Net Income (Loss) Reconciliation for Life Insurance Companies with Total Assets of $10 Million or More

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Form 1120-L Schedule M-3 Draft Instructions

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2006

Department of the Treasury
Internal Revenue Service

Form 1120-L Schedule M-3
Draft Instructions
Net Income (Loss) Reconciliation for Life Insurance Companies with Total Assets
of $10 Million or More
Section references are to the Internal
Revenue Code unless otherwise noted.

General Instructions
Purpose of Schedule
Schedule M-3 Part I asks certain
questions about the corporation’s
financial statements and reconciles
financial statement worldwide net income
(loss) for the corporation (or consolidated
financial statement group, if applicable),
as reported on Schedule M-3, Part I, line
4, to net income (loss) per the income
statement of the corporation for U.S.
taxable income purposes, as reported on
Schedule M-3, Part I, line 11.
Schedule M-3 Parts II and III reconcile
financial statement net income (loss) for
the U.S. corporation (or consolidated tax
group, if applicable) (per Schedule M-3,
Part I, line 11) to taxable income on Form
1120-L, page 1, line 20. For life insurance
companies that prepare an annual
statement, financial statement net income
(loss) should be reported on the statutory
basis on Part I, line 11.

Who Must File
Effective for any tax year ending on or
after December 31, 2006, any domestic
corporation or group of corporations
required to file Form 1120-L, U.S. Life
Insurance Company Tax Return, that
reports on Schedule L, Part II, line 2b of
Form 1120-L total assets at the end of the
corporation’s tax year that equal or
exceed $10 million must complete and file
Schedule M-3.
• A corporation filing a non-consolidated
Form 1120-L, U.S. Life Insurance
Company Tax Return, that reports on
Schedule L, Part II, line 2b for Form
1120-L total assets that equal or exceed
$10 million must complete and file
Schedule M-3 and must check checkbox
(1) Non-consolidated return, at the top of
Page 1 of Schedule M-3.
• Any U.S. consolidated tax group
consisting of a U.S. parent corporation
and additional includible corporations
listed on Form 851, Affiliations
Schedule required to file Form 1120-L,

U.S. Life Insurance Company Tax Return,
that reports on Schedule L, Part II, line 2b
of Form 1120-L total consolidated assets
at the end of the tax year that equal or
exceed $10 million must complete and file
Schedule M-3,and must check checkbox
(2) consolidated return (Form 1120-L
only), or checkbox (3) Mixed 1120/L/PC
group, as applicable, at the top of Page 1
of Schedule M-3.
Form 1120-L Schedule M-3 is effective
for any tax year ending on or after
December 31, 2006. For purposes of
determining whether a corporation with a
52-53 week tax year must file Schedule
M-3, such corporation’s tax year is
deemed to end or close on the last day of
the calendar month nearest to the last
day of the 52-53 week tax year. (For
further guidance on 52-53 week tax
years, see Regulations section
1.441-2(c)(1).)
A U.S. life insurance company filing
Form 1120-L that is not required to file
Schedule M-3 may voluntarily file
Schedule M-3. A life insurance company
filing Schedule M-3 must check the box
on Form 1120-L, page 1, item ___,
indicating that Schedule M-3 is attached
(whether required or voluntary).
If the parent corporation of a U.S.
consolidated tax group files Form 1120-L
and files Schedule M-3, all members of
the group must file Schedule M-3.
However, if the parent corporation of a
U.S. consolidated tax group files Form
1120-L and any member of the group files
Form 1120-PC, U.S. Property and
Casualty Insurance Company Income Tax
Return, or Form 1120, that member must
file a Form 1120-PC Schedule M-3 or a
Form 1120 Schedule M-3, respectively,
and the group must comply with the
mixed group consolidated Schedule M-3
reporting described in the section,
Schedule M-3 Consolidation for Mixed
Groups (1120/L/PC). A mixed group must
also file Form 8916, Reconciliation of
Schedule M-3 Taxable Income with Tax
Return Taxable Income for Mixed Groups
If the parent corporation of a U.S.
consolidated tax group files Form 1120-L
and any member of the group files Form
1120-PC or Form 1120, and the
consolidated Schedule L, Part II, line 2b
reported in the return includes the assets
of all of corporations (the insurance
companies as well as the non-insurance
Cat. No. 39945W

companies), in order to determine if the
group meets the $10 million threshold test
for the requirement to file Schedule M-3,
use the amount of total assets reported
on Schedule L, Part II, line 2b of the
consolidated return. If the parent
company of a U.S. consolidated tax group
files Form 1120-L and any member of the
group files Form 1120-PC or Form 1120
and the consolidated Schedule L, Part II,
line 2b reported in the return does not
include the assets of one or more of the
corporations in the U.S. consolidated tax
group, in order to determine if the group
meets the $10 million threshold test for
the requirement to file Schedule M-3, use
the sum of the amount of total assets
reported on the consolidated Schedule L,
Part II, line 2b plus the amounts of all
assets reported on Forms 1120-PC and
1120 that are included in the consolidated
return but not included on the
consolidated Schedule L, Part II, line 2b.
For insurance companies included in
the consolidated U.S. federal income tax
return, see instructions for Part I, lines 10
and 11 and Part II, line 7 for guidance on
Schedule m-3 reporting of intercompany
dividends and statutory accounting
adjustments.
Example 1.
1. U.S. life insurance company A
owns U.S. subsidiary B and foreign
subsidiary F. For its 2006 tax year, A
prepares consolidated financial
statements with B and F that report total
assets of $12 million. A files a
consolidated U.S. federal income tax
return with B and reports total
consolidated assets on Schedule L, Part
II, line 2b of $8 million. A’s U.S.
consolidated tax group is not required to
file Schedule M-3 for the 2006 tax year.
2. U.S. life insurance company C
owns U.S. life insurance company D. For
its 2006 tax year, C prepares
consolidated financial statements with D
but C and D file separate U.S. federal
income tax returns. The consolidated
accrual basis financial statements for C
and D report total assets at the end of the
taxable year of $12 million after
intercompany eliminations. C reports
separate company total year-end assets
on its Schedule L, Part II, line 2b of $7
million. D reports separate company total
year-end assets on its Schedule L, Part II,
line 2b of $6 million. Neither C nor D is

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required to file Schedule M-3 for the 2006
tax year.
3. Foreign corporation A owns 100
percent of both U.S. life insurance
company B and U.S. life insurance
company C. C owns 100 percent of U.S.
life insurance company D. For its 2006
tax year, A prepares a consolidated
worldwide financial statement for the
ABCD consolidated group. The ABCD
consolidated financial statement reports
total year-end assets of $25 million. A is
not required to file a U.S. federal income
tax return. B files a separate U.S. federal
income tax return and reports separate
company total year-end assets on
its Schedule L, Part II, line 2b of $12
million. C files a consolidated U.S.
federal income tax return with D and, after
eliminating intercompany transactions
between C and D, reports consolidated
total year-end assets on Schedule L, Part
II, line 2b of $8 million. B is required to file
Schedule M-3 because its total year-end
assets reported on Schedule L, Part II,
line 2b exceed $10 million. The CD U.S.
consolidated tax group is not required to
file Schedule M-3 because its total
year-end assets reported on Schedule L,
Part II, line 2b do not exceed $10 million.

Other Issues Affecting
Schedule M-3 Filing
Requirements
If a life insurance company was required
to file Schedule M-3 for the preceding tax
year but reports on Schedule L, Part II,
line 2b of Form 1120-L total consolidated
assets at the end of the current tax year
of less than $10 million, the life insurance
company is not required to file Schedule
M-3 for the current tax year. The life
insurance company may file Schedule
M-3 voluntarily for the current tax year. If
for a subsequent tax year the life
insurance company is required to file
Schedule M-3, the life insurance company
must complete Schedule M-3 in its
entirety (Part I and all columns in Parts II
and III) for that subsequent tax year.
In the case of a U.S. consolidated tax
group, total assets at the end of the tax
year must be determined based on the
total year-end assets of all includible
corporations listed on Form 851, net of
eliminations for intercompany
transactions and balances between the
includible corporations. In addition, for
purposes of determining for Schedule M-3
whether the corporation (or U.S.
consolidated tax group) has total assets
at the end of the current tax year of $10
million or more, the corporation’s total
consolidated assets must be determined
on an overall accrual method of
accounting unless both of the following
apply: (a) the tax returns of all includible
corporations in the U.S. consolidated tax
group are prepared using an overall cash
method of accounting, and (b) no
includible corporation in the U.S.

consolidated tax group prepares or is
included in financial statements prepared
on an accrual basis.

Other Form 1120-L
Schedules Affected by
Schedule M-3
Requirements
Report on Schedules L and Form 1120-L,
page 1, amounts for the U.S. corporation
or, if applicable, the U.S. consolidated tax
group.

Schedule L
Total assets shown on Schedule L, Part
II, line 2b, must equal the total assets of
the life insurance company (or, in the
case of a U.S. consolidated tax group, the
total assets of all members of the group
listed on Form 851) as of the last day of
the tax year, and must be the same total
assets reported by the life insurance
company (or by each member of the U.S.
consolidated tax group) in the financial
statements, if any, used for Schedule
M-3. If the life insurance company
prepares financial statements, Schedule
L, Part II, line 2b must equal the sum of
the financial statement total assets for
each corporation listed on Form 851 and
included in the U.S. consolidated tax
return (includible corporation) net of
eliminations for intercompany
transactions between includible
corporations. If the life insurance
company does not prepare financial
statements, Schedule L, Part II, line 2b
must be based on the life insurance
company’s books and records. The
Schedule L balance sheet may show
tax-basis balance sheet amounts if the life
insurance company is allowed to use
books and records for Schedule M-3 and
the life insurance company’s books and
records reflect only tax-basis amounts.
For purposes of measuring total assets
at the end of the year, assets may not be
netted or offset against liabilities. In
addition, total assets may not be reported
as a negative amount.

Consolidated Return
(Form 1120-L, Page 1)
Report on Form 1120-L, page 1, each
item of income, gain, loss, expense, or
deduction net of elimination entries for
intercompany transactions between
includible corporations. The corporation
must not report as dividends on Form
1120-L, Schedule A, any amounts
received from an includible corporation
unless the corporation receiving the
intercompany dividends is an insurance
company and only to the extent that the
insurance company is required to include
intercompany dividends in taxable
income. (See the instructions for Part I,
lines 10 and 11, for a discussion of
intercompany dividends and insurance
company statutory accounting.) In
general, dividends received from an

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includible corporation must be eliminated
in consolidation rather than offset by the
dividends-received deduction.

Entity Considerations for
Schedule M-3
For purposes of Schedule M-3,
references to the classification of an entity
(for example, as a corporation, a
partnership, or a trust) are references to
the treatment of the entity for U.S. federal
income tax purposes. An entity that
generally is disregarded as separate from
its owner for U.S. federal income tax
purposes (disregarded entity) must not be
separately reported on Schedule M-3
except, if required, on Part I, line 7. On
Schedule M-3, Parts II and III, any item of
income, gain, loss, deduction, or credit of
a disregarded entity must be reported as
an item of its owner. In particular, the
income or loss of a disregarded entity
must not be reported on Part II, lines 9,
10, or 11 as a separate partnership or
other pass-through. The financial
statement income or loss of a disregarded
entity is included on Part I, line 7, if and
only if its financial statement income or
loss is included on Part I, line 11, but not
on Part I, line 4.

Reportable Entity Partner
Reporting Responsibilities
For the purposes of the 2006 Schedule
M-3 instructions, a reportable entity
partner with respect to a partnership filing
Form 1065 is an entity that (1) owns or is
deemed to own, directly or indirectly,
under these instructions a 50 percent or
greater interest in the income, loss or
capital of the partnership on any day of
the tax year on or after June 30, 2006,
and (2) was required to complete
Schedule M-3 on its most recently filed
US federal income tax return or return of
income filed prior to that day.
For the purposes of the 2006 Schedule
M-3 instructions: (1) the parent
corporation of a consolidated tax group is
deemed to own all corporate and
partnership interests owned or deemed to
be owned under these instructions by any
member of the tax consolidated group; (2)
the owner of a disregarded entity is
deemed to own all corporate and
partnership interests owned or deemed to
be owned under these instructions by the
disregarded entity; (3) the owner of 50
percent or more of a corporation by vote
on any day of the corporation tax year is
deemed to own all corporate and
partnership interests owned or deemed to
be owned under these instructions by the
corporation during the corporation tax
year; (4) the owner of 50 percent or more
of partnership income, loss, or capital on
any day of the partnership tax year is
deemed to own all corporate and
partnership interests owned or deemed to
be owned under these instructions by the
partnership during the partnership tax
year; and (5) the beneficial owner of 50
percent or more of the beneficial interest
of a trust or nominee arrangement on any
day of the trust or nominee arrangement

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tax year is deemed to own all corporate
and partnership interests owned or
deemed to be owned under these
instructions by the trust or nominee
arrangement.
A reportable entity partner with respect
to a partnership (as defined above) must
report the following to the partnership on
September 15, 2006, or if later, within 30
days of first becoming a reportable entity
partner and, after first reporting to the
partnership under these instructions,
thereafter within 30 days of the date of
any change in the interest it owns or is
deemed to own, directly or indirectly,
under these instructions, in the
partnership: (1) its name, (2) its mailing
address, (3) its taxpayer identification
number (TIN or EIN) if applicable, (4) its
entity or organization type, (5) the state or
country in which it is organized, (6) the
date on which it first became a reportable
entity partner on or after June 30, 2006,
(7) the date with respect to which it is
reporting a change in its ownership
interest in the partnership, if applicable,
(8) the interest in the partnership it owns
or is deemed to own in the partnership,
directly or indirectly (as defined under
these instructions) as of the date with
respect to which it is reporting, and (9)
any change in that interest as of the date
with respect to which it is reporting
Example 2.
1. On September 16, 2007, A, an LLC
filing a Form 1065 for 2007, is owned 50
percent by U.S. life insurance company Z.
A owns 50 percent of each of B, C, D,
and E, each also an LLC filing a Form
1065 for calendar year 2007. Z was first
required to complete Form 1120-L
Schedule M-3 for its corporate tax year
ended December 31, 2006, and filed its
Form 1120-L with Schedule M-3 for 2006
on September 15, 2007. As of September
16, 2007, Z was a reportable entity
partner with respect to A and, through A,
with respect to B, C, D, and E. On
October 5, 2007, Z reports to A, B, C, D,
and E, as it is required to do witin 30 days
of September 16, that Z is a reportable
entity partner directly owning (with
respect to A) or deemed to own indirectly
(with respect to B, C, D, and E) a 50
percent interest. Therefore, because Z
was a reportable entity partner for 2007,
each of A, B, C, D, and E is required to
complete Form 1065 Schedule M-3 for
2007, regardless of whether they would
otherwise be required to complete
Schedule M-3 for that year.
2. P, a US life insurance company, is
the parent of a financial consolidation
group with 50 domestic subsidiaries DS1
through DS50 and 50 foreign subsidiaries
FS1 through FS50, all 100 percent owned
on September 16, 2007. On September
15, 2007, P filed a consolidated tax return
on Form 1120-L with DS1 through DS50
and was required to complete Schedule
M-3 for the tax year ending December 31,
2006. On September 16, 2007, DS1,
DS2, DS3, FS1, and FS2 are each 10
percent partners in partnership K which

files Form 1065 for the tax year ending
December 31, 2007. P is deemed to own,
directly or indirectly (under these
instructions) all corporate and partnership
interests of DS1, DS2, DS3, as the parent
of the tax consolidation group and
therefore is deemed to own 30 percent of
K on September 16, 2007. P is deemed to
own, directly or indirectly, (under these
instructions) all corporate and partnership
interests of FS1 and FS2 as the owner of
50 percent or more of each corporation by
vote and therefore is deemed to own 20
percent of K on September 16, 2007. P is
therefore deemed to own 50 percent of K
on September 16, 2007. P was required
to complete Schedule M-3 on its 2006
Form 1120-L filed September 15, 2007,
its most recently filed U.S. federal income
tax return filed prior to September 16,
2007. P owns or is deemed to own,
directly or indirectly, (under these
instructions) 50 percent or more of K on
September 16, 2007, and was required to
complete Schedule M-3 on its most
recently filed U.S. income tax return filed
prior to that date. Therefore, P is a
reportable entity partner of K as of
September 16, 2007. On October 5,
2007, P reports to K, as it is required to
do within 30 days of September 16, that P
is a reportable entity partner as of
September 15, 2007, deemed to own
(under these instructions) a 50 percent
interest in K. K is therefore required to
complete Schedule M-3 when it files its
Form 1065 for its tax year ending
December 31, 2007.

