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qualified corporation, subsection (b) (1) (A) (iii) shall cease to apply with respect to such loss for such taxable year and all subsequent taxable years.

(B) NONQUALIFIED CORPORATION DEFINED. For purposes of subparagraph (A), the term "nonqualified corporation" means any corporation connected through stock ownership with any other corporation, if either of such corporations possesses at least 50 percent of the voting power of all classes of stock of the other such corporation. For purposes of subparagraph (A), corporation shall be treated as becoming a nonqualified corporation at any time at which it becomes a party to a reorganization (other than a reorganization which is not described in any subparagraph of section 368 (a) (1) other than subparagraphs (E) and (F) thereof).

(f) APPLICATION OF SUBTITLE A AND SUBTITLE F.-Except as provided in section 809 (e), subtitle A and subtitle F shall apply in respect of operations loss carrybacks, operations loss carryovers, and the operations loss deduction under this part in the same manner and to the same extent as such subtitles apply in respect of net operating loss carrybacks, net operating loss carryovers, and the net operating loss deduction.

Subpart D-Distributions to Shareholders

Sec. 815, Distributions to shareholders.

SEC. 815. DISTRIBUTIONS TO SHAREHOLDERS.

(a) GENERAL RULE.-For purposes of this section and section 802 (b) (3), any distribution to shareholders after December 31, 1958, shall be treated as made

(1) first out of the shareholders surplus account, to the extent thereof,

(2) then out of the policyholders surplus account, to the extent thereof, and

(3) finally out of other accounts. For purposes of this section, the term "distribution" includes any distribution in redemption of stock or in partial or complete liquidation of the corporation, but does not include any distribution made by the corporation in its stock or in rights to acquire its stock and does not (except for purposes of paragraph (3) and subsection (e) (2) (B)) include any distribution in redemption of stock issued before 1958 which at all times on and after the date of issuance and on and before the date of redemption is limited as to dividends and is callable, at the option of the issuer, at a price not in excess of 105 percent of the sum of the issue price and the amount of any contribution to surplus made by the original purchaser at the time of his purchase. (b) SHAREHOLDERS SURPLUS ACCOUNT.

(1) IN GENERAL.-Each stock life insurance company shall, for purposes of this part, establish and maintain a shareholders surplus account. The amount in such account on January 1, 1958, shall be zero.

(2) ADDITIONS TO ACCOUNT.-The amount added to the shareholders surplus account for any taxable year beginning after December 31, 1957, shall be the amount by which

(A) the sum of

(i) the life insurance company taxable income (computed without regard to section 802 (b) (3)),

(ii) in the case of a taxable year beginning after December 31, 1958, the amount (if any) by which the net long-term capital gain exceeds the net short-term capital loss,

(iii) the deduction for partially tax-exempt interest provided by section 242 (as modified by section 804 (a) (3)), the deductions for dividends received provided by sections 243, 244, and 245 (as modified by section 809 (d) (8) (B)), and the amount of interest excluded from gross income under section 103, and (iv) the small business deduction provided by section 809 (d) (10), exceeds

(B) the taxes imposed for the taxable year by section 802 (a), determined without regard to section 802 (b) (3).

(3) SUBTRACTIONS FROM ACCOUNT.—

(A) IN GENERAL.-There shall be subtracted from the shareholders surplus account for any taxable year the amount which is treated under this section as distributed out of such account. (B) DISTRIBUTIONS IN 1958.-There shall be subtracted from the shareholders surplus account (to the extent thereof) for any taxable year beginning in 1958 the amount of distributions to shareholders made during 1958.

(c) POLICYHOLDERS SURPLUS ACCOUNT.

(1) IN GENERAL.-Each stock life insurance company shall, for purposes of this part, establish and maintain a policyholders surplus account. The amount in such account on January 1, 1959, shall be zero.

(2) ADDITIONS TO ACCOUNT.-The amount added to the policyholders surplus account for any taxable year beginning after December 31, 1958, shall be the sum of

(A) an amount equal to 50 percent of the amount by which the gain from operations exceeds the taxable investment income, (B) the deduction for certain nonparticipating contracts provided by section 809 (d) (5) (as limited by section 809 (f)), and (C) the deduction for group life and group accident and health insurance contracts provided by section 809 (d) (6) (as limited by section 809 (f)).

