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(B) that percentage which equals 100 percent

(i) increased by that percentage which is 10 times the average rate of interest assumed by the taxpayer in calculating such reserves, and

(ii) reduced by that percentage which is 10 times the adjusted reserves rate.

(2) AVERAGE INTEREST RATE ASSUMED. For purposes of this part, the average rate of interest assumed in calculating reserves shall be computed

(A) by multiplying each assumed rate of interest by the means of the amounts of such reserves computed at that rate at the beginning and end of the taxable year, and

(B) by dividing (i) the sum of the products ascertained under subparagraph (A), by (ii) the mean of the total of such reserves at the beginning and end of the taxable year.

(d) PENSION PLAN RESERVES.

(1) PENSION PLAN RESERVES DEFINED.-For purposes of this part, the term "pension plan reserves" means that portion of the life insurance reserves which is allocable to contracts

(A) purchased under contracts entered into with trusts which (as of the time the contracts were entered into) were deemed to be (i) trusts described in section 401 (a) and exempt from tax under section 501 (a), or (ii) trusts exempt from tax under section 165 of the Internal Revenue Code of 1939 or the corresponding provisions of prior revenue laws;

(B) purchased under contracts entered into under plans which (as of the time the contracts were entered into) were deemed to be plans meeting the requirements of section 401 (a) (3), (4), (5), and (6), or the requirements of section 165 (a) (3), (4), (5), and (6) of the Internal Revenue Code of 1939;

(C) provided for employees of the life insurance company under a plan which, for the taxable year, meets the requirements of section 401 (a) (3), (4), (5), and (6); or

(D) purchased to provide retirement annuities for its employees by an organization which (as of the time the contracts were purchased) was an organization described in section 501 (c) (3) which was exempt from tax under section 501 (a) or was an organization exempt from tax under section 101 (6) of the Internal Revenue Code of 1939 or the corresponding provisions of prior revenue laws.

(2) SPECIAL TRANSITIONAL RULE. For purposes of this part, the amount taken into account as pension plan reserves shall be—

(A) in the case of a taxable year beginning after December 31, 1957, and before January 1, 1959, zero;

(B) in the case of a taxable year beginning after December 31, 1958, and before January 1, 1960, 33% percent of the amount thereof (determined without regard to this paragraph);

(C) in the case of a taxable year beginning after December 31, 1959, and before January 1, 1961, 66% percent of the amount thereof (determined without regard to this paragraph); and

(D) in the case of a taxable year beginning after December 31, 1960, 100 percent of the amount thereof.

(e) INTEREST PAID. For purposes of this part, the interest paid for any taxable year is the sum of

(1) INTEREST ON INDEBTEDNESS.-All interest for the taxable year on indebtedness, except on indebtedness incurred or continued to purchase or carry obligations the interest on which is wholly exempt from taxation under this chapter.

(2) AMOUNTS IN THE NATURE OF INTEREST.-All amounts in the nature of interest, whether or not guaranteed, for the taxable year on insurance or annuity contracts (including contracts supplementary thereto) which do not involve, at the time of accrual, life, health, or accident contingencies.

(3) DISCOUNT ON PREPAID PREMIUMS.-All amounts accrued for the taxable year for discounts in the nature of interest, whether or not guaranteed, on premiums or other consideration paid in advance on insurance or annuity contracts.

(4) INTEREST ON CERTAIN SPECIAL CONTINGENCY RESERVES.Interest for the taxable year on special contingency reserves established pursuant to section 8 (d) of the Federal Employees' Group Life Insurance Act of 1954 (5 U. S. C. § 2097 (d)).

SEC. 806. CERTAIN CHANGES IN RESERVES AND ASSETS.

(a) ADJUSTMENTS TO MEANS FOR CERTAIN TRANSFERS Oof LiabiliTIES. For purposes of this part, if, during the taxable year, there is a change in life insurance reserves attributable to the transfer between the taxpayer and another person of liabilities under contracts taken into account in computing such reserves, then, under regulations prescribed by the Secretary or his delegate, the means of such reserves, and the mean of the assets, shall be appropriately adjusted, on a daily basis, to reflect the amounts involved in such transfer. This subsection shall not apply to reinsurance ceded to the taxpayer or to another person.

