Federal Register / Vol. 65, No. 4 / Thursday, January 6, 2000 / Rules and Regulations 701

substantial number of previous

opportunities provided to the public to

comment on substantially identical

actions have resulted in negligible

adverse comments or objections. Unless

a written adverse or negative comment,

or a written notice of intent to submit

an adverse or negative comment is

received within the comment period,

the regulation will become effective on

the date specified above. After the close

of the comment period, the FAA will

publish a document in the Federal

Register indicating that no adverse or

negative comments were received and

confirming the date on which the final

rule will become effective. If the FAA

does receive, within the comment

period, an adverse or negative comment,

or written notice of intent to submit

such a comment, a document

withdrawing the direct final rule will be

published in the Federal Register, and

a notice of proposed rulemaking may be

published with a new comment period.

Comments Invited

Although this action is in the form of

a final rule and was not preceded by a

notice of proposed rulemaking,

comments are invited on this rule.

Interested persons are invited to

comment on this rule by submitting

such written data, views, or arguments

as they desire. Communications should

identify the Rules Docket number and

be submitted in triplicate to the address

specified under the caption ADDRESSES.

All communications received on or

before the closing date for comments

will be considered, and this rule may be

amended or withdrawn in light of the

comments received. Factual information

that supports the commenter’s ideas and

suggestions is extremely helpful in

evaluating the effectiveness of this

action and determining whether

additional rulemaking action is needed.

Comments are specifically invited on

the overall regulatory, economic,

environmental, and energy aspects of

the rule that might suggest a need to

modify the rule. All comments

submitted will be available, both before

and after the closing date for comments,

in the Rules Docket for examination by

interested persons. A report that

summarizes each FAA-public contact

concerned with the substance of this

action will be filed in the Rules Docket.

Commenters wishing the FAA to

acknowledge receipt of their comments

submitted in response to this rule must

submit a self-addressed, stamped

postcard on which the following

statement is made: ‘‘Comments to

Docket No. 99–ASW–34.’’ The postcard

will be date stamped and returned to the

commenter.

Agency Findings

The regulations adopted herein will

not have substantial direct effects on the

States, on the relationship between the

national government and the States, or

on the distribution of power and

responsibilities among the various

levels of government. Therefore, it is

determined that this final rule will not

have federalism implications under

Executive Order 13132.

Further, the FAA has determined that

this regulation is noncontroversial and

unlikely to result in adverse or negative

comments and only involves an

established body of technical

regulations that require frequent and

routine amendments to keep them

operationally current. Therefore, I

certify that this regulation (1) is not a

‘‘significant regulatory action’’ under

Executive Order 12866; (2) is not a

‘‘significant rule’’ under DOT

Regulatory Policies and Procedures (44

FR 11034; February 26, 1979); and (3) if

promulgated, will not have a significant

economic impact, positive or negative,

on a substantial number of small entities

under the criteria of the Regulatory

Flexibility Act. Since this rule involves

routine matters that will only affect air

traffic procedures and air navigation, it

does not warrant preparation of a

Regulatory Flexibility Analysis because

the anticipated impact is so minimal.

List of Subjects in 14 CFR Part 71

Airspace, Incorporation by reference,

Navigation (air).

Adoption of the Amendment

Accordingly, pursuant to the

authority delegated to me, the Federal

Aviation Administration amends 14

CFR part 71 as follows:

PART 71—DESIGNATION OF CLASS A,

CLASS B, CLASS C, CLASS D, AND

CLASS E AIRSPACE AREAS;

AIRWAYS; ROUTES; AND REPORTING

POINTS

1. The authority citation for 14 CFR

part 71 continues to read as follows:

Authority: 49 U.S.C. 106(g), 40103, 40113,

40120; E.O. 10854; 24 FR 9565, 3 CFR, 1959–

1963 Comp., p. 389.

§ 71.1 [Amended]

2. The incorporation by reference in

14 CFR 71.1 of the Federal Aviation

Administration Order 7400.9G,

Airspace Designations and Reporting

Points, dated September 1, 1999, and

effective September 16, 1999, is

amended as follows:

Paragraph 6005 Class E airspace areas

extending upward from 700 feet or more

above the surface of the earth.

* * * * *

ASW TX E5 Bonham, TX [Revised]

Bonham, Jones Field, TX

(Lat. 33°36′42′′N., long. 96°10′46′′W.)

Bonham VORTAC

(Lat. 33°32′15′′N., long. 96°14′03′′W.)

Rayburn NDB

(Lat. 33°36′50′′N., long. 96°10′34′′W.)

That airspace extending upward from 700

feet above the surface within a 6.4-mile

radius of Jones Field and within 4 miles east

and 8 miles west of the 030° radial of the

Bonham VORTAC extending from the 6.4-

mile radius to 15 miles northeast of the

airport and within 2.5 miles each side of the

347° bearing from the Rayburn NDB

extending from the 6.4-mile radius to 7.5

miles northwest of the airport.

* * * * *

Issued in Fort Worth, TX, on December 27,

1999.

JoEllen Casilio,

Assistant Manager, Air Traffic Division,

Southwest Region.

[FR Doc. 00–242 Filed 1–5–00; 8:45 am]

BILLING CODE 4910–13–M

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 8857]

RIN 1545–AU60

Determination of Underwriting Income

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final

regulations relating to the determination

of underwriting income by insurance

companies other than life insurance

companies. In computing underwriting

income, non-life insurance companies

are required to reduce by 20 percent

their deductions for increases in

unearned premiums. This requirement

was enacted as part of the Tax Reform

Act of 1986. These regulations provide

guidance to non-life insurance

companies for purposes of determining

the amount of unearned premiums that

are subject to the 20 percent reduction

rule.

DATES: The regulations are effective

January 5, 2000.

FOR FURTHER INFORMATION CONTACT: Gary

Geisler, (202) 622–3970 (not a toll-free

number).

SUPPLEMENTARY INFORMATION:

702 Federal Register / Vol. 65, No. 4 / Thursday, January 6, 2000 / Rules and Regulations

1For this purpose, expenses incurred generally

refers to the expenses reported on the company’s

annual statement approved by the National

Association of Insurance Commissioners (NAIC)

and filed for state insurance regulatory purposes,

less expenses incurred which are not allowed as

deductions under section 832(c). See section

832(b)(6). Expenses incurred generally include

premium acquisition expenses attributable to

unearned premiums on insurance contracts.

Background

On January 2, 1997, the IRS published

in the Federal Register a notice of

proposed rulemaking (REG–209839–96,

1997–1 C.B. 780 [62 FR 72]) proposing

amendments to the Income Tax

Regulations (26 CFR part 1) under

section 832(b) of the Internal Revenue

Code. The IRS received a number of

written comments on the proposed

regulations. On April 30, 1997, the IRS

held a public hearing on the proposed

regulations. After consideration of all

written and oral comments regarding

the proposed regulations, those

regulations are adopted as revised by

this Treasury decision.

Explanation of Revisions and Summary

of Comments Underwriting Income

A non-life insurance company’s

underwriting income equals its

premiums earned on insurance

contracts during the taxable year less its

losses incurred on insurance contracts

and its expenses incurred.1 See section

832(b)(3). To compute premiums

earned, the company starts with the

gross premiums written on insurance

contracts during the taxable year,

subtracts return premiums and

premiums paid for reinsurance, and

makes an adjustment to reflect the

change in its unearned premiums over

the course of the taxable year. See

section 832(b)(4). This computation

results in premiums being recognized in

underwriting income over the term of

the insurance contract, rather than in

the taxable year in which the premiums

are billed or received from the

policyholder.

Prior to 1987, 100 percent of the

change in unearned premiums during

the taxable year was taken into account

as an increase or decrease to written

premiums in computing premiums

earned. This treatment ‘‘generally

reflect[ed]’’ the accounting conventions

(often referred to as ‘‘statutory

accounting principles’’) used to prepare

a non-life insurance company’s annual

statement for state insurance regulatory

purposes. See 2 H.R. Conf. Rep. No. 841,

99th Cong., 2d Sess. II–354 (1986),

1986–3 C.B. (Vol. 4) 354; S. Rep. No.

