
From the U.S. Code Online via GPO Access
[wais.access.gpo.gov]
[Laws in effect as of January 2, 2001]
[Document affected by Public Law 106-554 Section 1(a)(7)]
[Document affected by Public Law 106-554 Section 1(a)(7)]
[CITE: 26USC848]

 
                     TITLE 26--INTERNAL REVENUE CODE
 
                        Subtitle A--Income Taxes
 
                  CHAPTER 1--NORMAL TAXES AND SURTAXES
 
                    Subchapter L--Insurance Companies
 
               PART III--PROVISIONS OF GENERAL APPLICATION
 
Sec. 848. Capitalization of certain policy acquisition expenses


(a) General rule

    In the case of an insurance company--
        (1) specified policy acquisition expenses for any taxable year 
    shall be capitalized, and
        (2) such expenses shall be allowed as a deduction ratably over 
    the 120-month period beginning with the first month in the second 
    half of such taxable year.

(b) 5-year amortization for first $5,000,000 of specified policy 
        acquisition expenses

                           (1) In general

        Paragraph (2) of subsection (a) shall be applied with respect to 
    so much of the specified policy acquisition expenses of an insurance 
    company for any taxable year as does not exceed $5,000,000 by 
    substituting ``60-month'' for ``120-month''.

                            (2) Phase-out

        If the specified policy acquisition expenses of an insurance 
    company exceed $10,000,000 for any taxable year, the $5,000,000 
    amount under paragraph (1) shall be reduced (but not below zero) by 
    the amount of such excess.

          (3) Special rule for members of controlled group

        In the case of any controlled group--
            (A) all insurance companies which are members of such group 
        shall be treated as 1 company for purposes of this subsection, 
        and
            (B) the amount to which paragraph (1) applies shall be 
        allocated among such companies in such manner as the Secretary 
        may prescribe.

    For purposes of the preceding sentence, the term ``controlled 
    group'' means any controlled group of corporations as defined in 
    section 1563(a); except that subsections (a)(4) and (b)(2)(D) of 
    section 1563 shall not apply, and subsection (b)(2)(C) of section 
    1563 shall not apply to the extent it excludes a foreign corporation 
    to which section 842 applies.

       (4) Exception for acquisition expenses attributable to 
                        certain reinsurance contracts

        Paragraph (1) shall not apply to any specified policy 
    acquisition expenses for any taxable year which are attributable to 
    premiums or other consideration under any reinsurance contract.

(c) Specified policy acquisition expenses

    For purposes of this section--

                           (1) In general

        The term ``specified policy acquisition expenses'' means, with 
    respect to any taxable year, so much of the general deductions for 
    such taxable year as does not exceed the sum of--
            (A) 1.75 percent of the net premiums for such taxable year 
        on specified insurance contracts which are annuity contracts,
            (B) 2.05 percent of the net premiums for such taxable year 
        on specified insurance contracts which are group life insurance 
        contracts, and
            (C) 7.7 percent of the net premiums for such taxable year on 
        specified insurance contracts not described in subparagraph (A) 
        or (B).

                       (2) General deductions

        The term ``general deductions'' means the deductions provided in 
    part VI of subchapter B (sec. 161 and following, relating to 
    itemized deductions) and in part I of subchapter D (sec. 401 and 
    following, relating to pension, profit sharing, stock bonus plans, 
    etc.).

(d) Net premiums

    For purposes of this section--

                           (1) In general

        The term ``net premiums'' means, with respect to any category of 
    specified insurance contracts set forth in subsection (c)(1), the 
    excess (if any) of--
            (A) the gross amount of premiums and other consideration on 
        such contracts, over
            (B) return premiums on such contracts and premiums and other 
        consideration incurred for reinsurance of such contracts.

    The rules of section 803(b) shall apply for purposes of the 
    preceding sentence.

               (2) Amounts determined on accrual basis

        In the case of an insurance company subject to tax under part II 
    of this subchapter, all computations entering into determinations of 
    net premiums for any taxable year shall be made in the manner 
    required under section 811(a) for life insurance companies.

