate of amounts so set 
        aside in such reserve for the 8 preceding taxable years to the 
        extent such amounts were not deducted under this paragraph in 
        such preceding taxable years,

    except that the deduction allowable for the taxable year under this 
    paragraph shall not exceed the taxable income for the taxable year 
    computed without regard to this paragraph or to any carryback of a 
    net operating loss. For purposes of this paragraph, the amount 
    required by State law or regulation to be so set aside in any 
    taxable year shall not exceed 50 percent of premiums earned on 
    insurance contracts (as defined in subsection (b)(4)) with respect 
    to mortgage guaranty insurance for such year. For purposes of this 
    subsection, all amounts shall be taken into account on a first-in-
    time basis. The computation and deduction under this section of 
    losses incurred (including losses resulting from adverse economic 
    cycles) shall not be affected by the provisions of this subsection. 
    For purposes of this subsection, the terms ``preceding taxable 
    years'' and ``preceding taxable year'' shall not include taxable 
    years which began before January 1, 1967.

                        (2) Purchase of bonds

        The deduction under paragraph (1) shall be allowed only to the 
    extent that tax and loss bonds are purchased in an amount equal to 
    the tax benefit attributable to such deduction, as determined under 
    regulations prescribed by the Secretary, on or before the date that 
    any taxes (determined without regard to this subsection) due for the 
    taxable year for which the deduction is allowed are due to be paid. 
    If a deduction would be allowed but for the fact that tax and loss 
    bonds were not timely purchased, such deduction shall be allowed to 
    the extent such purchases are made within a reasonable time, as 
    determined by the Secretary, if all interest and penalties, computed 
    as if this sentence did not apply, are paid.

                    (3) Mortgage guaranty account

        Each company which writes mortgage guaranty insurance shall, for 
    purposes of this part, establish and maintain a mortgage guaranty 
    account.

                      (4) Additions to account

        There shall be added to the mortgage guaranty account for each 
    taxable year an amount equal to the amount allowed as a deduction 
    for the taxable year under paragraph (1).

     (5) Subtractions from account and inclusion in gross income

        After applying paragraph (4), there shall be subtracted for the 
    taxable year from the mortgage guaranty account and included in 
    gross income--
            (A) the amount (if any) remaining which was added to the 
        account for the tenth preceding taxable year,
            (B) the excess (if any) of the aggregate amount in the 
        mortgage guaranty account over the aggregate amount in the 
        reserve referred to in paragraph (1)(A). For purposes of 
        determining such excess, the aggregate amount in the mortgage 
        guaranty account shall be determined after applying subparagraph 
        (A), and the aggregate amount in the reserve referred to in 
        paragraph (1)(A) shall be determined by disregarding any amounts 
        remaining in such reserve added for taxable years beginning 
        before January 1, 1967,
            (C) an amount (if any) equal to the net operating loss for 
        the taxable year computed without regard to this subparagraph, 
        and
            (D) any amount improperly subtracted from the account under 
        subparagraph (A), (B), or (C) to the extent that tax and loss 
        bonds were redeemed with respect to such amount.

    If a company liquidates or otherwise terminates its mortgage 
    guaranty insurance business and does not transfer or distribute such 
    business in an acquisition of assets referred to in section 381(a), 
    the entire amount remaining in such account shall be subtracted. 
    Except in the case where a company transfers or distributes its 
    mortgage guaranty insurance in an acquisition of assets referred to 
    in section 381(a), if the company is not subject to the tax imposed 
    by section 831 for any taxable year, the entire amount in the 
    account at the close of the preceding taxable year shall be 
    subtracted from the account in such preceding taxable year.

     (6) Lease guaranty insurance; insurance of State and local 
                                 obligations

        In the case of any taxable year beginning after December 31, 
    1970, the provisions of this subsection shall also apply in all 
    respects to a company which writes lease guaranty insurance or 
    insurance on obligations the interest on which is excludable from 
    gross income under section 103. In applying this subsection to such 
    a company, any reference to mortgage guaranty insurance contained in 
    this section shall be deemed to be a reference also to lease 
    guaranty insurance and to insurance on obligations the interest on 
    which is excludable from gross income under section 103; and in the 
    case of insurance on obligations the interest on which is excludable 
    from gross income under section 103, the references in paragraph (1) 
    to ``losses resulting from adverse economic cycles'' include losses 
    from declining revenues related to such obligations (as well as 
    losses resulting from adverse economic cycles), and the time 
    specified in subparagraph (A) of paragraph (5) shall be the 
    twentieth preceding taxable year.

(f) Interinsurers

    In the case of a mutual insurance company which is an interinsurer 
or reciprocal underwriter--
        (1) there shall be allowed as a deduction the increase for the 
    taxable year in savings credited to subscriber accounts, or
        (2) there shall be included as an item of gross income the 
    decrease for the taxable year in savings credited to subscriber 
    accounts.

