Reg. § 1.953-4 Taxable income to which section 953 applies.
(a) Taxable income defined
(1) Life insurance taxable income For a controlled foreign corporation which is engaged in the business of reinsuring or issuing insurance or annuity contracts and which, if it were a domestic corporation engaged only in such business, would be taxable as a life insurance company to which part I (sections through 820) of subchapter L of the Code applies, the term “taxable income” means for purposes of the gain from operations, as defined in section and as modified by this section, derived from, and attributable to, the insurance of United States risks. For purposes of determining such taxable income, the provisions of section 802(b) (relating to the definition of life insurance company taxable income) shall not apply. Determinations for purposes of this subparagraph shall be made without regard to section .
(2) Mutual and other insurance taxable income For a controlled foreign corporation which is engaged in the business of reinsuring or issuing insurance or annuity contracts and which, if it were a domestic corporation engaged only in such business, would be taxable as a mutual insurance company to which part II (sections 821 through 826) of subchapter L of the Code applies or a mutual marine insurance or other insurance company to which part III (sections and ) of subchapter L of the Code applies, the term “taxable income” means for purposes of taxable income, as defined in section and as modified by this section, derived from, and attributable to, the insurance of United States risks. Determinations for purposes of this subparagraph shall be made without regard to section .
(3) Corporations not qualifying as insurance companies For special rules applicable under this section in the case of a controlled foreign corporation which, if it were a domestic corporation, would not qualify as an insurance company, see .
(b) Certain provisions inapplicable In determining taxable income under this section, the following provisions of subchapter L of the Code shall not apply:
(1) Section , relating to the operations loss deduction;
(2) Section , relating to certain nonparticipating contracts;
(3) Section , relating to certain accident and health insurance and group life insurance;
(4) Section , relating to small business deduction;
(5) Section , relating to gain on property held on December 31, 1958, and certain substituted property acquired after 1958; and
(6) Section , relating to capital losses.
(c) Computation of reserves required by law
(1) Law applicable in determining reserves The reserves which will be taken into account as reserves required by law under section , both in determining for any taxable year whether a controlled foreign corporation is a controlled foreign corporation described in or of this section and in determining taxable income of such corporation for the taxable year under of this section, shall be the following reserves:
(i) Reserves required by the law of a State The reserves which are required by the law of the State or States to which the insurance business of the controlled foreign corporation is subject, but only with respect to its United States business, if any, which is taxable under section 819(a).
(ii) Reserves deemed to be required To the extent of such controlled foreign corporation's insurance business not taxable under section 819(a)—
(a) Except as provided in (b) of this subdivision (ii), the reserves which would result if such reserves were determined by applying the minimum standards of the law of New York as if such controlled foreign corporation were an insurance company transacting all of its insurance business (other than its United States business which is taxable under section 819(a)) for such taxable year in such State, and
(b) With respect to all risks covered by insurance ceded to such controlled foreign corporation by an insurance company to which apply the provisions of subchapter L of the Code (determined without regard to section ) and in respect of which an election is made by or on behalf of such controlled foreign corporation to determine its reserves in accordance with this subdivision (b), the amount of reserves against such risks which would result if all of such reserves were determined by applying the law of the State, to which the risks in the hands of such insurance company are subject, as if such controlled foreign corporation were an insurance company engaged in reinsuring such risks in such State.
(2) Rules of application For purposes of subparagraph (1) of this paragraph, the following rules shall apply:
(i) Life insurance reserves computed on preliminary term basis For purposes of determining under of this section the taxable income of a controlled foreign corporation, an election may be made by or on behalf of such corporation that the amount of reserves which are taken into account as life insurance reserves with respect to contracts for which reserves are computed on a preliminary term basis shall be determined as provided in section . This election shall apply, subject to section , to all life insurance reserves of the controlled foreign corporation, whether or not reserves applicable to the United States business taxable under section 819(a). However, reserves determined as provided in section shall not be taken into account in determining whether a controlled foreign corporation is a controlled foreign corporation described in or of this section.
