Net Income (Loss) Reconciliation for U.S. Property and Casualty Insurance Companies With Total Assets of $10 Million or More

2007 Instructions for Schedule M-3 (Form 1120-PC),
Net Income (Loss) Reconciliation for U.S. Property and Casualty Insurance
Companies With Total Assets of $10 Million or More

Purpose: This is the first circulated draft of the 2007 Instructions for the Schedule M-3
(Form 1120-PC) for your review and comments. See below for a discussion of the major
changes.
TPCC: None, but one may be arranged if requested.
Prior version: The 2006 Instructions for Schedule M-3 (Form 1120-PC) are available at:
http://www.irs.gov/pub/irs-pdf/f1120pm3.pdf.
Form: The Schedule M-3 (Form 1120-PC) was circulated earlier at:
http://taxforms.web.irs.gov/Products/Drafts/2007-2/07f1120-PCschM3_d1.pdf.
Other products: Circulations of draft tax forms, instructions, notices, and publications
are posted at: http://taxforms.web.irs.gov/Circulations/index.htm.
Comments: Please email, fax, call or mail any comments to me by November 30, 2007.
Comments should also be sent to the reviewer at [email protected].
David L. Lupi-Sher
Tax Forms and Publications
SE:W:CAR:MP:T:B:C
Email: [email protected]

Major Changes to the 2007 Instructions for
Schedule M-3 (Form 1120-PC)

We deleted the word “federal” wherever used in the term “U.S. federal income tax return”
since it is redundant when used with “U.S.” The years used in the examples were
updated as appropriate. We also added commas after line numbers, as appropriate.
We corrected the spelling of “includible” in several places and inserted a hyphen in “subconsolidation” to be consistent. These changes were made to conform to the TFP style
guide.
All technical changes were made at the request of the LMSB M-3 Team.
Page 1
What’s New
We inserted new text concerning changes made to the Instructions for Schedule M-3.
• Non-tax-basis and tax-basis financial statements defined for Schedule M-3 filers.
• Changes to Part I, line 7a and 7b.

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•
•
•
•

Form 8916-A expanded to include Interest Income and Interest Expense.
Part II, line 29a, instructions expanded.
Reportable entity partner discussion.
Clarification that expense and deduction amounts that reduce financial
accounting and taxable income, respectively, must be reported as positive
amounts in Part III.
“Optional” has been deleted from columns (a) and (d) of Parts II and III as these
entries were optional for all filers in 2006, but may not be in 2007.

Page 2
Schedule L
We inserted a new first paragraph concerning non-tax-basis income statements at the
beginning of the discussion.
We inserted a new paragraph regarding differences in the measurements of total assets
at the beginning and the end of the year for purposes of Schedule L.
We inserted a new third paragraph referring to non-tax-basis income statements used in
preparing Schedule M-3 at the end of the section.

Entity Considerations for Schedule M-3
We deleted “on or after June 30, 2006,” in the first paragraph at the end of “(1).”
Page 3
Reportable Entity Partner Reporting Responsibilities
We inserted a new paragraph concerning reportable entity partner retention of copies of
reports.
Page 5
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.
We deleted this section since it was only for the transition year.
Page 6
Non-Tax-Basis Financial Statement and Tax-Basis Financial Statements. We
inserted a new header and text concerning non-tax-basis and tax-basis financial
statements as applied to Schedule M-3 including the header and text for “Order of
priority in accounting statements.”

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Page 7
Line 7a and 7b
We split the header into 7a and 7b to conform to the changes to Part I, lines 7a and 7b.
We made multiple revisions to the instructions for these lines in order to address
disregarded and other includible entities.
Page 10
When to complete columns (a) and (d) (cont’d)
We deleted the discussion of the filing requirements for years subsequent to the first
year as these are discussed earlier in the instructions.
Page 15
Line 13. Interest Income
We inserted a new paragraph stating that Form 8916-A must now be completed as a
reconciliation for this line.
Page 17
Line 29a. PC Insurance Subgroup Reconciliation Totals
We provided new instructions to clarify reporting on line 29a for mixed groups.
Page 18
Part III. Reconciliation of Net Income (Loss)
We inserted a note clarifying that the expense amounts that reduce financial accounting
income and the deduction amounts that reduce taxable income must be reported in Part
III as positive amounts.
Page 20
Line 36. Interest Expense
We inserted a new paragraph stating that Form 8916-A must now be completed.

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Instructions for Schedule M-3 (Form 1120-PC)

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2007

Department of the Treasury
Internal Revenue Service

Instructions for Schedule
M-3 (Form 1120-PC)
Net Income (Loss) Reconciliation for U.S. Property and Casualty 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-PC, Schedule A, line 35. For
property and casualty insurance
companies that prepare an annual
statement, financial statement net income
(loss) should be reported on the statutory
basis on Part I, line 11.

What’s New

• The use of non-tax-basis and tax-basis
financial statements and the selection of
the income statement to be used for
purposes of Schedule M-3 and the related
balance sheet amounts that must be used
by Schedule M-3 filers in preparing Form
1120-PC, Schedule L, are discussed on
page 2 and 6.
• Schedule M-3, Part I, line 7a, is used to
report the income (loss) for any other
disregarded entity that is not included in
Part I, line 4, but which is included in Part
I, line 11. Schedule M-3, Part I, line 7b, is
used to report the income (loss) for any
other disregarded entity that is not
included in Part I, line 4, but which is
included in Part I, line 11. Schedule M-3,
Part I, line 7b, is used to report the
income (loss) for any other includible
entity which is not a disregarded entity
and which is not included in Part I, line 4,
but is included in Part I, line 11.
• Form 8916-A, Supplemental
Attachment to Schedule M-3, must now
be attached to support any amounts on
Part II, line 13, Interest Income, or Part III,
line 36, Interest Expense.

• Part II, line 29a, instructions have been
expanded to include how to report
consolidating amounts for “mixed groups.”
• The word “optional” has been removed
from columns (a) and (d) in Parts II and
III. Columns (a) and (d) in Parts II and III
were optional for all Schedule M-3 (Form
1120 – PC) filers in 2006. However,
columns (a) and (b) may no longer be
optional for certain taxpayers beginning in
2007. See When to Complete Columns
(a) and (d), on page 10.
• The notification made by a “reportable
entity partner” must be retained by both
the reportable entity partner and the
partnership. For more information, see
Reportable Entity Partner Reporting
Responsibility on page 3.
• The instructions for Part III clarify that
expense amounts that reduce financial
accounting income and deduction
amounts that reduce taxable income must
be reported on Part III as positive
amounts.

