#### § 1.806-3 Certain changes in reserves and assets.

(a) *In general.* For purposes of part I, subchapter L, chapter 1 of the Code, section 806(a) provides that if there is a change in life insurance reserves (as defined in section 801(b)), during the taxable year, which is attributable to the transfer between the taxpayer and another person of liabilities under contracts taken into account in computing such life insurance reserves, then the means of such reserves, and the mean of the assets, shall be appropriately adjusted to reflect the amounts involved in such transfer. For example, the adjustments required under section 806(a) are applicable to transfers in which one life insurance company purchases or acquires a part or all of the business of another life insurance company under an arrangement whereby the purchaser or transferee becomes solely liable on the contracts transferred. This provision shall apply in the case of assumption reinsurance but not in the case of indemnity reinsurance or reinsurance ceded. Thus, no adjustments shall be required under section 806(a) when, in the ordinary course of business, an indemnity reinsurance contract is entered into with another company (on a yearly renewable term basis, on a coinsurance basis, or otherwise) whereby there is a sharing of risks under one or more individual contracts. It will be necessary for each life insurance company participating in a transfer described in section 806(a) to make the adjustments required by such section. Such adjustments shall be made without regard to whether or not the transferor of the liabilities was the original insurer.

(b) *Manner in which adjustments shall be made* —

(1) *Daily basis.* The means of the life insurance reserves, and the mean of the assets, shall be appropriately adjusted, on a daily basis, to reflect the amounts involved in a transfer described in section 806(a) and paragraph (a) of this section. The transferor and the transferee shall be treated as having held such life insurance reserves and assets for a fraction of the year in which the transfer occurs.

(2) *Determination of period held.* In determining the fraction which represents the fractional year that such reserves and assets were held, the numerator shall be the number of days during the taxable year which such reserves and assets were actually held, and the denominator shall be the number of days in the calendar year of the transfer. In computing the period held for purposes of the numerator, the day on which such reserves and assets are transferred is included by the transferor and excluded by the transferee.

(3) *Adjustments to the means of life insurance reserves and assets not transferred.* All life insurance reserves and assets transferred during the taxable year, within the meaning of section 806(a), shall be excluded from the beginning and end of the taxable year balances of the transferor and transferee, respectively. The amount of assets to be excluded from the beginning of the taxable year balance of the transferor shall be an amount equal to the value of such reserves at the beginning of the taxable year. The amount of assets to be excluded from the end of the taxable year balance of the transferee shall be an amount equal to the value of such reserves at the end of the taxable year. The means of the life insurance reserves and assets not so transferred shall be determined in the ordinary manner, that is, the arithmetic means. There shall be added to these means an amount to appropriately adjust them, on a daily basis, for the life insurance reserves and assets that were transferred during the taxable year. This adjustment shall be determined by multiplying

(i) the mean of the transferred life insurance reserves (or assets, as the case may be) at the beginning of the taxable year (or, if acquired later, at the beginning of the period held as defined in subparagraph (2) of this paragraph) and the end of the period held as defined in subparagraph (2) of this paragraph (or at the end of the taxable year, if held at such time) by

(ii) the fraction determined under subparagraph (2) of this paragraph.

(4) *Examples.* The application of this paragraph may be illustrated by the following examples:

# Example 1.

On March 14, 1958, the M Company, a life insurance company, transferred to the N Company, a life insurance company, pursuant to an assumption reinsurance agreement, all of its life insurance reserves, and related assets, on one block of policies. The reserves (and assets) for this block were held by the M Company on January 1, 1958, and totaled $60,000; on March 14, the reserves (and assets) totaled $64,000. The M Company had life insurance reserves of $1,000,000 at the beginning of 1958 (including those subsequently transferred) and $1,040,000 at the end of 1958. The M Company had assets of $1,300,000 at the beginning of 1958 (including those subsequently transferred) and $1,380,000 at the end of 1958. The mean of M's life insurance reserves for the taxable year 1958 is computed as follows:

| Reserves at 1-1-58 | $1,000,000 | |
| --- | --- | --- |
| Exclude reserves (at beginning of year) on contracts transferred to N | 60,000 | |
| Recomputed amount at 1-1-58 | $940,000 |
| Reserves at 12-31-58 | 1,040,000 |
| Sum | 1,980,000 |
| Mean | 990,000 |
| Adjustment for reserves transferred on 8-14-58: | | |
| Reserves at 1-1-58 on contracts transferred to N | $60,000 | |
| Reserves at 3-14-58 on such contracts | 64,000 | |
| Sum | 124,000 | |
| Mean | 62,000 | |
| Fraction taken into account | 73/365 | |
| Adjustment (73/365 × $62,000) | $12,400 |
| Mean of M's life insurance reserves after section 806(a) adjustment | 1,002,400 |