For purposes of the preceding sentence, the term ``savings credited to 
subscriber accounts'' means such portion of the surplus as is credited 
to the individual accounts of subscribers before the 16th day of the 3rd 
month following the close of the taxable year, but only if the company 
would be obligated to pay such amount promptly to such subscriber if he 
terminated his contract at the close of the company's taxable year. For 
purposes of determining his taxable income, the subscriber shall treat 
any such savings credited to his account as a dividend paid or declared.

(g) Dividends within group

    In the case of an insurance company subject to tax under section 
831(a) filing or required to file a consolidated return under section 
1501 with respect to any affiliated group for any taxable year, any 
determination under this part with respect to any dividend paid by one 
member of such group to another member of such group shall be made as if 
such group were not filing a consolidated return.

(Aug. 16, 1954, ch. 736, 68A Stat. 264; Mar. 13, 1956, ch. 83, 
Sec. 3(b), 70 Stat. 48; Pub. L. 87-834, Sec. 8(e)(2)-(5), Oct. 16, 1962, 
76 Stat. 997, 998; Pub. L. 88-272, title II, Sec. 228(c), Feb. 26, 1964, 
78 Stat. 99; Pub. L. 89-809, title I, Sec. 104(i)(7), Nov. 13, 1966, 80 
Stat. 1562; Pub. L. 90-240, Sec. 5(a)-(c), Jan. 2, 1968, 81 Stat. 776, 
777; Pub. L. 93-483, Sec. 5, Oct. 26, 1974, 88 Stat. 1458; Pub. L. 94-
455, title XIX, Secs. 1901(a)(108), (b)(1)(T), (U), 1906(b)(13)(A), Oct. 
4, 1976, 90 Stat. 1782, 1792, 1834; Pub. L. 97-248, title II, 
Sec. 234(b)(2)(A), Sept. 3, 1982, 96 Stat. 503; Pub. L. 98-369, div. A, 
title II, Sec. 211(b)(9), July 18, 1984, 98 Stat. 755; Pub. L. 99-514, 
title X, Secs. 1021(a), (b), 1022(a), 1023(a), 1024(c)(1)-(6), Oct. 22, 
1986, 100 Stat. 2395, 2397, 2399, 2406, 2407; Pub. L. 100-647, title I, 
Sec. 1010(c), (d)(1), (2), Nov. 10, 1988, 102 Stat. 3451-3453; Pub. L. 
101-508, title XI, Secs. 11303(a), (b), 11305(a), Nov. 5, 1990, 104 
Stat. 1388-450, 1388-451; Pub. L. 104-188, title I, Secs. 1702(h)(3), 
1704(t)(45), Aug. 20, 1996, 110 Stat. 1873, 1889; Pub. L. 105-34, title 
X, Sec. 1084(b)(4), Aug. 5, 1997, 111 Stat. 955.)

                       References in Text

    Section 821, referred to in subsec. (b)(7)(D), was repealed by Pub. 
L. 99-514, title X, Sec. 1024(a)(1), Oct. 22, 1986, 100 Stat. 2405.
    The date of the enactment of the Tax Reform Act of 1986, referred to 
in subsec. (b)(7)(D), is the date of enactment of Pub. L. 99-514, which 
was approved Oct. 22, 1986.

                          Codification

    Another section 1084(b) of Pub. L. 105-34 amended sections 101 and 
264 of this title.