(3) SUBTRACTIONS FROM ACCOUNT.-There shall be subtracted from the policyholders surplus account for any taxable year an amount equal to the sum of—

(A) the amount which (without regard to subparagraph (B)) is treated under this section as distributed out of the policyholders surplus account, and

(B) the amount (determined without regard to section 802 (a) (3)) by which the tax imposed for the taxable year by section 802 (a) (1) is increased by reason of section 802 (b) (3).

(d) SPECIAL RULES.

(1) ELECTION TO TRANSFER AMOUNTS FROM

POLICYHOLDERS

SURPLUS ACCOUNT TO SHAREHOLDERS SURPLUS ACCOUNT.

(A) IN GENERAL.-A taxpayer may elect for any taxable year for which it is a life insurance company to subtract from its policyholders surplus account any amount in such account as of the close of such taxable year. The amount so subtracted, less the amount of the tax imposed with respect to such amount by reason of section 802 (b) (3), shall be added to the shareholders surplus account as of the beginning of the succeeding taxable year.

(B) MANNER AND EFFECT OF ELECTION.-The election provided by subparagraph (A) shall be made (in such manner and in such form as the Secretary or his delegate may by regulations prescribe) after the close of the taxable year and not later than the time prescribed by law for filing the return (including extensions thereof) for the taxable year. Such an election, once made, may not be revoked.

(2) TERMINATION AS LIFE INSURANCE COMPANY.

(A) EFFECT OF TERMINATION.-Except as provided in section 381 (c) (22) (relating to carryovers in certain corporate readjustments), if

(i) for any taxable year the taxpayer is not an insurance company, or

(ii) for any two successive taxable years the taxpayer is not a life insurance company,

then the amount taken into account under section 802 (b) (3) for the last preceding taxable year for which it was a life insurance company shall be increased (after the application of subparagraph (B)) by the amount remaining in its policyholders surplus account at the close of such last preceding taxable year.

(B) EFFECT OF CERTAIN DISTRIBUTIONS.-If for any taxable year the taxpayer is an insurance company but not a life insurance company, then any distribution to shareholders during such taxable year shall be treated as made on the last day of the last preceding taxable year for which the taxpayer was a life insurance company.

(3) TREATMENT OF CERTAIN INDEBTEDNESS.-If

(A) the taxpayer makes any payment in discharge of its indebtedness, and

(B) such indebtedness is attributable to a distribution by the taxpayer to its shareholders after February 9, 1959,

then the amount of such payment shall, for purposes of this section and section 802 (b) (3), be treated as a distribution in cash to shareholders, but only to the extent that the distribution referred to in subparagraph (B) was treated as made out of accounts other than the shareholders and policyholders surplus accounts.

(4) LIMITATION ON AMOUNT IN POLICYHOLDERS SURPLUS ACCOUNT.-There shall be treated as a subtraction from the policyholders surplus account for a taxable year for which the taxpayer is a life insurance company the amount by which the policyholders surplus account (computed at the end of the taxable year without

regard to this paragraph) exceeds whichever of the following is the greatest

(A) 15 percent of life insurance reserves at the end of the taxable year,

(B) 25 percent of the amount by which the life insurance reserves at the end of the taxable year exceed the life insurance reserves at the end of 1958, or

(C) 50 percent of the net amount of the premiums and other consideration taken into account for the taxable year under section 809 (c) (1).

The amount so treated as subtracted, less the amount of the tax imposed with respect to such amount by reason of section 802 (b) (3), shall be added to the shareholders surplus account as of the beginning of the succeeding taxable year.

(e) SPECIAL RULE FOR CERTAIN MUTUALIZATIONS.