(ii) Actual reserves required
(a) A controlled foreign corporation will be considered to have a reserve only to the extent the reserve has been actually held during the taxable year for which such reserve is claimed.
(b) For determining when reserves are required by the law of a State, see .
(iii) Total reserves to be taken into account The total reserves of a controlled foreign corporation shall be taken into account in determining whether such corporation is a controlled foreign corporation described in or of this section. Therefore, in making such determination, the reserves which, under subparagraph (1)(i) of this paragraph, are required by the law of any State shall be taken into account together with the reserves which, under subparagraph (1)(ii) of this paragraph, are deemed to be required. Moreover, reserves applicable to the reinsuring or the issuing of insurance or annuity contracts of both United States risks and foreign risks shall be taken into account. Finally, except as provided in subdivision (i) of this subparagraph, the reserves which are taken into account in determining whether a controlled foreign corporation is a controlled foreign corporation described in or of this section shall be the same reserves which are taken into account in determining under of this section the taxable income of such corporation.
(iv) Method of comparing reserves when subject to more than one State If the insurance business of a controlled foreign corporation is subject to the law of more than one State, the amount of reserves taken into account under subparagraph (1)(i) of this paragraph shall be the amount of the highest aggregate reserve required by any State, determined as provided in .
(d) Domestic corporation tax attributes In determining taxable income of a controlled foreign corporation under this section there shall be allowed, except as provided in section , this section, and , the exclusions and deductions from gross income which would be allowed if such corporation were a domestic insurance company engaged in the business of only reinsuring or issuing the insurance or annuity contracts which have been reinsured or issued by such corporation. For this purpose, the provisions of sections 819, 821(e), 822(e), , and , relating to foreign insurance companies, shall not apply; however, for the exclusion from the taxable income determined under section of amounts derived from sources within the United States, see section and . Furthermore, taxable income shall be determined under this section without regard to section (b) and (c), relating to gross income and deductions of a foreign corporation, and without regard to whether the controlled foreign corporation is carrying on an insurance business in the United States. For other rules relating to the determination of gross income and taxable income of a foreign corporation for purposes of subpart F, see .
(e) Limitation on certain amounts in respect of United States risks In determining taxable income under this section the following amounts shall not, in accordance with section , be taken into account except to the extent they are attributable to the reinsuring or issuing of any insurance or annuity contract in connection with United States risks described in or :
(1) The amount of premiums determined under section ;
(2) The net decrease in reserves determined under section ;
(3) The net increase in reserves determined under section ; and
(4) The premiums earned on insurance contracts during the taxable year, as determined under section . For the allocation and apportionment of such amounts to income from the insurance of United States risks, see and of this section.
(f) Items allocated or apportioned
(1) Rules of allocation or apportionment In determining taxable income under this section, first determine all items of income, expenses, losses, and other deductions which directly relate to the premiums received for the reinsuring or the issuing of any insurance or annuity contract in connection with United States risks, as defined in and , and allocate such items to the insurance of United States risks. For example, the deductions allowed by section , relating to death benefits, section , relating to dividends to policyholders, and section , relating to the assumption by another person of liabilities under insurance contracts, shall be allocated to the insurance of United States risks to the extent they relate directly to the premiums received for reinsuring or issuing insurance or annuity contracts in connection with United States risks. Next, determine all items of income, expenses, losses, and other deductions which directly relate to the premiums received for the reinsuring or the issuing of any insurance or annuity contract in connection with foreign risks and allocate such items to the reinsuring of foreign risks. Finally, determine all items of income, expenses, losses, and other deductions which relate to the premiums received for the reinsuring or the issuing of any insurance or annuity contract in connection with both United States risks and foreign risks, and, except as provided in of this section, apportion such items between the insurance of United States risks and the insurance of foreign risks in the manner prescribed in subparagraph (2) or (3) of this paragraph, as the case may be. As used in this section, the term “foreign risks” means risks which are not United States risks as defined in or .