                               Amendments

    1997--Subsec. (b)(5)(B)(iii). Pub. L. 105-34, which directed 
amendment of subpar. (B) by adding cl. (iii) at the end, was executed by 
adding cl. (iii) after cl. (ii) to reflect the probable intent of 
Congress.
    1996--Subsec. (b)(5)(C)(ii)(II), (D)(ii)(II). Pub. L. 104-188, 
Sec. 1702(h)(3), substituted ``243(b)(2)'' for ``243(b)(5)''.
    Subsec. (b)(7)(A). Pub. L. 104-188, Sec. 1704(t)(45), provided that 
section 11303(b)(1) of Pub. L. 101-508 shall be applied as if 
``paragraph'' appeared instead of ``subparagraph'' in the material 
proposed to be stricken. See 1990 Amendment note below.
    1990--Subsec. (b)(4). Pub. L. 101-508, Sec. 11303(a), substituted 
``section 807.'' for ``section 807, 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 816.'' in first sentence after subpar. (C).
    Subsec. (b)(5)(A). Pub. L. 101-508, Sec. 11305(a), amended subpar. 
(A) generally. Prior to amendment, subpar. (A) read as follows: ``The 
term `losses incurred' means losses incurred during the taxable year on 
insurance contracts, computed as follows:
        ``(i) To losses paid during the taxable year, add salvage and 
    reinsurance recoverable outstanding at the end of the preceding 
    taxable year and deduct salvage and reinsurance recoverable 
    outstanding at the end of the taxable year.
        ``(ii) To the result so obtained, add all unpaid losses on life 
    insurance contracts plus all discounted unpaid losses (as defined in 
    section 846) outstanding at the end of the taxable year and deduct 
    unpaid losses on life insurance contracts plus all discounted unpaid 
    losses outstanding at the end of the preceding taxable year.''
    Subsec. (b)(7)(A). Pub. L. 101-508, Sec. 11303(b)(2), substituted 
``such contracts into account'' for ``such amounts into account''.
    Pub. L. 101-508, Sec. 11303(b)(1), which directed the substitution 
of ``insurance contracts described in section 816(b)(1)(B)'' for 
``amounts included in unearned premiums under the 2nd sentence of such 
subparagraph'', was executed by making the substitution for ``amounts 
included in unearned premiums under the 2nd sentence of such 
paragraph''. See 1996 Amendment note above.
    1988--Subsec. (b)(5)(B)(ii)(II). Pub. L. 100-647, Sec. 1010(d)(2), 
inserted ``(directly or indirectly)'' after ``attributable''.
    Subsec. (b)(7)(C). Pub. L. 100-647, Sec. 1010(c)(1), substituted 
``insurance company taxable under section 831(a)'' for ``nonlife 
insurance company'' in heading and ``section 831(a)'' for ``this part'' 
in text.
    Subsec. (b)(7)(D), (E). Pub. L. 100-647, Sec. 1010(c)(2), added 
subpars. (D) and (E).
    Subsec. (e)(5)(A). Pub. L. 100-647, Sec. 1010(c)(3), struck out 
``and'' after ``preceding taxable year,''.
    Subsec. (e)(5)(B). Pub. L. 100-647, Sec. 1010(c)(3), which directed 
amendment of subpar. (B) by substituting a comma for the period at end, 
could not be executed because there was no period at end of subpar. (B).
    Subsec. (g). Pub. L. 100-647, Sec. 1010(d)(1), added subsec. (g).
    1986--Subsec. (b)(1)(C). Pub. L. 99-514, Sec. 1024(c)(1), 
substituted ``exclusively issuing perpetual policies'' for ``described 
in section 831(a)(3)(A)''.
    Subsec. (b)(1)(D). Pub. L. 99-514, Sec. 1024(c)(2), amended subpar. 
(D) generally. Prior to amendment, subpar. (D) read as follows: ``in the 
case of a mutual fire or flood insurance company described in section 
831(a)(3)(B), an amount equal to 2 percent of the premiums earned on 
insurance contracts during the taxable year with respect to policies 
described in section 831(a)(3)(B) after deduction of premium deposits 
returned or credited during the same taxable year, and''.
    Subsec. (b)(4). Pub. L. 99-514, Sec. 1024(c)(3), substituted 
``paragraph (1)(D)'' for ``section 831(a)(3)(B)'' in two places and 
amended last sentence generally, substituting ``described in paragraph 
(1)(D) or issuing exclusively perpetual policies'' for ``referred to in 
paragraph (3) of section 831(a)'' and ``described in subparagraph (C) or 
(D) of paragraph (1)'' for ``referred to in such paragraph (3)''.
    Subsec. (b)(4)(B), (C). Pub. L. 99-514, Sec. 1021(a), added subpars. 
(B) and (C) and struck out former subpar. (B) which read as follows: 
``To the result so obtained, add unearned premiums on outstanding 