Consolidated Schedule
M-3 Versus Consolidating
Schedules M-3 for Form
1120-L Groups.
Note. A consolidated tax return group
with a parent corporation that files a Form
1120-L is a mixed group if any member is
a property and casualty insurance
company (files using 1120-PC, U.S.
Property and Casualty Insurance
Company Income Tax Return) or is not an
insurance company. See the discussion,
Schedule M-3 Consolidation for Mixed
Groups.
A U.S. consolidated tax group must file
a consolidated Schedule M-3. Parts I, II
and III of the consolidated Schedule M-3
must reflect the activity of the entire U.S.
consolidated tax group. The parent
corporation also must complete Parts II
and III of a separate Schedule M-3 to
reflect the parent’s own activity. In
addition, Parts II and III of a separate
Schedule M-3 must be completed by
each includible corporation to reflect the
activity of that includible corporation.
Lastly, it generally will be necessary to
complete Parts II and III of a separate
Schedule M-3 for consolidation
eliminations.

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If a U.S. consolidated tax group that is
not a mixed group consists of four
includible corporations (the parent and
three subsidiaries) all filing Form 1120-L,
the U.S. consolidated tax group must
complete six Schedules M-3 as follows:
(a) one consolidated Schedule M-3 with
Parts I, II, and III completed to reflect the
activity of the entire U.S. consolidated tax
group; (b) Parts II and III of a separate
Schedule M-3 for each of the four
includible corporations to reflect the
activity of each includible corporation; and
(c) Parts II and III of a separate Schedule
M-3 to eliminate intercompany
transactions between includible
corporations and to include limitations on
deductions (e.g., charitable contribution
limitations and capital loss limitations) and
carryover amounts (e.g., charitable
contribution carryovers and capital loss
carryovers). See the discussion,
Completion of Schedule M-3 and Certain
Allocations, Limitations, and Carryovers.
Note. On Part II and Part III, indicate on
the line after the common parent’s name
whether the Schedule M-3 is for the: (1)
consolidated group; (2) parent
corporation; (3) consolidation
eliminations; or (4) subsidiary corporation,
by checking the appropriate box.

Schedule M-3
Consolidation for Mixed
Groups (1120/L/PC)
Special Schedule M-3 consolidation rules
apply to a mixed group, that is, a
consolidated tax group that (1) includes
both a corporation that is an insurance
company and a corporation that is not an
insurance company, or (2) includes both a
life insurance company and a property
and casualty insurance company, or (3)
includes a life insurance company, a
property and casualty insurance
company, and a corporation that is not an
insurance company.
Mixed group consolidation for
Schedule M-3, Parts II and III, requires (1)
subgroup sub-consolidation of the 1120
subgroup, the 1120-PC subgroup, and
the 1120-L subgroup, each with its own
sub-consolidated Schedule M-3 Parts II
and III, and (2) consolidation of the
subgroup sub-consolidation totals on a
consolidated Schedule M-3 Part II that
ties to a consolidated Schedule M-3 Part I
and a consolidated Form 8916,
Reconciliation of Schedule M-3 Taxable
Income with Tax Return Taxable Income
for Mixed Groups.
In addition to one Schedule M-3 Part II
and one Schedule M-3 Part III for each
corporation in the three subgroup
sub-consolidations, there will be generally
a total of six additional Schedule M-3
Parts II and six additional Schedule M-3
Parts III for the subgroup
sub-consolidations. Specifically, there
must be one Part II and one Part III for
each subgroup’s sub-consolidated

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amounts and one Part II and one Part III
for each subgroup’s sub-consolidation
eliminations amounts.
At the mixed group consolidated level,
there must be a consolidated Schedule
M-3, Part II, and, if applicable, a Part II for
consolidation eliminations not includable
in the subgroup eliminations. At the
consolidated level there must also be a
consolidated Schedule M-3 Part I and a
consolidated Form 8916. For a mixed
group, there is no Schedule M-3 part III at
the consolidated level. At the
consolidated level, use the Schedule M-3
form (1120, 1120-PC, 1120-L) Parts I and
II that match the form on which the parent
corporation reports and the entire
consolidated group files.
The corporation must check the
applicable mixed group checkboxes on all
Schedule M-3, Parts I, II, and III, as
discussed below.
Subgroup Sub-Consolidation: 1120
Subgroup, 1120-PC Subgroup, and
1120-L Subgroup A subgroup Schedule
M-3, Parts II and III, sub-consolidation
must be prepared with all necessary
eliminations within the subgroup for each
of the three possible subgroups that are
in fact present: one subgroup for those
corporations reporting on Form 1120; one
subgroup for those corporations reporting
on Form 1120-PC; and one subgroup for
those reporting on Form1120-L . The
parent corporation is included in the
subgroup that corresponds to the form on
which it reports and the entire
consolidated group files. For example, in
the case of a Form 1120-L parent and
Form 1120-L consolidated group, the
parent is included in the Form 1120-L
subgroup sub-consolidation. Each
subgroup uses its own Schedule M-3
form (1120, 1120-PC, 1120-L), Parts II
and III, for each corporation within the
subgroup and for the subgroup
sub-consolidation and the subgroup
eliminations.
The three subgroup sub-consolidation
taxable income calculations on Schedule
M-3 must follow the separate return
requirements of the regulation under
Section 1502 and all other applicable
regulations taking into account the
amounts separately reported on Form
8916. Capital loss limitation and
carryforward used and charitable
deduction limitation and carryforward
used are not taken into account in the
determination of the three subgroup
sub-consolidated taxable incomes on
Schedule M-3, but are reflected on Form
8916 and in the calculation of the life/
non-life loss limitation and carryforward
used. See the discussion, Life/ Non-Life
Loss Limitation and Carryforward Used
Calculations
The reconciliation totals for book,
temporary difference, permanent
difference, and taxable income for each
subgroup are reported on Forms 1120,
1120-PC, or 1120-L, as applicable,
Schedule M-3, Part II, line 29a, columns

(a), (b), (c ), and (d), and equal the sum of
the line amounts on Part II, lines 26
through 28. For a mixed group, Schedule
M-3, Part II, lines 29b, 29c, and 30 are
blank on the Forms 1120, 1120-PC, or
1120-L, as applicable, for the separate
corporations (parent and subsidiary) and
for the three subgroup
sub-consolidations,
Reconciliation of Mixed Group
Subgroup Sub-Consolidation Amounts
to Schedule M-3 Part I, line 11, and to
Tax Return Taxable Income. At the
consolidated level, use the Schedule M-3
form (1120, 1120-PC, 1120-L) Parts I and
II that matches the form on which the
parent corporation reports and the entire
consolidated group files. For a mixed
group, the consolidated Schedule M-3,
Part II, lines 29a, 29b, and 29c amounts
are the roll-ups of the applicable amounts
from the three subgroup
sub-consolidation Part II, line 29a
amounts. (If a consolidated level Part II
for consolidation eliminations not
includable in the subgroup eliminations is
applicable, the roll-up amounts must be
adjusted by the applicable elimination
amounts.) The consolidated Schedule
M-3, Part II, line 30 amounts are the sum
of the applicable amounts on the
consolidated Part II lines 29a, 29b, and
29c. For a mixed group, the consolidated
Part II, lines 1 through 28 are blank and
no consolidated Part III is required to be
completed.
For mixed groups, the consolidated
Part II line 30 column (a) must equal Part
I, line 11, with appropriate adjustments for
statutory accounting requirements
reflected on Part I, line 10. The
consolidated taxable income indicated on
Part II, line 30, column (d), must equal the
amount shown on Form 8916 line 1. Form
8916 line 8 must equal taxable income
reported on the tax return.
Completion of Mixed Group
Checkboxes for Schedule M-3 Part II
and Part III The following discussion of
checkboxes will assume that the 1120-L
subgroup includes the corporate parent of
the mixed group.
Forms 1120, 1120-PC, and 1120-L,
Schedule M-3, Parts II and III, each have
a checkbox (5) at the top indicating a
mixed group. Checkbox (5) and one or
more other applicable checkboxes must
be checked for a mixed group.
For example, an 1120-L parent
corporation included in the 1120-L
subgroup must check Form 1120-L
Schedule M-3, Parts II and III, checkbox
(2) Parent corporation and checkbox (5)
Mixed 1120/L/PC group. An 1120-L
subsidiary corporations within the 1120-L
subgroup must check Form 1120-L
Schedule M-3, Parts II and III, checkbox
(4) Subsidiary corporation and checkbox
(5) Mixed 1120/L/PC group. An 1120-PC
subsidiary corporation within the 1120-PC
subgroup must check Form 1120-PC
Schedule M-3 Parts II and III, check box
(4) Subsidiary corporation and checkbox
(5) Mixed 1120/L/PC group. An 1120

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subsidiary corporation within the 1120
subgroup must check Form 1120
Schedule M-3 Parts II and III, check box
(4) Subsidiary corporation and checkbox
(5) Mixed 1120/L/PC group.
The 1120 subgroup sub-consolidation
Form 1120 Schedule M-3, Parts II and III,
must be indicated by checking check box
(5) Mixed 1120/L/PC group and checkbox
(6) 1120 group for the sub-consolidation
and by checking checkbox (5) Mixed
1120/L/PC group, and checkbox (7) 1120
eliminations for the eliminations. The
1120-PC subgroup sub-consolidation
Form 1120-PC Schedule M-3, Parts II
and III, must be indicated by checking
check box (5) Mixed 1120/L/PC group
and checkbox (6) 1120-PC group for the
sub-consolidation and by checking
checkbox (5) Mixed 1120/L/PC group,
and checkbox (7) 1120-PC eliminations
for the eliminations. The 1120-L subgroup
sub-consolidation Form 1120-L Schedule
M-3, Parts II and III, must be indicated by
checking check box (5) Mixed 1120/L/PC
group and checkbox (6) 1120-L group for
the sub-consolidation and by checking
checkbox (5) Mixed 1120/L/PC group,
and checkbox (7) 1120-L eliminations for
the eliminations.
A mixed group with a Form 1120-L
parent corporation completes a
consolidated level Form 1120-L Schedule
M-3, Parts I and II and a consolidated
Form 8916. The mixed group
consolidated Schedule M-3, Part II, must
be indicated by checking checkbox (1)
consolidated group and check box (5)
Mixed 1120/L/PC group. (If a
consolidated level Part II for consolidation
eliminations not includable in the
subgroup eliminations is applicable, that
Part II must be indicated by checking
checkbox (3) Consolidated eliminations
and checkbox (5) Mixed 1120/L/PC
group.)
Life/ Non-Life Loss Limitation and
Carryforward Used Calculations The
applicable life/non-life loss limitation and
all carryforward used calculations are
made using the amounts determined for
taxable income in the three subgroup
sub-consolidations and other applicable
amounts separately reported on Form
8916. The calculated life/non-life loss
limitation or carryforward used amounts, if
any, are not entered on Schedule M-3.
Rather the calculated amounts, if any, are
entered on Form 8916.
Mixed Group With 1120 Parent:
Transition Rule For Schedule M-3
Parts II and III Columns (a) and (d) For
Tax Years Ending December 2006
Through November 2007 For tax years
ending December 2006 through
November 2007, if a mixed group has an
1120 parent that is required to complete
Parts II and III columns (a) and (d), all
1120 subsidiaries must complete Parts II
and III columns (a) and (d). However, all
1120-PC and 1120-L subsidiaries
included in the mixed group tax
consolidated group have the option of
completing columns (a) and (d) for all of

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Parts II and III, or of completing columns
(a) and (d) only for Part II line 29a to
show the net contribution of the
subsidiary to the consolidated group total
Part II line 30 columns (a) and (d) shown
on the 1120 subgroup sub-consolidation
Part II. The 1120-PC subgroup
sub-consolidation Part II line 29a must
reflect the columns (a) and (d) net total
amounts for all 1120-PC subsidiaries. The
1120-L subgroup sub-consolidation Part II
line 29a must reflect the columns (a) and
(d) net total amounts for all 1120-L
subsidiaries. The 1120 subgroup
sub-consolidation must reflect the total
net amounts for column (a) and (d) for all
applicable lines. The consolidated level
Part II must reflect the total net amounts
for columns (a) and (d) for all applicable
lines 29a, 29b, 29c, and 30.
Note. All corporations within the mixed
group tax consolidation group are
required to complete columns (b) and (c)
for all applicable lines on all Schedules
M-3 Parts II and III, whether Form 1120,
Form 1120-PC, or Form 1120-L.

Completion of Schedule
M-3 and Certain
Allocations, Limitations,
and Carryovers
A corporation (or any member of a U.S.
consolidated tax group) required to file
Schedule M-3 must complete the form in
its entirety. In particular, a corporation
filing a non-consolidated return that meets
the filing requirements for Schedule M-3
must complete Parts I, II, and III. Such a
corporation does not check any of the
checkboxes at the top of Parts II and III.
In the case of a U.S. consolidated tax
group, Part I must be completed once, on
the consolidated Schedule M-3, by the
parent corporation. Parts II and III must
be completed by the parent corporation,
each includible corporation, and a
consolidating eliminations entity.
At the time the Form 1120-L is filed, all
applicable questions must be answered
on Part I, all columns must be completed
on Parts II and III, and all numerical data
required by Schedule M-3 must be
provided. Any schedule required to
support a line item on Schedule M-3 must
be attached at the time Schedule M-3 is
filed and must provide the information
required for that line item.
All detailed schedules for Part II and
Part III of Schedule M-3 must be attached
for each separate entity included in the
Consolidated Part II and Part III, including
those for the parent company and the
eliminations entity, if applicable. It is not
required that the same supporting
detailed information be presented for Part
II and Part III of the consolidated
Schedule M-3.
If an item attributable to an includible
corporation is not shared by or allocated
to the appropriate member of the group

but is retained in the parent corporation’s
financial statements (or books and
records, if applicable), then the item must
be reported by the parent corporation in
its separate Schedule M-3. For example,
if the parent of a U.S. consolidated tax
group prepares financial statements that
include all members of the U.S.
consolidated tax group and the parent
does not allocate the group’s income tax
expense as reflected in the financial
statements among the members of the
group but retains it in the parent
corporation, the parent corporation must
report on its separate Schedule M-3 the
U.S. consolidated tax group’s income tax
expense as reflected in the financial
statements.
Any adjustments made at the
consolidated group level that are not
attributable to any specific member of the
U.S. consolidated tax group (e.g.,
disallowance of net capital losses,
contribution deduction carryovers, and
limitation of contribution deductions) must
not be reported on the separate
consolidating parent or subsidiary
Schedules M-3 but rather on the
consolidated Schedule M-3 and on the
consolidating Schedule M-3 for
consolidation eliminations (or on Form
8916 in the case of a mixed group).
If an includible corporation has no
activity for the tax year (e.g., because the
corporation is a dormant or inactive
corporation), no amount for the
corporation was included in Part I, line 11,
and the corporation has no amounts to
report on Part II and Part III of Schedule
M-3 for the tax year, the parent
corporation of the U.S. consolidated tax
group may attach to the consolidated
Schedule M-3 a statement that provides
the name and EIN of the includible
corporation in lieu of filing a blank Part II
and Part III of Schedule M-3 for such
entity. On Part I, check checkbox (4)
Dormant subsidiaries schedule attached.

Specific Instructions
for Part I
Part I. Financial
Information and Net
Income (Loss)
Reconciliation
When To Complete Part I
Part I must be completed for any tax year
for which the life insurance company files
Schedule M-3. Check checkbox (1),
Non-consolidated return, checkbox (2),
Consolidated return – 1120-L only,
checkbox (3), Mixed 1120/L/PC group,
and checkbox (4) Dormant subsidiaries
schedule attached, as appropriate.