Where To File
If the corporation is required to file (or
voluntarily files) Schedule M-3 (Form
1120-PC), the corporation must file Form
1120-PC and all attachments and
schedules, including Schedule M-3 (Form
1120-PC), with the Department of
Treasury, Internal Revenue Service
Center, Ogden, UT 84201-0012.

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-PC, U.S.
Property and Casualty Insurance
Company Income Tax Return, that
reports on Schedule L of Form 1120-PC
total assets at the end of the corporation’s
tax year that equal or exceed $10 million
must complete and file Schedule M-3
instead of Schedule M-1, Reconciliation
of Income (Loss) per Books With Income
(Loss) per Return.
• A corporation filing a non-consolidated
Form 1120-PC that reports on Schedule L
for Form 1120-PC total assets that equal
or exceed $10 million must complete and
file Schedule M-3 instead of Schedule
M-1 and must check box (1)
Non-consolidated return, at the top of
page 1 of Schedule M-3.
Cat. No. 39943A

• 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-PC that reports
on Schedule L of Form 1120-PC total
consolidated assets at the end of the tax
year that equal or exceed $10 million
must complete and file Schedule M-3
instead of Schedule M-1, and must check
box (2) Consolidated return (Form
1120-PC only), or (3) Mixed 1120/L/PC
group, as applicable, at the top of page 1
of Schedule M-3.
Form 1120-PC 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. property and casualty
insurance company filing Form 1120-PC
that is not required to file Schedule M-3
may voluntarily file Schedule M-3 in place
of Schedule M-1. A property and casualty
insurance company filing Schedule M-3
must check the box on Form 1120-PC,
page 1, item A, indicating that Schedule
M-3 is attached (whether required or
voluntary). A property and casualty
insurance company filing Schedule M-3
must not file Schedule M-1.
If the parent company of a U.S.
consolidated tax group files Form
1120-PC 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-PC and any member of the group
files a Form 1120 or Form 1120-L, U.S.
Life Insurance Company Income Tax
Return, that member must file a Form
1120 Schedule M-3 or a Form 1120-L
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.

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Instructions for Schedule M-3 (Form 1120-PC)

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If the parent company of a U.S.
consolidated tax group files Form
1120-PC and any member of the group
files Form 1120 or Form 1120-L and the
consolidated Schedule L reported in the
return includes the assets of all of the
companies (insurance companies as well
as the non-insurance 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 of the consolidated return. If
the parent company of a U.S.
consolidated tax group files Form
1120-PC and any member of the group
files Form 1120 or Form 1120-L and the
consolidated Schedule L reported in the
return does not include the assets of one
or more of the insurance companies 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 plus the
amounts of all assets reported on Forms
1120 and 1120-L that are included in the
consolidated return but not included on
the consolidated Schedule L.
For insurance companies included in
the consolidated U.S. 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. corporation A owns U.S.
subsidiary B and foreign subsidiary F. For
its 2007 tax year, A prepares
consolidated financial statements with B
and F that report total assets of $12
million. A files a consolidated U.S. income
tax return with B and reports total
consolidated assets on Schedule L of $8
million. A’s U.S. consolidated tax group is
not required to file Schedule M-3 for the
2007 tax year.
2. U.S. property and casualty
insurance company C owns U.S. property
and casualty insurance company D. For
its 2007 tax year, C prepares
consolidated financial statements with D
but C and D file separate U.S. 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 of
$7 million. D reports separate company
total year-end assets on its Schedule L of
$6 million. Neither C nor D is required to
file Schedule M-3 for the 2007 tax year.
3. Foreign corporation A owns 100
percent of both U.S. property and
casualty insurance company B and U.S.
property and casualty insurance company
C. C owns 100 percent of U.S. property
and casualty insurance company D. For
its 2007 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.
income tax return. B files a separate U.S.
income tax return and reports separate
company total year-end assets on its
Schedule L of $12 million. C files a
consolidated U.S. income tax return with
D and, after eliminating intercompany
transactions between C and D, reports
consolidated total year-end assets on
Schedule L of $8 million. B is required to
file Schedule M-3 because its total
year-end assets reported on Schedule L
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
do not exceed $10 million.

Other Issues Affecting
Schedule M-3 Filing
Requirements
If a property and casualty insurance
company was required to file Schedule
M-3 for the preceding tax year but reports
on Schedule L of Form 1120-PC total
consolidated assets at the end of the
current tax year of less than $10 million,
the property and casualty insurance
company is not required to file Schedule
M-3 for the current tax year. The property
and casualty insurance company may
voluntarily file Schedule M-3 for the
current tax year. If for a subsequent tax
year the property and casualty insurance
company is required to file Schedule M-3,
the property and casualty 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.
See the instructions for Schedule M-3,
Part I, line 1, regarding non-tax-basis
income statements and related
non-tax-basis balance sheets to be used
in the preparation of Schedule M-3 and
Form 1120-PC, Schedule L.

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

Schedule L
If a non-tax-basis income statement and
related non-tax-basis balance sheet is
prepared for any purpose for a period
ending with or within the tax year,
Schedule L must be prepared showing
non-tax-basis amounts. See the
discussion in the instructions for Schedule
M-3, Part I, line 1, of non-tax-basis
income statements and related
non-tax-basis balance sheets prepared
for any purpose and the impact on the
selection of the income statement used
for Schedule M-3 and the related
non-tax-basis balance sheet amounts that
must be used for Schedule L.
Total assets shown on Schedule L,
line 15, column (d), must equal the total
assets of the property and casualty
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 property and casualty
insurance company (or by each member
of the U.S. consolidated tax group) in the
annual statements, if any, used for
Schedule M-3. If the property and
casualty insurance company prepares
non-tax-basis financial statements,
Schedule L must equal the sum of the
annual statement total assets for each
corporation listed on Form 851 and
included in the consolidated U.S. income
tax return (includible corporation) net of
eliminations for intercompany
transactions between includible
corporations. If the property and casualty
insurance company does not prepare
non-tax-basis financial statements,
Schedule L must be based on the
property and casualty company’s books
and records. The Schedule L balance
sheet may show tax-basis balance sheet
amounts if the property and casualty
insurance company is allowed to use
books and records for Schedule M-3 and
the property and casualty insurance
company’s books and records reflect only
tax-basis amounts.
Generally, total assets at the beginning
of the year (Schedule L, line 15, column
(b)) must equal total assets at the close of
the prior year (Schedule L, line 15,
column (d)). For each Schedule L balance
sheet item reported for which there is a
difference between the current opening
balance sheet amount and the prior
closing balance sheet amount attach a
schedule that reports the balance sheet
item, the prior closing amount, the current
opening amount, and a short explanation