(2) Method of apportionment in determination of life insurance taxable income
(i) Investment yield and net long-term capital gain Unless they can be allocated to the insurance of United States risks, as provided in subparagraph (1) of this paragraph, in determining a controlled foreign corporation's taxable income for any taxable year under of this section—
(a) The investment yield under section ,
(b) The amount (if any) under section by which the net long-term capital gain exceeds the net short-term capital loss, and
(c) Those deductions allowed under section , (9), and (12) which relate to gross investment income shall be apportioned to the reinsuring and issuing of insurance and annuity contracts in connection with United States risks in an amount which bears the same ratio to each of such amounts of investment yield, excess gain, and deductions as the sum of the mean of each of the items described in section at the beginning and end of the taxable year attributable to reinsuring and issuing any insurance and annuity contracts in connection with United States risks bears to the sum of the mean of each of the items described in section at the beginning and end of the taxable year attributable to reinsuring and issuing all insurance and annuity contracts. Thus, for example, if the ratio which the sum of the mean of each of the items described in section at the beginning and end of the taxable year attributable to reinsuring and issuing insurance and annuity contracts in connection with United States risks bears to the sum of the mean of each of the items described in section at the beginning and end of the taxable year attributable to reinsuring and issuing all insurance and annuity contracts in one to three, then, unless an allocation to the insurance of United States risks can be made as provided in subparagraph (1) of this paragraph, one-third of each of such amounts of investment yield, excess gain, and deductions shall be apportioned to the reinsuring and issuing of insurance and annuity contracts in connection with United States risks, and two-thirds of each of such amounts shall be apportioned to the reinsuring and issuing of insurance and annuity contracts in connection with foreign risks.
(ii) Other income and deductions
(a) Amount taken into account In determining a controlled foreign corporation's taxable income for any taxable year under of this section, all items of income taken into account under section , relating to other amounts of gross income, and the other deductions allowed under section to the extent that such other deductions do not relate to gross investment income shall be apportioned to the reinsuring and issuing of insurance and annuity contracts in connection with United States risks in an amount which bears the same ratio to each of such items of income or of such other deductions as the numerator determined under (b) of this subdivision bears to the denominator determined under (c) of this subdivision.
(b) Numerator The numerator used for purposes of the apportionment under (a) of this subdivision shall be an amount which equals the amount determined under (c) of this subdivision, but only to the extent that the amount so determined is taken into account under of this section in determining taxable income for the taxable year.
(c) Denominator The denominator used for purposes of the apportionment under (a) of this subdivision shall be an amount which equals—
(1) The amount of premiums determined under section for the taxable year, plus
(2) The net decrease in reserves determined under section for such year, minus
(3) The net increase in reserves determined under section for such year.
(iii) Reserves used in apportionment formula The rules for determining which reserves are taken into account in determining the taxable income of a controlled foreign corporation under of this section shall also apply under subdivision (ii) (b) and (c) of this subparagraph in determining the net decrease in reserves under section or the net increase in reserves under section . See of this section.
(3) Method of apportionment in determination of mutual and other insurance income
(i) In general In determining a controlled foreign corporation's taxable income for any taxable year under of this section, any item which is required to be apportioned under subparagraph (1) of this paragraph shall be apportioned to the reinsuring and issuing of insurance and annuity contracts in connection with United States risks in an amount which bears the same ratio to the total amount of such item as the amount of premiums earned on insurance contracts during the taxable year which is required to be taken into account by such corporation under of this section in determining such taxable income bears to the total amount of all its premiums earned (as determined under section ) on insurance contracts during the taxable year.
(ii) Reserves used in apportionment formula The principles of subparagraph (2)(iii) of this paragraph shall apply in determining the reserves included in premiums earned on insurance contracts during the taxable year for purposes of subdivision (i) of this subparagraph.