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Line 1. Questions Regarding
the Type of Income Statement
Prepared
For Schedule M-3, Part I, lines 1 through
11, use only the financial statements of
the U.S. life insurance company filing the
U.S. federal income tax return (the
consolidated financial statements for the
U.S. parent corporation of a U.S.
consolidated tax group). If the U.S. life
insurance company filing a U.S. federal
income tax return (or the U.S. parent
corporation of a U.S. consolidated tax
group) prepares its own financial
statements but is controlled by another
corporation (U.S. or foreign) that prepares
financial statements that include the U.S.
corporation, the U.S. corporation (or the
U.S. parent corporation of a U.S.
consolidated tax group) must use for its
Schedule M-3, Part I , its own financial
statements and not the financial
statements of the controlling corporation.
If a non-publicly traded U.S. parent life
insurance company of a U.S.
consolidated tax group prepares financial
statements and that group includes a
publicly traded subsidiary that files
financial statements with the Securities
and Exchange Commission (SEC), the
consolidated financial statements of the
parent life insurance company are the
appropriate financial statements for
purposes of completing Part I. Do not use
any separate company financial
statements that might be prepared for
publicly traded subsidiaries.
If no financial statements are prepared
for a U.S. life insurance company (or, in
the case of a U.S. consolidated tax group,
for the U.S. parent corporation’s
consolidated group) filing Form 1120-L
Schedule M-3, the U.S. life insurance
company (or the U.S. parent corporation
of a U.S. consolidated tax group) must
enter “No” on questions 1a, 1b, and 1c,
skip Part I, lines 2a through 3c, and enter
the net income (loss) per the books and
records of the U.S. life insurance
company (or U.S. consolidated tax group)
on Part I, line 4, Worldwide consolidated
net income (loss) from income statement
source identified in Part I, line 1.
If no financial statements are prepared
for a U.S. life insurance company (or, in
the case of a U.S. consolidated tax group,
for the U.S. parent corporation’s
consolidated group) filing Form 1120-L
Schedule M-3, and the U.S. life insurance
company is owned by a foreign
corporation that prepares financial
statements that includes the U.S. life
insurance company (or the U.S. parent
corporation’s consolidated group), the
U.S. life insurance company (or the U.S.
parent corporation of the U.S.
consolidated tax group) must enter “No”
on questions 1a, 1b, and 1c, skip Part I,
lines 2a through 3c, and enter the net
income (loss) per the books and records
of the U.S. corporation (or U.S.
consolidated tax group) on Part I, line 4,
Worldwide consolidated net income (loss)

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from income statement source identified
in Part I, line 1.

Line 2. Questions Regarding
Income Statement Period and
Restatements
Enter the beginning and ending dates on
line 2a for the life insurance company’s
income statement period ending with or
within this tax year.
The questions on Part I, lines 2b and
2c, regarding income statement
restatements refer to the worldwide
consolidated income statement issued by
the corporation filing the U.S. federal
income tax return (the consolidated
financial statements for the U.S. parent
corporation of a U.S. consolidated tax
group). Answer “Yes” on lines 2b and/or
2c if the corporation’s annual income
statement has been restated for any
reason. Attach a short explanation of the
reasons for the restatement in net income
for each annual income statement period
that is restated, including the original
amount and restated amount of each
annual statement period’s net income.
The attached schedule is not required to
report restatements on an entity-by-entity
basis.

Line 3. Questions Regarding
Publicly Traded Voting
Common Stock
The primary U.S. publicly traded voting
common stock class is the most widely
held or most heavily traded within the
U.S. as determined by the life insurance
company. If the life insurance company
has more than one class of publicly
traded voting common stock, attach a list
of the classes of publicly traded voting
common stock and the trading symbol
and the nine-digit CUSIP number of each
class.

Line 4. Worldwide Consolidated
Net Income (Loss) per Income
Statement
Report on Part I, line 4, the worldwide
consolidated net income (loss) per the
income statement (or books and records,
if applicable) of the corporation. A
corporation filing a non-consolidated
Form 1120-L for itself must report its
worldwide income on Part I line 4.
In completing Schedule M-3, the life
insurance company must use financial
statement amounts from the financial
statement type checked “Yes” on Part I,
line 1, or from its books and records if
Part I, line 1c is checked “No”. If Part I,
line 1a, is checked “Yes”, report on Part I,
line 4, the net income amount reported in
the income statement presented to the
SEC on the corporation’s Form 10-K (the
Form 10-K for the security identified on
Part I, line 3b, if applicable).
If a life insurance company prepares
financial statements, the amount on line 4
must equal the financial statement net
income (loss) for the income statement
period ending with or within the tax year
as indicated on line 2a.

If the life insurance company prepares
financial statements and the income
statement period differs from the life
insurance company’s tax year, the
income statement period indicated on line
2a applies for purposes of Part I, lines 4
through 8.
If the life insurance company does not
prepare financial statements, check “No”
on Part I, line 1c, and enter the net
income (loss) per the books and records
of the U.S. life insurance company or the
U.S. consolidated tax group on Part I,
line, line 4, Worldwide consolidated net
income (loss) from income statement
source identified in Part I, line 1.
Report on Part I, lines 5a through 10,
as instructed below, all adjustment
amounts required to adjust worldwide net
income (loss) reported on this Part I, line
4 (whether from financial statements or
books and records), to net income (loss)
of includible corporations that must be
reported on Part I, line 11.
If a U.S. life insurance company (a)
has net income (loss) included on Part I,
line 4, and removed on Part I, line 6a or
6b, on another U.S. corporation’s
Schedule M-3, (b) files its own Form
1120-L (separate or consolidated), (c)
does not have a separate financial
statement (certified or otherwise) of its
own, and (d) reports on Schedule L, Part
II, line 2b of its own Form 1120-L total
consolidated assets that equal or exceed
$10,000,000 at the end of the
corporation’s tax year, the life insurance
company must answer questions 1a, 1b,
and 1c of Part I as appropriate for its own
Form 1120-L and must report on Part I,
line 4, the amount for the corporation’s
net income (loss) that is removed on Part
I, line 6a or 6b of the other corporation’s
Schedule M-3. However, if in the
circumstances described immediately
above, the life insurance company does
have separate financial statements
(certified or otherwise) of its own,
independent of the amount of the
corporation’s net income included in Part
I, line 4, of the other U.S. corporation, the
life insurance company must answer
questions 1a, 1b, and 1c of Part I, as
appropriate, for its own Form 1120-L,
based on its own separate income
statement, and must report on Part I, line
4, the net income amounts shown on its
separate income statement.
Note. See the instructions for Part I, line
10, for adjustments that may be
necessary to reconcile financial statement
income to statutory income for the life
insurance company.

Line 5. Net Income (Loss) of
Nonincludible Foreign Entities
Remove the financial statement net
income (line 5a) or loss (line 5b) of each
foreign entity that is included in the
consolidated financial statement group
and is not an includible corporation in the
U.S. consolidated tax group
(nonincludible foreign entity). In addition,
on Part I, line 8, adjust for consolidation

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eliminations and correct for minority
interest and intercompany dividends
between any nonincludible foreign entity
and any includible corporation. Do not
remove in Part I the financial statement
net income (loss) of any nonincludible
foreign entity accounted for in the
financial statements on the equity
method.
Attach a supporting schedule that
provides the name, EIN (if applicable),
and net income (loss) per the financial
statement or books and records included
on line 4 that is removed on this line 5 for
each separate nonincludible foreign
entity. The amounts of income (loss)
detailed on the supporting schedule
should be reported for each separate
nonincludible foreign entity without regard
to the effect of consolidation or
elimination entries. If there are
consolidation or elimination entries
relating to nonincludible foreign entities
whose income (loss) is reported on the
attached schedule that are not reportable
on Part I, line 8, the net amounts of all
such consolidation and elimination entries
must be reported on a separate line on
the attached schedule, so that the
separate financial accounting income
(loss) of each nonincludible foreign entity
remains separately stated. For example, if
the net income (after consolidation and
elimination entries) of a nonincludible
foreign sub-consolidated group is being
reported on line 5a, the attached
supporting schedule should report the
income (loss) of each separate
nonincludible foreign legal entity from
each such entity’s own financial
accounting net income statement or
books and records, and any consolidation
or elimination entries (for intercompany
dividends, minority interests, etc.) not
reportable on Part I, line 8, should be
reported on the attached supporting
schedule as a net amount on a line
separate and apart from lines that report
each nonincludible foreign entity’s
separate net income (loss).

Line 6. Net Income (Loss) of
Nonincludible U.S. Entities
Remove the financial statement net
income (line 6a) or loss (line 6b) of each
U.S. entity that is included in the
consolidated financial statement group
and is not an includible corporation in the
U.S. consolidated tax group
(nonincludible U.S. entity). In addition, on
Part I, line 8, adjust for consolidation
eliminations and correct for minority
interest and intercompany dividends
between any nonincludible U.S. entity and
any includible corporation. Do not remove
in Part I the financial statement net
income (loss) of any nonincludible U.S.
entity accounted for in the financial
statements on the equity method.
Attach a supporting schedule that
provides the name, EIN, and net income
(loss) per the financial statement or books
and records included on line 4 that is
removed on this line 6 for each separate

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nonincludible U.S. entity. The amounts of
income (loss) detailed on the supporting
schedule should be reported for each
separate nonincludible U.S. entity without
regard to the effect of consolidation or
elimination entries. If there are
consolidation or elimination entries
relating to nonincludible U.S. entities
whose income (loss) is reported on the
attached schedule that are not reportable
on Part I, line 8, the net amounts of all
such consolidation and elimination entries
must be reported on a separate line on
the attached schedule, so that the
separate financial accounting income
(loss) of each nonincludible U.S. entity
remains separately stated. For example, if
the net income (after consolidation and
elimination entries) of a nonincludible
U.S. sub-consolidated group is being
reported on line 6a, the attached
supporting schedule should report the
income (loss) of each separate
nonincludible U.S. legal entity from each
such entity’s own financial accounting net
income statement or books and records,
and any consolidation or elimination
entries (for intercompany dividends,
minority interests, etc.) not reportable on
Part I, line 8, should be reported on the
attached supporting schedule as a net
amount on a line separate and apart from
lines that report each nonincludible U.S.
entity’s separate net income (loss).

Line 7. Net Income (Loss) of
Other Includible Entities
Include the financial statement net
income (line 7a) or loss (line 7b) of each
corporation includible in the U.S.
consolidated tax group that is not
included in the consolidated financial
statement group (other includible
corporation) and therefore not included in
the income reported on Part I line 4. Also
include on this line 7 the financial
statement income of any disregarded
entity that is not included in the income
reported on Part I line 4 , but is included
in Part I, line 11 (other includible
entities)). In addition, on Part I, line 8,
adjust for consolidation eliminations and
correct for minority interest and
intercompany dividends for such other
includible corporations and such other
includible entities.
Attach a supporting schedule that
provides the name, EIN, and net income
(loss) per the financial statement or books
and records on this line 7 for each
separate other includible corporation and
each separate other includible entity. The
amounts of income (loss) detailed on the
supporting schedule should be reported
for each separate other includible
corporation or entity without regard to the
effect of consolidation or elimination
entries solely between or among the
entities listed. If there are consolidation or
elimination entries relating to such other
includible corporations or entities whose
income (loss) is reported on the attached

schedule that are not reportable on Part I,
line 8, the net amounts of all such
consolidation and elimination entries must
be reported on a separate line on the
attached schedule, so that the separate
financial accounting income (loss) of each
other includible corporation or entity
remains separately stated. For example, if
the net income (after consolidation and
elimination entries) of a sub-consolidated
U.S. group of other includible
corporations or entities is being reported
on line 7a, the attached supporting
schedule should report the income (loss)
of each separate other includible
corporation or entity from each
corporation’s own financial accounting net
income statement or books and records,
and any consolidation or elimination
entries (for intercompany dividends,
minority interests, etc.) not reportable on
Part I, line 8, should be reported on the
attached supporting schedule as a net
amount on a line separate and apart from
lines that report each other includible
corporation’s or entity’s separate net
income (loss).

Line 8. Adjustment to
Eliminations of Transactions
Between Includible Entities and
Nonincludible Entities
Adjustments on Part I, line 8, to reverse
certain financial accounting consolidation
or elimination entries are necessary to
ensure that transactions between
includible corporations and nonincludible
U.S. or foreign entities are not eliminated,
in order to report the correct total amount
on Part I, line 11. Also, additional
consolidation entries and eliminations
entries may be necessary on Part I, line
8, related to transactions between
includible corporations that are in the
consolidated financial statement group
and other includible corporations and
entities that are not in the consolidated
financial statement group but that are
reported on Part I, line 7, in order to
report the correct total amount on Part I,
line 11.
Include on Part I, line 8, the total of the
following: (i) amounts of any adjustments
to consolidation entries and elimination
entries that are contained in the amount
reported on Part I, line 4, required as a
result of removing amounts on Part I, line
5 or 6; and (ii) amounts of any additional
consolidation entries and elimination
entries that are required as a result of
including amounts on Part I, line 7. This is
necessary in order that the consolidation
entries and intercompany eliminations
entries included in the amount reported
on Part I, line 11 are only those applicable
to the financial net income (loss) of
includible corporations for the financial
statement period. For example,
adjustments must be reported on line 8 to
remove minority interest and to reverse
the elimination of intercompany dividends

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included on Part I, line 4 that relate to the
net income of entities removed on Part I,
line 5 or 6, because the income to which
the consolidation or elimination entries
relate has been removed. Also, for
example, consolidation or elimination
entries must be reported on line 8 to
reflect any minority interest ownership in
the net income of other includible
corporations or entities reported on Part I,
line 7, and to eliminate any intercompany
dividends between corporations or
entities whose income is included on Part
I, line 7 and other corporations included in
the consolidated U.S. federal income tax
return.
If a corporate owner of an interest in
another entity (entity): (1) accounts for the
interest in entity in the owner
corporation’s separate general ledger on
the equity method, and (2) fully
consolidates entity in the owner
corporation’s consolidated financial
statements, but entity is not includible in
the owner corporation’s consolidated U.S.
federal income tax return, then, as part of
reversing all consolidation and elimination
entries for the nonincludible entity, the
corporate owner must reverse on
Schedule M-3, Part I, line 8, the
elimination of the equity income inclusion
from entity. If the owner corporation does
not account for entity on the equity
method on its own general ledger, it will
not have eliminated the equity income for
consolidated financial statement
purposes, and therefore will have no
elimination of equity income to reverse.
The attached supporting schedule for
Part I, line 8, must identify the type (e.g.,
minority interest, intercompany dividends,
etc.) and amount of consolidation or
elimination entries reported, as well as
the names of the entities to which they
pertain. It is not necessary, but it is
permitted, to report intercompany
eliminations that net to zero on Part I, line
8, such as intercompany interest income
and expense.

Line 9. Adjustment to Reconcile
Income Statement Period to Tax
Year
Include on line 9 any adjustments
necessary to the income (loss) of
includible corporations to reconcile
differences between the corporation’s
income statement period reported on line
2a and the corporation’s tax year. Attach
a schedule describing the adjustment.
Statutory accounting for an insurance
company subsidiary acquired or merged
may require the use of a financial
statement period for income reported on
Part I line 11 that differs from the period
reported on Part I line 4 or line 7. Report
on Part I line 10b adjustments to income
because of such differences in accounting
period.

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Line 10a. Intercompany
Dividend Adjustments To
Reconcile to Line 11
Line 10b. Other Statutory
Accounting Adjustments To
Reconcile to Line 11
Line 10c. Other Adjustments To
Reconcile to Amount on Line 11
Include on lines 10a, 10b, and 10c any
other adjustments to reconcile net income
(loss) on Part I, line 4 through Part I, line
9, with net income (loss) on Part I, line 11.
Include on line 10a the amount of any
intercompany dividend adjustment
required by statutory accounting. Include
on line 10b the amount of any other
required statutory accounting adjustment.
Include on line 10c the amount of any
other adjustment not required by statutory
accounting.
Normally, all intercompany dividends
will have been eliminated or excluded
from the financial accounting consolidated
net income (loss) reported on Part I, line
4. However, an insurance company may
be required to include certain
intercompany dividends on Part I, line 11,
so that the amount reported on Part I, line
11, agrees with statutory accounting net
income (Annual Statement). If the net
income (loss) of a corporation that files
Form 1120-PC or Form 1120-L is
included on Part I, line 4 or line 7, and is
computed on a basis other than statutory
accounting, include on line 10a the
adjustments necessary such that Part I,
line 11, includes intercompany dividends
in the net income (loss) for such
corporation to the extent required by
statutory accounting principles. (For
insurance companies included in the
consolidated U.S. federal income tax
return, see instructions for Part I, line 11
and Part II, line 7.)
Statutory accounting for an insurance
company subsidiary acquired or merged
may require the use of a financial
statement period for income reported on
Part I line 11 that differs from the period
reported on Part I line 4 or line 7. Report
on Part I line 10b adjustments to income
because of such differences in accounting
period.
For any adjustments reported on Part
I, lines 10a, 10b, and 10c, attach a
supporting schedule that provides, for
each corporation to which an adjustment
relates: the name and EIN of the
corporation, the amount of net income
included in Part I before any adjustments
on line 10, the amount of net income
included on Part I, line 11, the amount of
the net adjustment that is attributable to
intercompany dividend adjustments
required to be reported by statutory
accounting and included on Part I, line
10a, the amount of the net adjustment
attributable to other statutory accounting
requirements and included on Part I, line
10b, , and the amount of the remainder of
the net adjustment not required because

of statutory accounting and included on
Part I, line 10c. If any net adjustment is
included for the corporation on Part I,
lines 10b or 10c, attach a supplemental
supporting schedule identifying the line
(10b or 10c), the type of each adjustment
included in the net adjustment, and the
amount of each adjustment included in
the net adjustment.