Instructions for Schedule M-3 (Form 1120-PC)

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Instructions for Schedule M-3 (Form 1120-PC)

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of the change. Such reasons for these
differences include mergers and
acquisitions.
For purposes of measuring total assets
at the end of the year, the corporation’s
assets may not be netted or reduced by
the corporation’s liabilities. In addition,
total assets may not be reported as a
negative amount. If Schedule L is
prepared on a non-tax-basis method, an
investment in a partnership may be
shown as appropriate under the
corporation’s non-tax-basis method of
accounting, including, if required by the
corporation’s reporting methodology, the
equity method of accounting for
investments. If Schedule L is prepared on
a tax-basis, an investment by the
corporation in a partnership must be
shown as an asset and measured by the
corporation’s adjusted basis in its
partnership interest. Any liabilities
contributing to such adjusted basis must
be shown on Schedule L as corporate
liabilities. In any event, assets reported on
Schedule L can never be reported as
negative amounts.

Schedule M-2
The amount shown on Schedule M-2, line
2, Net income (loss) per books, must
equal the amount shown on Schedule
M-3, Part I, line 11. Schedule M-2 must
reflect activity only of corporations
included in the consolidated U.S. income
tax return.

Consolidated Return (Form
1120-PC)
Report on Form 1120-PC 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-PC,
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
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. income
tax purposes. An entity that generally is
disregarded as separate from its owner
for U.S. income tax purposes
(disregarded entity) must not be
separately reported on Schedule M-3
except, if required, on Part I, line 7a. 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 7a, 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 2007 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, and (2) was required to
complete Schedule M-3 on its most
recently filed U.S. income tax return or
return of income filed prior to that day.
For the purposes of the 2007 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
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
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

Instructions for Schedule M-3 (Form 1120-PC)

-3-

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, (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.
The reportable entity partner must
retain copies of required reports it makes
to partnerships under these instructions.
Each partnership must retain copies of
the required reports it receives under
these instructions from reportable entity
partners.
Example 2
1. On September 16, 2007, A, an LLC
filing a Form 1065 for 2007, is owned 50
percent by U.S. property and casualty
insurance company Z. A owns 50 percent
of B, C, D, and E, which are also LLCs
filing a Form 1065 for calendar year 2007.
Z was first required to complete Form
1120-PC Schedule M-3 for its corporate
tax year ended December 31, 2006, and
filed its Schedule M-3 with Form 1120-PC
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 within 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 U.S. property and casualty
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-PC 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 each acquire a
10 percent partnership interest 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

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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. Since 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
with its most recently filed U.S. income
tax return filed prior to that date, 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 16, 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-PC Groups
Note: A consolidated tax return group
with a parent corporation that files a Form
1120-PC is a mixed group if any member
is a life insurance company (files Form
1120-L, U.S. Life Insurance Company
Income Tax Return) or is not an
insurance company. See the discussion,
Schedule M-3 Consolidation for Mixed
Groups (1120/L/PC).
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.
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-PC, 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
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 includible 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

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Schedules 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
Form 1120-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-PC
parent and Form 1120-PC consolidated
group, the parent is included in the Form
1120-PC 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

Instructions for Schedule M-3 (Form 1120-PC)

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Instructions for Schedule M-3 (Form 1120-PC)

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files. For a mixed group, the consolidated
Schedule M-3, Part II, lines 29a, 29b, and
29c amounts report the applicable
amounts from the three subgroup
sub-consolidation Part II, line 29a
amounts. (If a consolidated level Part II
for consolidation eliminations not
includible in the subgroup eliminations is
applicable, the applicable amounts must
be adjusted by the applicable elimination
amounts.) The consolidated Schedule
M-3, Part II, line 30, amount is 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-PC 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-PC parent
corporation included in the 1120-PC
subgroup must check Form 1120-PC
Schedule M-3, Parts II and III, boxes (2)
Parent corporation and (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, boxes (4) Subsidiary
corporation and (5) Mixed 1120/L/PC
group. An 1120 subsidiary corporation
within the 1120 subgroup must check
Form 1120 Schedule M-3 Parts II and III,
boxes (4) Subsidiary corporation and (5)
Mixed 1120/L/PC group. An 1120-L
subsidiary corporation within the 1120-L
subgroup must check Form 1120-L
Schedule M-3 Parts II and III, boxes (4)
Subsidiary corporation and (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 boxes (5)
Mixed 1120/L/PC group and (6) 1120
group for the sub-consolidation, and by
checking boxes (5) Mixed 1120/L/PC
group, and (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 boxes (5) Mixed
1120/L/PC group and (6) 1120-PC group
for the sub-consolidation and by checking
boxes (5) Mixed 1120/L/PC group, and
(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 boxes (5) Mixed 1120/L/PC
group and (6) 1120-L group for the
sub-consolidation and by checking boxes
(5) Mixed 1120/L/PC group, and (7)
1120-L eliminations, for the eliminations.
A mixed group with a Form 1120-PC
parent corporation completes a
consolidated level Form 1120-PC
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 boxes (1)
consolidated group and (5) Mixed 1120/L/
PC group. (If a consolidated level Part II
for consolidation eliminations not
includible in the subgroup eliminations is
applicable, that Part II must be indicated
by checking boxes (3) Consolidated
eliminations and (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.
The calculated amounts, if any, are
entered on Form 8916.

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 nonconsolidated 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-PC is filed,
all applicable questions must be
answered on Part I, all columns must be

Instructions for Schedule M-3 (Form 1120-PC)

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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 (1) no
activity for the tax year (e.g., because the
corporation is a dormant or inactive
corporation), (2) no amount for the
corporation was included in Part I, line 11,
and (3) 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 box (4) Dormant
subsidiaries schedule attached.