business at the end of the preceding taxable year and deduct unearned 
premiums on outstanding business at the end of the taxable year.''
    Subsec. (b)(5)(A). Pub. L. 99-514, Sec. 1022(a), in amending par. 
(5) generally, designated existing provisions of par. (5) as subpar. 
(A), inserted subpar. heading ``In general'', and redesignated former 
subpars. (A) and (B) as cls. (i) and (ii).
    Subsec. (b)(5)(A)(ii). Pub. L. 99-514, Sec. 1023(a)(1), amended cl. 
(ii) generally, inserting ``on life insurance contracts plus all 
discounted unpaid losses (as defined in section 846)'' and ``on life 
insurance contracts plus all discounted unpaid losses''.
    Subsec. (b)(5)(B) to (E). Pub. L. 99-514, Sec. 1022(a), in amending 
par. (5) generally, added subpars. (B) to (E). Former subpar. (B) 
redesignated (A)(ii).
    Subsec. (b)(6). Pub. L. 99-514, Sec. 1023(a)(2), inserted second 
sentence defining ``expenses unpaid''.
    Subsec. (b)(7), (8). Pub. L. 99-514, Sec. 1021(b), added pars. (7) 
and (8).
    Subsec. (c)(5). Pub. L. 99-514, Sec. 1024(c)(4), substituted 
``section 834(b)'' for ``section 822(b)''.
    Subsec. (c)(11). Pub. L. 99-514, Sec. 1024(c)(5), substituted 
``subsection (b)(1)(C)'' for ``section 831(a)(3)(A)'' and ``subsection 
(b)(1)(D)'' for ``section 831(a)(3)(B)''.
    Subsec. (f). Pub. L. 99-514, Sec. 1024(c)(6), added subsec. (f).
    1984--Subsec. (b)(4). Pub. L. 98-369, in provisions following 
subpar. (B), substituted ``section 816(b) but determined as provided in 
section 807'' and ``section 816'' for ``section 801(b)'' and ``section 
801'', respectively.
    1982--Subsec. (e)(2). Pub. L. 97-248 struck out ``, as if no 
election to make installment payments under section 6152 is made'' after 
``due to be paid''.
    1976--Subsec. (b)(1), (6). Pub. L. 94-455, Sec. 1901(a)(108), 
substituted ``Association'' for ``Convention''.
    Subsec. (c)(5)(A). Pub. L. 94-455, Sec. 1901(b)(1)(T), struck out 
``or to the deductions provided in section 242 for partially tax-exempt 
interest'' after ``exchanges of capital assets''.
    Subsec. (c)(12). Pub. L. 94-455, Sec. 1901(b)(1)(U), struck out 
``partially tax-exempt interest and to'' after ``and following, relating 
to''.
    Subsec. (e)(2). Pub. L. 94-455, Sec. 1906(b)(13)(A), struck out ``or 
his delegate'' after ``Secretary''.
    1974--Subsec. (e)(6). Pub. L. 93-483 added par. (6).
    1968--Subsec. (b)(1)(E). Pub. L. 90-240, Sec. 5(a), added subpar. 
(E).
    Subsec. (c)(13). Pub. L. 90-240, Sec. 5(b), added par. (13).
    Subsec. (e). Pub. L. 90-240, Sec. 5(c), added subsec. (e).
    1966--Subsec. (d). Pub. L. 89-809 redesignated subsec. (e) as (d). 
Former subsec. (d), having reference to the taxable income of foreign 
insurance companies other than life or mutual and foreign mutual marine, 
was struck out.
    Subsec. (e). Pub. L. 89-809 redesignated subsec. (e) as (d).
    1964--Subsec. (c)(10). Pub. L. 88-272 inserted reference to part I 
of subchapter D.
    1962--Subsec. (b)(1)(C). Pub. L. 87-834, Sec. 8(e)(3), (5), 
substituted ``section 831(a)(3)(A)'' for ``section 831(a)''.
    Subsec. (b)(1)(D). Pub. L. 87-834, Sec. 8(e)(5), added subpar. (D).
    Subsec. (b)(4). Pub. L. 87-834, Sec. 8(e)(2), inserted provisions 
defining unearned premiums of mutual fire or flood insurance companies, 
and which require premiums paid by the subscriber of a mutual flood 
insurance company to be treated, for purposes of computing the taxable 
income of such subscriber, in the same manner as premiums paid by a 
policyholder to a mutual fire insurance company referred to in par. (3) 
of section 831(a) of this title.
    Subsec. (c)(11). Pub. L. 87-834, Sec. 8(e)(4), substituted ``section 
831(a)(3)(A)'' for ``section 831(a)'', and inserted definition of 
``dividends and similar distributions''.
    1956--Subsec. (b)(4). Act Mar. 13, 1956, Sec. 3(b)(1), substituted 
``section 801(b)'' for ``section 806''.
    Subsec. (c). Act Mar. 13, 1956, Sec. 3(b)(2), (3), substituted ``the 
items described in section 822(b) (other than paragraph (1)(D) thereof) 
and net premiums received. In the application of section 1212'' for 
``interest, dividends, rents, and net premiums received. In the 
application of section 1211'' in par. (5), and authorized the deduction 
for depletion in par. (8).