Line 11. Net Income (Loss) per
Income Statement of Includible
Corporations
Report on line 11 the net income (loss)
per the income statement (or books and
records, if applicable) of the life insurance
company. In the case of a U.S.
consolidated tax group, report the
consolidated income statement net
income (loss) of all corporations listed on
Form 851and included in the consolidated
U.S. federal income tax return for the tax
year. Amounts reported in column (a) of
Parts II and III (see instructions below)
must be reported on the same accounting
method as is used to report the amount of
net income (loss) per income statement of
includible corporations on Part I, line 11,
which for insurance companies is usually
statutory accounting. (For insurance
companies included in the consolidated
U.S. federal income tax return, see
instructions for Part I, line 10 and Part II,
line 7.)
Do not, in any event, report on this line
11 the net income of entities not listed on
Form 851 and not included in the
consolidated U.S. federal income tax
return for the tax year. For example, it is
not permissible to remove the income of
non-includible entities on lines 5 and/or 6,
above, then to add back such income on
lines 7 through 10, such that the amount
reported at line 11 includes the net
income of entities not includible in the
consolidated U.S. federal income tax
return. A principal purpose of Schedule
M-3 is to report on this Part I, line 11, only
the financial accounting net income of
only the corporations included in the
consolidated U.S. federal income tax
return.
Whether or not the corporation
prepares financial statements, Part I, line
11, must include all items that impact the
net income (loss) of the corporation even
if they are not recorded in the profit and
loss accounts in the corporation’s general
ledger, including, for example, all
post-closing adjusting entries (including
workpaper adjustments) and dividend
income or other income received from
non-includible corporations.
Example 3.
1. U.S. life insurance company P is
publicly traded and files Form 10-K with
the SEC. P owns 80% or more of the
stock of 75 U.S. corporations, DS1
through DS75, between 51% and 79% of
the stock of 25 U.S. corporations DS76
through DS100, and 100% of the stock of
50 foreign subsidiaries FS1 through
FS50. P eliminates all dividend income
from DS1 through DS100 and FS1

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through FS50 in financial statement
consolidation entries. Furthermore, P
eliminates the minority interest ownership,
if any, of DS1 through DS100 in financial
statement consolidation entries. P’s SEC
Form 10-K includes P, DS1 through
DS100 and FS1 through FS50 on a fully
consolidated basis. P files a consolidated
U.S. income tax return with DS1 through
DS75.
P must check “Yes” on Part I, line 1a.
On Part I, line 4, P must report the
consolidated net income from the SEC
Form 10-K for the consolidated financial
statement group of P, DS1 through
DS100, and FS1 through FS50. P must
remove the net income (loss) of FS1
through FS50 on Part I, lines 5a or 5b, as
applicable. P must remove the net income
(loss) before minority interests of DS76
through DS100 on Part I, lines 6a or 6b,
as applicable. P must reverse on Part I,
line 8:
a. The elimination of dividends
received by P and DS1 through DS75
from DS76 through DS100 and FS1
through FS50; and; and
b. The recognition of minority
interests’ share of the net income (loss) of
DS76 through DS100. (Note: The minority
interests’ share, if any, of the income of
DS1through DS75 must be reported in
Part II, line 8, Minority interest for
includible corporations.)
P reports on Part I, line 11, the
consolidated financial statement net
income (loss) attributable to the includible
corporations. Intercompany transactions
between the includible corporations that
had been eliminated in the net income
amount on line 4 remain eliminated in the
net income amount on line 11.
Transactions between the includible
corporations and the nonincludible
entities that are eliminated in the net
income amount on line 4 are included in
the net income amount on line 11 since
the elimination of those transactions were
reversed on line 8.
2. Foreign corporation F owns 100%
of the stock of U.S. life insurance
company P. P owns 100% of the stock of
DS1, 60% of the stock of DS2, and 100%
of the stock of FS1. F prepares certified
audited financial statements. P does not
prepare any financial statements. P files a
consolidated U.S. federal income tax
return with DS1.
P must not complete Schedule M-3,
Part I, with reference to the financial
statements of its foreign parent F. P must
check “No” on Part I, lines 1a, 1b, and 1c,
skip lines 2a through 3c of Part I, and
enter worldwide net income (loss) per the
books and records of the includible
corporations (P and DS1) on Part I, line 4.
If the amount on line 4 includes the
income (loss) of DS2 and FS1 or is not on
the statutory basis, P must enter any
necessary adjustments on lines 5a
through 10 in order for Part I, line 11, to
report the net income (loss) of includible
corporations P and DS1, net of
eliminations for transactions between P

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and DS1. In particular, P must make any
required adjustments on Part I line 10 in
order for the net income on line 11 for life
insurance companies to be on the
statutory basis.
Example 4.
1. U.S. life insurance company P
owns 60% of corporation DS1 which is
fully consolidated in P’s financial
statements. P does not account for DS1
in P’s separate general ledger on the
equity method. DS1 has net income of
$100 (before minority interests) and pays
dividends of $50, of which P receives
$30. The dividend is eliminated in the
consolidated financial statements. In its
financial statements, P consolidates DS1
and includes $60 of net income ($100
less the minority interest of $40) on Part I,
line 4.
P must remove the $100 net income of
DS1 on Part I, line 6a. P must reverse on
Part I, line 8, the elimination of the $40
minority interest net income of DS1. In
addition, P reverses its elimination of the
$30 intercompany dividend in its financial
statements on Part I, line 8. The net result
is that P includes the $30 dividend from
DS1 at Part I, line 11, and on Part II, line
7, column (a). P’s taxable dividend
income from DS1 must be reported on
Part II, line 7, column (d).
2. U.S. life insurance company C
owns 60% of the capital and profits
interests in U.S. LLC N. C does not
account for N in P’s separate general
ledger on the equity method. N has net
income of $100 (before minority interests)
and makes no distributions during the tax
year. C treats N as a corporation for
financial statement purposes and as a
partnership for U.S. federal income tax
purposes. In its financial statements, C
consolidates N and includes $60 of net
income ($100 less the minority interest of
$40) on Part I, line 4.
C must remove the $100 net income of
N on Part I, line 6a. C must reverse on
Part I, line 8, the elimination of the $40
minority interest net income of N. The
result is that C includes no income for N
either on Part I, line 11, or on Part II, line
9, column (a). C’s taxable income from N
must be reported by C on Part II, line 9.
3. U.S. life insurance company P
owns 60% of corporation DS1, which is
fully consolidated in P’s financial
statements. P accounts for DS1 in P’s
separate general ledger on the equity
method. DS1 has net income of $100
(before minority interests) and pays
dividends of $50, of which P receives
$30. The dividend reduces P’s investment
in DS1 for equity method reporting on P’s
separate general ledger where P includes
its 60% equity share of DS1 income,
which is $60. In its financial statements, P
eliminates the DS1 equity method income
of $60 and consolidates DS1, including
$60 of net income ($100 less the minority
interest of $40) on Part I, line 4.
P must remove the $100 net income of
DS1 on Part I, line 6a. P must reverse on

Part I, line 8, the elimination of the $40
minority interest net income of DS1 and
the elimination of the $60 of DS1 equity
income. The net result is that P includes
the $60 of equity method income from
DS1 at Part I, line 11, and on Part II, line
6, column (a). P’s taxable dividend
income from its investment in DS1 must
be reported on Part II, line 7, column (d).
4. U.S. life insurance company C
owns 60% of the capital and profits
interests in U.S. LLC N. C accounts for N
in C’s separate general ledger on the
equity method. N has net income of $100
(before minority interests) and makes no
distributions during the tax year. C treats
N as a corporation for financial statement
purposes and as a partnership for U.S.
federal income tax purposes. For equity
method reporting on C’s separate general
ledger, C includes its 60% equity share of
N income, which is $60. In its financial
statements, C eliminates the $60 of N
equity method income and consolidates N
including $60 of net income ($100 less
the minority interest of $40) on Part I, line
4.
C must remove the $100 net income of
N on Part I, line 6a. C must reverse on
Part I, line 8, the elimination of the $40
minority interest net income of N and the
elimination of the $60 of N equity method
income. The result is that C includes the
$60 of equity method income for N on
Part I, line 11, and on Part II, line 9,
column (a). C’s taxable income from N
must be reported by C on Part II, line 9,
column (d).
5. U.S. life insurance company C
owns 60% of the capital and profits
interests in U.S. LLC N. C accounts for N
in C’s separate general ledger on the
equity method. N has net income of $100
(before minority interests) and pays a $50
cash distribution, of which C receives
$30. The dividend reduces C’s investment
in N for equity method reporting on C’s
separate general ledger. C treats N as a
corporation for financial statement
purposes and as a partnership for U.S.
federal income tax purposes. For equity
method reporting on C’s separate general
ledger, C includes its 60% equity share of
N income, which is $60. In its financial
statements, C eliminates the $60 of N
equity method income and consolidates N
and includes $60 of net income ($100
less the minority interest of $40) on Part I,
line 4.
C must remove the $100 net income of
N on Part I, line 6a. C must reverse on
Part I, line 8, the elimination of the $40
minority interest net income of N and the
elimination of the $60 of N equity method
income. The result is that C includes the
$60 of equity method income for N on
Part I, line 11, and on Part II, line 9,
column (a). C’s taxable income from N
must be reported by C on Part II, line 9,
column (d).
Example 5. U.S. life insurance
company P owns 80% of the stock of
corporation DS1. DS1 is included in P’s

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consolidated federal income tax return,
even though DS1 is not included in P’s
consolidated financial statements on
either a consolidated basis or on the
equity method. DS1 has current year net
income of $100 after taking into account
its $40 interest payment to P. P has net
income of $1,040 after recognition of the
interest income from DS1. Because DS1
is an includible corporation, 100% of the
net income of both P and DS1 must be
reported on Form 1120-L, page 1 of the
PDS consolidated U.S. federal income tax
return, and the intercompany interest
income and expense must be removed by
consolidation elimination entries.
P must report its financial statement
net income of $1,040 on Part I, line 4, and
reports DS1’s net income of $100 on Part
I, line 7. Then, in order to reflect the full
consolidation of the financial accounting
net income of P and DS1 at Part I, line
11, Net income (loss) per income
statement of includible corporations, the
following consolidation and elimination
entries are reported on Part I, line 8: (a)
offsetting entries to remove the $40 of
interest income received from DS1
included by P on line 4, and to remove
the $40 of interest expense of DS1
included in line 7 for a net change of zero;
and (b) an entry to reflect the $20 minority
interest in the net income of DS1 (DS1
net income of $100 × 20% minority
interest). The result is that Part 1, line 11,
reports $1,120: $1,040 from line 4, $100
from line 7, and ($20) from line 8. Stated
another way, Part I, line 11, includes the
entire $1,000 net income of P, measured
before recognition of the intercompany
interest income from DS1 and the
consolidation of DS1 operations, plus the
entire $140 net income of DS1, measured
before interest expense to P, less the
minority interest ownership of $20 in
DS1’s separate net income ($100). The
PDS consolidated U.S. federal income tax
group is required to include on the
attached supporting schedule for Part,
line 8, the details of the adjustment to the
minority interest in the net income of DS1,
but is not required to report the offsetting
adjustment to the intercompany
elimination of interest income and interest
expense (though it is permitted to do so).

Specific Instructions for
Parts II and III
For consolidated U.S. income tax returns,
file supporting schedules for each
includible corporation. See Consolidated
returns in the Instructions for Form
1120-L.

General Format of Parts II and
III
Indicate on the line after the common
parent’s name on Part II and Part III,
whether the Schedule M-3 is for the: (1)
consolidated tax group; (2) parent
corporation; (3) consolidation
eliminations; (4) subsidiary corporation; or

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(5) Mixed 1120/L/PC, by checking the
appropriate box. If applicable, indicate on
the second line of checkboxes, whether
the Schedule M-3 is for a
sub-consolidated: (6) 1120-L group; or (7)
1120-L eliminations. (See sections above
titled Schedule M-3 Consolidated
Schedule M-3 vs. Consolidating
Schedules M-3 for Form 1120-L Groups
and Schedule M-3 Consolidation for
Mixed Groups (1120/L/PC).)
For each line item in Parts II and III,
report in column (a) the amount of net
income (loss) included in Part I, line 11,
and report in column (d) the amount
included in taxable income on Form
1120-L, page 1, line 20.
Note. A schedule or explanation may be
attached to any line even if none is
required.

When To Complete Columns (a)
and (d)
A life insurance company is not required
to complete columns (a) and (d) of Parts
II and III for the first tax year the life
insurance company is required to file
Schedule M-3, and for all subsequent
years the corporation is required to file
Schedule M-3, the corporation must
complete Schedule M-3 in its entirety.
Accordingly, the life insurance company
must complete columns (a) and (d) of
Parts II and III for all tax years
subsequent to the first tax year the life
insurance company is required to file
Schedule M-3. For example, if a
corporation was required to file Schedule
M-3 as a member of a consolidated U.S.
federal income tax group and the
corporation leaves the U.S. consolidated
tax group, the corporation is required to
complete Schedule M-3 in its entirety in
any succeeding tax year that the
corporation is required to complete
Schedule M-3. However, if the
corporation joins in filing a different U.S.
consolidated tax return, then the
corporation must complete its Schedule
M-3 in its entirety in any year that the U.S.
consolidated tax group must complete its
Schedule M-3 in its entirety.
If, for any tax year (or tax years) prior
to the first tax year a life insurance
company is required to file Schedule M-3,
a life insurance company voluntarily files
Schedule M-3 , then in those voluntary
filing years the life insurance company is
not required to complete columns (a) and
(d) of Parts II and III. In addition, in the
first tax year the life insurance company is
required to file Schedule M-3 the life
insurance company is not required to
complete columns (a) and (d) of Parts II
and III.
If a life insurance company that is not
a mixed group chooses not to complete
columns (a) and (d) of Parts II and III in
the first tax year the life insurance
company is required to file Schedule M-3
(or in any year in which the life insurance
company voluntarily files Schedule M-3),
then Part II, line 30, is reconciled by the
life insurance company (or, in the case of

a U.S. consolidated tax group, by the
group’s parent life insurance company on
Part II, line 30, of the group’s
consolidated Schedule M-3) in the
following manner:
1. Report the amount from Part I, line
11, on Part II, line 30, column (a);
2. Leave blank Part II, lines 1 through
29, columns (a) and (d);
3. Leave blank Part III, columns (a)
and (d); and
4. Report on Part II, line 30, column
(d), the sum of Part II, line 29, columns
(a), (b), and (c).
Note. Mixed groups should see the
section, Schedule M-3 Consolidation for
Mixed Groups (1120/L/PC)
In the case of a U.S. consolidated tax
group that is not a mixed group, the
reconciliation described in the preceding
paragraph must be performed by each
member of the U.S. consolidated tax
group. However, because Part I must be
completed only once on the consolidated
Schedule M-3 by the parent corporation
of the U.S. consolidated tax group, the
amount reported on Part II, line 30,
column (a), by each member of the U.S.
consolidated tax group on its respective
Schedule M-3 is the amount attributable
to that member that is reported on the
consolidated Schedule M-3, Part I, line
11, completed by the parent corporation.
Accordingly, the amount reported on Part
II, line 30, columns (a) through (d) of the
consolidated Schedule M-3 is the sum of
the amounts reported by each member of
the U.S. consolidated tax group on its
respective Schedule M-3 (including a
Schedule M-3 for consolidation
eliminations, if necessary). Note that the
amount reported on Part II, line 30,
column (a) of the consolidated Schedule
M-3 must equal the amount reported on
Part I, line 11 of the consolidated
Schedule M-3, and that the amount
reported on Part II, line 30, column (d) of
the consolidated Schedule M-3 must
equal the amount reported on the
consolidated Form 1120-L, page 1, line
20.

When To Complete Columns (b)
and (c)
Columns (b) and (c) of Parts II and III
must be completed for any tax year for
which the life insurance company files
Schedule M-3.
For any item of income, gain, loss,
expense, or deduction for which there is a
difference between columns (a) and (d),
the portion of the difference that is
temporary must be entered in column (b)
and the portion of the difference that is
permanent must be entered in column (c).
If financial statements are prepared by
the life insurance company in accordance
with statutory accounting principles
(SAP), differences that are treated as
temporary for SAP must be reported in
column (b) and differences that are
permanent (that is, not temporary for
SAP) must be reported in column (c).