(b) CHANGE OF BASIS IN COMPUTING RESERVES.-If the basis for determining the amount of any item referred to in section 810 (c) as of the close of the taxable year differs from the basis for such determination as of the beginning of the taxable year, then for purposes of this subpart the amount of such item

(1) as of the close of the taxable year shall be computed on the old basis, and

(2) as of the beginning of the next taxable year shall be computed on the new basis.

Subpart C-Gain and Loss From Operations

Sec. 809. In general.

Sec. 810. Rules for certain reserves.

Sec. 811. Dividends to policyholders.

Sec. 812. Operations loss deduction.

SEC. 809. IN GENERAL.

(a) EXCLUSION OF SHARE OF INVESTMENT YIELD SET ASIDE FOR POLICYHOLDERS.

(1) AMOUNT.-The 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 set aside for policyholders shall not be included in gain or loss from opera

tions. For purposes of the preceding sentence, the share of any item set aside for policyholders shall be that percentage obtained by dividing the required interest by the investment yield; except that if the required interest exceeds the investment yield, then the share of any item set aside for policyholders shall be 100 percent.

(2) REQUIRED INTEREST.-For purposes of this part, the required interest for any taxable year is the sum of the products obtained by multiplying

(A) each rate of interest required, or assumed by the taxpayer, in calculating the reserves described in section 810 (c), by

(B) the means of the amount of such reserves computed at that rate at the beginning and end of the taxable year. (b) GAIN AND LOSS FROM OPERATIONS.

(1) GAIN FROM OPERATIONS DEFINED. For purposes of this part, the term "gain from operations" means the amount by which the sum of the following exceeds the deductions provided by subsection (d):

(A) the life insurance company's share of each and every item of investment yield (including tax-exempt interest, partially taxexempt interest, and dividends received); and

(B) the sum of the items referred to in subsection (c).

(2) Loss FROM OPERATIONS DEFINED. For purposes of this part, the term "loss from operations" means the amount by which the sum of the deductions provided by subsection (d) exceeds the sum of

(A) the life insurance company's share of each and every item of investment yield (including tax-exempt interest, partially taxexempt interest, and dividends received); and

(B) the sum of the items referred to in subsection (c).

(3) LIFE INSURANCE COMPANY'S SHARE.-For purposes of this subpart, 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 subsection (a) (1), equals 100 percent. (4) EXCEPTION.-If it is established in any case that the application of the definition of gain from operations contained in paragraph (1) 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 section 804 (a) (3)) is allowable as a deduction, or

(C) any amount of dividends received which under sections 243, 244, and 245 (as modified by subsection (d) (8) (B)) is allowable as a deduction,

adjustment shall be made to the extent necessary to prevent such imposition.

(c) GROSS AMOUNT.-For purposes of subsections (b) (1) and (2), the following items shall be taken into account:

(1) PREMIUMS.-The gross amount of premiums and other consideration (including advance premiums, deposits, fees, assessments, and consideration in respect of assuming liabilities under contracts not issued by the taxpayer) on insurance and annuity contracts (including contracts supplementary thereto); less return premiums, and premiums and other consideration arising out of

reinsurance ceded. Except in the case of amounts of premiums or other consideration returned to another life insurance company in respect of reinsurance ceded, amounts returned where the amount is not fixed in the contract but depends on the experience of the company or the discretion of the management shall not be included in return premiums.

(2) DECREASES IN CERTAIN RESERVES.-Each net decrease in reserves which is required by section 810 or 811 (b) (2) to be taken into account for purposes of this paragraph.

(3) OTHER AMOUNTS.-All amounts, not included in computing investment yield and not includible under paragraph (1) or (2), which under this subtitle are includible in gross income.

Except as included in computing investment yield, 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.