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Instructions for Schedule M-3 (Form 1120-PC)

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Specific Instructions
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 property and casualty
insurance company files Schedule M-3.
Check either box (1) Non-consolidated
return, (2) Consolidated return (Form
1120-PC only), or (3) Mixed 1120/L/PC
group, as applicable. In addition, check
box (4) Dormant subsidiaries schedule
attached, if applicable.

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. property and casualty insurance
company filing the U.S. income tax return
(the consolidated financial statements for
the U.S. parent corporation of a U.S.
consolidated tax group). If the U.S.
property and casualty insurance company
filing a U.S. 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
property casualty 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 property and
casualty 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.

Non-Tax-Basis Financial
Statements and Tax-Basis
Financial Statements
A tax basis income statement is allowed
for Schedule M-3 and a tax-basis balance
sheet for Schedule L only if no
non-tax-basis income statement and no
non-tax-basis balance sheet was
prepared for any purpose and the books
and records of the corporation reflect only
tax-basis amounts. The corporation is
deemed to have non-tax-basis income
statements and the related non-tax-basis
balance sheets for the current tax year for

purposes of Schedule M-3 and Schedule
L if such non-tax-basis financial
statements were prepared for and
presented to management, creditors,
shareholders, government regulators, and
any other third parties for a period ending
with or within the tax year. If a Form 10-K
is filed with the SEC for the period ending
with or within the tax year, the corporation
must check “Yes,” for Part I, line 1a, and
use that income statement for Schedule
M-3. If Form 10-K is not filed and a
non-tax-basis income statement is
prepared that is a certified non-tax-basis
income statement for the period ending
with or within the tax year, the corporation
must check “Yes,” for Part I, line 1b, and
use that income statement for Schedule
M-3. If Form 10-K is not filed and no
certified non-tax-basis income statement
is prepared for the period ending with or
within the tax year, the corporation must
check “Yes,” for Part I, line 1c, and use
that income statement for Schedule M-3.
Order of priority in accounting
standards. If no Form 10-K is filed and
two or more non-tax-basis income
statements are both certified
non-tax-basis income statements for the
period, the income statement prepared
according to the following order of priority
in accounting standards shall be used.
1. U.S. Generally Accepted
Accounting Principles (GAAP).
2. International Financial Reporting
Standards (IFRS).
3. Any other International Accounting
Standards (IAS).
4. Statutory accounting for insurance
companies.
5. Other regulatory accrual
accounting.
6. Any other accrual accounting
standard.
7. Section 704(b) book accounting.
8. Any other fair market value
standard.
9. Any cash basis standard.
If no non-tax-basis income statement
is certified and two or more non-tax-basis
income statements are prepared, the
income statement prepared according to
the first listed of the accounting standards
above shall be used.
If no non-tax-basis financial
statements are prepared for a U.S.
property and casualty 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-PC
Schedule M-3, the U.S. property and
casualty 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. property and casualty insurance
company (or U.S. consolidated tax group)
on Part I, line 4.
If no non-tax-basis financial
statements are prepared for a U.S.
property and casualty insurance company

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(or, in the case of a U.S. consolidated tax
group, for the U.S. parent corporation’s
consolidated group) filing Form 1120
Schedule M-3, and the U.S. property and
casualty insurance company is owned by
a foreign corporation that prepares
financial statements that include the U.S.
corporation (or the U.S. parent
corporation’s consolidated group), the
U.S. corporation (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.

Line 2. Questions Regarding
Income Statement Period and
Restatements
Enter the beginning and ending dates on
line 2a for the property and casualty
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. income tax
return (the consolidated financial
statements for the U.S. parent corporation
of a U.S. consolidated tax group) and
used to prepare Schedule M-3. Answer
“Yes” on lines 2b and/or 2c if the property
and casualty insurance company’s
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 property and
casualty insurance company. If the
property and casualty 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). A corporation filing a
non-consolidated Form 1120-PC for itself
must report its worldwide income on Part
I, line 4.

Instructions for Schedule M-3 (Form 1120-PC)

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Instructions for Schedule M-3 (Form 1120-PC)

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In completing Schedule M-3, the
property and casualty 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 property and casualty insurance
company prepares non-tax-basis 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 property and casualty insurance
company prepares non-tax-basis financial
statements and the income statement
period differs from the corporation’s tax
year, the income statement period
indicated on line 2a applies for purposes
of Part I, lines 4 through 8.
If the property and casualty insurance
company does not prepare non-tax-basis
financial statements, and has checked
“No” on Part I, line 1c, enter the net
income (loss) per the books and records
of the U.S. corporation or the U.S.
consolidated tax group on Part I, line 4.
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. property and casualty
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-PC (separate
or consolidated), (c) does not have a
separate non-tax-basis financial
statement (certified or otherwise) of its
own, and (d) reports on Schedule L of its
own Form 1120-PC total consolidated
assets that equal or exceed $10 million at
the end of the corporation’s tax year, the
property and casualty insurance company
must answer questions 1a, 1b, and 1c of
Part I as appropriate for its own Form
1120-PC 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 property and casualty
insurance company does have separate
non-tax-basis 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
corporation must answer questions 1a,
1b, and 1c of Part I, as appropriate, for its
own Form 1120-PC, 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
property and casualty insurance
company.

Line 5. Net Income (Loss) of
Nonincludible Foreign Entities
Remove the financial net income (line 5a)
or loss (line 5b) of each foreign entity that
is included on line 4 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 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 net income (loss) of
any nonincludible foreign entity accounted
for on line 4 using the equity method.
Attach a supporting schedule that
provides the name, EIN (if applicable),
and net income (loss) 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 net income (line 6a)
or loss (line 6b) included on line 4 for
each U.S. entity that is not an includible
corporation in the U.S. consolidated tax
group (nonincludible U.S. entity). In

Instructions for Schedule M-3 (Form 1120-PC)

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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 net
income (loss) of any nonincludible U.S.
entity accounted for on line 4 using the
equity method.
Attach a supporting schedule that
provides the name, EIN, and net income
(loss) included on line 4 that is removed
on this line 6 for each separate
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 7a. Net Income (Loss) of
Other Includible Disregarded
Entities and 7b. Net Income
(Loss) of Other Includible
Entities.
Include on line 7a or 7b the financial net
income or (loss) of each disregarded
entity or other includible entity that is not
included in the consolidated financial
group and therefore not included in the
income reported on Part I, line 4. Include
on line 7a the financial income of any
disregarded entity that is not included in
the income reported on Part I, line 4, but
is included on Part I, line 11 (other
disregarded entities).
Include on line 7b the financial income
of any entity not a disregarded entity that
is not included in the income reported on
line 4, but is included on 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
any other disregarded entity or other
includible entities.

