Rev. Rul. 60-306

Advice has been requested whether an insurance company subject to the provisions of section 832 of the Internal Revenue Code of 1954 is required to include in gross income bond discount attributable to market fluctuations, where the requirements of the underwriting and investment exhibit of the annual statement approved by the National Convention of Insurance Commissioners provides for the annual accrual of bond discount.

The taxpayer is an insurance company, but is neither a life nor a mutual insurance company. It is therefore subject to the provisions of section 832 of the Code. Among its investments are bonds purchased at a discount from their par value. The discounts are not `original issue discounts' as defined in section 1232(b)(1) of the Code, but are attributable to market fluctuations.

The taxpayer files with the insurance commissioners of the states in which it operates an annual statement using the form approved by the National Convention of Insurance Commissioners. That form requires that all discount on bonds be amortized over the life of the bonds and that the underwriting and investment exhibit of the annual statement approved by the National Convention of Insurance Commissioners show an accrual of income for the annual amount of this amortization.

Gross income of insurance companies subject to the provisions of section 832 of the Code is defined, in part, by section 832(b) of the Code as follows:

GROSS INCOME.-The term `gross income' means the sum of-

(A) the combined gross amount earned during the taxable year, from investment income and from underwriting income as provided in this subsection, computed on the basis of the underwriting and investment exhibit of the annual statement approved by the National Convention of Insurance Commissioners.

Section 1.832-1 of the Income Tax Regulations provides that the underwriting and investment exhibit is presumed to reflect the true net income of the company, and insofar as it is not inconsistent with the provisions of the Internal Revenue Code of 1954 will be recognized and used as a basis for that purpose.

Ordinarily, bonds which are capital assets in the hands of a taxpayer would be subject to capital gain or loss treatment upon their retirement, sale, or exchange except to the extent that `original issue discount' is involved. The fact that the bonds were purchased at a discount is accounted for for the purpose of determining the basis for gain or loss upon the retirement, sale, or exchange of the bonds.

Sections 818(b)(1) (and corresponding sections of prior laws) and 822(d)(2) of the Code specifically require the accrual of bond discount by life insurance companies and mutual insurance companies. See Rev. Rul. 60-210, C.B. 1960-1, 473. However, there are no provisions in the Code or regulations specifically requiring such accrual for insurance companies, other than life or mutual, subject to section 832 of the Code, unless the reference in section 832(b)(1) of the Code to the annual statement approved by the National Convention of Insurance Commissioners implies such a result. That reference is to an `accounting method' on the basis of which investment income and underwriting income is to be computed and is meant to be used only as a guide in computing the income of insurance companies subject to the provisions of section 832 of the Code. See Commissioner v. General Reinsurance Corp. , 190 Fed.(2d) 148; and Pacific Employers Insurance Co. v. Commissioner , 89 Fed.(2d) 186. Thus, section 832 of the Code does not convert what would be a capital gain into ordinary income.

Accordingly, it is held that, with respect to bonds other than bonds issued with an original issue discount as defined in section 1232(b) of the Code, an insurance company, other than life or mutual, which is subject to the provision of section 832 of the Code, is not required to accrue bond discount for Federal income tax purposes, even though the underwriting and investment exhibit of the annual statement approved by the National Convention of Insurance Commissioners provides for such accrual.