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Generally, pursuant to SAP, a temporary
difference affects (creates, increases, or
decreases) a deferred tax asset or
liability.
If the life insurance company does not
prepare financial statements, or the
financial statements are not prepared in
accordance with SAP, report in column
(b) any difference that the life insurance
company believes will reverse in a future
tax year (that is, have an opposite effect
on taxable income in a future tax year (or
years) due to the difference in timing of
recognition for financial accounting and
U.S. federal income tax purposes) or is
the reversal of such a difference that
arose in a prior tax year. Report in column
(c) any difference that the life insurance
company believes will not reverse in a
future tax year (and is not the reversal of
such a difference that arose in a prior tax
year).
If the life insurance company is unable
to determine whether a difference
between column (a) and column (d) for an
item will reverse in a future tax year or is
the reversal of a difference that arose in a
prior tax year, report the difference for
that item in column (c).
Example 6. For the 2006, 2007, and
2008 tax years, life insurance company A
has total consolidated assets on the last
day of the tax year as reported on
Schedule L, Part II, line 2b, of $8 million,
$11 million, and $12 million, respectively.
A is required to file Schedule M-3 for its
2007 and 2008 tax years.
For its 2006 tax year, A voluntarily files
Schedule M-3 and does not complete
columns (a) and (d) of Parts II and III.
For A’s 2007 tax year, the first tax year
that A is required to file Schedule M-3, A
is only required to complete Part I and
columns (b) and (c) of Parts II and III. For
A’s 2008 tax year, A is required to
complete Schedule M-3 in its entirety.
Example 7. Life insurance company B
is a U.S. publicly traded corporation that
files a consolidated U.S. federal income
tax return and prepares consolidated
SAP/GAAP financial statements. In prior
years, B acquired intellectual property (IP)
and goodwill through several corporate
acquisitions. The IP is amortizable for
both U.S. federal income tax and financial
statement purposes. In the current year,
B’s annual amortization expense for IP is
$9,000 for U.S. federal income tax
purposes and $6,000 for financial
statement purposes. In its financial
statements, B treats the difference in IP
amortization as a temporary difference.
The goodwill is not amortizable for U.S.
federal income tax purposes and is
subject to impairment for financial
statement purposes. In the current year,
B records an impairment charge on the
goodwill of $5,000. In its financial
statements, B treats the goodwill
impairment as a permanent difference. B
must report the amortization attributable
to the IP on Part III, line 30, and report
$6,000 in column (a), a temporary

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difference of $3,000 in column (b), and
$9,000 in column (d). B must report the
goodwill impairment on Part III, line 29,
and report $5,000 in column (a), a
permanent difference of ($5,000) in
column (c), and $0 in column (d).

Reporting Requirements for
Parts II and III
Except for mixed group consolidation, the
number of Parts II must equal the number
of Parts III filed by the corporation. Mixed
groups should see the discussion,
Schedule M-3 Consolidation for Mixed
groups (1120/L/PC).

General Reporting
Requirements
If an amount is attributable to a reportable
transaction described in Regulations
section 1.6011-4(b), the amount must be
reported in columns (a), (b), (c), and (d),
as applicable, of Part II, line 12, Items
relating to reportable transactions,
regardless of whether the amount would
otherwise be reported on Part II or Part III
of Schedule M-3. Thus, if a taxpayer files
Form 8886, Reportable Transaction
Disclosure Statement, the amounts
attributable to that reportable transaction
must be reported on Part II, line 12.
A life insurance company is required to
report in column (a) of Parts II and III the
amount of any item specifically listed on
Schedule M-3 that is in any manner
included in the life insurance company’s
current year annual statement net income
(loss) or in an income or expense account
maintained in the life insurance
company’s books and records, even if
there is no difference between that
amount and the amount included in
taxable income unless (a) otherwise
provided in these instructions or (b) the
amount is attributable to a reportable
transaction described in Regulations
section 1.6011-4(b) and is therefore
reported on Part II, line 12. For example,
with the exception of interest income
reflected on a Schedule K-1 received by a
life insurance company as a result of the
life insurance company’s investment in a
partnership or other pass-through entity,
all interest income, whether from
unconsolidated affiliated companies, third
parties, banks, or other entities, whether
from foreign or domestic sources,
whether taxable or exempt from tax and
regardless of how or where the income is
classified in the life insurance company’s
annual statement, must be included on
Part II, line 13, column (a). Likewise, all
fines and penalties paid to a government
or other authority for the violation of any
law for which fines or penalties are
assessed must be included on Part III,
line 12, column (a), regardless of the
government authority that imposed the
fines or penalties, regardless of whether
the fines or penalties are civil or criminal,
regardless of the classification,
nomenclature, or terminology attached to
the fines or penalties by the imposing
authority in its actions or documents, and
regardless of how or where the fines or

penalties are classified in the life
insurance company’s summary of
operations or the income and expense
accounts maintained in the life insurance
company’s books and records.
If a life insurance company would be
required to report in column (a) of Parts II
and III the amount of any item specifically
listed on Schedule M-3 in accordance
with the preceding paragraph, except that
the life insurance company has
capitalized the item of income or expense
and reports the amount in its annual
statement or in asset and liability
accounts maintained in the life insurance
company’s books and records, the life
insurance company must report the
proper tax treatment of the item in
columns (b), (c), and (d), as applicable.
Furthermore, in applying the two
preceding paragraphs, a life insurance
company is required to report in column
(a) of Parts II and III the amount of any
item specifically listed on Schedule M-3
that is included in the life insurance
company’s annual statement or exists in
the life insurance company’s books and
records, regardless of the nomenclature
associated with that item in the annual
statement or books and records. Accurate
completion of Schedule M-3 requires
reporting amounts according to the
substantive nature of the specific line
items included in Schedule M-3 and
consistent reporting of all transactions of
like substantive nature that occurred
during the tax year. For example, all
expense amounts that are included in the
annual statement or exist in the books
and records that represent some form of
“Bad debt expense”, must be reported on
Part III, line 33, in column (a), regardless
of whether the amounts are recorded or
stated under different nomenclature in the
annual statement or the books and
records such as: “Provision for doubtful
accounts”; “Expense for uncollectible
notes receivable”; or “Impairment of trade
accounts receivable”. Likewise, as stated
in the preceding paragraph, all fines and
penalties must be included on Part III, line
12, column (a), regardless of the
terminology or nomenclature attached to
them by the life insurance company in its
books and records or annual statement.
With limited exceptions, Part II
includes lines for specific items of income,
gain, or loss (income items). (See Part II,
lines 1 through 24.) If an income item is
described in Part II, lines 1 through 24,
report the amount of the item on the
applicable line, regardless of whether
there is a difference for the item. If there
is a difference for the income item, or only
a portion of the income item has a
difference and a portion of the item does
not have a difference, and the item is not
described in Part II, lines 1 through 24,
report and describe the entire amount of
the item on Part II, line 25.
With limited exceptions, Part III
includes lines for specific items of
expense or deduction (expense items).
(See Part III, lines 1 through 37.) If an

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expense item is described on Part III,
lines 1 through 37, report the amount of
the item on the applicable line, regardless
of whether there is a difference for the
item. If there is a difference for the
expense item, or only a portion of the
expense item has a difference and a
portion of the item does not have a
difference and the item is not described in
Part III, lines 1 through 37, report and
describe the entire amount of the item on
Part III, line 38.
If there is no difference between the
annual statement amount and the taxable
amount of an entire item of income, loss,
expense, or deduction and the item is not
described or included in Part II, lines 1
through 24, or Part III, lines 1 through 37,
report the entire amount of the item in
column (a) and (d) of Part II, line 28.
Separately stated and adequately
disclosed. Each difference reported in
Parts II and III must be separately stated
and adequately disclosed. In general, a
difference is adequately disclosed if the
difference is labeled in a manner that
clearly identifies the item or transaction
from which the difference arises. For
further guidance about adequate
disclosure, see Regulations section
1.6662-4(f) Rev. Proc. 2004-45, 2004-31
I.R.B. 140 and Rev. Proc. 2005-75,
2005-50 I.R.B. 1137. If a specific item of
income, gain, loss, expense, or deduction
is described on Part II, lines 9 through 24,
or Part III, lines 1 through 37, and the line
does not indicate to “attach schedule” or
“attach details”, and the specific
instructions for the line do not call for an
attachment of a schedule or statement,
then the item is considered separately
stated and adequately disclosed if the
item is reported on the applicable line and
the amount(s) of the item(s) are reported
in the applicable columns of the
applicable line. See the instructions
beginning on page 8 for specific
additional information required to be
provided for amounts reported on Part II,
lines 1 through 8.
Note. A schedule or explanation may be
attached to any line even if none is
required. Except as otherwise provided,
differences for the same item must be
combined or netted together and reported
as one amount on the applicable line of
Schedule M-3. However, differences for
separate items must not be combined or
netted together. Each item (and
corresponding amount attributable to that
item) must be separately stated and
adequately disclosed on the applicable
line of Schedule M-3, or any schedule
required to be attached, even if the
amounts are below a certain dollar
amount.
Example 8. Life insurance company C
is a calendar year taxpayer that placed in
service ten depreciable fixed assets in
2000. C was required to file Schedule M-3
for its 2006 tax year and is required to file
Schedule M-3 for its 2007 tax year. C’s
total depreciation expense for its 2007 tax
year for five of the assets is $50,000 for

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summary of operations purposes and
$70,000 for U.S. federal income tax
purposes. C’s total annual depreciation
expense for its 2007 tax year for the other
five assets is $40,000 for summary of
operations purposes and $30,000 for U.S.
federal income tax purposes. In its annual
statement, C treats the differences
between annual statement and U.S.
federal income tax depreciation expense
as giving rise to temporary differences
that will reverse in future years. C must
combine all of its depreciation
adjustments. Accordingly, C must report
on Part III, line 32, for its 2007 tax year
income statement depreciation expense
of $90,000 in column (a), a temporary
difference of $10,000 in column (b), and
U.S. federal income tax depreciation
expense of $100,000 in column (d).
Example 9. Life insurance company D
is a calendar year taxpayer that was
required to file Schedule M-3 for its 2006
tax year and is required to file Schedule
M-3 for its 2007 tax year. On December
31, 2007, D establishes two reserve
accounts in the amount of $100,000 for
each account. One reserve account is an
allowance for agency balances that are
estimated to be uncollectible. The second
reserve is an estimate of future office
closure expenses. In its annual
statement, D treats the two reserve
accounts as giving rise to temporary
differences that will reverse in future
years. The two reserves are expenses in
D’s 2007 annual statement but are not
deductions for U.S. federal income tax
purposes in 2007. D must not combine
the Schedule M-3 differences for the two
reserve accounts. D must report the
amounts attributable to the allowance for
bad debts on Part III, line 33, Bad debt
expense/agency balances written off, and
must separately state and adequately
disclose the amount attributable to the
other reserve, office closure costs, on a
required, attached schedule that supports
the amounts at Part III, line 38.
Example 10. Life insurance company
F is a calendar year taxpayer that was
required to file Schedule M-3 for its 2006
tax year and is required to file Schedule
M-3 for its 2007 tax year. During 2007, F
incurs $200 of meals and entertainment
expenses that F deducts in computing net
income per the income statement. $50 of
the $200 is subject to the 50% limitation
under section 274(n). F treats the
limitation on deductions for meals and
entertainment as a permanent difference.
Because meals and entertainment
expenses are specifically described in
Part III, line 11, Meals and entertainment,
F must report all of its meals and
entertainment expenses on this line,
regardless of whether there is a
difference. Accordingly, F must report
$200 in column (a), $25 in column (c),
and $175 in column (d). F must not report
the $150 of meals and entertainment
expenses that are deducted in F’s annual
statement net income and are fully
deductible for U.S. federal income tax

purposes on Part II, line 28 and the $50
subject to the limitation under section
274(n) on Part III, line 11.

Part II. Reconciliation of
Net Income (Loss) per
Income Statement of Life
Insurance Companies With
Taxable Income per Return
Lines 1 Through 8. Additional
Information for Each Life
Insurance Company
For any item reported on Part II, lines 1, 3
through 6, or 8, attach a supporting
schedule that provides the name of the
entity for which the item is reported, the
type of entity (corporation, partnership,
etc.), the entity’s EIN (if applicable), and
the item amounts for columns (a) through
(d). See the instructions for Part II, lines 2
and 7, for the specific information
required for those particular lines.

Line 1. Income (Loss) From
Equity Method Foreign
Corporations
Report on line 1, column (a), the income
statement income (loss) included in Part I,
line 11, for any foreign corporation
accounted for on the equity method and
remove such amount in column (b) or (c),
as applicable. Report the amount of
dividends received and other taxable
amounts received or includible from
foreign corporations on Part II, lines 2
through 5, as applicable.

Line 2. Gross Foreign
Dividends Not Previously Taxed
Except as otherwise provided in this
paragraph, report on line 2, column (d),
the amount (before any withholding tax)
of any foreign dividends included in
current year taxable income on Form
1120-L, page 1, line 20, and report on line
2, column (a), the amount of dividends
from any foreign corporation included in
Part I, line 11. Do not report on Part I, line
2, any amounts that must be reported on
Part II, lines 3 or 4, or dividends that were
previously taxed and must be reported on
Part II, line 5. (See the instructions below
for Part II, lines 3, 4 and 5.) Report
amounts in columns (b) and (c), as
applicable.
For any dividends reported on Part II,
line 2, that are received on a class of
voting stock of which the life insurance
company directly or indirectly owned 10%
or more of the outstanding shares of that
class at any time during the tax year,
report on an attached supporting
schedule for Part II, line 2, (1) the name
of the dividend payer, (2) the payer’s EIN
(if applicable), (3) the class of voting stock
on which the dividend was paid, (4) the
percentage of the class directly or
indirectly owned, and (5) to (8) the item
amounts for columns (a) through (d).

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Line 3. Subpart F, QEF, and
Similar Income Inclusions
Report on line 3, column (d), the amount
included in taxable income under section
951 (relating to Subpart F), gains or other
income inclusions resulting from elections
under sections 1291(d)(2) and 1298(b)(1),
and any amount included in taxable
income pursuant to section 1293 (relating
to qualified electing funds). The amount of
Subpart F income corresponds to the total
of the amounts reported by the life
insurance company on line 6, Schedule I,
of all Forms 5471, Information Return of
U.S. Persons With Respect to Certain
Foreign Corporations. The amount of
qualified electing fund income
corresponds to the total of the amounts
reported by the life insurance company on
line 3(a), Part II, of all Forms 8621,
Return by a Shareholder of a Passive
Foreign Investment Company or Qualified
Electing Fund.
Also include on line 3 PFIC
mark-to-market gains and losses under
section 1296. Do not report such gains
and losses on Part II, line 16.

Line 4. Section 78 Gross-Up
Report on line 4, column (d), the amount
of any section 78 gross-up not
included in column (d) of Part II, lines
9, 10, and 11, Income (loss) from U.S.
partnerships, foreign partnerships and
other pass-through entities. The section
78 gross-up amount on this line 4 must
correspond to the total section 78
gross-up amounts reported by the
corporation on all Forms 1118, Foreign
Tax Credit-Corporations, excluding the
amounts reported in column (d) of Part II,
lines 9, 10 and 11.

Line 5. Gross Foreign
Distributions Previously Taxed
Report on line 5, column (a), any
distributions received from foreign
corporations that were included in Part I,
line 11, and that were previously taxed for
U.S. federal income tax purposes. For
example, include in column (a) amounts
that are excluded from taxable income
under sections 959 and 1293(c). Remove
such amount in column (b) or (c), as
applicable. Report the full amount of the
distribution before any withholding tax.
Since previously taxed foreign
distributions are not currently taxable, line
5, column (d) is shaded. (Also, see
instructions above for Part II, line 2.)

Line 6. Income (Loss) From
Equity Method U.S.
Corporations
Report on line 6, column (a), the income
statement income (loss) included in Part I,
line 11, for any U.S. corporation
accounted for on the equity method and
remove such amount in column (b) or (c),
as applicable. Report on Part II, line 7,
dividends received from any U.S.
corporation accounted for on the equity
method.

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Line 7. U.S. Dividends Not
Eliminated in Tax Consolidation
Report on line 7, column (a), the amount
of dividends included in Part I, line 11 that
were received from any U.S. corporation.
Report on line 7, column (d), the amount
of any U.S. dividends included in taxable
income on Form 1120-L, page 1, line 20.
Usually, the amounts included on line
7, columns (a) and (d) include only
dividends received from U.S. corporations
that are not included in the U.S.
consolidated tax group because
intercompany dividends (dividends
received from includible corporations
listed on Form 851) are eliminated or
excluded for financial accounting
purposes and eliminated for the
calculation of U.S. taxable income. In the
case of an insurance company included in
the consolidated U.S. federal income tax
return required to report intercompany
dividends as part of statutory accounting
net income, include such intercompany
dividends on Part II, line 7 column (a) and
the taxable amount of those dividends on
Part II, line 7 column (d). (For insurance
companies included in the consolidated
U.S. federal income tax return, see
instructions for Part I, lines 10 and 11.)
For any intercompany dividends
(dividends received from includible
corporations listed on Form 851) included
on Part II, line 7, report on an attached
supporting schedule for Part II, line 7, (1)
the name of the dividend payer, (2) the
payer’s EIN, (3) the class of stock or
security on which the dividends were
paid, (4) the amount of any net
adjustment included on Part I, line 10a,
for such dividends, and (5) to (8) the item
amounts for columns (a) through (d).
For any dividends included on Part II,
line 7, that are not intercompany
dividends (dividends received from
includible corporations listed on Form
851) that are received on classes of
voting stock in which the corporation
directly or indirectly owned 10% or more
of the outstanding shares of that class at
any time during the tax year, report on an
attached supporting schedule for Part II,
line 7, (1) the name of the dividend payer,
(2) the payer’s EIN (if applicable), (3) the
class of voting stock on which the
dividend was paid, (4) the percentage of
the class directly or indirectly owned, and
(5) to (8) the item amounts for columns
(a) through (d).