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Attach a supporting schedule that
provides the name, EIN, and net income
(loss) per the financial statement or books
and records for each separate other
disregarded entity or other includible
entity reported on line 7. The amount of
income (loss) detailed on the supporting
schedule should be reported for each
separate other disregarded entity or other
includible 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
disregarded entity or other includible
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 disregarded
entity or other includible entity remains
separately stated. For example, if the net
income (after consolidation and
elimination entries) of a sub-consolidated
group of other disregarded entities is
being reported on line 7a, the attached
supporting schedule should report the
income (loss) of each separate other
disregarded entity from each 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 other disregarded 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 entities 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 entities that are in the
consolidated financial statement group
and other disregarded entities and other
includible entities that are not in the
consolidated financial statement group
but that are reported on Part I, line 7a or
7b, in order to report the correct total
amount on Part I, line 11.
Include on Part I, line 8, the total of the
following: (a) 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 (b) amounts of any additional
consolidation entries and elimination

entries that are required as a result of
including amounts on Part I, line 7a or 7b.
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 entities 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
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 disregarded
entities or other includible entities
reported on Part I, line 7a or 7b, and to
eliminate any intercompany dividends
between corporations or entities whose
income is included on Part I, line 7a and
7b, and other entities included in the
consolidated U.S. federal income tax
return. See line 11, examples, 3, 4, and 5.
If a corporate owner of an interest in
another 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.
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.

-8-

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.

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. 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

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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 property and
casualty 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 851 and included in the
consolidated U.S. 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 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. 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 other than disregarded entities
and not included in the consolidated U.S.
income tax return for the tax year. For
example, it is not permissible to remove
the income of nonincludible 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. 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. 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. property and casualty
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 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
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
DS1 through 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. corporation 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. 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.

Instructions for Schedule M-3 (Form 1120-PC)

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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
and DS1.
Example 4.
1. U.S. property and casualty
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. property and casualty
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.
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. property and casualty
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

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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. property and casualty
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. 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. property and casualty
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 distribution 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. 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).

General Format for Parts II
and III

Example 5. U.S. property and
casualty insurance company P owns 80%
of the stock of corporation DS1. DS1 is
included in P’s consolidated U.S. 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-PC, Schedule A, of the PDS
consolidated U.S. income tax return, and
the intercompany interest income and
expense must be removed by
consolidation elimination entries.

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
(5) Mixed 1120/L/PC group, 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-PC group; or
(7) 1120-PC eliminations. See sections
above titled Consolidated Schedule M-3
Versus Consolidating Schedules M-3 for
Form 1120-PC 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-PC, Schedule A, line 35.
Note: A schedule or explanation may be
attached to any line even if none is
required.

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 7b. 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 7b 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 times 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 consolidated U.S. income tax group
is required to include on the attached
supporting schedule for Part I, 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 U.S. consolidated tax returns, file
supporting schedules for each includible
corporation. See Consolidated Return in
the instructions for Form 1120-PC.

-10-

When To Complete Columns (a)
and (d)
A property and casualty insurance
company is not required to complete
columns (a) and (d) of Parts II and III for
the first tax year the property and casualty
insurance company is required to file
Schedule M-3. The corporation must
complete columns (a) and (d) of Parts II
and III for all tax years subsequent to the
first tax year the property and casualty
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 U.S. consolidated
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 consolidated U.S. income 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 property and
casualty insurance company is required
to file Schedule M-3, a property and
casualty insurance company voluntarily
files Schedule M-3 in lieu of Schedule
M-1, then in those voluntary filing years
the property and casualty insurance
company is not required to complete
columns (a) and (d) of Parts II and III. In
addition, in the first tax year the property
and casualty insurance company is
required to file Schedule M-3 the property
and casualty insurance company is not
required to complete columns (a) and (d)
of Parts II and III.

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If a property and casualty 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 property and casualty insurance
company is required to file Schedule M-3
(or in any year in which the property and
casualty insurance company voluntarily
files Schedule M-3), then Part II, line 30,
is reconciled by the property and casualty
insurance company (or, in the case of a
U.S. consolidated tax group, by the
group’s parent property and casualty
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 30, 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-PC, Schedule A,
line 35.

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 property and casualty
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 property and casualty 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). Generally, pursuant to
SAP, a temporary difference affects
(creates, increases, or decreases) a
deferred tax asset or liability.
If the property and casualty 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 property and casualty 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. 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 property and casualty
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 property and casualty 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, property and casualty
insurance company A has total
consolidated assets on the last day of the
tax year as reported on Schedule L, line
15, column (d), 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 in lieu of Schedule M-1 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. Property and casualty
insurance company B is a U.S. publicly
traded corporation that files a U.S.
consolidated 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.
income tax and financial statement
purposes. In the current year, B’s annual
amortization expense for IP is $9,000 for

Instructions for Schedule M-3 (Form 1120-PC)

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U.S. 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. 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 28, and report
$6,000 in column (a), a temporary
difference of $3,000 in column (b), and
$9,000 in column (d). B must report the
goodwill impairment on Part III, line 27,
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 property and casualty 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
property and casualty insurance
company’s current year annual statement
net income (loss) or in an income or
expense account maintained in the
property and casualty 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
property and casualty insurance company
as a result of the property and casualty
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

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imputed interest or not, whether from
foreign or domestic sources, whether
taxable or exempt from tax and
regardless of how or where the income is
classified in the property and casualty
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 11,
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 property
and casualty insurance company’s
summary of operations or the income and
expense accounts maintained in the
property and casualty insurance
company’s books and records.
If a property and casualty 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 property and
casualty 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 property and
casualty insurance company’s books and
records, the property and casualty
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 property and
casualty 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
property and casualty insurance
company’s annual statement or exists in
the property and casualty 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,” except write offs of
premium receivables, must be reported
on Part III, line 32, 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” or “Expense for
uncollectible notes receivable.” Likewise,

as stated in the preceding paragraph, all
fines and penalties must be included on
Part III, line 11, column (a), regardless of
the terminology or nomenclature attached
to them by the property and casualty
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
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 25, or Part III, lines 1 through 38,
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) and Rev. Proc. 2006-48,
2006-47 I.R.B. 934. 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 12 for specific
additional information required to be

