Rev. Rul. 56-106

Advice has been requested whether, in the case of a life insurance company, as defined in section 801 of the Internal Revenue Code of 1954, which transfers all of its insurance business and assets to another insurance company in pursuance of a reinsurance agreement between the two companies, and which ceases thereafter to engage in the business of issuing insurance contracts, but continues its corporate existence for an extended period subsequent to the effective date of such agreement for the purpose of liquidating and winding up its affairs, such life insurance company retains its identity as a life insurance company under section 801 of the 1954 Code.

In the instant case M company, prior to the date of the transaction described below, qualified as a `life insurance company' as defined by section 801 of the Code. It filed its Federal income tax returns on the calendar year basis. Effective as of the close of business September 30, 1954, M company, pursuant to a reinsurance agreement with N company, transferred to the latter all of its assets, including the investments underlying its life insurance reserves. N company, under the terms of the agreement, assumed all obligations of M company to the latter's policyholders and, as additional consideration for the transfer, agreed to pay to M company certain fixed or determinable amounts described in the agreement. Under the terms of the agreement such amounts, plus interest on the unpaid balance, will be paid to M company over a period of years. After the effective date of the reinsurance agreement, M company ceased to engage in the business of issuing insurance contracts, but its corporate existence under local law will be continued indefinitely for the purpose of liquidating and winding up its affairs.

Section 801 of the 1954 Code defines `life insurance company,' in part, as follows:

SEC. 801. DEFINITION OF LIFE INSURANCE COMPANY.

For purposes of this subtitle, the term `life insurance company' means an insurance company which is engaged in the business of issuing life insurance and annuity contracts (either separately or combined with health and accident insurance), or noncancellable contracts of health and accident insurance, if its life insurance reserves (as defined in section 803(b)), plus unearned premiums and unpaid losses on noncancellable life, health, or accident policies not included in life insurance reserves, comprise more than 50 percent of its total reserves. For purposes of this section, the term `total reserves' means life insurance reserves, unearned premiums and unpaid losses not included in life insurance reserves, and all other insurance reserves required by law. * * *

After the effective date of the reinsurance agreement, M company will have no `life insurance reserves' as defined in section 803(b) of the 1954 Code; nor will it have any unearned premiums and unpaid losses on health or accident policies since the entire business, including these items, was transferred to N company. Thus, M company can no longer meet the conditions of the definition of `life insurance company' contained in section 801. Accordingly, M company will not be taxable as a life insurance company after the effective date of the reinsurance agreement with N company, but will be taxable under the provisions of the 1954 Code applicable to ordinary corporations. Cf. Reserve Loan Life Ins. Code of Texas , 4 T.C. 732, acquiescence C.B. 1945, 6; The Royal Highlanders , 1 T.C. 184, acquiescence C.B. 1943, 20.