(i) the policy and other contract liability requirements computed by reference to the items which relate to annuity contracts described in paragraph (1), and (ii) the policy and other contract liability requirements computed by excluding the items taken into account under clause (i); and (B) such additional separate computations, with respect to such annuity contracts and such other contracts, shall be made as may be necessary to carry out the purposes of this subsection and this part. (6) TERMINATION.-Paragraphs (1), (2), (3), (4), and (5) shall not apply with respect to any taxable year beginning after December 31, 1962. SEC. 802. TAX IMPOSED. (a) TAX IMPOSED. (1) IN GENERAL.-A tax is hereby imposed for each taxable year beginning after December 31, 1957, on the life insurance company taxable income of every life insurance company. Such tax shall consist of (A) a normal tax on such income computed at the rate provided by section 11 (b), and (B) a surtax, on so much of such income as exceeds $25,000, computed at the rate provided by section 11 (c). (2) TAX IN CASE OF CAPITAL GAINS.-If for any taxable year beginning after December 31, 1958, the net long-term capital gain of any life insurance company exceeds the net short-term capital loss, there is hereby imposed a tax equal to 25 percent of such excess. (3) SPECIAL RULE FOR 1959 AND 1960.-If any amount is subtracted from the policyholders surplus account under section 815 (c) (3) for a taxable year beginning in 1959 or 1960 on account of a distribution in 1959 or 1960 (not including any distribution treated under section 815 (d) (2) (B) as made in 1959 or 1960), the tax imposed for such taxable year on the life insurance company taxable income shall be the amount determined under paragraph (1) reduced by the following percentage of the amount by which the tax imposed by paragraph (1) is (without regard to this paragraph) increased, on account of the amount so subtracted, by reason of section 802 (b) (3)— (A) in the case of a taxable year beginning in 1959, 66% percent; and (B) in the case of a taxable year beginning in 1960, 33% per cent. The preceding sentence shall not apply with respect to any payment treated as a distribution under section 815 (d) (3). (b) LIFE INSURANCE COMPANY TAXABLE INCOME DEFINED.-For purposes of this part, the term "life insurance company taxable income" means the sum of (1) the taxable investment income (as defined in section 804) or, if smaller, the gain from operations (as defined in section 809), (2) if the gain from operations exceeds the taxable investment income, an amount equal to 50 percent of such excess, plus (3) the amount subtracted from the policyholders surplus account for the taxable year, as determined under section 815. Subpart B-Investment Income Sec. 804. Taxable investment income. Sec. 805. Policy and other contract liability requirements. SEC. 804. TAXABLE INVESTMENT INCOME. (a) IN GENERAL. (1) EXCLUSION OF POLICYHOLDERS' SHARE OF INVESTMENT YIELD.The policyholders' share of each and every item of investment yield (including tax-exempt interest, partially tax-exempt interest, and dividends received) of any life insurance company shall not be included in taxable investment income. For purposes of the preceding sentence, the policyholders' share of any item shall be that percentage obtained by dividing the policy and other contract liability requirements by the investment yield; except that if the policy and other contract liability requirements exceed the investment yield, then the policyholders' share of any item shall be 100 percent. (2) TAXABLE INVESTMENT INCOME DEFINED.-For purposes of this part, the taxable investment income for any taxable year shall be an amount (not less than zero) equal to the sum of the life insurance company's share of each and every item of investment yield (including tax-exempt interest, partially tax-exempt interest, and dividends received), reduced by (A) the sum of— (i) the life insurance company's share of interest which under section 103 is excluded from gross income, (ii) the deduction for partially tax-exempt interest provided by section 242 (as modified by paragraph (3)) computed with respect to the life insurance company's share of such interest, and (iii) the deductions for dividends received provided by sections 243, 244, and 245 (as modified by paragraph (5)) computed with respect to the life insurance company's share of the dividends received; and (B) the small business deduction provided by paragraph (4). For purposes of the preceding sentence, the life insurance company's share of any item shall be that percentage which, when added to the percentage obtained under the second sentence of paragraph (1), equals 100 percent. (3) PARTIALLY TAX-EXEMPT INTEREST.-For purposes of this part, the deduction allowed by section 242 shall be an amount which bears the same ratio to the amount determined under such section without regard to this paragraph as (A) the normal tax rate for the taxable year prescribed by section 11, bears to (B) the sum of the normal tax rate and the surtax rate for the taxable year prescribed by section 11. (4) SMALL BUSINESS DEDUCTION.- -For purposes of this part, the small business deduction is an amount equal to 10 percent of the investment yield for the taxable year. The deduction under this paragraph shall not exceed $25,000. (5) APPLICATION OF SECTION 246 (b). In applying section 246 (b) (relating to limitation on aggregate amount of deductions for dividends received) for purposes of this subsection, the limit on the aggregate amount of the deductions allowed by sections 243 (a), 244, and 245 shall be 85 percent of the taxable investment income computed without regard to the deductions allowed by such sections. (6) EXCEPTION.-If it is established in any case that the application of the definition of taxable investment income contained in paragraph (2) results in the imposition of tax on (A) any interest which under section 103 is excluded from gross income, (B) any amount of interest which under section 242 (as modified by paragraph (3)) is allowable as a deduction, or (C) any amount of dividends received which under sections. 243, 244, and 245 (as modified by paragraph (5)) is allowable as a deduction, adjustment shall be made to the extent necessary to prevent such imposition. (b) GROSS INVESTMENT INCOME. For purposes of this part, the term "gross investment income" means the sum of the following: (1) INTEREST, ETC.