313, 99th Cong., 2d Sess. 495 (1986),

1986–3 C.B. (Vol. 3) 495, H.R. Rep. No.

426, 99th Cong., 1st Sess. 668 (1985),

1986–3 C.B. (Vol. 2) 668. Because

unearned premiums are computed on

the basis of the gross premiums for an

insurance contract, the amount of

unearned premiums reflects not only

the portion of the gross premium

allocable to future insurance claims but

also the portion allocable to the

insurance company’s expenses and

profit on the insurance contract.

In 1986, Congress determined that

deferring unearned premium income

and currently deducting premium

acquisition expenses attributable to

unearned premiums resulted in a

mismatch of an insurance company’s

net income and expense. Congress

decided to require a better measurement

of net income for Federal income tax

purposes. See H.R. Rep. No. 426, 1986–

3 C.B. (Vol. 2) at 669; S. Rep. No. 313,

1986–3 C.B. (Vol. 3) at 496. Rather than

defer the deduction for premium

acquisition expenses attributable to

unearned premiums, Congress reduced

by 20 percent the adjustment for

unearned premiums. For taxable years

beginning on or after January 1, 1993, a

non-life insurance company’s premiums

earned is an amount equal to: (1) its

gross premiums written, less both return

premiums and premiums paid for

reinsurance; plus (2) 80 percent of

unearned premiums at the end of the

prior taxable year, less 80 percent of

unearned premiums at the end of the

current taxable year. Section 832(b)(4).

The acceleration of income that is

typically generated by the 20 percent

reduction of unearned premiums is

intended to be roughly equivalent to

denying current deductibility for the

portion of the insurance company’s

premium acquisition expenses allocable

to the unearned premiums. See 2 H.R.

Conf. Rep. No. 841, 1986–3 C.B. (Vol. 4)

at 354–55; S. Rep. No. 313, 1986–3 C.B.

(Vol. 3) at 495–98; H.R. Rep. No. 426,

1986–3 C.B. (Vol. 2) at 668–70.

Role of the Annual Statement

The proposed regulations provide

definitions of the items used to

determine premiums earned under

section 832(b)(4) and timing rules for

taking these items into account for

Federal income tax purposes. The

treatment provided in the proposed

regulations would apply regardless of

the classification or method of reporting

the items used on an insurance

company’s annual statement.

Several comments questioned

whether there is legal authority to

require an insurance company to use a

method to calculate premiums earned

for Federal income tax purposes that

differs from the method that the

company is permitted to use to calculate

premiums earned on its annual

statement. As noted in the preamble to

the proposed regulations, the existing

regulations under § 1.832–4(a)(2) state

that the annual statement ‘‘* * *

insofar as it is not inconsistent with the

provisions of the Code * * *’’ will be

recognized and used as a basis for

computing the net income of a non-life

insurance company. Also, if statutory

accounting principles permit alternative

practices, one or more of which do not

clearly reflect income as defined by the

Code, the company is required for

Federal income tax purposes to use a

method that clearly reflects income.

Section 446(b) and § 1.446–1(a)(2).

Gross Premiums Written

The proposed regulations generally

define gross premiums written as the

total amounts payable for insurance

coverage under insurance or reinsurance

contracts issued or renewed during the

taxable year. The proposed regulations,

however, do not address situations

where the amounts charged for

insurance coverage may change due to

increases or decreases in coverage

limits, additions or deletions in

property or risks covered, changes in

location or status of insureds, or other

similar factors.

The final regulations define an

insurance company’s ‘‘gross premiums

written’’ on insurance contracts (which

includes premiums attributable to

reinsurance contracts) as amounts

payable for insurance coverage for the

effective periods of the contracts. The

label placed on a payment in a contract

does not determine whether an amount

is a gross premiums written. The

effective period of a contract is the

period over which one or more rates for

insurance coverage are guaranteed in

the contract. If a new rate for insurance

coverage is guaranteed after the effective

date of an insurance contract, the

making of the guarantee generally is

treated as the issuance of a new

insurance contract with an effective

period equal to the duration of the new

guaranteed rate for insurance coverage.

Under the final regulations, gross

premiums written include: (1)

Additional premiums resulting from

increases in risk exposure during the

effective period of an insurance

contract; (2) amounts subtracted from a

premium stabilization reserve that are

used to pay premiums; and (3)

consideration for assuming insurance

liabilities under contracts not issued by

the insurance company (that is, a

payment or transfer of property in an

assumption reinsurance transaction).

Federal Register / Vol. 65, No. 4 / Thursday, January 6, 2000 / Rules and Regulations 703

2Prior to 1989, advance premiums were required

to be reported in written premiums and unearned

premiums on a non-life insurance company’s

annual statement. However, statutory accounting

principles were later modified to permit advance

premiums to be accumulated in a suspense account

and reported as a write-in liability on the annual

statement. A company electing to use this

alternative treatment would not report advance

premiums in either written premiums or unearned

premiums on its annual statement until the

effective date of the underlying coverage.

Gross premiums written, however, do

not include other items of gross income

described in section 832(b)(1)(C). To the

extent that amounts paid or payable to

an insurance company with respect to

an arrangement are not gross premiums

written, the insurance company may not

treat amounts payable to customers with

respect to the applicable portion of such

arrangements as losses incurred

described in section 832(b)(5).

Method of Reporting Gross Premiums

Written

The proposed regulations provide that

a non-life insurance company reports

the full amount of gross premiums

written for an insurance contract for the

earlier of the taxable year which

includes the effective date of the

contract or the year in which all or a

portion of the premium for the contract

is received. A variety of comments were

received with respect to the application

of this timing rule to insurance contracts

with installment premiums. In response

to comments, the final regulations

provide a number of exceptions from

the general rule with respect to when an

insurance company reports gross

premiums written.

Advance Premiums

Under the proposed regulations, a

non-life insurance company that

receives a portion of the premium for an

insurance contract prior to the effective

date of the contract includes the full

amount of the premium in gross

premiums written for the taxable year

during which the portion of the

premium was received.

Several comments addressed the

treatment of advance premiums in the

proposed regulations. One comment

endorsed the proposed treatment of

advance premiums, noting that it is

proper under statutory accounting

principles to record the full amount of

gross premiums written and expenses

incurred with respect to a casualty

insurance policy for the year in which

an advance premium is received.2 Other

comments argued that since the

policyholder may demand a refund of

an advance premium prior to the

policy’s effective date, the company

should be permitted to treat an advance

premium as a nontaxable deposit until

such time as coverage begins under the

contract. Alternatively, these comments

urged that the company be permitted to

report only the advance premium

(rather than the entire gross premium

for the contract) in gross premiums

written for the taxable year of receipt,

and to report the remainder of the gross

premium for the taxable year that

includes the contract’s effective date.

These comments also indicated that

companies generally do not deduct the

full amount of premium acquisition

expenses for the contract in the taxable

year in which they receive advance

premiums.

In response to comments, the final

regulations permit an insurance

company that receives part of the gross

premium for an insurance contract prior

to the effective date of the contract to

report only the advance premium

(rather than the full amount of the gross

premium written for the contract) in

gross premiums written for the taxable

year of receipt. The remainder of the

gross premium for the insurance

contract is included in gross premiums

written for the taxable year which

includes the effective date of the

contract. This method of reporting gross

premiums written is available only if

the company’s deduction for premium

acquisition expenses attributable to the

contract does not exceed a limitation

specified in the regulations, which is

intended to ensure that a company does

not deduct premium acquisition

expenses attributable to an insurance

contract more rapidly than the company

includes premiums for the insurance

contract in its gross premiums written.

Companies that adopt this method of

reporting gross premiums written must

use this method for all insurance

contracts with advance premiums.

Accident and Health Insurance

Contracts

The proposed regulations have no

special rules for determining gross

premiums written with respect to

accident and health insurance contracts.

