Rev. Rul. 75-51

Advice has been requested, under the circumstances described below, as to the proper method of determining reserves computed on a preliminary term basis with respect to decreasing term life insurance contracts that are revalued under the approximate revaluation method pursuant to the election provided for in section 818(c)(2)(B) of the Internal Revenue Code of 1954.

X is a life insurance company subject to tax under section 802 of the Code. X was organized in 1971 under the laws of State A and is located in that State. X's life insurance business consists entirely of decreasing term life insurance contracts. X has computed the life insurance reserves on such contracts on a recognized preliminary term basis for all taxable years prior to 1974. Because of the decreasing term feature of the life insurance contracts involved, the amount of reserves computed using the preliminary term basis formula was so small that additional amounts were required to be added each year to such reserves in order to comply with the minimum reserve requirements under the laws of State A.

For the taxable year 1973 X elected to revalue its reserves under the approximate revaluation method pursuant to section 818(c)(2)(B) of the Code. The mean of the reserves held by X for the taxable year 1973 computed under the preliminary term basis formula was 2x dollars. The amount added to such reserves to meet minimum state law reserve requirements for the taxable year 1973 was 13x dollars. The question is whether the amount of reserves to be revalued under the approximate method pursuant to X's election is the amount arrived at using the recognized preliminary term basis formula (2x dollars) or the amount of reserves actually held by X on its decreasing term life insurance contracts at the time of revaluation pursuant to state law (15x dollars).

Section 818(c) of the Code provides, in part, that for purposes of part I, subchapter L (other than section 801), at the election of the taxpayer the amount taken into account as life insurance reserves with respect to contracts for which the reserves are computed on a preliminary term basis may be determined by approximate revaluation, using, in the case of term insurance, the method set forth in section 818(c)(2)(B).

Section 1.818-4(a) of the Income Tax Regulations indicates that the reserves that a life insurance company may elect to revalue are those computed on one of the recognized preliminary term bases.

Thus, the reserves that may be revalued under section 818(c)(2)(B) of the Code are those that have been computed on a recognized preliminary term basis. Reserves that, as in the instant case, have been arbitrarily increased in order to meet the minimum reserve requirements of state law are not reserves computed on a preliminary term basis.

Accordingly, in the instant case, the reserves of X that may be revalued under section 818(c)(2)(B) of the Code are those arrived at using a recognized preliminary term basis formula (2x dollars). The portion of X's reserves consisting of amounts that X was required to add to the reserves to meet the minimum reserve requirements of State A (13x dollars) may not be revalued under section 818(c)(2)(B).