(d) DEDUCTIONS.-For purposes of subsections (b) (1) and (2), there shall be allowed the following deductions:

(1) DEATH BENEFITS, ETC.-All claims and benefits accrued, and all losses incurred (whether or not ascertained), during the taxable year on insurance and annuity contracts (including contracts supplementary thereto).

(2) INCREASES IN CERTAIN RESERVES.-The net increase in reserves which is required by section 810 to be taken into account for purposes of this paragraph.

(3) DIVIDENDS TO POLICYHOLDERS.-The deduction for dividends to policyholders (determined under section 811 (b)).

(4) OPERATIONS LOSS DEDUCTION.-The operations loss deduction (determined under section 812).

(5) CERTAIN NONPARTICIPATING CONTRACTS.-An amount equal to 10 percent of the increase for the taxable year in the reserves for nonparticipating contracts or (if greater) an amount equal to 3 percent of the premiums for the taxable year (excluding that portion of the premiums which is allocable to annuity features) attributable to nonparticipating contracts (other than group contracts) which are issued or renewed for periods of 5 years or more. For purposes of this paragraph, the term "reserves for nonparticipating contracts" means such part of the life insurance reserves (excluding that portion of the reserves which is allocable to annuity features) as relates to nonparticipating contracts (other than group contracts). For purposes of this paragraph and paragraph (6), the term "premiums" means the net amount of the premiums and other consideration taken into account under subsection (c) (1). (6) GROUP LIFE, ACCIDENT, AND HEALTH INSURANCE.-An amount equal to 2 percent of the premiums for the taxable year attributable to group life insurance contracts and group accident and health insurance contracts. The deduction under this paragraph for the taxable year and all preceding taxable years shall not exceed an amount equal to 50 percent of the premiums for the taxable year attributable to such contracts.

(7) ASSUMPTION BY ANOTHER PERSON OF LIABILITIES UNDER INSURANCE, ETC., CONTRACTS.-The consideration (other than consid

eration arising out of reinsurance ceded) in respect of the assumption by another person of liabilities under insurance and annuity contracts (including contracts supplementary thereto).

(8) TAX-EXEMPT INTEREST, DIVIDENDS, ETC.

(A) LIFE INSURANCE COMPANY'S SHARE.-Each of the following items:

(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 section 804 (a) (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 subparagraph (B)) computed with respect to the life insurance company's share of the dividends received.

(B) APPLICATION OF SECTION 246 (b).-In applying section 246 (b) (relating to limitation on aggregate amount of deductions for dividends received) for purposes of subparagraph (A) (iii), the limit on the aggregate amount of the deductions allowed by sections 243 (a), 244, and 245 shall be 85 percent of the gain from operations computed without regard to

(i) the deductions provided by paragraphs (3), (5), and (6) of this subsection,

(ii) the operations loss deduction provided by section 812, and

(iii) the deductions allowed by sections 243 (a), 244, and 245, but such limit shall not apply for any taxable year for which there is a loss from operations.

(9) INVESTMENT EXPENSES, ETC.-Investment expenses to the extent not allowed as a deduction under section 804 (c) (1) in computing investment yield, and the amount (if any) by which the sum of the deductions allowable under section 804 (c) exceeds the gross investment income.

(10) SMALL BUSINESS DEDUCTION.-A small business deduction in an amount equal to the amount determined under section 804 (a) (4).

(11) CERTAIN MUTUALIZATION DISTRIBUTIONS.-The amount of distributions to'shareholders made in 1958 and 1959 in acquisition of stock pursuant to a plan of mutualization adopted before January

1, 1958.

(12) OTHER DEDUCTIONS. Subject to the modifications provided by subsection (e), all other deductions allowed under this subtitle for purposes of computing taxable income to the extent not allowed as deductions in computing investment yield.

Except as provided in paragraph (3), no amount shall be allowed as a deduction under this subsection in respect of dividends to policyholders.

(e) MODIFICATIONS.-The modifications referred to in subsection. (d) (12) are as follows:

(1) INTEREST.-In applying section 163 (relating to deduction for interest), no deduction shall be allowed for interest in respect of items described in section 810 (c).

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