Several comments indicated that the

longstanding practice of insurance

companies that issue accident and

health insurance contracts with

installment premiums is to include

amounts in gross premiums written for

the taxable year in which the

installment premiums become due

under the contracts. These comments

also stated that companies generally do

not deduct premium acquisition

expenses allocable to installment

premiums not yet due or received with

respect to accident and health insurance

contracts.

In response to comments, the final

regulations permit a non-life insurance

company that either issues or

proportionally reinsures cancellable

accident and health insurance contracts

with installment premiums to report the

installment premiums in gross

premiums written for the earlier of the

taxable year in which the installment

premiums become due under the terms

of the contract or the taxable year in

which the installment premiums are

received. This method of reporting gross

premiums written for cancellable

accident and health insurance contracts

with installment premiums is available

only if the company’s deduction for

premium acquisition expenses

attributable to those contracts does not

exceed the matching limitation

specified in the regulations. Companies

that adopt this method of reporting

gross premiums written must use it for

all cancellable accident and health

insurance contracts with installment

premiums.

Multi-year Contracts With Installment

Premiums

The final regulations also provide an

exception with respect to the reporting

of gross premiums written for a multiyear insurance contract for which the

gross premium is payable in

installments over the effective period of

the contract. Under the final regulations,

a company may treat this type of multiyear insurance contract as a series of

separate insurance contracts. The first

insurance contract in the series will be

treated as having an effective period of

12 months. Subsequent insurance

contracts in the series will be treated as

having an effective period equal to the

lesser of 12 months or the remainder of

the period for which the rates for

insurance coverage are guaranteed in

the multi-year insurance contract. This

method of reporting gross premium

written for a multi-year insurance

contract with installment premiums is

available only if the company’s

deduction for premium acquisition

expenses attributable to the contract

does not exceed the matching limitation

specified in the regulations. Companies

that adopt this method of reporting

gross premiums written for a multi-year

insurance contract must use it for all

multi-year contracts with installment

premiums.

Contracts That Give Rise to Life

Insurance Reserves

Some insurance companies that are

taxable under Part II of Subchapter L

704 Federal Register / Vol. 65, No. 4 / Thursday, January 6, 2000 / Rules and Regulations

3Under section 848(e)(5), a contract that reinsures

a contract subject to section 848 is treated in the

same manner as the reinsured contract.

issue or reinsure risks relating to

guaranteed renewable accident and

health insurance contracts or other

contracts that give rise to ‘‘life insurance

reserves’’ (as defined in section 816(b)).

For these companies, section 832(b)(4)

provides that unearned premiums

includes the amount of the company’s

life insurance reserves, as determined

under section 807. However, under

section 832(b)(7), the unearned

premiums for contracts giving rise to life

insurance reserves are not reduced by

20 percent. Instead, an amount of

otherwise deductible expenses equal to

a percentage of the net premiums for the

contracts must be capitalized and

amortized as specified policy

acquisition expenses under section

848.3 For purposes of determining the

amount of specified policy acquisition

expenses under section 848, a non-life

insurance company computes net

premiums for the contracts in

accordance with section 811(a). See

section 848(d)(2). Thus, with respect to

contracts described in section 832(b)(7),

a non-life insurance company does not

take into account unpaid premiums

attributable to insurance coverage not

yet provided (such as deferred and

uncollected premium installments) in

determining the amount of specified

policy acquisition expenses required to

be amortized under section 848.

The proposed regulations do not

provide special rules for determining

gross premiums written with respect to

contracts described in section 832(b)(7).

Under the final regulations, a non-life

insurance company that issues or

reinsures the risks related to a contract

described in section 832(b)(7) may

report gross premiums written for the

contract in the manner required for life

insurance companies under sections 803

and 811. This method of reporting gross

premiums written for contracts

described in section 832(b)(7) is

available only if the company also

determines its deduction for premium

acquisition expenses for the contracts in

accordance with section 811(a), as

adjusted by the amount required to be

amortized under section 848 based on

the net premiums of the contracts. Thus,

the final regulations ensure that the

rules for determining premium income

and amortizing premium acquisition

expenses for contracts described in

section 832(b)(7) operate consistently,

whether the issuing company is a nonlife insurance company or a life

insurance company.

Fluctuating Risk Contracts

The method of reporting gross

premiums written for certain insurance

contracts covering fluctuating risks is

reserved in the proposed regulations.

Some comments requested that the final

regulations not address the method of

reporting gross premiums written for

insurance contracts covering fluctuating

risks, noting that the method of

recording gross written premiums for

these policies for annual statement

reporting purposes was being

considered by the NAIC as part of its

project to codify statutory accounting

principles. Subsequently, the NAIC

issued guidance permitting an insurance

company for annual statement purposes

to report written premiums on workers’

compensation policies (but not on other

casualty contracts involving

‘‘fluctuating risks,’’ such as commercial

automobile liability and product

liability policies) either on the effective

date of the insurance contract or based

on installment billings to the

policyholder. By contrast, with respect

to other types of casualty insurance

policies, the NAIC reaffirmed the

general rule that gross premiums with

respect to these policies must be

recorded on the annual statement on the

effective date of the insurance contract.

The final regulations do not permit a

non-life insurance company to report

gross premiums written for a fluctuating

risk contract based on installment

billings to the policyholder. Rather, the

final regulations require a company

generally to report the gross premiums

written for the contract for the earlier of

the taxable year which includes the

effective date of the contract or the year

in which all or a portion of the premium

for the contract is received, with special

rules for advance premiums, cancellable

accident and health contracts, multiyear insurance contracts, and contracts

described in section 832(b)(7). The

company reports any additional

premiums resulting from an increase in

risk exposure in gross premiums written

for the taxable year in which the change

in risk exposure occurs. Unless the

increase in risk exposure is of temporary

duration, the company determines the

additional premium resulting from a

change in risk exposure based on the

remainder of the effective period of the

contract.

Return Premiums

The proposed regulations define

return premiums as amounts (other than

policyholder dividends or claims and

benefit payments) paid or credited to

the policyholder in accordance with the

terms of an insurance contract. Under

the final regulations, return premiums

are amounts previously included in an

insurance company’s gross premiums

written, which are refundable to the

policyholder (or the ceding company

with respect of a reinsurance agreement)

if the amounts are fixed by the

insurance contract and do not depend

on the experience of the insurance

company or the discretion of its

management. This rule incorporates a

specific definition of policyholder

dividends.

The final regulations list a number of

items which are included in return

premiums, to the extent they have

previously been included in gross

premiums written. These items include:

(1) amounts that are refundable due to

policy cancellations or decreases in risk

exposure during the effective period of

an insurance contract; (2) the unearned

portion of unpaid premiums for an

insurance contract that is canceled or

for which there is a decrease in risk

exposure during its effective period; and

(3) amounts that are either refundable or

that reflect the unearned portion of

unpaid premiums for an insurance

contract, arising from the

redetermination of the premium due to

correction of posting or other similar

errors.

In addition, the final regulation

provides timing rules for the deduction

of return premiums. If a contract is

canceled, the return premium arising

from that cancellation is deducted in the

taxable year in which the contract is

canceled. If there is a reduction in risk

exposure under an insurance contract

that gives rise to a return premium, such

return premium is deductible in the

taxable year in which the reduction in

risk exposure occurs.

Retrospectively Rated Insurance

Contracts

The proposed regulations provide that

gross written premiums include an

insurance company’s estimate of

additional premiums (retro debits) to be

received with regard to the expired

portion of a retrospectively rated

insurance or reinsurance contract. The

proposed regulations also provide that

return premiums include an insurance

company’s estimate of amounts to be

refunded to policyholders (retro credits)

with regard to the expired portion of a

retrospectively rated insurance or

reinsurance contract. The proposed

regulations, therefore, would modify the

treatment of retro credits under § 1.832–

4(a)(3)(ii) of the existing regulations,

which treat retro credits as unearned

premiums. At the option of the

taxpayer, however, the proposed

Federal Register / Vol. 65, No. 4 / Thursday, January 6, 2000 / Rules and Regulations 705

4 In Rev. Rul. 97–5, 1997–1 C.B. 136, the Service

revoked Rev. Rul. 70–480, 1970–2 C.B. 142, which

had held that amounts held by a non-life insurance

company in a premium stabilization reserve funded

by retro credits are not unearned premiums under

section 832(b)(4). Rev. Rul. 97–5 reasoned that the

assumption in Rev. Rul. 70–480 that stabilization

reserves are part of the insurance company’s

surplus was erroneous.

regulations permit a company to

continue to include gross retro credits

(but not gross retro debits) in the

amount of unearned premiums subject

to the 20 percent reduction under

section 832(b)(4)(B).