Line 8. Minority Interest for
Includible Corporations
Report on line 8, column (a), the minority
interest included in the income statement
income (loss) on Part I, line 11, for any
member of the U.S. consolidated tax
group that is less than 100% owned.
Example 11. Life insurance company
G is a calendar year taxpayer that was
required to file Schedule M-3 for its 2006
tax year and is required to file Schedule
M-3 for its 2007 tax year. G owns 90% of
the stock of U.S. corporation DS1. G files

a consolidated U.S. federal income tax
return with DS1 as the GDS1 U.S.
consolidated group. G prepares certified
SAP/GAAP financial statements for the
consolidated financial statement group
consisting of G and DS1. G has no net
income of its own, and G does not report
its equity interest in the income of DS1 on
its separate financial statements. DS1
has financial statement net income
(before minority interests) and taxable
income of $1,000 ($2,500 of revenue less
$1,500 cost of goods sold).
On the consolidated Schedule M-3,
Part I, line 4, Worldwide consolidated net
income (loss) per income statement, and
on line 11, Net income (loss) per income
statement of includible corporations, the
U.S. consolidated tax group GDS1 must
report $900 of financial statement net
income ($1,000 net income less $100
minority interest).
The GDS1 group must prepare one
consolidated Schedule M-3, Parts II and
III and three additional Schedules M-3,
Parts II and III: one for G, one for DS1,
and one for consolidation eliminations.
On the Schedule M-3, Parts II and III
for DS1, $1,000 is reported on Part II, line
28 and line 30, in both columns (a) and
(d). On G’s Schedule M-3, Parts II and III,
zero is reported on Part II, line 30, in both
columns (a) and (d). On the consolidation
eliminations Schedule M-3, Parts II and
III, on Part II, line 8 and line 30, the
minority interest elimination for the U.S.
consolidated tax group is reported as
($100) in column (a), $100 in column (c),
and $0 in column (d).
On the Schedule M-3, Parts II and III
for the U.S. consolidated tax group, on
Part II, line 8, Minority interest for
includible corporations, ($100) is reported
in column (a), $100 in column (c), and $0
in column (d). On Part II, line 28, the U.S.
consolidated tax group reports $1,000 in
both columns (a) and (d). As a result,
financial statement net income on Part II,
line 30, column (a), will total $900, net
permanent differences on Part II, line 30,
column (c), will total $100, and taxable
income on line 30, column (d), will total
$1,000.

distributive share of income or loss from a
U.S. or foreign partnership; and
3. In column (d), except for amounts
described in item 4., below, the sum of all
amounts of income, gain, loss, or
deduction attributable to the corporation’s
distributive share of income or loss from a
U.S. or foreign partnership (i.e., the sum
of all amounts reportable on the
corporation’s Schedule(s) K-1 received
from the partnership (if applicable)),
without regard to any limitations
computed at the partner level (e.g.,
limitations on utilization of charitable
contributions, capital losses, and interest
expense).
4. Do not report on Part II, line 9 or
10, as applicable, any portion of a
corporation’s deduction under section 199
(income attributable to domestic
production activities) even if some or all of
the corporation’s deduction under section
199 is attributable to a partnership
interest held by the corporation. A
corporation must report its deduction
under section 199 only on Part III, Line
37.
For each partnership reported on line 9
or 10, attach a supporting schedule that
provides the name, EIN (if applicable),
end of year profit-sharing percentage (if
applicable), end of year loss-sharing
percentage (if applicable), and the
amount reported in column (a), (b), (c), or
(d) of lines 9 or 10, as applicable.

Line 9. Income (Loss) From U.S.
Partnerships and Line 10.
Income (Loss) From Foreign
Partnerships

Example 12. U.S. life insurance
company H is a calendar year taxpayer
that was required to file Schedule M-3 for
its 2006 tax year and is required to file
Schedule M-3 for its 2007 tax year. H has
an investment in a U.S. partnership USP.
H prepares annual statements in
accordance with SAP. In its annual
statement, H treats the difference
between annual statement net income
and taxable income from its investment in
USP as a permanent difference. For its
2007 tax year, H’s annual statement net
income includes $10,000 of income
attributable to its share of USP’s net
income. H’s Schedule K-1 from USP
reports $5,000 of ordinary income, $7,000
of long-term capital gains, $4,000 of
charitable contributions, and $200 of
section 179 expense. H must report on
Part II, line 9, $10,000 in column (a), a
permanent difference of ($2,200) in
column (c), and $7,800 in column (d).

For any interest owned by the corporation
or a member of the U.S. consolidated tax
group that is treated as an investment in a
partnership for U.S. federal income tax
purposes (other than an interest in a
disregarded entity), report amounts on
Part II, line 9 or 10, as described below:
1. In column (a) the sum of the
corporation’s distributive share of income
or loss from a U.S. or foreign partnership
that is included in Part I, line 11;
2. In column (b) or (c), as applicable,
except for amounts described in item 4.,
below, the sum of all differences, if any,
attributable to the corporation’s

Example 13. Same facts as Example
12 except that corporation H’s charitable
contribution deduction is wholly
attributable to its partnership interest in
USP and is limited to $90 pursuant to
section 170(b)(2) due to other investment
losses incurred by H. In its financial
statements, H treated this limitation as a
temporary difference. H must not report
the charitable contribution limitation of
$3,910 ($4,000 -$90) on Part II, line 9. H
must report the limitation on Part III, line
21, and report the disallowed charitable
contributions of ($3,910) in columns (b)
and (d).

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Line 11. Income (Loss) From
Other Pass-Through Entities
For any interest in a pass-through entity
(other than an interest in a partnership
reportable on Part II, line 9 or 10, as
applicable) owned by a member of the
U.S. consolidated tax group (other than
an interest in a disregarded entity), report
the following on line 11:
1. In column (a) the sum of the
corporation’s distributive share of income
or loss from the pass-through entity that is
included in Part I, line 11;
2. In column (b) or (c), as applicable,
except for amounts described in item 4.,
below, the sum of all differences, if any,
attributable to the pass-through entity;
and
3. In column (d), except for amounts
described in item 4., below, the sum of all
taxable amounts of income, gain, loss, or
deduction reportable on the corporation’s
Schedules K-1 received from the
pass-through entity (if applicable).
4. Do not report on Part II, line 11, any
portion of a corporation’s deduction under
section 199 (income attributable to
domestic production activities) even if
some or all of the corporation’s deduction
under section 199 is attributable to an
interest in a pass-thru entity held by the
corporation. A corporation must report its
deduction under section 199 only on Part
III, Line 37.
For each pass-through entity reported
on line 11, attach a supporting schedule
that provides that entity’s name, EIN (if
applicable), the life insurance company’s
end of year profit-sharing percentage (if
applicable), the life insurance company’s
end of year loss-sharing percentage (if
applicable), and the amounts reported by
the life insurance company in column (a),
(b), (c), or (d) of line 11, as applicable.

Line 12. Items Relating to
Reportable Transactions
Any amounts attributable to any
reportable transactions (as described in
Regulations section 1.6011-4) must be
included on Part II, line 12, regardless of
whether the difference, or differences,
would otherwise be reported elsewhere in
Part II or Part III. Thus, if a taxpayer files
Form 8886 for any reportable transaction
described in Regulations section
1.6011-4, the amounts attributable to that
reportable transaction must be reported
on Part II, line 12. In addition, all income
and expense amounts attributable to a
reportable transaction must be reported
on Part II, line 12, columns (a) and (d)
even if there is no difference between the
annual statement amounts and the
taxable amounts.
Each difference attributable to a
reportable transaction must be separately
stated and adequately disclosed. A life
insurance company will be considered to
have separately stated and adequately
disclosed a reportable transaction on line
12 if the life insurance company
sequentially numbers each Form 8886

and lists by identifying number on the
supporting schedule for Part II, line 12,
each sequentially numbered reportable
transaction and the amounts required for
Part II, line 12, columns (a) through (d).
In lieu of the requirements of the
preceding paragraph, a life insurance
company will be considered to have
separately stated and adequately
disclosed a reportable transaction if the
life insurance company attaches a
supporting schedule that provides the
following for each reportable transaction:
1. A description of the reportable
transaction disclosed on Form 8886 for
which amounts are reported on Part II,
line 12;
2. The name and tax shelter
registration number, if applicable, as
reported on lines 1a and 1b, respectively,
of Form 8886; and
3. The type of reportable transaction
(i.e., listed transaction, confidential
transaction, transaction with contractual
protection, etc.) as reported on line 2 of
Form 8886.
If a transaction is a listed transaction
described in Regulations section
1.6011-4(b)(2), the description also must
include the description provided on line 3
of Form 8886. In addition, if the reportable
transaction involves an investment in the
transaction through another entity such as
a partnership, the description must
include the name and EIN (if applicable)
of that entity as reported on line 5 of Form
8886.
Example 14. Life insurance company
J is a calendar year taxpayer that was
required to file Schedule M-3 for its 2006
tax year and is required to file Schedule
M-3 for its 2007 tax year. J incurred
seven different abandonment losses
during its 2007 tax year. One loss of $12
million results from a reportable
transaction described in Regulations
section 1.6011-4(b)(5), another loss of $5
million results from a reportable
transaction described in Regulations
section 1.6011-4(b)(4), and the remaining
five abandonment losses are not
reportable transactions. J discloses the
reportable transactions giving rise to the
$12 million and $5 million losses on
separate Forms 8886 and sequentially
numbers them X1 and X2, respectively. J
must separately state and adequately
disclose the $12 million and $5 million
losses on Part II, line 12. The $12 million
loss and the $5 million loss will be
adequately disclosed if J attaches a
supporting schedule for line 12 that lists
each of the sequentially numbered forms,
Form 8886-X1 and Form 8886-X2, and
with respect to each reportable
transaction reports the appropriate
amounts required for Part II, line 12,
columns (a) through (d). Alternatively, J’s
disclosures will be adequate if the
description provided for each loss on the
supporting schedule includes the names
and tax shelter registration numbers, if
any, disclosed on the applicable Form

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8886, identifies the type of reportable
transaction for the loss, and reports the
appropriate amounts required for Part II,
line 12, columns (a) through (d). J must
report the losses attributable to the other
five abandonment losses on Part II, line
23e, regardless of whether a difference
exists for any or all of those abandonment
losses.
Example 15. Life insurance company
K is a calendar year taxpayer that was
required to file Schedule M-3 for its 2006
tax year and is required to file Schedule
M-3 for its 2007 tax year. K enters into a
transaction with contractual protection
that is a reportable transaction described
in Regulations section 1.6011-4(b)(4).
This reportable transaction is the only
reportable transaction for K’s 2007 tax
year and results in a $7 million capital
loss for both annual statement purposes
and U.S. federal income tax purposes.
Although the transaction does not result
in a difference, K is required to report on
Part II, line 12, the following amounts: ($7
million) in column (a), zero in columns (b)
and (c), and ($7 million) in column (d).
The transaction will be adequately
disclosed if K attaches a supporting
schedule for line 12 that (a) sequentially
numbers the Form 8886 and refers to the
sequentially-numbered Form 8886-X1
and (b) reports the applicable amounts
required for line 12, columns (a) through
(d). Alternatively, the transaction will be
adequately disclosed if the supporting
statement for line 12 includes a
description of the transaction, the name
and tax shelter registration number, if
any, and the type of reportable
transaction disclosed on Form 8886.

Line 13. Interest income
Report on Part II, line 13, column (a), the
total amount of interest income included
on Part I, line 11, and report on Part II,
line 13, column (d), the total amount of
interest income included on Form 1120-L,
page 1, line, that is not required to be
reported elsewhere on Schedule M-3. In
columns (b) or (c), as applicable, adjust
for any amounts treated for U.S. federal
income tax purposes as interest income
that are treated as some other form of
income in the annual statement, or vice
versa. For example, adjustments to
interest income resulting from
adjustments made in accordance with
instructions for Part II, line 18, should be
made in columns (b) and (c) of this line
13.
Do not report on this line 13 amounts
reported in accordance with instructions
for Part II, lines 9, 10 and 11, Part II, line
12, and Part II line 21,.

Line 14. Accrual of Bond
Discount
Report on Line 14, column (a), the
amount of accrued bond discount
included in Part 1, line 11. Report on line
14, column (d), the amount of accrued
bond discount included in taxable income
on Form 1120-L, page 1, line 20. Report

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amounts in columns (b) and (c), as
applicable.

Line 15. Hedging Transactions
Report on line 15, column (a), the net
gain or loss from hedging transactions
included in net income per the income
statement. Report in column (d) the
amount of taxable income from hedging
transactions as defined in section 1221
(b)(2). Use columns (b) and (c) to report
all differences caused by treating hedging
transactions differently for statutory
accounting purposes and for U.S. federal
income tax purposes. For example, if a
portion of a hedge is considered
ineffective under SAP but still is a valid
hedge under section 1221(b)(2), the
difference must be reported on line 15.
The hedge of a capital asset, which is not
a valid hedge for U.S. federal income tax
purposes but may be considered a hedge
for SAP purposes, must also be reported
here.
Report hedging gains and losses
computed under the mark-to-market
method of accounting on line 15 and not
on Part II, line 16, Mark-to-market income
(loss).

Line 16. Mark-to-Market Income
(Loss)
Report on line 16 any amount
representing the mark-to-market income
or loss for any securities held by a dealer
in securities, a dealer in commodities
having made a valid election under
section 475(e), or a trader in securities or
commodities having made a valid election
under section 475(f). “Securities” for
these purposes are securities described
in section 475(c)(2) and section 475(e)(2).
“Securities” do not include any items
specifically excluded from sections
475(c)(2) and 475(e)(2), such as certain
contracts to which section 1256(a)
applies.
Report hedging gains and losses
computed under the mark-to-market
method of accounting on Part II, line 15
and not on line 16.

Line 17. Deferred and
Uncollected Premiums
Report on Line 17, column (a), the
amount of deferred and uncollected
premiums included in Part I, line 11.
Report on line 17, column (d), the amount
of deferred and uncollected premiums
included in taxable income on Form
1120-L, page 1, line 20. Report amounts
in columns (b) and (c), as applicable.