                    Effective Date of 1997 Amendment

    Amendment by Pub. L. 105-34 applicable to contracts issued after 
June 8, 1997, in taxable years ending after such date, with special 
provisions relating to changes in contracts to be treated as new 
contracts, see section 1084(d) of Pub. L. 105-34, set out as a note 
under section 101 of this title.


                    Effective Date of 1996 Amendment

    Amendment by section 1702(h)(3) of Pub. L. 104-188 effective, except 
as otherwise expressly provided, as if included in the provision of the 
Revenue Reconciliation Act of 1990, Pub. L. 101-508, title XI, to which 
such amendment relates, see section 1702(i) of Pub. L. 104-188, set out 
as a note under section 38 of this title.


                    Effective Date of 1990 Amendment

    Section 11303(c) of Pub. L. 101-508 provided that:
    ``(1) In general.--The amendments made by this section [amending 
this section] shall apply to taxable years beginning on or after 
September 30, 1990.
    ``(2) Amendments treated as change in method of accounting.--In the 
case of any taxpayer who is required by reason of the amendments made by 
this section to change his method of computing reserves--
        ``(A) such change shall be treated as a change in a method of 
    accounting,
        ``(B) such change shall be treated as initiated by the taxpayer,
        ``(C) such change shall be treated as having been made with the 
    consent of the Secretary, and
        ``(D) the net adjustments which are required by section 481 of 
    the Internal Revenue Code of 1986 to be taken into account by the 
    taxpayer shall be taken into account over a period not to exceed 4 
    taxable years beginning with the taxpayer's first taxable year 
    beginning on or after September 30, 1990.
    ``(3) Coordination with section 832(b)(4)(C).--The amendments made 
by this section shall not affect the application of section 832(b)(4)(C) 
of the Internal Revenue Code of 1986.''
    Section 11305(c) of Pub. L. 101-508 provided that:
    ``(1) In general.--The amendments made by this section [amending 
this section and section 846 of this title] shall apply to taxable years 
beginning after December 31, 1989.
    ``(2) Amendments treated as change in method of accounting.--
        ``(A) In general.--In the case of any taxpayer who is required 
    by reason of the amendments made by this section to change his 
    method of computing losses incurred--
            ``(i) such change shall be treated as a change in a method 
        of accounting,
            ``(ii) such change shall be treated as initiated by the 
        taxpayer, and
            ``(iii) such change shall be treated as having been made 
        with the consent of the Secretary.
        ``(B) Adjustments.--In applying section 481 of the Internal 
    Revenue Code of 1986 with respect to the change referred to in 
    subparagraph (A)--
            ``(i) only 13 percent of the net amount of adjustments 
        (otherwise required by such section 481 to be taken into account 
        by the taxpayer) shall be taken into account, and
            ``(ii) the portion of such net adjustments which is required 
        to be taken into account by the taxpayer (after the application 
        of clause (i)) shall be taken into account over a period not to 
        exceed 4 taxable years beginning with the taxpayer's 1st taxable 
        year beginning after December 31, 1989.
    ``(3) Treatment of companies which took into account salvage 
recoverable.--In the case of any insurance company which took into 
account salvage recoverable in determining losses incurred for its last 
taxable year beginning before January 1, 1990, 87 percent of the 
discounted amount of estimated salvage recoverable as of the close of 
such last taxable year shall be allowed as a deduction ratably over its 
1st 4 taxable years beginning after December 31, 1989.
    ``(4) Special rule for overestimates.--If for any taxable year 
beginning after December 31, 1989--
        ``(A) the amount of the section 481 adjustment which would have 
    been required without regard to paragraph (2) and any discounting, 
    exceeds
        ``(B) the sum of the amount of salvage recovered taken into 
    account under section 832(b)(5)(A)(i) for the taxable year and any 
    preceding taxable year beginning after December 31, 1989, 
    attributable to losses incurred with respect to any accident year 
    beginning before 1990 and the undiscounted amount of estimated 
    salvage recoverable as of the close of the taxable year on account 
    of such losses,
87 percent of such excess (adjusted for discounting used in determining 
the amount of salvage recoverable as of the close of the last taxable 
year of the taxpayer beginning before January 1, 1990) shall be included 
in gross income for such taxable year.
    ``(5) Effect on earnings and profits.--The earnings and profits of 
any insurance company for its 1st taxable year beginning after December 
31, 1989, shall be increased by the amount of the section 481 adjustment 
which would have been required but for paragraph (2). For purposes of 
applying sections 56, 902, 952(c)(1), and 960 of the Internal Revenue 
Code of 1986, earnings and profits of a corporation shall be determined 
by applying the principles of paragraph (2)(B).''


                    Effective Date of 1988 Amendment

    Amendment by Pub. L. 100-647 effective, except as otherwise 
provided, as if included in the provision of the Tax Reform Act of 1986, 
Pub. L. 99-514, to which such amendment relates, see section 1019(a) of 
Pub. L. 100-647, set out as a note under section 1 of this title.