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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. Property and casualty
insurance company C is a calendar year
taxpayer that placed in service ten
depreciable fixed assets in 2001. 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
income statement purposes and $70,000
for U.S. income tax purposes. C’s total
annual depreciation expense for its 2007
tax year for the other five assets is
$40,000 for income statement purposes
and $30,000 for U.S. income tax
purposes. In its annual statement, C
treats the differences between annual
statement and U.S. 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 31, 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. income
tax depreciation expense of $100,000 in
column (d).
Example 9. Property and casualty
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.
income tax purposes in 2007. D must not
combine the Schedule M-3 differences for
the three reserve accounts. D must report
the amounts attributable to the allowance
for bad debts on Part III, line 32 and must
separately state and adequately disclose
the amount attributable to the other
reserve, office closure costs, on a

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required, attached schedule that supports
the amounts at Part III, line 38.

Line 2. Gross Foreign
Dividends Not Previously Taxed

reported in column (d) of Part II, lines 9,
10, and 11.

Example 10. Property and casualty
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). In its annual statement, 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 10, 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. income tax purposes
on Part II, line 28, and the $50 subject to
the limitation under section 274(n) on Part
III, line 10.

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
taxable income on Form 1120-PC,
Schedule A, line 35, 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 II, 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.)
For any dividends reported on Part II,
line 2, that are received on a class of
voting stock of which the property and
casualty 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) the item amounts for columns (a)
through (d).

Line 5. Gross Foreign
Distributions Previously Taxed

Line 3. Subpart F, QEF, and
Similar Income Inclusions

Part II. Reconciliation of
Net Income (Loss) per
Income Statement of
Includible Corporations
With Taxable Income per
Return
Lines 1 Through 8. Additional
Information for Each Property
and Casualty 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 financial
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.

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 property
and casualty 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 property and
casualty insurance company on line 3(a),
Part II, of all Forms 8621, Return by a
Shareholder of a Passive Foreign
Investment Company (PFIC) 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 15.

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
property and casualty insurance company
on all Forms 1118, Foreign Tax Credit —
Corporations, excluding the amounts

Instructions for Schedule M-3 (Form 1120-PC)

-13-

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. 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 financial
income (loss) included in Part I, line 11,
for any U.S. property and casualty
insurance company 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.

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-PC, Schedule A,
line 35.
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. 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. 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

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included on Part I, line 10a, for such
dividends, and (5) the 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) the 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. Property and casualty
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.

Line 9. Income (Loss) From U.S.
Partnerships and Line 10.
Income (Loss) From Foreign
Partnerships
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. 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
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.
Example 12. U.S. property and
casualty 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

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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).
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
20, and report the disallowed charitable
contributions of ($3,910) in columns (b)
and (d).

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-through 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 property and casualty
insurance company’s end of year
profit-sharing percentage (if applicable),

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the property and casualty insurance
company’s end of year loss-sharing
percentage (if applicable), and the
amounts reported by the property and
casualty 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
financial amounts and the taxable
amounts.
Each difference attributable to a
reportable transaction must be separately
stated and adequately disclosed. A
property and casualty insurance company
will be considered to have separately
stated and adequately disclosed a
reportable transaction on line 12 if the
property and casualty 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 property and
casualty insurance company will be
considered to have separately stated and
adequately disclosed a reportable
transaction if the property and casualty
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. Property and casualty
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 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. Property and casualty
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
financial purposes and U.S. 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

Instructions for Schedule M-3 (Form 1120-PC)

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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
Attach Form 8916-A. Complete Form
8916-A, Part II, and enter the amounts
shown on line 6, columns (a) through (d),
on Schedule M-3, line 13, column (a)
through (d), as applicable.
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-PC, Schedule A, line 35, 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. income tax purposes as
interest income that are treated as some
other form of income for financial
accounting purposes, or vice versa. For
example, adjustments to interest income
resulting from adjustments made in
accordance with instructions for Part II,
line 17, 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, 11, 12, and 21.
Report the proration adjustment required
by section 832(b)(5)(B) on Part III, line 30.

Line 14. Hedging Transactions
Report on line 14, column (a), the net
gain or loss from hedging transactions on
Part I, line 11. 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. 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 14. The hedge of a
capital asset, which is not a valid hedge
for U.S. 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 14 and not
on Part II, line 15.

Line 15. Mark-to-Market Income
(Loss)
Report on line 15 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

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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 14,
Hedging transactions, and not on line 15.

Line 16. Premium Income
Report on line 16, column (a), the amount
of earned premiums included in Part I,
line 11. Include on line 16, column (d), the
amount of earned premiums included on
Form 1120-PC, Schedule A, line 35.
Complete columns (b) and (c), as
appropriate. Attach a detailed schedule
separately stating amounts included on
line 16 attributable to the change in (1)
advance premiums (2) earned but
unbilled premiums (3) retrospective
premium accruals (4) unearned
premiums, and (5) other premium
accounts.

Line 17. 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
financial 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 17, 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 17, column (d),
report the gross profit or gross rental
income for income tax purposes. Interest
income amounts for such transactions
must be reported on Part II, line 13,
Interest income, in column (a) or (d), as
applicable. Depreciation expense for such
transactions must be reported on Part III,
line 31, Depreciation, in column (a) or (d),
as applicable. Use columns (b) and (c) of
Part II, lines 13 and 17, and Part III, line
31, as applicable to report the differences
between columns (a) and (d).
Example 16. Property and casualty
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 financial accounting
purposes, M accounts for each
transaction as a sale. For U.S. income tax
purposes, each of M’s transactions must
be treated as a lease. In its annual
statement, M treats the difference in the

financial accounting and the U.S. 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 financial accounting
purposes, M reports gross profit of $300
($1,000 -$700) and interest income of
$100 from these transactions. For U.S.
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 17, $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 31, $200 in column (b) and (d).

Line 18. Section 481(a)
Adjustments
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
authorized (or unauthorized) change in
method of accounting made for U.S.
income tax purposes that results in a
section 481(a) adjustment must be
reported on Part II, line 18, regardless of
whether a separate line for that income or
expense item exists in Part II or Part III.
Example 17. Property and casualty
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
18, $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 31.