Line 18. Sale Versus Lease (for
Sellers and/or Lessors)
(Also see the instructions at Part III, line
35, for purchasers and/or lessees.)
Asset transfer transactions with
periodic payments characterized for
statutory accounting purposes as either a
sale or a lease may, under some
circumstances, be characterized as the
opposite for tax purposes. If the
transaction is treated as a lease, the

seller/lessor reports the periodic
payments as gross rental income and
also reports depreciation expense or
deduction. If the transaction is treated as
a sale, the seller/lessor reports gross
profit (sale price less cost of goods sold)
from the sale of assets and reports the
periodic payments as payments of
principal and interest income.
On Part II, line 18, column (a), report
the gross profit or gross rental income for
statutory income purposes for all sale or
lease transactions that must be given the
opposite characterization for tax
purposes. On Part II, line 18, column (d),
report the gross profit or gross rental
income for federal income tax purposes.
Interest income amounts for such
transactions must be reported on Part II,
line 13, in column (a) or (d), as applicable.
Depreciation expense for such
transactions must be reported on Part III,
line 32, in column (a) or (d), as applicable.
Use columns (b) and (c) of Part II, lines
13 and 18, and Part III, line 32, as
applicable to report the differences
between column (a) and (d).
Example 16 Life insurance company
M sells and leases property to customers.
M is a calendar year taxpayer that was
required to file Schedule M-3 for its 2006
tax year and is required to file Schedule
M-3 for its 2007 tax year. For statutory
accounting purposes, M accounts for
each transaction as a sale. For U.S.
federal income tax purposes, each of M’s
transactions must be treated as a lease.
In its annual statement, M treats the
difference in the statutory accounting and
the U.S. federal income tax treatment of
these transactions as temporary. During
2007, M reports in its annual statement
$1,000 of sales and $700 of cost of goods
sold with respect to 2007 lease
transactions. M receives periodic
payments of $500 in 2007 with respect to
these 2007 transactions and similar
transactions from prior years and treats
$400 as principal and $100 as interest
income. For statutory income purposes,
M reports gross profit of $300 ($1,000
-$700) and interest income of $100 from
these transactions. For U.S. federal
income tax purposes, M reports $500 of
gross rental income (the periodic
payments) and (based on other facts)
$200 of depreciation deduction on the
property. On its 2007 Schedule M-3, M
must report on Part II, line 13, $100 in
column (a), ($100) in column (b), and
zero in column (d). In addition, M must
report on Part II, line 18, $300 of gross
profit in column (a), $200 in column (b),
and $500 of gross rental income in
column (d). Lastly, M must report on Part
III, line 32, $200 in column (b) and (d).

authorized (or unauthorized) change in
method of accounting made for U.S.
federal income tax purposes that results
in a section 481(a) adjustment must be
reported on Part II, line 19, regardless of
whether a separate line for that income or
expense item exists in Part II or Part III.
Section 807(f) changes should be
reported on Part III line 25.
Example 17. Life insurance company
N is a calendar year taxpayer that was
required to file Schedule M-3 for its 2006
tax year and is required to file Schedule
M-3 for its 2007 tax year. N was
depreciating certain fixed assets over an
erroneous recovery period and, effective
for its 2007 tax year, N receives IRS
consent to change its method of
accounting for the depreciable fixed
assets and begins using the proper
recovery period. The change in method of
accounting results in a positive section
481(a) adjustment of $100,000 that is
required to be spread over four tax years,
beginning with the 2007 tax year. In its
annual statement, N treats the section
481(a) adjustment as a temporary
difference. N must report on Part II, line
19, $25,000 in columns (b) and (d) for its
2007 tax year and each of the
subsequent three tax years (unless N is
otherwise required to recognize the
remainder of the 481(a) adjustment
earlier). N must not report the section
481(a) adjustment on Part III, line 32.

Line 20. Amortization of Interest
Maintenance Reserve
Report on Line 20, column (a), the
amount of interest maintenance reserve
amortization included in Part I, line 11.
Report amounts in columns (b) and (c),
as applicable.

Line 21. Original Issue Discount
and Other Imputed Interest
Report on line 21 any amounts of original
issue discount (OID) and imputed
interest. The term 00original issue
discount and other imputed interest’’
includes, but is not limited to:
1. The difference between issue price
and the stated redemption price at
maturity of a debt instrument, which may
be wholly or partially realized on the
disposition of a debt instrument under
section 1273;
2. Amounts that are imputed interest
on a deferred sales contract under
section 483;
3. Amounts treated as interest or OID
under the striped bond rules under
Section 1286; and
4. Amounts treated as OID under the
below-market interest rate rules under
Section 7872.

Line 19. Section 481(a)
Adjustments

Line 22. Market Discount
Reclassification

With the exception of a section 481(a)
adjustment that is required to be reported
on Part II, line 12, for reportable
transactions, any difference between an
income or expense item attributable to an

Report on Line 23, column (a), the
amount of market discount reclassification
included in Part I, line 11. Report on line
23, column (d), the amount of market
discount reclassification included in

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taxable income on Form 1120-L, page 1,
line 20. Report amounts in columns (b)
and (c), as applicable.

Line 23a. Income Statement
Gain/loss on Sale, Exchange,
Abandonment, Worthlessness,
or Other Disposition of Assets
Other Than Pass -Through
Entities
Report on line 23a, column (a), all gains
and losses on the disposition of assets
except for gains and losses allocated to
the life insurance company from a
pass-through entity (e.g., on Schedule
K-1) that are included in the net income
(loss) per summary of operations of
includible corporations reported on Part I,
line 11. Reverse the amount reported in
column (a) in column (b) or (c), as
applicable. The corresponding gains and
losses for U.S. federal income tax
purposes are reported on Part II, lines
23b through 23g, as applicable.

Line 23b. Gross Capital Gains
From Schedule D, Excluding
Amounts From Pass -Through
Entities
Report on line 23b, gross capital gains
reported on Schedule D, excluding capital
gains from pass-through entities, which
must be reported on Part II, lines 9, 10, or
11, as applicable.

Line 23c. Gross Capital Losses
From Schedule D, Excluding
Amounts From Pass -Through
Entities, Abandonment Losses,
and Worthless Stock Losses
Report on line 23c, gross capital losses
reported on Schedule D, excluding capital
losses from (a) pass-through entities,
which must be reported on Part II, lines 9,
10 or 11, as applicable; (b) abandonment
losses, which must be reported on Part II,
line 23e; and (c) worthless stock losses,
which must be reported on Part II, line
23f. Do not report on line 23c capital
losses carried over from a prior tax year
and utilized in the current tax year. See
the instructions for Part II, line 24,
regarding the reporting requirements for
capital loss carryovers utilized in the
current tax year.

Line 23d. Net Gain/Loss
Reported on Form 4797, Line
17, Excluding Amounts From
Pass -Through Entities,
Abandonment Losses, and
Worthless Stock Losses
Report on line 23d the net gain or loss
reported on line 17 of Form 4797, Sales
of Business Property, excluding amounts
from (a) pass-through entities, which must
be reported on Part II, lines 9, 10, or 11,
as applicable; (b) abandonment losses,
which must be reported on Part II, line
23e; and (c) worthless stock losses,
which must be reported on Part II, line
23f.

Line 23e. Abandonment Losses
Report on line 23e any abandonment
losses, regardless of whether the loss is
characterized as an ordinary loss or a
capital loss.

Line 23f. Worthless Stock
Losses
Report on line 23f any worthless stock
loss, regardless of whether the loss is
characterized as an ordinary loss or a
capital loss. Attach a schedule that
separately states and adequately
discloses each transaction that gives rise
to a worthless stock loss and the amount
of each loss.

Line 23g. Other Gain/Loss on
Disposition of Assets
Report on line 23g any gains or losses
from the sale or exchange of property that
are not reported on lines 23b through 23f.

Line 24. Capital loss limitation
and carryforward used
Report as a positive amount on line 24,
columns (b) or (c), as applicable, and (d)
the excess of the net capital losses over
the net capital gains reported on
Schedule D, Capital Gains and Losses,
by the corporation. For a U.S.
consolidated tax group, the Schedule M-3
adjustment for the amount of the
consolidated net capital loss that is
disallowed should not be made on the
separate consolidating Schedules M-3 of
the includible corporations, but on the
separate Schedule M-3 for consolidated
eliminations (or on Form 8916 in the case
of a mixed group) as described in the
section, Completion of Schedule M-3 and
Certain Allocations, Limitations, and
Carryovers.
If the corporation utilizes a capital loss
carryforward on Schedule D in the current
tax year, report the carryforward utilized
as a negative amount on Part II, line 24,
columns (b) or (c), as applicable, and
column (d). For a U.S. consolidated tax
group, the Schedule M-3 adjustment for
the amount of the consolidated capital
loss carryforward should not be made on
the separate consolidating Schedules M-3
of the includible corporations, but on the
separate Schedule M-3 for consolidation
eliminations (or on Form 8916 in the case
of a mixed group) as described in the
section, Completion of Schedule M-3 and
Certain Allocations, Limitations, and
Carryovers.

Line 25. Other Income (Loss)
Items With Differences
Separately state and adequately disclose
on Part II, line 25, all items of income
(loss) with differences that are not
otherwise listed on Part II, lines 1 through
24. Attach a schedule that itemizes the
type of income (loss) and the amount of
each item.
For insurance companies included in
the consolidated U.S. federal income tax
return, see instructions for Part I, lines 10
and 11, and Part II, line 7, for guidance on

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the treatment of intercompany dividends
and statutory accounting.
If any “comprehensive income” as
defined by Statement of Financial
Accounting Standards (SFAS) No. 130 is
reported on this line, describe the item(s)
in detail. Examples of sufficiently detailed
descriptions include “Foreign currency
translation adjustments” and “gains and
losses on available-for-sale securities”.
Whether an item of income (loss) is
reported on this line 25, or is reported on
Part II, line 28, is determined separately
by each member of the U.S. consolidated
tax group and not at the U.S.
consolidated tax group level. For
example, U.S. Corporation P has two
subsidiaries, Corporation A and B, that
are included in P’s consolidated financial
statements and in P’s consolidated U.S.
federal income tax return. For financial
statement purposes, P, A, and B
recognize revenue from the sale of
inventory upon delivery to the customer.
For U.S. federal income tax purposes, P
and A recognize such revenue consistent
with the method used for financial
statement purposes, whereas B
recognizes such revenue based upon
customer acceptance. P and A must
report this revenue in column (a) and (d)
on Part II, line 28, B must report the
following on Part II, line 25: in column (a),
B’s revenue recognized in the financial
statements based upon delivery to the
customer; in column (d), B’s revenue
recognized for U.S. federal income tax
purposes based upon customer
acceptance; and in column (b) or (c), as
applicable, the difference between B’s
revenue recognized in its financial
statements and in its U.S. federal taxable
income.

Line 27. Total Expense/
Deduction Items
Report on Part II, line 27, columns (a)
through (d), as applicable, the negative of
the amounts reported on Part III, line 39,
columns (a) through (d). For example, if
Part III, line 39, column (a), reflects an
amount of $1 million then report on Part
II, line 27, column (a), ($1 million).
Similarly, if Part III, line 39, column (b),
reflects an amount of ($50,000), then
report on Part II, line 27, column (b),
$50,000.

Line 28. Other Items With No
Differences
If there is no difference between the
statutory accounting amount and the
taxable amount of an entire item of
income, gain, loss, expense, or deduction
and the item is not described or included
in Part II, lines 1 through 25, or Part III,
lines 1 through 38, report the entire
amount of the item in columns (a) and (d)
of line 28. If a portion of an item of
income, loss, expense, or deduction has
a difference and a portion of the item
does not have a difference, do not report
any portion of the item on line 28. Instead,
report the entire amount of the item (i.e.,

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both the portion with a difference and the
portion without a difference) on the
applicable line of Part II, lines 1 through
25, or Part III, lines 1 through 38. See
Example 10.

Line 29a. Life insurance
subgroup reconciliation totals.
Add lines 26 through 28.

Line 29b. 1120 subgroup
reconciliation totals.
This line 29b is only used by mixed
groups. See the discussion, Schedule
M-3 Consolidation for Mixed Groups
(1120/L/PC).

Line 29c. PC insurance
subgroup reconciliation totals.
This line 29c is only used by mixed
groups. See the discussion, Schedule
M-3 Consolidation for Mixed groups
(1120/L/PC).

Line 30. Reconciliation Totals.
Combine lines 29a through 29c.
If a life insurance company that is not
a mixed group chooses not to complete
columns (a) and (d) of Parts II and III in
the first tax year the life insurance
company is required to file Schedule M-3
(or for any year in which the life insurance
company voluntarily files Schedule M-3),
Part II, line 30, is reconciled by the life
insurance company (or, in the case of a
U.S. consolidated tax group, on the
group’s consolidated Schedule M-3) in
the following manner:
1. Report the amount from Part I, line
11, on Part II, line 30, column (a);
2. Leave blank Part II, lines 1 through
29, columns (a) and (d);
3. Leave blank Part III, columns (a)
and (d); and
4. Report on Part II, line 30, column
(d), the sum of Part II, line 29, columns
(a), (b), and (c).
Note. Mixed groups should see the
section, Schedule M-3 Consolidation for
Mixed Groups (1120/L/PC)

Part III. Reconciliation of
Net Income (Loss) per
Income Statement of
Includible Corporations
With Taxable Income per
Return — Expense/
Deduction Items
Lines 1 Through 6. Income Tax
Expense
If the life insurance company does not
distinguish between current and deferred
income tax expense in its annual
statement (or its books and records, if
applicable), report income tax expense as
current income tax expense using lines 1,
3, and 5, as applicable.

A U.S. consolidated tax group must
complete lines 1 through 6 in accordance
with the allocation of tax expense among
the members of the U.S. consolidated tax
group in the financial statements (or its
books and records, if applicable). If the
current and deferred U.S., state, and
foreign income tax expense for the U.S.
consolidated tax group (income tax
expense) is allocated among the
members of the U.S. consolidated tax
group in the group’s financial statements
(or its books and records, if applicable),
then each member must report its
allocated income tax expense on Part III,
lines 1 through 6, of that member’s
separate Schedule M-3. However, if the
income tax expense is not shared or
allocated among members of the U.S.
consolidated tax group but is retained in
the parent corporation’s financial
statements (or books and records, if
applicable), then amounts are reported
only on Part III, lines 1 through 6, of the
parent’s separate Schedule M-3.

Line 7. Foreign Withholding
Taxes
Report on line 7, column (a), the amount
of foreign withholding taxes included in
statutory accounting net income on Part I,
line 11. If the life insurance company is
deducting foreign tax, use column (b) or
(c), as applicable, to correct for any
difference between foreign withholding
tax included in statutory accounting net
income and the amount of foreign
withholding taxes being deducted in the
return. If the life insurance company is
crediting foreign withholding taxes against
the U.S. income tax liability, use column
(b) or (c), as applicable, to negate the
amount reported in column (a).

Line 8. Equity Based
Compensation
Report on line 8 any amounts for
equity-based compensation or
consideration that are reflected as
expense in the annual statement (column
(a)) or deducted in the U.S. federal
income tax return (column (d)) other than
amounts reportable elsewhere on
Schedule M-3, Parts II and III. Examples
of amounts reportable on line 8 include
incentive stock options, nonqualified stock
options, payments attributable to
employee stock purchase plans (ESPPs),
phantom stock options, phantom stock
units, stock warrants, stock appreciation
rights, and restricted stock, regardless of
whether such payments are made to
employees or non-employees, or as
payment for property or compensation for
services.
If the amounts include incentive stock
options or nonqualified stock options,
attach a detail schedule separately stating
each.

Line 9. Capitalization of
Deferred Acquisition Costs
Report on line 9, column (d), the amount
of deferred acquisition costs capitalized
and taken into account in taxable income

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on Form 1120-L, page 1, line 20. Report
amounts in columns (b) and (c), as
applicable.

Line 10. Amortization of
Deferred Acquisition Costs
Report on line 10, column (d), the amount
of deferred acquisition costs amortized
and taken into account in taxable income
on Form 1120-L, page 1, line 20. Report
amounts in columns (b) and (c), as
applicable.

Line 11. Meals and
Entertainment
Report on line 11, column (a), any
amounts paid or accrued by the life
insurance company during the tax year
for meals, beverages, and entertainment
that are accounted for in statutory
accounting income, regardless of the
classification, nomenclature, or
terminology used for such amounts, and
regardless of how or where such amounts
are classified in the life insurance
company’s statutory income statement or
the income and expense accounts
maintained in the life insurance
company’s books and records. Report
only amounts not otherwise reportable
elsewhere on Schedule M-3, Parts II and
III.

Line 12. Fines and Penalties
Report on line 12 any fines or similar
penalties paid to a government or other
authority for the violation of any law for
which fines or penalties are assessed. All
fines and penalties expensed in financial
accounting income (paid or accrued) must
be included on this line 12, column (a),
regardless of the government or other
authority that imposed the fines or
penalties, regardless of whether the fines
and penalties are civil or criminal,
regardless of the classification,
nomenclature, or terminology used for the
fines or penalties by the imposing
authority in its actions or documents, and
regardless of how or where the fines or
penalties are classified in the
corporation’s financial income statement
or the income and expense accounts
maintained in the corporation’s books and
records. Also report on line 12, column
(a), the reversal of any overaccrual of any
amount described in this paragraph. See
section 162(f) for additional guidance.
Report on line 12, column (d), any
such amounts as are described in the
preceding paragraph that are includible in
taxable income, regardless of the
financial accounting period in which such
amounts were or are included in financial
accounting net income. Complete
columns (b) and (c) as appropriate.
Do not report on this Part III, line 12,
amounts required to be reported in
accordance with instructions for Part III,
line 13.
Do not report on this Part III, line 12,
amounts recovered from insurers or any
other indemnitors for any fines and
penalties described above.

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Line 13. Judgments, Damages,
Awards, and Similar Costs.

Line 17. Other Post-Retirement
Benefits

Line 22. Change in Section
807(c)(1) Tax Reserves

Report on line 13, column (a), the amount
of any estimated or actual judgments,
damages, awards, settlements, and
similar costs, however named or
classified, included in financial accounting
income, regardless of whether the
amount deducted was attributable to an
estimate of future anticipated payments or
actual payments. Also report on line 13,
column (a), the reversal of any
overaccrual of any amount described in
this paragraph.

Report on line 17 any amounts
attributable to other post-retirement
benefits not otherwise includible on Part
III, line 16, for example, retiree health and
life insurance coverage, dental coverage,
etc.