    (3) Treatment of certain policyholder dividends and similar 
                                   amounts

        Net premiums shall be determined without regard to section 
    808(e) and without regard to other similar amounts treated as paid 
    to, and returned by, the policyholder.

                  (4) Special rules for reinsurance

        (A) Premiums and other consideration incurred for reinsurance 
    shall be taken into account under paragraph (1)(B) only to the 
    extent such premiums and other consideration are includible in the 
    gross income of an insurance company taxable under this subchapter 
    or are subject to tax under this chapter by reason of subpart F of 
    part III of subchapter N.
        (B) The Secretary shall prescribe such regulations as may be 
    necessary to ensure that premiums and other consideration with 
    respect to reinsurance are treated consistently by the ceding 
    company and the reinsurer.

(e) Classification of contracts

    For purposes of this section--

                  (1) Specified insurance contract

        (A) In general

            Except as otherwise provided in this paragraph, the term 
        ``specified insurance contract'' means any life insurance, 
        annuity, or noncancellable accident and health insurance 
        contract (or any combination thereof).

        (B) Exceptions

            The term ``specified insurance contract'' shall not 
        include--
                (i) any pension plan contract (as defined in section 
            818(a)),
                (ii) any flight insurance or similar contract,
                (iii) any qualified foreign contract (as defined in 
            section 807(e)(4) without regard to paragraph (5) of this 
            subsection), and
                (iv) any contract which is an Archer MSA (as defined in 
            section 220(d)).

                  (2) Group life insurance contract

        The term ``group life insurance contract'' means any life 
    insurance contract--
            (A) which covers a group of individuals defined by reference 
        to employment relationship, membership in an organization, or 
        similar factor,
            (B) the premiums for which are determined on a group basis, 
        and
            (C) the proceeds of which are payable to (or for the benefit 
        of) persons other than the employer of the insured, an 
        organization to which the insured belongs, or other similar 
        person.

          (3) Treatment of annuity contracts combined with 
                noncancellable accident and health insurance

        Any annuity contract combined with noncancellable accident and 
    health insurance shall be treated as a noncancellable accident and 
    health insurance contract and not as an annuity contract.

           (4) Treatment of guaranteed renewable contracts

        The rules of section 816(e) shall apply for purposes of this 
    section.

                (5) Treatment of reinsurance contract

        A contract which reinsures another contract shall be treated in 
    the same manner as the reinsured contract.

(f) Special rule where negative net premiums

                           (1) In general

        If for any taxable year there is a negative capitalization 
    amount with respect to any category of specified insurance contracts 
    set forth in subsection (c)(1)--
            (A) the amount otherwise required to be capitalized under 
        this section for such taxable year with respect to any other 
        category of specified insurance contracts shall be reduced (but 
        not below zero) by such negative capitalization amount, and
            (B) such negative capitalization amount (to the extent not 
        taken into account under subparagraph (A))--
                (i) shall reduce (but not below zero) the unamortized 
            balance (as of the beginning of such taxable year) of the 
            amounts previously capitalized under subsection (a) 
            (beginning with the amount capitalized for the most recent 
            taxable year), and
                (ii) to the extent taken into account as such a 
            reduction, shall be allowed as a deduction for such taxable 
            year.

                 (2) Negative capitalization amount

        For purposes of paragraph (1), the term ``negative 
    capitalization amount'' means, with respect to any category of 
    specified insurance contracts, the percentage (applicable under 
    subsection (c)(1) to such category) of the amount (if any) by 
    which--
            (A) the amount determined under subparagraph (B) of 
        subsection (d)(1) with respect to such category, exceeds
            (B) the amount determined under subparagraph (A) of 
        subsection (d)(1) with respect to such category.

(g) Treatment of certain ceding commissions

    Nothing in any provision of law (other than this section or section 
197) shall require the capitalization of any ceding commission incurred 
on or after September 30, 1990, under any contract which reinsures a 
specified insurance contract.