                    Effective Date of 1986 Amendment

    Section 1021(c) of Pub. L. 99-514 provided that:
    ``(1) In general.--The amendment made by this section [amending this 
section] shall apply to taxable years beginning after December 31, 1986.
    ``(2) Special transitional rule for title insurance companies.--For 
the 1st taxable year beginning after December 31, 1986, in the case of 
premiums attributable to title insurance--
        ``(A) In general.--The unearned premiums at the end of the 
    preceding taxable year as defined in paragraph (4) of section 832(b) 
    [of the Internal Revenue Code of 1986] shall be determined as if the 
    amendments made by this section had applied to such unearned 
    premiums in the preceding taxable year and by using the interest 
    rate and premium recognition pattern applicable to years ending in 
    calendar year 1987.
        ``(B) Fresh start.--Except as provided in subparagraph (C), any 
    difference between--
            ``(i) the amount determined to be unearned premiums for the 
        year preceding the first taxable year of a title insurance 
        company beginning after December 31, 1986, determined without 
        regard to subparagraph (A), and
            ``(ii) such amount determined with regard to subparagraph 
        (A),
    shall not be taken into account for purposes of the Internal Revenue 
    Code of 1986.
        ``(C) Effect on earnings and profits.--The earnings and profits 
    of any insurance company for its 1st taxable year beginning after 
    December 31, 1986, shall be increased by the amount of the 
    difference determined under subparagraph (A) with respect to such 
    company.''
    Section 1022(b) of Pub. L. 99-514 provided that: ``The amendment 
made by this section [amending this section] shall apply to taxable 
years beginning after December 31, 1986.''
    Amendment by section 1023(a) of Pub. L. 99-514 applicable to taxable 
years beginning after Dec. 31, 1986, except as otherwise provided, see 
section 1023(e) of Pub. L. 99-514, set out as an Effective Date note 
under section 846 of this title.
    Amendment by section 1024(c)(1)-(6) of Pub. L. 99-514 applicable to 
taxable years beginning after Dec. 31, 1986, see section 1024(e) of Pub. 
L. 99-514, set out as a note under section 831 of this title.


                    Effective Date of 1984 Amendment

    Amendment by Pub. L. 98-369 applicable to taxable years beginning 
after Dec. 31, 1983, see section 215 of Pub. L. 98-369, set out as an 
Effective Date note under section 801 of this title.


                    Effective Date of 1982 Amendment

    Amendment by Pub. L. 97-248 applicable to taxable years beginning 
after Dec. 31, 1982, see section 234(e) of Pub. L. 97-248, set out as a 
note under section 6655 of this title.


                    Effective Date of 1976 Amendment

    Amendment by section 1901(a)(108), (b)(1)(T), (U) of Pub. L. 94-455 
effective for taxable years beginning after Dec. 31, 1976, see section 
1901(d) of Pub. L. 94-455, set out as a note under section 2 of this 
title.


                    Effective Date of 1968 Amendment

    Section 5(e) of Pub. L. 90-240, as amended by Pub. L. 99-514, 
Sec. 2, Oct. 22, 1986, 100 Stat. 2095, provided that: ``The amendments 
made by subsections (a), (b), (c), and (d) [amending this section and 
section 381 of this title] shall apply to taxable years beginning after 
December 31, 1966, except that so much of section 832(e)(2) of the 
Internal Revenue Code of 1986 [formerly I.R.C. 1954] (as added by the 
amendment made by subsection (c)) as provides for payment of interest 
and penalties for failure to make a timely purchase of tax and loss 
bonds shall not apply with respect to any period during which such bonds 
are not available for purchase.''


                    Effective Date of 1966 Amendment

    Amendment by Pub. L. 89-809 applicable with respect to taxable years 
beginning after Dec. 31, 1966, see section 104(n) of Pub. L. 89-809, set 
out as a note under section 11 of this title.


                    Effective Date of 1964 Amendment

    Section 228(d) of Pub. L. 88-272 provided that: ``The amendment made 
by subsection (a) [amending former section 809 of this title] shall 
apply to taxable years beginning after December 31, 1961. The amendment 
made by subsection (c) [amending this section] shall apply to taxable 
years beginning after December 31, 1953, and ending after August 16, 
1954.''


                    Effective Date of 1962 Amendment

    Amendment by Pub. L. 87-834 applicable with respect to taxable years 
beginning after Dec. 31, 1962, see section 8(h) of Pub. L. 87-834, set 
out as a note under section 501 of this title.


                    Effective Date of 1956 Amendment

    Amendment by act Mar. 13, 1956, applicable only to taxable years 
beginning after Dec. 31, 1954, see section 6 of act Mar. 13, 1956, set 
out as a note under section 316 of this title.


  Deduction From Earnings and Profits of Insurance Companies to Which 
             Section 11305(c)(3) of Pub. L. 101-508 Applies

    Section 1702(c)(4) of Pub. L. 104-188 provided that: ``The earnings 
and profits of any insurance company to which section 11305(c)(3) of the 
Revenue Reconciliation Act of 1990 [Pub. L. 101-508, set out above] 
applies shall be determined without regard to any deduction allowed 
under such section; except that, for purposes of applying sections 56 
and 902, and subpart F of part III of subchapter N of chapter 1 of the 
Internal Revenue Code of 1986, such deduction shall be taken into 
account.''