(1) IN GENERAL.-For purposes of this section and section 802 (b) (3), any distribution to shareholders after December 31, 1958, in acquisition of stock pursuant to a plan of mutualization shall be treated

(A) first, as made out of paid-in capital and paid-in surplus, to the extent thereof,

(B) thereafter, as made in two allocable parts

(i) one part of which is made out of the other accounts referred to in subsection (a) (3), and

(ii) the remainder of which is a distribution to which subsection (a) applies.

(2) SPECIAL RULES.

(A) ALLOCATION RATIO. The part referred to in paragraph (1) (B) (i) is the amount which bears the same ratio to the amount to which paragraph (1) (B) applies as

(i) the excess (determined as of December 31, 1958, and adjusted to the beginning of the year of the distribution as provided in subparagraph (B)) of the assets over the total liabilities, bears to

(ii) the sum (determined as of the beginning of the year of the distribution) of the excess described in clause (i), the amount in the shareholders surplus account, plus the amount in the policyholders surplus account.

(B) ADJUSTMENT FOR CERTAIN DISTRIBUTIONS.-The excess described in subparagraph (A) (i) shall be reduced by the aggregate of the prior distributions which have been treated under subsection (a) (3) as made out of accounts other than the shareholders surplus account and the policyholders surplus account.

Subpart E-Miscellaneous Provisions

Sec. 817. Rules relating to certain gains and losses.

Sec. 818. Accounting provisions.

Sec. 819. Foreign life insurance companies.

Sec. 820. Optional treatment of policies reinsured under modified coinsurance contracts.

SEC. 817. RULES RELATING TO CERTAIN GAINS AND LOSSES.

(a) TREATMENT OF CAPITAL GAINS AND LOSSES, ETC.-In the case of a life insurance company

(1) in applying section 1231 (a), the term "property used in the trade or business" shall be treated as including only

(A) property used in carrying on an insurance business, of a character which is subject to the allowance for depreciation provided in section 167, held for more than 6 months, and real property used in carrying on an insurance business, held for more than 6 months, which is not described in section 1231 (b) (1) (A), (B), or (C), and

(B) property described in section 1231 (b) (2), and

(2) in applying section 1221 (2), the reference to property used in trade or business shall be treated as including only property used in carrying on an insurance business.

(b) GAIN ON PROPERTY HELD ON DECEMBER 31, 1958, AND CERTAIN SUBSTITUTED PROPERTY ACQUIRED AFTER 1958.

(1) PROPERTY HELD ON DECEMBER 31, 1958.-In the case of property held by the taxpayer on December 31, 1958, if

(A) the fair market value of such property on such date exceeds the adjusted basis for determining gain as of such date, and

(B) the taxpayer has been a life insurance company at all times on and after December 31, 1958,

the gain on the sale or other disposition of such property shall be treated as an amount (not less than zero) equal to the amount by which the gain (determined without regard to this subsection) exceeds the difference between the fair market value on December 31, 1958, and the adjusted basis for determining gain as of such date. (2) CERTAIN PROPERTY ACQUIRED AFTER DECEMBER 31, 1958.—In the case of property acquired after December 31, 1958, and having a substituted basis (within the meaning of section 1016 (b))—

(A) for purposes of paragraph (1), such property shall be deemed held continuously by the taxpayer since the beginning of the holding period thereof, determined with reference to section 1223,

(B) the fair market value and adjusted basis referred to in paragraph (1) shall be that of that property for which the holding period taken into account includes December 31, 1958,

(C) paragraph (1) shall apply only if the property or properties the holding periods of which are taken into account were held only by life insurance companies after December 31, 1958, during the holding periods so taken into account,

(D) the difference between the fair market value and adjusted basis referred to in paragraph (1) shall be reduced (not less than zero) by the excess of (i) the gain that would have been recognized but for this subsection on all prior sales or dispositions after December 31, 1958, of properties referred to in subparagraph (C), over (ii) the gain that was recognized on such sales or other dispositions, and

(E) the basis of such property shall be determined as if the gain which would have been recognized but for this subsection were recognized gain.

(3) PROPERTY DEFINED.-For purposes of paragraphs (1) and (2), the term "property" does not include insurance and annuity contracts (and contracts supplementary thereto) and property described in paragraph (1) of section 1221.

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