(h) Secretarial authority to adjust capitalization amounts

                           (1) In general

        Except as provided in paragraph (2), the Secretary may provide 
    that a type of insurance contract will be treated as a separate 
    category for purposes of this section (and prescribe a percentage 
    applicable to such category) if the Secretary determines that the 
    deferral of acquisition expenses for such type of contract which 
    would otherwise result under this section is substantially greater 
    than the deferral of acquisition expenses which would have resulted 
    if actual acquisition expenses (including indirect expenses) and the 
    actual useful life for such type of contract had been used.

                  (2) Adjustment to other contracts

        If the Secretary exercises his authority with respect to any 
    type of contract under paragraph (1), the Secretary shall adjust the 
    percentage which would otherwise have applied under subsection 
    (c)(1) to the category which includes such type of contract so that 
    the exercise of such authority does not result in a decrease in the 
    amount of revenue received under this chapter by reason of this 
    section for any fiscal year.

(i) Treatment of qualified foreign contracts under adjusted current 
        earnings preference

    For purposes of determining adjusted current earnings under section 
56(g), acquisition expenses with respect to contracts described in 
clause (iii) of subsection (e)(1)(B) shall be capitalized and amortized 
in accordance with the treatment generally required under generally 
accepted accounting principles as if this subsection applied to such 
contracts for all taxable years.

(j) Transitional rule

    In the case of any taxable year which includes September 30, 1990, 
the amount taken into account as the net premiums (or negative 
capitalization amount) with respect to any category of specified 
insurance contracts shall be the amount which bears the same ratio to 
the amount which (but for this subsection) would be so taken into 
account as the number of days in such taxable year on or after September 
30, 1990, bears to the total number of days in such taxable year.

(Added Pub. L. 101-508, title XI, Sec. 11301(a), Nov. 5, 1990, 104 Stat. 
1388-445; amended Pub. L. 103-66, title XIII, Sec. 13261(d), Aug. 10, 
1993, 107 Stat. 539; Pub. L. 104-191, title III, Sec. 301(h), Aug. 21, 
1996, 110 Stat. 2052; Pub. L. 106-554, Sec. 1(a)(7) [title II, 
Sec. 202(a)(5), (b)(10)], Dec. 21, 2000, 114 Stat. 2763, 2763A-628, 
2763A-629.)


                               Amendments

    2000--Subsec. (e)(1)(B)(iv). Pub. L. 106-554, Sec. 1(a)(7) [title 
II, Sec. 202(b)(10)], substituted ``an Archer MSA'' for ``a Archer 
MSA''.
    Pub. L. 106-554, Sec. 1(a)(7) [title II, Sec. 202(a)(5)], 
substituted ``Archer MSA'' for ``medical savings account''.
    1996--Subsec. (e)(1)(B)(iv). Pub. L. 104-191 added cl. (iv).
    1993--Subsec. (g). Pub. L. 103-66 substituted ``this section or 
section 197'' for ``this section''.


                    Effective Date of 1996 Amendment

    Amendment by Pub. L. 104-191 applicable to taxable years beginning 
after Dec. 31, 1996, see section 301(j) of Pub. L. 104-191, set out as a 
note under section 62 of this title.


                    Effective Date of 1993 Amendment

    Amendment by Pub. L. 103-66 applicable, except as otherwise 
provided, with respect to property acquired after Aug. 10, 1993, see 
section 13261(g) of Pub. L. 103-66, set out as an Effective Date note 
under section 197 of this title.


                             Effective Date

    Section 11301(d)(1) of Pub. L. 101-508 provided that: ``The 
amendments made by subsections (a) and (c) [enacting this section] shall 
apply to taxable years ending on or after September 30, 1990. Any 
capitalization required by reason of such amendments shall not be 
treated as a change in method of accounting for purposes of the Internal 
Revenue Code of 1986.''

                  Section Referred to in Other Sections

    This section is referred to in sections 197, 264 of this title.