Line 19. Income From a Special
Loss Discount Account
Report on line 19 income recognized from
a subtraction from the Special Loss
Discount Account under section 847(5).

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Line 20. Income Recognition
From Long-Term Contracts
Report on line 20 the amount of net
income or loss for financial statement
purposes (or books and records, if
applicable) or U.S. income tax purposes
for any contract accounted for under a
long-term contract method of accounting.

Line 21. Original Issue Discount
and Other Imputed Interest
Report on line 21 any amounts of original
issue discount (OID) and other imputed
interest. The term “original 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 stripped bond rules under
section 1286; and
4. Amounts treated as OID under the
below-market interest rate rules under
section 7872.

Line 22. Reserved for Future
Use
This line is reserved for future use. Do not
include any amounts on this line.

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 corporation from a pass-through entity
(e.g., on Schedule K-1) that are included
in the net income (loss) per income
statement 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.
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

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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 under
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 under
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. income tax return,
see instructions for Part I, lines 10 and 11
and Part II, line 7 for guidance on 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 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. 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. 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. 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. taxable income.

Instructions for Schedule M-3 (Form 1120-PC)

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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.,
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 on page 12.

Line 29a. PC Insurance
Subgroup Reconciliation Totals
For filers other than a mixed group,
combine lines 26 through 28 and skip
lines 29b and 29c. On the
sub-consolidated Schedule M-3 for a
mixed group, combine lines 26 through 28
and skip lines 29b and 29c. For the
consolidated Schedule M-3 of a mixed
group, complete only lines 29a through
29c and line 30 of Part II. Part III is not
required for the consolidated Schedule
M-3 of a mixed group.

Line 29b. 1120 Subgroup
Reconciliation Totals
Line 29b is only used by mixed groups.
See, Schedule M-3 Consolidation for
Mixed Groups (1120/L/PC), earlier.

Line 29c. Life Insurance
Subgroup Reconciliation Totals
Line 29c is only used by mixed groups.
See Schedule M-3 Consolidation for
Mixed Groups (1120/L/PC), earlier.

Line 30. Reconciliation Totals.
Combine Lines 29a through 29c
If a property and casualty 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 property and casualty insurance
company is required to file Schedule M-3
(or for any year in which the property and
casualty insurance company voluntarily
files Schedule M-3), Part II, line 30, is
reconciled by the property and casualty

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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 30, columns
(a), (b), and (c).
Note. Mixed groups see Schedule M-3
Consolidation for Mixed Groups (1120/L/
PC), earlier.

Part III. Reconciliation of
Net Income (Loss) per
Income Statement of
Includible Corporations
With Taxable Income per
Return—Expense/
Deduction Items
Note. Expense amounts that reduce
financial accounting income must be
reported on Part III, column (a), as
positive amounts. Deduction amounts that
reduce taxable income must be reported
on Part III, column (d), as positive
amounts. Amounts reported on Part II,
line 27, must be the negative of the
amounts reported on Part III, line 36.

Lines 1 Through 6. Income Tax
Expense
If the property and casualty 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
financial accounting income on Part I, line
11. If the property and casualty 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 property and casualty
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. Stock Option Expense
Report on line 8, column (a), amounts
expensed on Part I, line 11, net income,
that are attributable to all stock options.
Report on line 8, column (d), deduction
amounts attributable to all stock options.

Line 9. Other Equity-Based
Compensation
Report on line 9 any amounts for
equity-based compensation or
consideration that are reflected as
expenses for financial accounting
purposes (column (a)) or deducted in the
U.S. income tax return (column (d)) other
than amounts reportable elsewhere on
Schedule M-3, Parts II and III (e.g., on
Part III, line 8, for stock options expense).
Examples of amounts reportable on line 9
include 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.

Line 10. Meals and
Entertainment
Report on line 10, column (a), any
amounts paid or accrued by the property
and casualty 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 property and casualty
insurance company’s statutory income
statement or the income and expense
accounts maintained in the property and
casualty insurance company’s books and
records. Report only amounts not
otherwise reportable elsewhere on
Schedule M-3, Parts II and III.

Line 11. Fines and Penalties
Report on line 11 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 statutory
accounting income (paid or accrued) must

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be included on this line 11, 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 property
and casualty insurance company’s
statutory income statement or the income
and expense accounts maintained in the
property and casualty insurance
company’s books and records. Also
report on line 11, column (a), the reversal
of any overaccrual of any amount
described in this paragraph. See section
162(f) for additional guidance.
Report on line 11, 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 11,
amounts required to be reported in
accordance with instructions for Part III,
line 12.
Do not report on this Part III, line 11,
amounts recovered from insurers or any
other indemnitors for any fines and
penalties described above.

Line 12. Judgments, Damages,
Awards, and Similar Costs
Report on line 12, 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 12,
column (a), the reversal of any
overaccrual of any amount described in
this paragraph.
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
statutory accounting period in which such
amounts were or are included in statutory
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 11.
Do not report on this Part III, line 12,
amounts recovered from insurers or any
other indemnitors for any judgments,
damages, awards, or similar costs
described above.

Line 13. Parachute Payments
Report on line 13, column (a), the total
expense included in statutory accounting
net income on Part I, line 11, that is

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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 13.

• 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 14. Compensation With
Section 162(m) Limitation

Report on line 15 any amounts
attributable to the property and casualty
insurance company’s pension plans,
profit-sharing plans, and any other
retirement plans.

Report as a negative amount on this line
20, 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 U.S. 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 under Completion of Schedule
M-3 and Certain Allocations, Limitations,
and Carryovers.

Line 16. Other Post-Retirement
Benefits

Line 21. Write-Off of Premium
Receivables

Report on line 14, 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 13, Parachute
payments. See Regulations section
1.162-27(g) for the interaction between
sections 162(m) and 280G.

Line 15. Pension and
Profit-Sharing

Report on line 16 any amounts
attributable to other post-retirement
benefits not otherwise includible on Part
III, line 15, for example, retiree health and
life insurance coverage, dental coverage,
etc.

Line 17. Deferred
Compensation
Report on line 17, 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.
income tax purposes in the current tax
year and that was not reported elsewhere
on Schedule M-3, column (a). Report on
line 17, 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 17.