   Acquisition Date of Certain Stocks or Obligations for Purposes of 
                         Subsection (b)(5)(C)(i)

    Section 1010(d)(3) of Pub. L. 100-647 provided that: ``For purposes 
of section 832(b)(5)(C)(i) of the 1986 Code, any stock or obligation 
acquired on or after August 8, 1986, by an insurance company subject to 
the tax imposed by section 831 of the 1986 Code (hereinafter in this 
paragraph referred to as the `acquiring company') from another insurance 
company so subject (hereinafter in this paragraph referred to as the 
`transferor company') shall be treated as acquired on the date on which 
such stock or obligation was acquired by the transferor company if--
        ``(A) the transferor company acquired such stock or obligation 
    before August 8, 1986, and
        ``(B) at all times after the date on which such stock or 
    obligation was acquired by the transferor company and before the 
    date of the acquisition by the acquiring company, the transferor 
    company and the acquiring company were members of the same 
    affiliated group filing a consolidated return.
For purposes of the preceding sentence, the date on which the stock or 
obligation was acquired by the transferor company shall be determined 
with regard to any prior application of the preceding sentence. For 
purposes of this paragraph, if the acquiring corporation or transferor 
corporation was a party to a reorganization described in section 
368(a)(1)(F) of the 1986 Code, any reference to such corporation shall 
include a reference to any predecessor thereof involved in such 
reorganization.''


     Study of Treatment of Property and Casualty Insurance Companies

    Section 1025 of subtitle C (Secs. 1021-1025) of title X of Pub. L. 
99-514 directed Secretary of the Treasury or his delegate to conduct a 
study of the treatment of policyholder dividends by mutual property and 
casualty insurance companies, the treatment of property and casualty 
insurance companies under the minimum tax, and the operation and effect 
of, and revenue raised by, the amendments made by this subtitle, and not 
later than Jan. 1, 1989 (due date extended to Jan. 1, 1992, by Pub. L. 
101-508, title XI, Sec. 11831(b), Nov. 5, 1990, 104 Stat. 1388-559), 
such Secretary to submit to Committee on Ways and Means of House of 
Representatives, Committee on Finance of Senate, and Joint Committee on 
Taxation, the results of such study, together with such recommendations 
as he determined to be appropriate.


     Physicians' and Surgeons' Mutual Protection and Interindemnity 
                      Arrangements or Associations

    Section 1031 of subtitle D of title X of Pub. L. 99-514, as amended 
by Pub. L. 100-647, title I, Sec. 1010(g), Nov. 10, 1988, 102 Stat. 
3455, provided that:
    ``(a) Certain Physicians' and Surgeons' Mutual Protection and 
Interindemnity Arrangements or Associations.--
        ``(1) Treatment of arrangements or associations.--
            ``(A) Capital contributions.--There shall not be included in 
        the gross income of any eligible physicians' and surgeons' 
        mutual protection and interindemnity arrangement or association 
        any initial payment (whether made in a lump sum or a series of 
        substantially equal payments over a period of not more than 6 
        years) made during any taxable year to such arrangement or 
        association by a member joining such arrangement or association 
        which--
                ``(i) does not release such member from obligations to 
            pay current or future dues, assessments, or premiums; and
                ``(ii) is a condition precedent to receiving benefits of 
            membership.
    Such initial payment shall be included in the gross income of such 
        arrangement or association for such taxable year if it is 
        reasonable to expect that such payment will be deductible 
        pursuant to paragraph (2) by any member of such arrangement or 
        association.
            ``(B) Return of contributions.--
                ``(i) In general.--The repayment to any member of any 
            amount of any payment excluded under subparagraph (A) shall 
            not be treated as policyholder dividend, and is not 
            deductible by the arrangement or association.
                ``(ii) Source of returns.--Except in the case of the 
            termination of a member's interest in the arrangement or 
            association, any amount distributed to any member shall be 
            treated as paid out of surplus in excess of amounts excluded 
            under subparagraph (A).
        ``(2) Deduction for members of eligible arrangements or 
    associations.--
            ``(A) Payment as trade or business expenses.--To the extent 
        not otherwise allowable under the Internal Revenue Code of 1986, 
        any member of any eligible arrangement or association may treat 
        any initial payment referred to in paragraph (1) made during a 
        taxable year to such arrangement or association as an ordinary 
        and necessary expense incurred in connection with a trade or 
        business for purposes of the deduction allowable under section 
        162, to the extent such payment does not exceed the amount which 
        would be payable to an independent insurance company for similar 
        annual insurance coverage (as determined by the Secretary), and 
        further reduced by any annual dues, assessments, or premiums 
        paid during such taxable year. Such deduction shall not be 
        allowable as to any initial payment referred to in paragraph (1) 
        made to an eligible arrangement or association by any person who 
        is a member of any other eligible arrangement or association on 
        or after the effective date of the Tax Reform Act of 1986. Any 
        excess amount not allowed as a deduction for the taxable year in 
        which such payment was made pursuant to the limitation contained 
        in the 1st sentence of this subparagraph shall, subject to such 
        limitation, be allowable as a deduction in any of the 5 
        succeeding taxable years, in order of time, to the extent not 
        previously allowed as a deduction under this sentence.
            ``(B) Refunds of initial payments.--Any amount attributable 
        to any initial payment referred to in paragraph (1) to such 
        arrangement or association described in paragraph (1) which is 
        later refunded for any reason shall be included in the gross 
        income of the recipient in the taxable year received, to the 
        extent a deduction for such payment was allowed. Any amount 
        refunded in excess of such payment shall be included in gross 
        income except to the extent otherwise excluded from income by 
        the Internal Revenue Code of 1986.
        ``(3) Eligible arrangements or associations.--The terms 
    `eligible physicans' [sic] and surgeons' mutual protection and 
    interindemnity arrangement or association' and `eligible arrangement 
    or association' mean and are limited to any mutual protection and 
    interindemnity arrangement or association that provides only medical 
    malpractice liability protection for its members or medical 
    malpractice liability protection in conjunction with protection 
    against other liability claims incurred in the course of, or related 
    to, the professional practice of a physician or surgeon and which--
            ``(A) was operative and was providing such protection, or 
        had received a permit for the offer and sale of memberships, 
        under the laws of any State before January 1, 1984,
            ``(B) is not subject to regulation by any State insurance 
        department,
            ``(C) has a right to make unlimited assessments against all 
        members to cover current claims and losses, and
            ``(D) is not a member of, nor subject to protection by, any 
        insurance guaranty plan or association of any State.
    ``(b) Effective Date.--The provisions of subsection (a) shall apply 
to payments made to and receipts of physicians' and surgeons' mutual 
protection and interindemnity arrangements or associations, and refunds 
of payments by such arrangements or associations, after the date of the 
enactment of this Act [Oct. 22, 1986], in taxable years ending after 
such date.''


