Rev. Rul. 65-240

Advice has been requested as to the proper treatment, for Federal income tax purposes, of an increase in life insurance reserves due to a change in computing such reserves from a preliminary term basis to a net level premium basis, by a casualty insurance company subject to the tax imposed by section 831 of the Internal Revenue Code of 1954.

The taxpayer is a casualty insurance company writing life insurance as well as casualty insurance contracts and is subject to the tax imposed under section 831 of the Code. During the taxable year 1964, the taxpayer strengthened its life insurance reserves on all guaranteed renewable health policies by changing the basis of computing such reserves from the preliminary term basis to the net level premium basis. The annual statements for the year 1964 and all subsequent taxable years will reflect the life insurance reserves on all guaranteed renewable health policies computed on the net level premium basis.

There are no provisions in sections 831 and 832 of the Code which permit strengthening or weakening of life insurance reserves. However, section 832(b)(4) of the Code provides that unearned premiums shall include life insurance reserves, as defined in section 801(b) of the Code.

Since casualty insurance companies writing life insurance as well as casualty insurance contracts maintain life insurance reserves on the life insurance contracts, such companies should have the right to strengthen or weaken their life insurance reserves. Such reserve strengthening or weakening should be made in accordance with the same Federal income tax rules in respect of reserve strengthening or weakening as are provided for in determining gain and loss from operations of life insurance companies.

Section 810(d)(1) of the Code provides, in part, that for the purpose of determining gain and loss from operations of a life insurance company, if the basis for determining life insurance reserves as of the close of the taxable year differs from the basis for such determination as of the close of the preceding taxable year, then one-tenth of the difference between the amount determined on the new basis and the amount determined on the old basis shall be taken into account for each of the 10 succeeding taxable years, as a net increase in reserves.

Accordingly, based on the facts set forth above, it is held that, pursuant to the rules applicable to strengthening life insurance reserves in the case of life insurance companies, one-tenth of the difference between the amount of life insurance reserves on all guaranteed renewable health policies computed on the new basis and the amount of such reserves computed on the old basis, as of December 31, 1964, shall be taken into account by the taxpayer as an increase in unearned premiums under section 832(b)(4) of the Code in each year of the 10-year period commencing with the taxable year 1965. No amount shall be taken into account for the taxable year 1964, the year in which such reserves were strengthened.