A variety of comments were received

with respect to the treatment of retro

debits and retro credits in the proposed

regulations. Most comments approved

of the proposed rule to modify the

treatment of retro credits in § 1.832–

4(a)(3)(ii) and, instead, to permit retro

credits to be accounted for as part of

return premiums. Some comments

contended, however, that the method of

netting retro debits and retro credits as

an adjustment to unearned premiums

was required under NAIC accounting

rules, prior case law, and the Service’s

published rulings interpreting § 1.832–

4(a)(3)(ii). These comments argued that

the enactment of the 20 percent

reduction rule in 1986 did not authorize

the Service to change the items included

in unearned premiums, including the

historical treatment of retro debits and

retro credits as part of unearned

premiums. Other comments contended

that retro debits (but not retro credits)

should be discounted using the

applicable discount factors for unpaid

losses under section 846. These

comments argued that there is a direct

correlation between amounts reported

by an insurance company as retro debits

and the company’s related liabilities for

unpaid losses and unpaid loss

adjustment expenses. Therefore, the

comments urged that, to achieve proper

matching of these items, a non-life

insurance company should be permitted

either to report retro debits as a

subtraction from unearned premiums or

to discount the retro debits using the

applicable discount factors under

section 846 for the related line of

business.

The treatment of retro debits and retro

credits in the proposed regulations was

premised on the assumptions that

retrospectively rated arrangements

could qualify as insurance contracts for

tax purposes, and that all amounts

payable under such arrangements could

be considered to have been paid for

insurance coverage. The final

regulations provide that gross premiums

are amounts paid for insurance

coverage. Similarly, unearned premiums

and return premiums only include

amounts included in gross written

premiums. The final regulations also

provide that retro credits are not

included in unearned premiums, and

retro debits cannot be subtracted from

unearned premiums. The final

regulations do not permit amounts

includable in gross premiums written to

be discounted, regardless of when such

amounts are paid to the insurance

company.

The final regulations do not provide

any inference as to whether some or all

of a retrospective arrangement can

qualify as an insurance contract, or as to

whether or the extent to which amounts

paid or payable to an insurance

company with respect to a retrospective

arrangement are for insurance coverage.

Premium Stabilization Reserves

Several comments asked for

clarification of the treatment of

premium stabilization reserves.4 As

noted below, the final regulations

provide that retro credits are not

unearned premiums for Federal income

tax purposes. Thus, retro credits added

to premium stabilization reserves are

not unearned premiums for Federal

income tax purposes. The final

regulations also provide that amounts

withdrawn from a premium

stabilization reserve to pay premiums

are included in gross premiums written

for the taxable year in which these

amounts are withdrawn from the

stabilization reserve for that purpose.

Unearned Premiums

The proposed regulations define

unearned premiums as the portion of

the gross premiums written that is

attributable to future insurance coverage

to be provided under an insurance or

reinsurance contract. The final

regulations generally retain the rules

relating to unearned premiums.

Consistent with the existing regulations

under § 1.801–4(a), the final regulations

provide that an insurance company

must exclude from unearned premiums

amounts attributable to the net value of

risks reinsured with, or retroceded to,

another insurance company. The final

regulations also provide that unearned

premiums do not include a liability

established by an insurance company on

its annual statement to cover premium

deficiencies.

The proposed regulations provide that

an insurance company may consider the

incidence or pattern of the insured risks

in determining the portion of the gross

premium written that is attributable to

the unexpired portion of the insurance

coverage. The final regulations clarify

that, if the risk of loss under an

insurance contract does not vary

significantly over the effective period of

the contract, the unearned premium

attributable to the unexpired portion of

the effective period of the contract is

determined on a pro rata basis.

However, if the risk of loss under an

insurance contract varies significantly

over the effective period of the contract,

the insurance company may consider

the pattern and incidence of the risk in

determining the portion of gross

premium which are attributable to the

unexpired portion of the effective

period of the contract, provided that the

company maintains sufficient

information to demonstrate that its

method of computing unearned

premiums accurately reflects the pattern

and incidence of the risk for the

insurance contract.

Effective Date and Transition Rules

Under the proposed regulations, the

new rules apply to the determination of

premiums earned for insurance

contracts issued or renewed during

taxable years beginning after the date on

which final regulations are published in

the Federal Register. Several comments

requested that the regulations permit an

insurance company to adopt the new

rules for determining premiums earned

as a change in method of accounting

deemed made with the Commissioners’

consent, with audit protection for prior

years. These comments also urged that

the insurance company be given the

option of either implementing the

change in method of accounting on a

cut-off basis or spreading the section

481(a) adjustments resulting from the

change over a number of years

consistent with the Commissioner’s

general administrative procedures when

a taxpayer files a request to change a

method of accounting under section

446(e).

In response to these comments, the

final regulations permit taxpayers to

change their method of accounting for

determining premiums earned to

comply with the final regulations under

the automatic change in method of

accounting provisions of Rev. Proc. 99–

49, 1999–52 I.R.B. 725, subject to certain

limitations. A taxpayer makes the

automatic change in method of

accounting on its Federal income tax

return for the first taxable year

beginning after December 31, 1999. The

scope limitations in section 4.02 of Rev.

Proc. 99–49 do not apply to a taxpayer’s

automatic change in method of

accounting pursuant to this regulation.

The timely duplicate filing requirement

in section 6.02 of Rev. Proc. 99–49 also

706 Federal Register / Vol. 65, No. 4 / Thursday, January 6, 2000 / Rules and Regulations

does not apply to this change. If the

taxpayer’s method of computing earned

premiums was an issue under

consideration (within the meaning of

section 3.09 of Rev. Proc. 99–49) on

January 5, 2000, however, then the audit

protection rule in section 7.01 of Rev.

Proc. 99–49 does not apply to the

taxpayer’s change in method of

accounting.

Special Analyses

It has been determined that this

Treasury Decision is not a significant

regulatory action as defined in

Executive Order 12866. Therefore, a

regulatory assessment is not required. It

also has been determined that section

553(b) of the Administrative Procedure

Act (5 U.S.C. chapter 5) does not apply

to these regulations, and, because these

regulations do not impose on small

entities a collection of information

requirement, the Regulatory Flexibility

Act (5 U.S.C. chapter 6) does not apply.

Therefore, a Regulatory Flexibility

Analysis is not required. Pursuant to

section 7805(f) of the Internal Revenue

Code, the notice of proposed rulemaking

preceding these regulations was

submitted to the Chief Counsel for

Advocacy of the Small Business

Administration for comment on its

impact on small business.

Drafting Information. The principal

author of these regulations is Gary

Geisler, Office of the Assistant Chief

Counsel (Financial Institutions and

Products), IRS. However, other

personnel from the IRS and Treasury

Department participated in their

development.

Adoption of Amendments to the

Regulations

Accordingly, 26 CFR part 1 is

amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation

for part 1 continues to read in part as

follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 1.832–4 is amended as

follows:

1. Paragraph (a)(3) is revised.

2. Paragraphs (a)(4) and (a)(5) are

redesignated as paragraphs (a)(13) and

(a)(14).

3. New paragraphs (a)(4) through

(a)(12) are added.

The additions and revisions read as

follows:

§ 1.832–4 Gross income.

(a) * * *

(3) Premiums earned. The

determination of premiums earned on

insurance contracts during the taxable

year begins with the insurance

company’s gross premiums written on

insurance contracts during the taxable

year, reduced by return premiums and

premiums paid for reinsurance. Subject

to the exceptions in sections 832(b)(7),

832(b)(8), and 833(a)(3), this amount is

increased by 80 percent of the unearned

premiums on insurance contracts at the

end of the preceding taxable year, and

is decreased by 80 percent of the

unearned premiums on insurance

contracts at the end of the current

taxable year.