(g) Separate accounting The methods of apportionment prescribed in subparagraphs (2) and (3) of of this section for determining taxable income under this section shall not apply if the district director determines that the controlled foreign corporation, in good faith and unaffected by considerations of tax liability, regularly employs in its books of account a detailed segregation of receipts, expenditures, assets, liabilities, and net worth which clearly reflects the income derived from the reinsuring or issuing of insurance or annuity contracts in connection with United States risks. The district director, in making such determination, shall give effect to any foreign law, satisfactory evidence of which is presented by the United States shareholder to the district, director, which requires a reasonable segregation of those items of income, expense, losses, and other deductions which relate to determining such taxable income.
(h) Illustration The application of and of this section may be illustrated by the following example:
Example.
Controlled foreign corporation A, incorporated under, and engaged in an insurance business subject to, the laws of foreign country X, is a wholly owned subsidiary of domestic corporation M. Both corporations use the calendar year as the taxable year. Corporation M is a life insurance company as defined in section ; A Corporation would, if it were a domestic corporation, be taxable under part I of subchapter L of the Code. In 1963, A Corporation derives income from the insurance of United States risks as a result of reinsuring the life insurance policies issued by M Corporation on lives of residents of the United States. In 1963, A Corporation also issues policies of life insurance on individuals who are not residents of the United States, but its premiums from the reinsuring of United States risks exceed he 5-percent minimum premium requirement prescribed in . Based upon the facts set forth in paragraph (a) of this example, A Corporation for 1963 has taxable income under this section of $40,200, which is attributable to the reinsuring of life insurance contracts in connection with United States risks, determined in the manner provided in paragraphs (b), (c), and (d) of this example.
(a) A summary of the entire operations of A Corporation for 1963, determined under this section as though such corporation were a domestic life insurance company but without applying of this section, is as follows:
| Item | Attributable to all insurance | Attributable to reinsuring U.S. risks | Attributable to insuring foreign risks |
|---|---|---|---|
| Investment Income: | |||
| (1) Investment yield under section 804(c) | $90,000 | Unallocable | Unallocable |
| (2) Sum of the mean of each of the items described in section 810(c) at beginning and end of 1963 | 2,500,000 | $1,000,000 | $1,500,000 |
| (3) Required interest under section 809(a)(2) | 60,000 | 25,000 | 35,000 |
| (4) Deductions allowed under section 809(d)(8), (9), and (12) which relate to gross investment income | 10,000 | Unallocable | Unallocable |
| Underwriting Income: | |||
| (5) Premiums under section 809(c)(1) | 600,000 | 200,000 | 400,000 |
| (6) Net decrease in reserves under section 809(c)(2) | 10,000 | None | 10,000 |
| (7) Net increase in reserves under section 809(d)(2) | 40,000 | 40,000 | None |
| (8) Deductions allowed under section 809(d) (other than deduction allowed under section 809(d)(2) and other than those deductions allowed under section 809(d)(8), (9), and (12) which relate to gross investment income): | |||
| (i) Allocable | 330,000 | 110,000 | 220,000 |
| (ii) Unallocable | 60,000 | Unallocable | Unallocable |
(b) The unallocable investment yield ($90,000) under paragraph (a)(1) of this example and the unallocable deductions ($10,000) under paragraph (a)(4) relating to gross investment income are apportioned to the reinsuring of United States risks under of this section in the amounts of $36,000, and $4,000, respectively, determined as follows:
| (1) Sum of the mean of each of the items described in section 810(c) at beginning and end of 1963, attributable to reinsuring U.S. risks (paragraph (a)(2)) | $1,000,000 |
| (2) Sum of the mean of each of the items described in section 810(c) at beginning and end of 1963, attributable to all insurance (paragraph (a)(2)) | $2,500,000 |
| (3) Ratio of amount under subparagraph (1) to amount under subparagraph (2) ($1,000,000/$2,500,000) | 40% |
| (4) Amount of investment yield attributable to reinsuring of U.S. risks (40% of $90,000) | $36,000 |
| (5) Amount of such deductions attributable to reinsuring of U.S. risks (40% of $10,000) | $4,000 |
(c) The unallocable deductions ($60,000) under paragraph (a)(8)(ii) of this example which do not relate to gross investment income are apportioned to the reinsuring of United States risks under of this section in the amount of $16,800, determined as follows:
(1) The numerator determined under of this section is $160,000, determined as follows:
| (i) Premiums under section 809(c)(1) attributable to reinsuring U.S. risks (paragraph (a)(5)) | $200,000 | |
| (ii) Plus: Net decrease in reserves under section 809(c)(2) attributable to reinsuring U.S. risks (paragraph (a)(6)) | $200,000 | |
| (iii) Less: Net increase in reserves under section 809(d)(2) attributable to reinsuring U.S. risks (paragraph (a)(7)) | $40,000 | |
| $160,000 |
(2) The denominator determined under of this section is $570,000, determined as follows:
| (i) Premiums under section 809(c)(1) attributable to all insurance (paragraph (a)(5)) | $600,000 | |
| (ii) Plus: Net decrease in reserves under section 809(c)(2) attributable to all insurance (paragraph (a)(6)) | 10,000 | |
| $610,000 | ||
| (iii) Less: Net increase in reserves under section 809(d)(2) attributable to all insurance (paragraph (a)(7)) | 40,000 | |
| $570,000 |
(3) Ratio which the numerator determined under subparagraph (1) bears to the denominator determined under subparagraph (2) ($160,000/$570,000)—28%.
(4) Amount of deductions attributable to reinsuring of U.S. risks (28% of $60,000)—$16,800.
(d) The taxable income of A Corporation for 1963 which constitutes its income derived from the insurance of United States risks for purposes of is $40,200, determined as follows:
| Attributable to all insurance | Attributable to reinsuring U.S. risks | Attributable to insuring foreign risks | |||||||
|---|---|---|---|---|---|---|---|---|---|
| Item: | |||||||||
| (1) Investment yield under section 804(c) (paragraph (a)(1), unallocable but as apportioned under paragraph (b)(4) | $90,000 | $36,000 | $54,000 | ||||||
| (2) Less: Required interest under section 809(a)(2) (paragraph (a)(3)) | 60,000 | 25,000 | 35,000 | ||||||
| (3) Life insurance company's share of investment yield under section 809(b)(1)(A) | $30,000 | $11,000 | $19,000 | ||||||
| Plus sum of: | |||||||||
| (4) Premiums under section 809(c)(1) (paragraph (a)(5)) | 600,000 | 200,000 | 400,000 | ||||||
| (5) Net decrease in reserves under section 809(c)(2) (paragraph (a)(6)) | 10,000 | 610,000 | None | 200,000 | 10,000 | 410,000 | |||
| Sum determined under section 809(b)(1) | 640,000 | 211,000 | 429,000 | ||||||
| Less sum of: | |||||||||
| (6) Net increase in reserves under section 809(d)(2) (paragraph (a)(7)) | 40,000 | 40,000 | None | ||||||
| (7) Deductions allowed under section 809(d)(8), (9), and (12) which relate to gross investment income (paragraph (a)(4)), unallocable but as apportioned under paragraph (b)(5) | 10,000 | 4,000 | 6,000 | ||||||
| (8) Deductions allowed under section 809(d) (other than deduction allowed under section 809(d)(2) and other than those deductions allowed under section 809(d)(8), (9), and (12) which relate to gross investment income) (paragraph (a)(8)): | |||||||||
| (i) Allocable | 330,000 | 110,000 | 220,000 | ||||||
| (ii) Unallocable, but as apportioned under paragraph (c)(4) | 60,000 | 440,000 | 16,800 | 170,800 | 43,200 | 269,200 | |||
| Gain from operations | 200,000 | 40,200 | 159,800 |
[T.D. 6781, 29 FR 18207, Dec. 23, 1964]