Report on Line 22, column (a), the
change in section 807(c)(1) life insurance
reserves included in Part I, line 11. Report
on line 22, column (d), the change in
section 807(c)(1) life insurance reserves
included in taxable income on Form
1120-L, page 1, line 20. Report amounts
in columns (b) and (c), as applicable.

Report on line 13, column (d), any
such amounts as are described in the
preceding paragraph that are includible in
taxable income, regardless of the
financial accounting period in which such
amounts were or are included in financial
accounting net income. Complete
columns (b) and (c) as appropriate.
Do not report on this Part III, line 13,
amounts required to be reported in
accordance with instructions for Part III,
line 12.
Do not report on this Part III, line 13,
amounts recovered from insurers or any
other indemnitors for any judgments,
damages, awards, or similar costs
described above.

Line 14. Parachute Payments
Report on line 14, column (a), the total
expense included in statutory accounting
net income on Part I, line 11, that is
subject to section 280G. Report in column
(b) or (c), as applicable, the amount of
nondeductible parachute payments
pursuant to section 280G , and report in
column (d) the deductible amount of
compensation after any excess parachute
payment limitations under section 280G.
If a payment is subject to limitation under
both sections 162 (m) and 280G, report
the total payment on this line 14.

Line 15. Compensation With
Section 162(m) Limitation
Report on line 15, column (a), the total
amount of non-performance-based
current compensation expense for the
corporate officers to whom section 162
(m) applies. Report the nondeductible
amount of current compensation in
excess of $1 million in column (b) or (c),
as applicable, and the deductible
compensation in column (d). If a payment
is subject to limitation under both sections
162(m) and 280G, report the total
payment on Part III, line 14, Parachute
payments. See Regulations section
1.162-27(g) for the interaction between
sections 162(m) and 280G.

Line 16. Pension and
Profit-Sharing
Report on line 16 any amounts
attributable to the life insurance
company’s pension plans, profit-sharing
plans, and any other retirement plans.

Line 18. Deferred
Compensation
Report on line 18, column (a), any
compensation expense included in the
net income (loss) amount reported in Part
I, line 11, that is not deductible for U.S.
federal income tax purposes in the
current tax year and that was not reported
elsewhere on Schedule M-3, column (a).
Report on line 18, column (d), any
compensation deductible in the current
tax year that was not included in the net
income (loss) amount reported in Part I,
line 11, for the current tax year and that is
not reportable elsewhere on Schedule
M-3. For example, report originations and
reversals of deferred compensation
subject to section 409A on line 18.

Line 20. Charitable Contribution
of Intangible Property
Report on line 20 any charitable
contribution of intangible property, for
example, contributions of:
• Intellectual property, patents including
any amounts of additional contributions
allowable by virtue of income earned by
donees subsequent to the year of
donation), copyrights, trademarks;
• Securities (including stocks and their
derivatives, stock options, and bonds);
• Conservation easements (including
scenic easements or air rights);
• Railroad rights of way;
• Mineral rights; and
• Other intangible property.

Line 21. Charitable Contribution
Limitation/ Carryforward
Report as a negative amount on this line
21, columns (b), (c), and (d), as
applicable, the excess of charitable
contributions made during the tax year
over the amount of the charitable
contribution limitation amount.
If the corporation utilizes a contribution
carryforward in the current tax year,
report the carryforward utilized as a
positive amount on columns (b), (c), and
(d), as applicable.
When a consolidated federal income
tax return is being filed, Schedule M-3
adjustments for the amount of charitable
contributions in excess of the limitation, or
for charitable contribution carryforward
utilized, should not be made on the
separate consolidating Schedules M-3 of
the includible corporations, but on the
separate consolidating Schedule M-3 for
consolidation eliminations ( or on Form
8916 in the case of a mixed group) as
described in Completion of Schedule M-3
and Certain Allocations, Limitations, and
Carryovers.

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Line 23. Change in Section
807(c)(2) Tax Reserves
Report on Line 23, column (a), the
change in section 807(c)(2) unearned
premiums and unpaid losses included in
Part I, line 11. Report on line 23, column
(d), the change in section 807(c)(2)
unearned premiums and unpaid losses
included in taxable income on Form
1120-L, page 1, line 20. Report amounts
in columns (b) and (c), as applicable.

Line 24. Change in All Other
Section 807(c) Tax Reserves
Report on Line 24, column (a), the
change in all other section 807(c)
reserves included in Part I, line 11. Report
on line 24, column (d), the change in all
other section 807(c) reserves included in
taxable income on Form 1120-L, page 1,
line 20. Report amounts in columns (b)
and (c), as applicable.

Line 25. Section 807(f)
Adjustments for Change in
Computing Reserves.
Report on line 25, column (d), the section
807(f) adjustments included in taxable
income on Form 1120-L, page 1, line 20.
Report amounts in columns (b) and (c),
as applicable.

Line 26. Section 807(a)(2)(B)
Tax Reserve Amount with
Respect to Policyholder Share
of Tax Exempt Interest
Report on line 26, column (d), the change
in section 807(a)(2)(B) tax reserve
amount with respect to policyholder share
of tax exempt interest included in taxable
income on Form 1120-L, page 1, line 20.
Report amounts in columns (b) and (c),
as applicable.

Line 27. Current Year
Acquisition/Reorganization
Costs
Report on line 27 any investment
banking, legal and accounting and any
other fees paid or incurred in connection
with a taxable or tax-free acquisition of
property (e.g., stock or assets) or a
tax-free reorganization. Report on this line
any investment banking fees, legal and
accounting and any other fees paid or
incurred at any stage of the acquisition or
reorganization process including, for
example, fees paid or incurred to evaluate
whether to investigate an acquisition, fees
to conduct an actual investigation, and
fees to consummate the acquisition. Also
include on this line any investment
banking fees, legal and accounting and

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Form 1120-L Schedule M-3 Draft Instructions

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any other fees paid or incurred in
connection with the liquidation of a
subsidiary, a spin-off of a subsidiary, or
an initial public stock offering. Attach a
schedule separately stating acquisition/
reorganization investment banking fees,
legal and accounting fees, and other
costs. Report amounts in columns (b) and
(c), as applicable.

Line 28. Amortization of
Acquisition, Reorganization,
and Start-Up Costs
Report on line 28 amortization of
acquisition, reorganization, and start-up
costs. For purposes of column (b), (c),
and (d), include amounts amortizable
under section 167, 195, or 248.

Line 29. Amortization/
Impairment of Goodwill,
Insurance in Force and Ceding
Commissions
Report on line 29 amortization of goodwill,
insurance in force and ceding
commissions or amounts attributable to
the impairment of goodwill, insurance in
force and ceding commissions. Attach a
schedule separately stating the amounts
for each item.

Line 30. Other Amortization or
Impairment Write-Offs
Report on line 30 any amortization or
impairment write-offs not otherwise
includible on Schedule M-3.

Line 31. Section 846 Amount
Report on line 31, column (d), the section
846 amount included in taxable income
on Form 1120-L, page 1, line0. Report
amounts in columns (b) and (c), as
applicable.

Line 32. Depreciation
Report on line 32 any depreciation
expense that is not required to be
reported elsewhere on Schedule M-3
(e.g., on Part II, lines, 9, 10, or 11).

Line 33. Bad Debt Expense and/
or Agency Balances Written Off
Report on line 33, column (a), any
amounts attributable to an allowance for
uncollectible accounts receivable or
actual write-offs of accounts receivable
included in net income per the income
statement. Also report on this line agency
balances written off per the annual
statement. Report in column (d) the
amount of bad debt expense deductible
for federal income tax purposes in
accordance with section 166.

Line 34. Corporate Owned Life
Insurance Premiums
Report on line 34 all amounts of
insurance premiums attributable to any
life insurance policy if the life insurance
company is directly or indirectly a
beneficiary under the policy or if the policy
has a cash value. Report in column (d)
the amount of the premiums that are
deductible for federal income tax
purposes.

Line 35. Purchase Versus Lease
(for Purchasers and/or
Lessees)
Note. Also see the instructions at Part II,
line 18, for sellers and/or lessors.
Asset transfer transactions with
periodic payments characterized for
statutory accounting purposes as either a
purchase or a lease may, under some
circumstances, be characterized as the
opposite for tax purposes.
If a transaction is treated as a lease,
the purchaser/lessee reports the periodic
payments as gross rental expense. If the
transaction is treated as a purchase, the
purchaser/lessee reports the periodic
payments as payments of principal and
interest and also reports depreciation
expense or deduction with respect to the
purchased asset.
Report on Part III, line 35, column (a),
gross rent expense for a transaction
treated as a lease for income statement
purposes but as a sale for tax return
purposes. Report on Part III, line 35,
column (d), gross rental deductions for a
transaction treated as a lease for tax
purposes but as a purchase for annual
statement purposes. Report interest
expense or deduction amounts for such
transactions on Part III, line 36, Interest
expense/deduction , in column (a) or (d),
as applicable. Report depreciation
expense or deductions for such
transactions on Part III, line 32,
Depreciation, in column (a) or (d), as
applicable. Use columns (b) and (c) of
Part III, lines 32, 35, and 36, as
applicable, to report the differences
between column (a) and (d) for such
recharacterized transactions.
Example 18. U.S. life insurance
company X acquired property in a
transaction that, for statutory accounting
purposes, X treats as a lease. X is a
calendar year taxpayer that was required
to file Schedule M-3 for its 2006 tax year
and is required to file Schedule M-3 for its
2007 tax year. For U.S. federal income
tax purposes, because of its terms, the
transaction is taxed as a purchase and X
must treat the periodic payments it makes
partially as payment of principal and
partially as payment of interest. In its
annual statement, X treats the difference
between the statutory accounting and
U.S. federal tax treatment of this
transaction as temporary. During 2007, X
reports in its annual statement $1,000 of
gross rental expense that, for federal
income tax purposes, is recharacterized
as a $700 payment of principal and a
$300 payment of interest, accompanied
by a depreciation deduction of $1,200
(based on other facts). On its 2007
Schedule M-3, X must report the following
on Part III, line 35: column (a) $1,000, its
statutory accounting gross rental
expense; column (b), ($1,000); and
column (d), zero. On Part III, line 36, X
reports $300 in columns (b) and (d) for
the interest deduction. On Part III, line 32,

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X reports $1,200 in columns (b) and (d)
for the depreciation deduction.

Line 36. Interest Expense
Report on Part III, line 36, column (a), the
total amount of interest expense included
on Part I, line 11, and report on Part III,
line 36, column (d), the total amount of
interest deduction included on Form
1120-L, page 1, line 20, that is not
required to be reported elsewhere on
Schedule M-3. In columns (b) or (c), as
applicable, include any adjustments for
any amounts treated for U.S. federal
income tax purposes as interest
deduction that are treated as some other
form of expense in the financial
statements, or vice versa. For example,
adjustments to interest expense/
deduction resulting from adjustments
made in accordance with the instructions
for Part III, line 35, Purchase versus lease
(for purchasers and/or lessees), should
be made in columns (b) and (c), as
applicable, on this line 36.
Do not report on this line 36 amounts
reported in accordance with the
instructions for (i) Part II, lines 9, 10, and
11, Income (loss) from U.S. partnerships,
foreign partnerships, and other
pass-through entities, and (ii) Part II, line
12, Items relating to reportable
transactions.

Line 37. Domestic Production
Activities Deduction
Report on Part III, line 37, column (d), the
amount of the domestic production
activities deduction included in taxable
income on Form 1120-L, page 1, line 20.
Complete columns (b) and (c), as
applicable. Do not report any portion of
the corporation’s domestic production
activities deduction on any other line of
Schedule M-3.

Line 38. Other Expense/
Deduction Items With
Differences
Report on Part III, line 38, all items of
expense/deduction that are not otherwise
listed on Part III, lines 1 through 37.
Whether an expense/deduction item is
reported on this line 38, or reported on
Part II, line 28, Other items with no
differences, is determined separately by
each member of the U.S. consolidated tax
group and not at the U.S. consolidated
tax group level. For example, U.S.
Corporation P has two subsidiaries, A and
B, that are included in P’s consolidated
financial statements and in P’s
consolidated U.S. federal income tax
return. For financial statement purposes,
P, A, and B recognize real estate tax
expense when accrued. For U.S. federal
income tax purposes, P and A recognize
such expense consistent with the method
used for financial statement purposes,
whereas B recognizes such deduction
based on a method different from that
used for financial statement purposes. P
and A must report this expense/deduction
in column (a) and (d) on Part II, line 28. B

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must report the following on Part III, line
38: in column (a), B’s expense
recognized in the financial statements
when accrued; in column (d), B’s real
estate tax expense recognized for U.S.
federal income tax purposes; and in
column (b) or (c), as applicable, the
difference between B’s real estate tax
expense in its financial statements and its
real estate tax deduction recognized for
U.S. federal taxable income purposes.
Comprehensive income. If any
“comprehensive income” as defined by
SFAS No. 130 is reported on this line,
describe the item(s) in detail as, for
example, “Foreign currency translation
adjustments” and “Gains and losses on
available-for-sale securities”.

Reserves and contingent
liabilities.
Report on line 38 amounts related to the
change in each reserve or contingent
liability that is not required to be reported
elsewhere on Schedule M-3. For
example: (1) amounts relating to changes
in reserves for litigation must be reported
on Part III, line 13, Judgments, Damages,
Awards, and Similar Costs; and (2)
amounts relating to changes in reserves
for uncollectible accounts receivable must
be reported on Part III, line 33, Bad Debt
Expense and/or Agency Balances Written
Off. (See Examples 9 and 19.)
Report on Part III, line 38, the
amortization of various items of prepaid
expense, such as prepaid subscriptions
and license fees, prepaid insurance, etc.
Report on line 38, column (a),
expenses included in net income reported
on Part I, line 11, that are related to
reserves and contingent liabilities. Report
on line 38, column (d), amounts related to
liabilities for reserves and contingent
liabilities that are deductible in the current

tax year for U.S. federal income tax
purposes. Examples of reserves that are
allowed for book purposes, but not for tax
purposes include restructuring reserves,
reserves for discontinued operations, and
reserves for acquisitions and dispositions.
Only report on line 38 items that are not
required to be reported elsewhere on
Schedule M-3, Parts II and III.
The schedule of details attached to the
return for line 38 must separately state
and adequately disclose the nature and
amount of the expense related to each
reserve and/or contingent liability. The
appropriate level of disclosure depends
upon each taxpayer’s operational activity
and the nature of its accounting records.
For example, if a life insurance
company’s net income amount reported in
the income statement includes anticipated
expenses for a discontinued operation as
a single amount, and its general ledger or
other books, records, and workpapers
provide details for the anticipated
expenses under more explanatory and
defined categories such as employee
termination costs, lease cancellation
costs, loss on sale of equipment, etc., a
supporting schedule that lists those
categories of expenses and their details
will satisfy the requirement to separately
state and adequately disclose. In order to
separately state and adequately disclose
the employee termination costs, it is not
required that an anticipated termination
cost amount be listed for each employee,
or that each asset (or category of asset)
be listed along with the anticipated loss
on disposition.
Example 19. Life insurance company
Q is a calendar year taxpayer that was
required to file Schedule M-3 for its 2006
tax year and is required to file Schedule
M-3 for its 2007 tax year. On July 1 of
each year, Q has a fixed liability for its

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annual insurance premiums on its home
office building that provides a 12-month
coverage period beginning July 1 through
June 30. In addition, Q historically
prepays 12 months of advertising
expense on July 1. On July 1, 2007, Q
prepays its insurance premium of
$500,000 and advertising expenses of
$800,000. For annual statement
purposes, Q capitalizes and amortizes the
prepaid insurance and advertising over 12
months. For U.S. federal income tax
purposes, Q deducts the insurance
premium when paid and amortizes the
advertising over the 12-month period. In
its annual statement, Q treats the
differences attributable to the annual
statement treatment and U.S. federal
income tax treatment of the prepaid
insurance and advertising as temporary
differences. Q must separately state and
adequately disclose on Part III, line 38, its
prepaid insurance premium and report
$250,000 in column (a) ($500,000/12
months X 6 months), $250,000 in column
(b), and $500,000 in column (d). Q must
also separately state and adequately
disclose on Part II, line 28, Other items
with no differences, its prepaid advertising
and report $400,000 in column (a) and
(d).

Line 39. Total Expense/
Deduction Items
Report on Part II, line 27, columns (a)
though (d), as applicable, the negative of
the amounts reported on Part III, line 39,
column (a) through (d), as applicable. For
example, if Part III, line 39, column (a),
reflects an amount of $1 million, then
report on Part II, line 27, column (a), ($1
million). Similarly, if Part III, line 39,
column (b), reflects an amount of
($50,000), then report on Part II, line 27,
column (b), $50,000.