(4) Gross premiums written—(i) In

general. Gross premiums written are

amounts payable for insurance coverage.

The label placed on a payment in a

contract does not determine whether an

amount is a gross premium written.

Gross premiums written do not include

other items of income described in

section 832(b)(1)(C) (for example,

charges for providing loss adjustment or

claims processing services under

administrative services or cost-plus

arrangements). Gross premiums written

on an insurance contract include all

amounts payable for the effective period

of the insurance contract. To the extent

that amounts paid or payable with

respect to an arrangement are not gross

premiums written, the insurance

company may not treat amounts payable

to customers under the applicable

portion of such arrangements as losses

incurred described in section 832(b)(5).

(ii) Items included. Gross premiums

written include—

(A) Any additional premiums

resulting from increases in risk exposure

during the effective period of an

insurance contract;

(B) Amounts subtracted from a

premium stabilization reserve to pay for

insurance coverage; and

(C) Consideration in respect of

assuming insurance liabilities under

insurance contracts not issued by the

taxpayer (such as a payment or transfer

of property in an assumption

reinsurance transaction).

(5) Method of reporting gross

premiums written—(i) In general.

Except as otherwise provided under this

paragraph (a)(5), an insurance company

reports gross premiums written for the

earlier of the taxable year that includes

the effective date of the insurance

contract or the year in which the

company receives all or a portion of the

gross premium for the insurance

contract. The effective date of the

insurance contract is the date on which

the insurance coverage provided by the

contract commences. The effective

period of an insurance contract is the

period over which one or more rates for

insurance coverage are guaranteed in

the contract. If a new rate for insurance

coverage is guaranteed after the effective

date of an insurance contract, the

making of such a guarantee generally is

treated as the issuance of a new

insurance contract with an effective

period equal to the duration of the new

guaranteed rate for insurance coverage.

(ii) Special rule for additional

premiums resulting from an increase in

risk exposure. An insurance company

reports additional premiums that result

from an increase in risk exposure during

the effective period of an insurance

contract in gross premiums written for

the taxable year in which the change in

risk exposure occurs. Unless the

increase in risk exposure is of temporary

duration (for example, an increase in

risk exposure under a workers’

compensation policy due to seasonal

variations in the policyholder’s payroll),

the company reports additional

premiums resulting from an increase in

risk exposure based on the remainder of

the effective period of the insurance

contract.

(iii) Exception for certain advance

premiums. If an insurance company

receives a portion of the gross premium

for an insurance contract prior to the

first day of the taxable year that

includes the effective date of the

contract, the company may report the

advance premium (rather than the full

amount of the gross premium for the

contract) in gross premiums written for

the taxable year in which the advance

premium is received. An insurance

company may adopt this method of

reporting advance premiums only if the

company’s deduction for premium

acquisition expenses for the taxable year

in which the company receives the

advance premium does not exceed the

limitation of paragraph (a)(5)(vii) of this

section. A company that reports an

advance premium in gross premiums

written under this paragraph (a)(5)(iii)

takes into account the remainder of the

gross premium written and premium

acquisition expenses for the contract in

the taxable year that includes the

effective date of the contract. A

company that adopts this method of

reporting advance premiums must use

the method for all contracts with

advance premiums.

(iv) Exception for certain cancellable

accident and health insurance contracts

with installment premiums. If an

insurance company issues or

proportionally reinsures a cancellable

accident and health insurance contract

Federal Register / Vol. 65, No. 4 / Thursday, January 6, 2000 / Rules and Regulations 707

(other than a contract with an effective

period that exceeds 12 months) for

which the gross premium is payable in

installments over the effective period of

the contract, the company may report

the installment premiums (rather than

the total gross premium for the contract)

in gross premiums written for the earlier

of the taxable year in which the

installment premiums are due under the

terms of the contract or the year in

which the installment premiums are

received. An insurance company may

adopt this method of reporting

installment premiums for a cancellable

accident and health insurance contract

only if the company’s deduction for

premium acquisition expenses for the

first taxable year in which an

installment premium is due or received

under the contract does not exceed the

limitation of paragraph (a)(5)(vii) of this

section. A company that adopts this

method of reporting installment

premiums for a cancellable accident and

health contract must use the method for

all of its cancellable accident and health

insurance contracts with installment

premiums.

(v) Exception for certain multi-year

insurance contracts. If an insurance

company issues or proportionally

reinsures an insurance contract, other

than a contract described in paragraph

(a)(5)(vi) of this section, with an

effective period that exceeds 12 months,

for which the gross premium is payable

in installments over the effective period

of the contract, the company may treat

the insurance coverage provided under

the multi-year contract as a series of

separate insurance contracts. The first

contract in the series is treated as having

been written for an effective period of

twelve months. Each subsequent

contract in the series is treated as having

been written for an effective period

equal to the lesser of 12 months or the

remainder of the period for which the

rates for insurance coverage are

guaranteed in the multi-year insurance

contract. An insurance company may

adopt this method of reporting

premiums on a multi-year contract only

if the company’s deduction for premium

acquisition expenses for each year of the

multi-year contract does not exceed the

limitation of paragraph (a)(5)(vii) of this

section. A company that adopts this

method of reporting premiums for a

multi-year contract must use the method

for all multi-year contracts with

installment premiums.

(vi) Exception for insurance contracts

described in section 832(b)(7). If an

insurance company issues or reinsures

the risks related to a contract described

in section 832(b)(7), the company may

report gross premiums written for the

contract in the manner required by

sections 803 and 811(a) for life

insurance companies. An insurance

company may adopt this method of

reporting premiums on contracts

described in section 832(b)(7) only if the

company also determines the deduction

for premium acquisition costs for the

contract in accordance with section

811(a), as adjusted by the amount

required to be taken into account under

section 848 in connection with the net

premiums of the contract. A company

that adopts this method of reporting

premiums for a contract described in

section 832(b)(7) must use the method

for all of its contracts described in that

section.

(vii) Limitation on deduction of

premium acquisition expenses. An

insurance company’s deduction for

premium acquisition expenses (for

example, commissions, state premium

taxes, overhead reimbursements to

agents or brokers, and other similar

amounts) related to an insurance

contract is within the limitation of this

paragraph (a)(5)(vii) if—

(A) The ratio obtained by dividing the

sum of the company’s deduction for

premium acquisition expenses related to

the insurance contract for the taxable

year and previous taxable years by the

total premium acquisition expenses

attributable to the insurance contract;

does not exceed

(B) The ratio obtained by dividing the

sum of the amounts included in gross

premiums written with regard to the

insurance contract for the taxable year

and previous taxable years by the total

gross premium written for the insurance

contract.

(viii) Change in method of reporting

gross premiums. An insurance company

that adopts a method of accounting for

gross premiums written and premium

acquisition expenses described in

paragraph (a)(5)(iii), (iv), (v), or (vi) of

this section must continue to use the

method to report gross premiums

written and premium acquisition

expenses unless the company obtains

the consent of the Commissioner to

change to a different method under

section 446(e) and § 1.446–1(e).

(6) Return premiums—(i) In general.

An insurance company’s liability for

return premiums includes amounts

previously included in an insurance

company’s gross premiums written,

which are refundable to a policyholder

or ceding company, provided that the

amounts are fixed by the insurance

contract and do not depend on the

experience of the insurance company or

the discretion of its management.

(ii) Items included. Return premiums

include amounts—

(A) Which were previously paid and

become refundable due to policy

cancellations or decreases in risk

exposure during the effective period of

an insurance contract;

(B) Which reflect the unearned

portion of unpaid premiums for an

insurance contract that is canceled or

for which there is a decrease in risk

exposure during its effective period; or

(C) Which are either previously paid

and refundable or which reflect the

unearned portion of unpaid premiums

for an insurance contract, arising from

the redetermination of a premium due

to correction of posting or other similar

errors.