Line 19. Charitable Contribution
of Intangible Property
Report on line 19 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;

Line 20. Charitable Contribution
Limitation/Carryforward

Report on line 21 the amount of premium
receivables written-off rather than on line
32.

Line 22. Guarantee Fund
Assessments
Report on line 22 all special purpose and
guaranty fund assessments accrued or
deducted for the taxable year.

Line 23. Current Year
Acquisition or Reorganization
Investment Banking Fees
Report on line 23 any investment banking
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 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 23 investment banking fees
incurred in connection with the liquidation
of a subsidiary, a spin-off of a subsidiary,
or an initial public stock offering.

Line 24. Current Year
Acquisition or Reorganization
Legal and Accounting Fees
Report on line 24 any legal and
accounting fees paid or incurred in
connection with a taxable or tax-free

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acquisition of property (e.g., stock or
assets) or tax-free reorganization. Report
on this line any legal and accounting fees
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 legal and accounting
fees incurred in connection with the
liquidation of a subsidiary, a spin-off of a
subsidiary, or an initial public stock
offering.

Line 25. Current Year
Acquisition/Reorganization
Other Costs
Report on line 25 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 not
otherwise reportable on Schedule M-3
(e.g., Part III, line 23 or 24). Report on
this line any 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 25 other acquisition/
reorganization costs incurred in
connection with the liquidation of a
subsidiary, a spin-off of a subsidiary, or
an initial public stock offering.

Line 26. Amortization of
Acquisition, Reorganization,
and Start-Up Costs
Report on line 26 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 27. Amortization/
Impairment of Goodwill,
Insurance in Force, and Ceding
Commissions
Report on line 27 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 28. Other Amortization or
Impairment Write-Offs
Report on line 28 any amortization or
impairment write-offs not otherwise
includible on Schedule M-3.

Line 29. Discounting of Unpaid
Losses (Section 846)
Report on line 29, column (a), the change
in liability for unpaid losses and loss
adjustment expense net of reinsurance as
included in Part 1, line 11. Report in
column (d) the amount of change in the
same liability valued for tax purposes
included in the taxable income on Form
1120-PC, Schedule A, line 35. Do not

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include paid losses on this line 29.
Indicate amounts in columns (b) and (c),
as appropriate. Attach a schedule
supporting columns (b) and (c) that
identifies the beginning and end of the
taxable year amounts of discounting as
required by IRC section 846. Include any
other differences between columns (a)
and (d) by separate title as well as
beginning and end of tax year amounts.

Line 30. Reduction of Loss
Deduction (Section
832(b)(5)(B))
Report the proration adjustment required
by section 832(b)(5)(B) as a negative
amount on line 30, column (d). Report
amounts in column (b) and (c), as
appropriate. Do not enter an amount on
line 30, column (a).

Line 31. Depreciation
Report on line 31 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 32. Bad Debt Expense and/
or Agency Balances Written Off
Report on line 32, column (a), any
amounts attributable to an allowance for
uncollectible accounts receivable or
actual write-offs of accounts receivable
included in net income. 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 income tax purposes in
accordance with section 166.

Line 33. Deduction From a
Special Loss Discount Account
Report on line 33 the deduction for
additions to the Special Loss Discount
Account under section 847(4).

Line 34. Corporate Owned Life
Insurance Premiums
Report on line 34 all amounts of
insurance premiums attributable to any
life insurance policy if the 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 income tax purposes.

Line 35. Purchase Versus Lease
(for Purchasers and/or
Lessees)
Note: Also see the instructions at Part II,
line 17, on page 15, for sellers and/or
lessors.
Asset transfer transactions with
periodic payments characterized for
financial 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 financial accounting
purposes but as a sale for U.S. federal
income tax purposes. Report on Part III,
line 35, column (d), gross rental
deductions for a transaction treated as a
lease for U.S. federal income tax
purposes but as a purchase for financial
accounting purposes. Report interest
expense for such transactions on Part III,
line 36, Interest expense, in column (a) or
(d), as applicable. Report depreciation
expense or deductions for such
transactions on Part III, line 31,
Depreciation, in column (a) or (d), as
applicable. Use columns (b) and (c) of
Part III, lines 31, 35, and 36, as
applicable, to report the differences
between column (a) and (d) for such
recharacterized transactions.
Example 18. U.S. property and
casualty 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. income
tax purposes, because of its terms, the
transaction is treated for U.S. income tax
purposes 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. income tax treatment of this
transaction as a temporary difference.
During 2007, X reports in its annual
statement $1,000 of gross rental expense
that, for U.S. 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 zero in column (a) and $300 in
columns (b) and (d) for the interest
deduction. On Part III, line 31, X reports
zero in column (a) and $1,200 in columns
(b) and (d) for the depreciation deduction.

Line 36. Interest Expense
Attach Form 8916-A. Complete Form
8916-A, Part III, and enter the amounts
shown on line 5, columns (a) through (d),
on Schedule M-3, line 36, columns (a)
through (d), as applicable.
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 expense included on
Form 1120-PC, Schedule A, line 35, that
is not reported elsewhere on Schedule

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M-3 in accordance with the next
paragraph. In columns (b) or (c), as
applicable, adjust for any amounts treated
for U.S. federal income tax purposes as
interest expense that are treated as some
other form of expense for financial
accounting purposes, or vice versa. For
example, adjustments to interest expense
resulting from adjustments made in
accordance with 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 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 under section 199 that
is included in taxable income on Form
1120-PC, Schedule A, line 35. Complete
columns (b) and (c), as appropriate. Do
not report any potion of the company’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, 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. income tax
return. For financial statement purposes,
P, A, and B recognize real estate tax
expense when accrued. For U.S. 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
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. 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. income tax purposes.
Comprehensive income. If any
“comprehensive income” as defined by
SFAS No. 130 is reported on this line,

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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 12, 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 32, Bad debt
expense and/or agency balances written
off. (See Example 9 and Example 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. income tax purposes.
Examples of items that must be reported
on line 38 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 property and casualty
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. Property and casualty
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 annual insurance
premiums on its home office building that
provides a 12-month coverage period
beginning July 1 through June 30. In

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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 financial accounting
purposes, Q capitalizes and amortizes the
prepaid insurance and advertising over 12
months. For U.S. 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 financial accounting
treatment and U.S. 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 times 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, its prepaid advertising and report
$400,000 in columns (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,
columns (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.