# Example 2.

Assuming the facts to be the same as in example 1, the mean of M's assets for the taxable year 1958 is computed as follows:

| Assets at 1-1-58 | $1,300,000 | |
| --- | --- | --- |
| Exclude assets (at beginning of year) on contracts transferred to N | 60,000 | |
| Recomputed amount at 1-1-58 | $1,240,000 |
| Assets at 12-31-58 | 1,380,000 |
| Sum | 2,620,000 |
| Mean | 1,310,000 |
| Adjustments for assets transferred on 3-14-58: | | |
| Assets at 1-1-58 on contracts transferred to N | $60,000 | |
| Assets at 3-14-58 on such contracts | 64,000 | |
| Sum | 124,000 | |
| Mean | 62,000 | |
| Fraction taken into account | 73/365 | |
| Adjustment (73/365 × $62,000)− | $12,400 |
| Mean of M's assets after section 806(a) adjustment | 1,322,400 |

# Example 3.

Assume the facts are the same as in example 1. At the end of 1958, N Company had life insurance reserves (and assets) of $80,000 on the contracts transferred on March 14, 1958. The N Company had life insurance reserves of $6,000,000 at the beginning of 1958 and $6,400,000 at the end of 1958 (including those transferred). The N Company had assets of $6,800,000 at the beginning of 1958 and $7,300,000 at the end of 1958 (including those on the contracts transferred). The mean of N's life insurance reserves for the taxable year 1958 is computed as follows:

| Reserves at 1-1-58 | $6,000,000 |
| --- | --- |
| Reserves at 12-31-58 | $6,400,000 | |
| Exclude reserves (at end of year) on contracts transferred from M | 80,000 | |
| Recomputed amount at 12-31-58 | 6,320,000 |
| Sum | 12,320,000 |
| Mean | 6,160,000 |
| Adjustment for reserves transferred on 3-14-58: | | |
| Reserves at 3-14-58 on contracts transferred from M | $64,000 | |
| Reserves at 12-31-58 on such contracts | 80,000 | |
| Sum | 144,000 | |
| Mean | 72,000 | |
| Fraction taken into account | 292/365 | |
| Adjustment (292/365 × $72,000) | 57,600 |
| Mean of N's life insurance reserves after section 806(a) adjustment | 6,217,600 |

# Example 4.

Assuming the facts to be the same as in example 3, the mean of N's assets for the taxable year 1958 is computed as follows:

| Assets at 1-1-58 | $6,800,000 |
| --- | --- |
| Assets at 12-31-58 | $7,300,000 | |
| Exclude assets (at end of year) on contracts transferred from M | 80,000 | |
| Recomputed amount at 12-31-58 | 7,220,000 |
| Sum | 14,020,000 |
| Mean | 7,010,000 |
| Adjustments for assets transferred on 3-14-58: | | |
| Assets at 3-14-58 on contracts transferred from M | $64,000 | |
| Assets at 12-31-58 on such contracts | 80,000 | |
| Sum | 144,000 | |
| Mean | 72,000 | |
| Fraction taken into account | 292/365 | |
| Adjustment (292/365 × $72,000) | $57,600 |
| Mean of N's assets after section 806(a) adjustment | 7,067,600 |

# Example 5.

The facts are the same as in example 1, except that on October 19, 1958, company N transfers to company P, a life insurance company, all of the life insurance reserves, and related assets, on the block of policies it had received from company M on March 14, 1958. The reserves (and assets) for this block totaled $76,000 on October 19, 1958. The means of company M's life insurance reserves and assets, as computed in examples 1 and (2), respectively, would be unchanged by the transfer of October 19, 1958. Since company N did not own this block of policies at either the beginning or end of the taxable year, it would not have to recompute its beginning or end of the taxable year reserves or assets. Company N will, however, have to adjust (or increase) the mean of its life insurance reserves and assets on account of the policies it received from company M. This adjustment will be $42,000, which is determined by multiplying the means of the life insurance reserves (or assets) on these policies as of March 15, 1958, and October 19, 1958, $70,000 ($64,000 + $76,000 = $140,000 ÷ 2) by the fraction 219/365 (the numerator of 219 is determined by excluding the day of the transfer to N, March 14, 1958, and including the day of the transfer from N to P, October 19, 1958). Company P will have to recompute its end of the year life insurance reserves and assets (in the same manner as illustrated in examples 3 and 4). Assuming the end of the year reserves (and assets) on this block of policies is $80,000, company P will have an adjustment under section 806 (a) of $15,600, which is determined by multiplying the means of the reserves on these policies as of October 20, 1958, and December 31, 1958, $78,000 ($76,000 + $80,000= $156,000 ÷ 2) by the fraction 73/365.

[T.D. 6513, 25 FR 12663, Dec. 10, 1960]