(7) Method of reporting return

premiums. An insurance company

reports the liability for a return

premium resulting from the cancellation

of an insurance contract for the taxable

year in which the contract is canceled.

An insurance company reports the

liability for a return premium

attributable to a reduction in risk

exposure under an insurance contract

for the taxable year in which the

reduction in risk exposure occurs.

(8) Unearned premiums—(i) In

general. The unearned premium for a

contract, other than a contract described

in section 816(b)(1)(B), generally is the

portion of the gross premium written

that is attributable to future insurance

coverage during the effective period of

the insurance contract. However,

unearned premiums held by an

insurance company with regard to the

net value of risks reinsured with other

solvent companies (whether or not

authorized to conduct business under

state law) are subtracted from the

company’s unearned premiums.

Unearned premiums also do not include

any additional liability established by

the insurance company on its annual

statement to cover premium

deficiencies. Unearned premiums do

not include an insurance company’s

estimate of its liability for amounts to be

paid or credited to a customer with

regard to the expired portion of a

retrospectively rated contract (retro

credits). An insurance company’s

estimate of additional amounts payable

by its customers with regard to the

expired portion of a retrospectively

rated contract (retro debits) cannot be

subtracted from unearned premiums.

(ii) Special rules for unearned

premiums. For purposes of computing

‘‘premiums earned on insurance

contracts during the taxable year’’ under

section 832(b)(4), the amount of

unearned premiums includes—

708 Federal Register / Vol. 65, No. 4 / Thursday, January 6, 2000 / Rules and Regulations

(A) Life insurance reserves (as defined

in section 816(b), but computed in

accordance with section 807(d) and

sections 811(c) and (d));

(B) In the case of a mutual flood or

fire insurance company described in

section 832(b)(1)(D) (with respect to

contracts described in that section), the

amount of unabsorbed premium

deposits that the company would be

obligated to return to its policyholders

at the close of the taxable year if all its

insurance contracts were terminated at

that time;

(C) In the case of an interinsurer or

reciprocal underwriter that reports

unearned premiums on its annual

statement net of premium acquisition

expenses, the unearned premiums on

the company’s annual statement

increased by the portion of premium

acquisition expenses allocable to those

unearned premiums; and

(D) In the case of a title insurance

company, its discounted unearned

premiums (computed in accordance

with section 832(b)(8)).

(9) Method of determining unearned

premiums. If the risk of loss under an

insurance contract does not vary

significantly over the effective period of

the contract, the unearned premium

attributable to the unexpired portion of

the effective period of the contract is

determined on a pro rata basis. If the

risk of loss varies significantly over the

effective period of the contract, the

insurance company may consider the

pattern and incidence of the risk in

determining the portion of the gross

premium that is attributable to the

unexpired portion of the effective

period of the contract. An insurance

company that uses a method of

computing unearned premiums other

than the pro rata method must maintain

sufficient information to demonstrate

that its method of computing unearned

premiums accurately reflects the pattern

and incidence of the risk for the

insurance contract.

(10) Examples. The provisions of

paragraphs (a)(4) through (a)(9) of this

section are illustrated by the following

examples:

Example 1. (i) IC is a non-life insurance

company which, pursuant to section 843,

files its returns on a calendar year basis. IC

writes a casualty insurance contract that

provides insurance coverage for a one-year

period beginning on July 1, 2000 and ending

on June 30, 2001. IC charges a $500 premium

for the insurance contract, which may be

paid either in full by the effective date of the

contract or in quarterly installments over the

contract’s one year term. The policyholder

selects the installment payment option. As of

December 31, 2000, IC collected $250 of

installment premiums for the contract.

(ii) The effective period of the insurance

contract begins on July 1, 2000 and ends on

June 30, 2001. For the taxable year ending

December 31, 2000, IC includes the $500

gross premium, based on the effective period

of the contract, in gross premiums written

under section 832(b)(4)(A). IC’s unearned

premium with respect to the contract was

$250 as of December 31, 2000. Pursuant to

section 832(b)(4)(B), to determine its

premiums earned, IC deducts $200 ($250 x

.8) for the insurance contract at the end of the

taxable year.

Example 2. (i) The facts are the same as

Example 1, except that the insurance contract

has a stated term of 5 years. On each contract

anniversary date, IC may adjust the rate

charged for the insurance coverage for the

succeeding 12 month period. The amount of

the adjustment in the charge for insurance

coverage is not substantially limited under

the insurance contract.

(ii) Under paragraph (a)(5)(i) of this

section, IC is required to report gross

premiums written for the insurance contract

based on the effective period for the contract.

The effective period of the insurance contract

is the period for which a rate for insurance

coverage is guaranteed in the contract.

Although the insurance contract issued by IC

has a stated term of 5 years, a rate for

insurance coverage is guaranteed only for a

period of 12 months beginning with the

contract’s effective date and each anniversary

date thereafter. Thus, for the taxable year

ending December 31, 2000, IC includes the

$500 gross premium for the 12 month period

beginning with the contract’s effective date in

gross premiums written. IC’s unearned

premium with respect to the contract was

$250 as of December 31, 2000. Pursuant to

section 832(b)(4)(B), to determine its

premiums earned, IC deducts $200 ($250 x

.8) for the insurance contract at the end of the

taxable year.

Example 3. (i) The facts are the same as

Example 1, except that coverage under the

insurance contract begins on January 1, 2001

and ends on December 31, 2001. On

December 15, 2000, IC collects the first $125

premium installment on the insurance

contract. For the taxable year ended

December 31, 2000, IC deducts $20 of

premium acquisition expenses related to the

insurance contract. IC’s total premium

acquisition expenses, based on the insurance

contract’s $500 gross premium, are $80.

(ii) Under paragraph (a)(5)(iii) of this

section, IC may elect to report only the $125

advance premium (rather than the contract’s

$500 gross premium) in gross premiums

written for the taxable year ended December

31, 2000, provided that IC’s deduction for the

premium acquisition expenses related to the

insurance contract does not exceed the

limitation in paragraph (a)(5)(vii). IC’s

deduction for premium acquisition expenses

is within this limitation only if the ratio of

the insurance contract’s premium acquisition

expenses deducted for the taxable year and

any previous taxable year to the insurance

contract’s total premium acquisition

expenses does not exceed the ratio of the

amounts included in gross premiums written

for the taxable year and any previous taxable

year for the contract to the total gross

premium written for the contract.

(iii) For the taxable year ended December

31, 2000, IC deducts $20 of premium

acquisition expenses related to the insurance

contract. This deduction represents 25% of

the total premium acquisition expenses for

the insurance contract ($20/$80 = 25%). This

ratio does not exceed the ratio of the $125

advance premium to the insurance contract’s

$500 gross premium ($125/$500 = 25%).

Therefore, under paragraph (a)(5)(iii) of this

section, IC may elect to report only the $125

advance premium (rather than the $500 gross

premium) in gross premiums written for the

taxable year ending December 31, 2000. IC

reports the balance of the gross premium for

the insurance contract ($375) and deducts the

remaining premium acquisition expenses

($60) for the insurance contract in the taxable

year ending December 31, 2001.

Example 4. (i) The facts are the same as

Example 3, except that for the taxable year

ending December 31, 2000, IC deducts $60 of

premium acquisition expenses related to the

insurance contract.

(ii) For the taxable year ended December

31, 2000, IC deducted 75% of total premium

acquisition expenses for the insurance

contract ($60/$80 = 75%). This ratio exceeds

the ratio of the $125 advance premium to the

$500 gross premium ($125/$500 = 25%).

Because IC’s deduction for premium

acquisition expenses allocable to the contract

exceeds the limitation in paragraph (a)(5)(vii)

of this section, paragraph (a)(5)(i) of this

section requires IC to report the $500 gross

premium in gross premiums written for the

taxable year ending December 31, 2000. IC’s

unearned premium with respect to the

contract was $500 as of December 31, 2000.

Pursuant to section 832(b)(4)(B), to determine

its premiums earned, IC deducts $400

($500 × .8) for the insurance contract at the

end of the taxable year.