  Treatment as Unearned Premiums of Additions to Reserves Required by 
     State Law or Regulations for Mortgage Guaranty Insurance Losses

    Section 5(g) of Pub. L. 90-240, as amended by Pub. L. 99-514, 
Sec. 2, Oct. 22, 1986, 100 Stat. 2095, provided that:
    ``(1) In the case of taxable years beginning before 1967, a company 
shall treat additions to a reserve, required by State law or regulations 
for mortgage guaranty insurance losses resulting from adverse economic 
cycles, as unearned premiums for purposes of section 832(b)(4) of the 
Internal Revenue Code of 1986 [formerly I.R.C. 1954], but the amount so 
treated as unearned premiums in a taxable year shall not exceed 50 
percent of premiums earned on insurance contracts (as defined in section 
832(b)(4) of such Code), determined without regard to amounts added to 
the reserve, with respect to mortgage guaranty insurance for such year. 
The amount of unearned premiums at the close of 1966 shall be determined 
without regard to the preceding sentence for the purpose of applying 
section 832(b)(4) of such Code to 1967. Additions to such a reserve 
shall not be treated as unearned premiums for any taxable year beginning 
after 1966.
    ``(2) If a mortgage guaranty insurance company made additions to a 
reserve which were so treated as unearned premiums described in 
paragraph (1), such company, in taxable years beginning after 1966, 
shall include in gross income (in addition to the items specified in 
section 832(b)(1) of such Code) the sum of the following amounts until 
there is included in gross income an amount equal to the aggregate 
additions to the reserve described in paragraph (1) for taxable years 
beginning before 1967:
        ``(A) an amount (if any) equal to the excess of losses incurred 
    (as defined in section 832(b)(5) of such Code) for the taxable year 
    over 35 percent of premiums earned on insurance contracts during the 
    taxable year (as defined in section 832(b)(4) of such Code), 
    determined without regard to amounts added to the reserve referred 
    to in paragraph (1), with respect to mortgage guaranty insurance,
        ``(B) the amount (if any) remaining which was added to the 
    reserve for the tenth preceding taxable year, and
        ``(C) the excess (if any) of--
            ``(i) the aggregate of amounts so treated as unearned 
        premiums for all taxable years beginning before 1967 less the 
        total of the amounts included in gross income under this 
        paragraph for prior taxable years and the amounts included in 
        gross income under subparagraphs (A) and (B) for the taxable 
        year, over
            ``(ii) the aggregate of the additions made for taxable years 
        beginning before 1967 which remain in the reserve at the close 
        of the taxable year.
Amounts shall be taken into account on a first-in-time basis. For 
purposes of section 832(e) of such Code and this paragraph, if part of 
the reserve is reduced under State law or regulation, such reduction 
shall first apply to the extent of amounts added to the reserve for 
taxable years beginning before 1967, and only then to amounts added 
thereafter.
    ``(3) The provisions of this subsection shall apply to taxable years 
beginning after December 31, 1956.''

                  Section Referred to in Other Sections

    This section is referred to in sections 543, 833, 841, 844, 861, 
953, 954, 6511 of this title; title 31 section 3109.