-The gross amount of income from— (A) interest, dividends, rents, and royalties, (B) the entering into of any lease, mortgage, or other instrument or agreement from which the life insurance company derives interest, rents, or royalties, and (C) the alteration or termination of any instrument or agreement described in subparagraph (B). (2) SHORT-TERM CAPITAL GAIN. In the case of a taxable year beginning after December 31, 1958, the amount (if any) by which the net short-term capital gain exceeds the net long-term capital loss. (3) TRADE OR BUSINESS INCOME.-The gross income from any trade or business (other than an insurance business) carried on by the life insurance company, or by a partnership of which the life insurance company is a partner. In computing gross income under this paragraph, there shall be excluded any item described in paragraph (1). Except as provided in paragraph (2), in computing gross investment income under this subsection, there shall be excluded any gain from the sale or exchange of a capital asset, and any gain considered as gain from the sale or exchange of a capital asset. (c) INVESTMENT YIELD DEFINED.-For purposes of this part, the term "investment yield" means the gross investment income less the following deductions (1) INVESTMENT EXPENSES.-Investment expenses for the taxable year. If any general expenses are in part assigned to or included in the investment expenses, the total deduction under this paragraph shall not exceed the sum of (A) one-fourth of one percent of the mean of the assets (as defined in section 805 (b) (4)) held at the beginning and end of the taxable year, (B) the amount of the mortgage service fees for the taxable year, plus (C) whichever of the following is the greater: (i) one-fourth of the amount by which the investment yield (computed without any deduction for investment expenses allowed by this paragraph) exceeds 3% percent of the mean of the assets (as defined in section 805 (b) (4)) held at the beginning and end of the taxable year, reduced by the amount described in subparagraph (B), or (ii) one-fourth of one percent of the mean of the value of mortgages held at the beginning and end of the taxable year for which there are no mortgage service fees for the taxable year. (2) REAL ESTATE EXPENSES.-The amount of taxes (as provided in section 164), and other expenses, for the taxable year exclusively on or with respect to the real estate owned by the company. No deduction shall be allowed under this paragraph for any amount paid out for new buildings, or for permanent improvements or betterments made to increase the value of any property. (3) DEPRECIATION.-The deduction allowed by section 167. The deduction under this paragraph and paragraph (2) on account of any real estate owned and occupied for insurance purposes in whole or in part by a life insurance company shall be limited to an amount which bears the same ratio to such deduction (computed without regard to this sentence) as the rental value of the space not so occupied bears to the rental value of the entire property. (4) DEPLETION.-The deduction allowed by section 611 (relating to depletion). (5) TRADE OR BUSINESS DEDUCTIONS.-The deductions allowed by this subtitle (without regard to this part) which are attributable to any trade or business (other than an insurance business) carried on by the life insurance company, or by a partnership of which the life insurance company is a partner; except that in computing the deduction under this paragraph (A) There shall be excluded losses (i) from (or considered as from) sales or exchanges of capital assets, (ii) from sales or exchanges of property used in the trade or business (as defined in section 1231 (b)), and (iii) from the compulsory or involuntary conversion (as a result of destruction, in whole or in part, theft or seizure, or an exercise of the power of requisition or condemnation or the threat or imminence thereof) of property used in the trade or business (as so defined). (B) Any item, to the extent attributable to the carrying on of the insurance business, shall not be taken into account. (C) The deduction for net operating losses provided in section 172, and the special deductions for corporations provided in part VIII of subchapter B, shall not be allowed. SEC. 805. POLICY AND OTHER CONTRACT LIABILITY REQUIREMENTS. (a) IN GENERAL.-For purposes of this part, the term "policy and other contract liability requirements" means, for any taxable year, the sum of (1) the adjusted life insurance reserves, multiplied by the adjusted reserves rate, (2) the mean of the pension plan reserves at the beginning and end of the taxable year, multiplied by the current earnings rate, and (3) the interest paid. (b) ADJUSTED RESERVES RATE AND EARNINGS RATES.— (1) ADJUSTED RESERVES RATE.-For purposes of this part, the adjusted reserves rate for any taxable year is the average earnings rate or, if lower, the current earnings rate. (2) CURRENT EARNINGS RATE. For purposes of this part, the current earnings rate for any taxable year is the amount determined by dividing (A) the taxpayer's investment yield for such taxable year, by (B) the mean of the taxpayer's assets at the beginning and end of the taxable year. (3) AVERAGE EARNINGS RATE. (A) IN GENERAL.-For purposes of this part, the average earnings rate for any taxable year is the average of the current earnings rates for such taxable year and for each of the 4 taxable years immediately preceding such taxable year (excluding any of such 4 taxable years for which the taxpayer was not an insurance company). (B) SPECIAL RULES. For purposes of subparagraph (A)— (i) the current earnings rate for any taxable year beginning before January 1, 1958, shall be determined as if this part (as in effect for 1958) and section 381 (c) (22) applied to such taxable year, and (ii) the current earnings rate for any taxable year of any company which, for such year, is an insurance company (but not a life insurance company) shall be determined as if this part applied to such company for such year. - (4) ASSETS. For purposes of this part, the term "assets" means all assets of the company (including nonadmitted assets), other than real and personal property (excluding money) used by it in carrying on an insurance trade or business. For purposes of this paragraph, the amount attributable to— (A) real property and stock shall be the fair market value thereof, and (B) any other asset shall be the adjusted basis (determined without regard to fair market value on December 31, 1958) of such asset for purposes of determining gain on sale or other disposition. (c) ADJUSTED LIFE INSURANCE RESERVES. (1) ADJUSTED LIFE INSURANCE RESERVES DEFINED. For purposes of this part, the term "adjusted life insurance reserves" means (A) the mean of the life insurance reserves (as defined in section 801 (b)), other than pension plan reserves, at the beginning and end of the taxable year, multiplied by |