Example 5. (i) IC is a non-life insurance

company which, pursuant to section 843,

files its returns on a calendar year basis. On

August 1, 2000, IC issues a one-year

cancellable accident and health insurance

policy to X, a corporation with 80 covered

employees. The gross premium written for

the insurance contract is $320,000. Premiums

are payable in monthly installments. As of

December 31, 2000, IC has collected $150,000

of installment premiums from X. For the

taxable year ended December 31, 2000, IC has

paid or incurred $21,000 of premium

acquisition expenses related to the insurance

contract. IC’s total premium acquisition

expenses for the insurance contract, based on

the $320,000 gross premium, are $48,000.

(ii) Under paragraph (a)(5)(iv) of this

section, IC may elect to report only the

$150,000 of installment premiums (rather

than the $320,000 estimated gross premium)

in gross premiums written for the taxable

year ended December 31, 2000, provided that

its deduction for premium acquisition

expenses allocable to the insurance contract

does not exceed the limitation in paragraph

(a)(5)(vii). For the taxable year ended

December 31, 2000, IC deducts $21,000 of

premium acquisition expenses related to the

insurance contract, or 43.75% of total

premium acquisition expenses for the

insurance contract ($21,000/

$48,000 = 43.75%). This ratio does not exceed

Federal Register / Vol. 65, No. 4 / Thursday, January 6, 2000 / Rules and Regulations 709

the ratio of installment premiums to the gross

premium for the contract ($150,000/

$320,000 = 46.9%). Therefore, under

paragraph (a)(5)(iv) of this section, IC may

elect to report only $150,000 of installment

premiums for the insurance contract (rather

than $320,000 of gross premium) in gross

premiums written for the taxable year ending

December 31, 2000.

Example 6. (i) IC is a non-life insurance

company which, pursuant to section 843,

files its returns on a calendar year basis. On

July 1, 2000, IC issues a one-year workers’

compensation policy to X, an employer. The

gross premium for the policy is determined

by applying a monthly rate of $25 to each of

X’s employees. This rate is guaranteed for a

period of 12 months, beginning with the

effective date of the contract. On July 1, 2000,

X has 1,050 employees. Based on the

assumption that X’s payroll would remain

constant during the effective period of the

contract, IC determines an estimated gross

premium for the contract of $315,000

(1,050 × $25 × 12 = $315,000). The estimated

gross premium is payable by X in equal

monthly installments. At the end of each

calendar quarter, the premiums payable

under the contract are adjusted based on an

audit of X’s actual payroll during the

preceding three months of coverage.

(ii) Due to an expansion of X’s business in

2000, the actual number of employees

covered under the contract during each

month of the period between July 1, 2000 and

December 31, 2000 is 1,050 (July), 1,050

(August), 1,050 (September), 1,200 (October),

1,200 (November), and 1,200 (December).

The increase in the number of employees

during the year is not attributable to a

temporary or seasonal variation in X’s

business activities and is expected to

continue for the remainder of the effective

period of the contract.

(iii) Under paragraph (a)(5)(i) of this

section, IC is required to report gross

premiums written for the insurance contract

based on the effective period of the contract.

The effective period of X’s contract is based

on the 12 month period for which IC has

guaranteed rates for insurance coverage.

Under paragraph (a)(5)(ii), IC must also

report the additional premiums resulting

from the change in risk exposure under the

contract for the taxable year in which the

change in such exposure occurs. Unless the

change in risk exposure is of temporary

duration, the additional gross premiums are

included in gross premiums written for the

remainder of the effective period of the

contract. Thus, for the taxable year ending

December 31, 2000, IC reports gross

premiums written of $348,750 with respect to

the workers’ compensation contract issued to

X, consisting of the sum of the initial gross

premium for the contract ($315,000) plus the

additional gross premium attributable to the

150 employees added to X’s payroll who will

be covered during the last nine months of the

contract’s effective period (150 × $25

(monthly premium) × 9 = $33,750). IC’s

unearned premium with respect to the

contract was $180,000 as of December 31,

2000, which consists of the sum of the

remaining portion of the original gross

premium ($315,000 × 6/12 = $157,500), plus

the additional premiums resulting from the

change in risk exposure ($33,750 × 6/

9 = $22,500) that are allocable to the

remaining six months of the contract’s

effective period. Pursuant to section

832(b)(4)(B), to determine its premiums

earned, IC deducts $144,000 ($180,000 × .8)

for the insurance contract at the end of the

taxable year.

Example 7. (i) The facts are the same as

Example 6, except that the increase in the

number of X’s employees for the period

ending December 31, 2000 is attributable to

a seasonal variation in X’s business activity.

(ii) Under paragraph (a)(5)(ii) of this

section, for the taxable year ending December

31, 2000, IC reports gross premiums written

of $326,500, consisting of the sum of the

initial gross premium for the contract

($315,000) plus the additional premium

attributable to the temporary increase in risk

exposure during the taxable year

(150 × $25 × 3 = $11,250). The unearned

premium that is allocable to the remaining

six months of the effective period of the

contract is $157,500. Pursuant to section

832(b)(4)(B), to determine its premiums

earned, IC deducts $126,000 ($157,500 × .8)

for the insurance contract at the end of the

taxable year.

Example 8. (i) IC, a non-life insurance

company, issues a noncancellable accident

and health insurance contract (other than a

qualified long-term care insurance contract,

as defined in section 7702B(b)) to A, an

individual, on July 1, 2000. The contract has

an entry-age annual premium of $2,400,

which is payable by A in equal monthly

installments of $200 on the first day of each

month of coverage. IC incurs agents’

commissions, premium taxes, and other

premium acquisition expenses equal to 10%

of the gross premiums received for the

contract. As of December 31, 2000, IC has

collected $1,200 of installment premiums for

the contract.

(ii) A noncancellable accident and health

insurance contract is a contract described in

section 832(b)(7). Thus, under paragraph

(a)(5)(vi) of this section, IC may report gross

premiums written in the manner required for

life insurance companies under sections 803

and 811. Accordingly, for the taxable year

ending December 31, 2000, IC may report

gross premiums written of $1,200, based on

the premiums actually received on the

contract. Pursuant to section (a)(5)(vi) of this

section, IC deducts a total of $28 of premium

acquisition costs for the contract, based on

the difference between the acquisition costs

actually paid or incurred under section

811(a) ($1,200 × .10 = $120) and the amount

required to be taken into account under

section 848 in connection with the net

premiums for the contract

($1,200 × .077 = $92).

(iii) Under paragraph (a)(8)(ii)(A) of this

section, IC includes the amount of life

insurance reserves (as defined in section

816(b), but computed in accordance with

section 807(d) and sections 811(c) and (d)) in

unearned premiums under section

832(b)(4)(B). Section 807(d)(3)(A)(iii) requires

IC to use a two-year preliminary term method

to compute the amount of life insurance

reserves for a noncancellable accident and

health insurance contract (other than a

qualified long-term care contract). Under this

tax reserve method, no portion of the $1,200

gross premium received by IC for A’s contract

is allocable to future insurance coverage.

Accordingly, for the taxable year ending

December 31, 2000, no life insurance reserves

are included in IC’s unearned premiums

under section 832(b)(4)(B) with respect to the

contract.

Example 9. (i) IC, a non-life insurance

company, issues an insurance contract with

a twelve month effective period for $1,200 on

December 1, 2000. Immediately thereafter, IC

reinsures 90% of its liability under the

insurance contract for $900 with IC–2, an

unrelated and solvent insurance company.

On December 31, 2000, IC–2 has an $825

unearned premium with respect to the

reinsurance contract it issued to IC. In

computing its earned premiums, pursuant to

section 832(b)(4)(B), IC–2 deducts $660 of

unearned premiums ($825 × .8) with respect

to the reinsurance contract.

(ii) Under paragraph (a)(8)(i) of this

section, unearned premiums held by an

insurance company with regard to the net

value of the risks reinsured in other solvent

companies are deducted from the ceding

company’s unearned premiums taken into

account for purposes of section 832(b)(4)(B).

If IC had not reinsured 90% of its risks, IC’s

unearned premium for the insurance contract

would have been $1,100 ($1,200 × 11/12) and

IC would have deducted $880 ($1,100 × .8) of

unearned premiums with respect to such

contract. However, because IC reinsured 90%

of its risks under the contract with IC–2, as

of December 31, 2000, the net value of the

risks retained by IC for the remaining 11

months of the effective period of the contract

is $110 ($1,100—$990). For the taxable year

ending December 31, 2000, IC includes the

$1,200 gross premium in its gross premiums

written and deducts the $900 reinsurance

premium paid to IC–2 under section

832(b)(4)(A). Pursuant to section 832(b)(4)(B),

to determine its premiums earned, IC deducts

$88 ($110 × .8) for the insurance contract at

the end of the taxable year.

(11) Change in method of

accounting—(i) In general. A change in

the method of determining premiums

earned to comply with the provisions of

paragraphs (a)(3) through (a)(10) of this

section is a change in method of

accounting for which the consent of the

Commissioner is required under section

446(e) and § 1.446–1(e).

(ii) Application. For the first taxable

year beginning after December 31, 1999,

a taxpayer is granted consent of the

Commissioner to change its method of

accounting for determining premiums

earned to comply with the provisions of

paragraphs (a)(3) through (a)(10) of this

section. A taxpayer changing its method

of accounting in accordance with this

section must follow the automatic

change in accounting provisions of Rev.

Proc. 99–49, 1999–52 I.R.B. 725 (see

§ 601.601(d)(2) of this chapter), except

that—

710 Federal Register / Vol. 65, No. 4 / Thursday, January 6, 2000 / Rules and Regulations

(A) The scope limitations in section

4.02 of Rev. Proc. 99–49 shall not apply;

(B) The timely duplicate filing

requirement in section 6.02(2) of Rev.

Proc. 99–49 shall not apply; and

(C) If the method of accounting for

determining premiums earned is an

issue under consideration within the

meaning of section 3.09 of Rev. Proc.

99–49 as of January 5, 2000, then

section 7.01 of Rev. Proc. 99–49 shall

not apply.

(12) Effective date. Paragraphs (a)(3)

through (a)(11) of this section are

applicable with respect to the

determination of premiums earned for

taxable years beginning after December

31, 1999.

* * * * *

Robert E. Wenzel,

Deputy Commissioner of Internal Revenue.

Approved: December 23, 1999.

Jonathan Talisman,

Acting Assistant Secretary of the Treasury.

[FR Doc. 00–13 Filed 1–5–00; 8:45 am]

BILLING CODE 4830–01–U

DEPARTMENT OF TRANSPORTATION

Coast Guard

33 CFR Part 177

[CGD01–99–193]

Drawbridge Operation Regulations:

Saugus River, MA

AGENCY: Coast Guard, DOT.

ACTION: Notice of temporary deviation

from regulations.

SUMMARY: The Commander, First Coast

Guard District has issued a temporary

deviation from the existing drawbridge

regulations for the Fox Hill SR107

Bridge, mile 2.5, across the Saugus River

between Saugus and Lynn,

Massachusetts. This deviation allows

the bridge owner to open the bridge

only three times each day for vessel

traffic. This deviation is necessary to

facilitate repairs to replace structural

steel, floor beams and the wearing

surface at the bridge.

DATES: This deviation is effective from

January 3, 2000 to March 2, 2000.

FOR FURTHER INFORMATION CONTACT: Mr.

John McDonald, Project Officer, First

Coast Guard District, (617) 223–8364.

SUPPLEMENTARY INFORMATION: The Fox

Hill SR107 Bridge has a vertical

clearance of 6 feet at mean high water

and 16 feet at mean low water.

The existing regulations for the Fox

Hill SR107 Bridge in 33 CFR 117.618(c)

require the bridge to open on signal;

except that, from October 1 through May

31, 7 p.m. to 5 a.m., daily, and all day

on December 25 and January 1, the draw

shall open as soon as possible, but not

more than one one-hour, after notice is

given to the drawtenders either at the

bridge during the time the drawtenders

are on duty or by calling the number

posted at the bridge.

The bridge owner, Massachusetts

Highway Department (MHD), asked the

Coast Guard to allow the bridge to open

on signal, only, at 6 a.m., 2 p.m., and 6

p.m., from January 3, 2000, through

March 2, 2000.

The purpose of this temporary

deviation is to facilitate necessary

repairs to the bridge. Structural steel,

floor beams, and the bridge wearing

surface will be replaced during the 60

day repair period. The bridge can not

open for vessel traffic during the

replacement of the above components.

Vessels that can pass under the bridge

without an opening may do so at all

times.

In accordance with 33 CFR 117.35(c),

this work will be performed with all due

speed in order to return the bridge to

normal operation as soon as possible.

This deviation is authorized under 33

CFR 117.35.

Dated: December 17, 1999.

R.M. Larrabee,

Rear Admiral, U.S. Coast Guard Commander,

First Coast Guard District.

[FR Doc. 00–257 Filed 1–5–00; 8:45 am]

BILLING CODE 4910–15–M

DEPARTMENT OF TRANSPORTATION

Coast Guard

33 CFR Parts 154 and 155

[USCG–1998–3350]

Review of Cap Increases; Response

Plans for Marine TransportationRelated (MTR) Facilities and Tank

Vessels

AGENCY: Coast Guard, DOT.

ACTION: Notice of decision.

SUMMARY: Coast Guard response plan

regulations contain requirements for onwater oil recovery capacity (referred to

as caps). These caps were scheduled to

increase by 25 percent on February 18,

1998, provided the Coast Guard

completed a review of the cap increases.

The Coast Guard has completed its

review and the 25 percent increase for

on-water mechanical recovery will take

effect 90 days from the date of this

notice. The Coast Guard will consider a

2003 cap for mechanical on-water

removal capability and requirements for

other removal technologies in a

subsequent notice of proposed

rulemaking.

DATES: The scheduled cap increase for

on-water mechanical recovery

requirements will take effect on April 5,

2000.

ADDRESSES: The Docket Management

Facility maintains the public docket for

this notice (USCG–1998–3350). The

Response Plan Equipment Cap Review

(Cap Review) is part of the docket and

is available for inspection or copying at

room PL–401 on the Plaza level of the

Nassif Building, 400 Seventh Street

SW., Washington, DC 20590–0001,

between 9 a.m. and 5 p.m., Monday

through Friday, except Federal holidays.

You may also find this docket on the

Internet at http://dms.dot.gov. The Cap

Review is also available for examination

on the Vessel Response Plan Internet

site at http://www.uscg.mil/vrp.

FOR FURTHER INFORMATION CONTACT: For

questions on this notice, call Lieutenant

Commander John Caplis, Office of

Response (G–MOR), Coast Guard,

telephone 202–267–6922 or by e-mail at

JCaplis@comdt.uscg.mil. For questions

on viewing materials in the docket, call

Dorothy Walker, Chief, Dockets,

Department of Transportation,

telephone 202–366–9329.

SUPPLEMENTARY INFORMATION:

Regulatory History

In 1996, the Coast Guard published

two final rules entitled ‘‘Vessel

Response Plans’’ (61 FR 1052, January

12, 1996) and ‘‘Response Plans for

Marine Transportation-Related

Facilities’’ (61 FR 7890, February 29,

1996). Those rules finalized the 1993

interim rules (58 FR 7330, February 5,

1993, and 58 FR 7376, February 5, 1993,

for Marine Transportation-Related

Facilities and Vessels, respectively) and

are located in the Code of Federal

Regulations (CFR) in 33 CFR parts 154

and 155. 33 CFR 154.1045(m) and

155.1050(o) contain requirements for

on-water oil recovery capacity (referred

to as caps) that an owner or operator

must ensure is available, through

contract or other approved means, in

planning for a worst case discharge.

These caps were established taking into

account 1993 technology, deployment

capability, and availability of response

resources.

The 1993 and 1996 rules established

a 1998 cap, a 25 percent increase from

the 1993 levels, as a target for increasing

response capabilities. This increase was

endorsed by the Vessel Response Plan

Negotiated Rulemaking Committee as an

incentive to expand response