Td 8857

Federal Register / Vol. 65, No. 4 / Thursday, January 6, 2000 / Rules and Regulations
substantial number of previous
opportunities provided to the public to
comment on substantially identical
actions have resulted in negligible
adverse comments or objections. Unless
a written adverse or negative comment,
or a written notice of intent to submit
an adverse or negative comment is
received within the comment period,
the regulation will become effective on
the date specified above. After the close
of the comment period, the FAA will
publish a document in the Federal
Register indicating that no adverse or
negative comments were received and
confirming the date on which the final
rule will become effective. If the FAA
does receive, within the comment
period, an adverse or negative comment,
or written notice of intent to submit
such a comment, a document
withdrawing the direct final rule will be
published in the Federal Register, and
a notice of proposed rulemaking may be
published with a new comment period.
Comments Invited
Although this action is in the form of
a final rule and was not preceded by a
notice of proposed rulemaking,
comments are invited on this rule.
Interested persons are invited to
comment on this rule by submitting
such written data, views, or arguments
as they desire. Communications should
identify the Rules Docket number and
be submitted in triplicate to the address
specified under the caption ADDRESSES.
All communications received on or
before the closing date for comments
will be considered, and this rule may be
amended or withdrawn in light of the
comments received. Factual information
that supports the commenter’s ideas and
suggestions is extremely helpful in
evaluating the effectiveness of this
action and determining whether
additional rulemaking action is needed.
Comments are specifically invited on
the overall regulatory, economic,
environmental, and energy aspects of
the rule that might suggest a need to
modify the rule. All comments
submitted will be available, both before
and after the closing date for comments,
in the Rules Docket for examination by
interested persons. A report that
summarizes each FAA-public contact
concerned with the substance of this
action will be filed in the Rules Docket.
Commenters wishing the FAA to
acknowledge receipt of their comments
submitted in response to this rule must
submit a self-addressed, stamped
postcard on which the following
statement is made: ‘‘Comments to
Docket No. 99–ASW–34.’’ The postcard

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will be date stamped and returned to the
commenter.
Agency Findings

Paragraph 6005 Class E airspace areas
extending upward from 700 feet or more
above the surface of the earth.

*

The regulations adopted herein will
not have substantial direct effects on the
States, on the relationship between the
national government and the States, or
on the distribution of power and
responsibilities among the various
levels of government. Therefore, it is
determined that this final rule will not
have federalism implications under
Executive Order 13132.
Further, the FAA has determined that
this regulation is noncontroversial and
unlikely to result in adverse or negative
comments and only involves an
established body of technical
regulations that require frequent and
routine amendments to keep them
operationally current. Therefore, I
certify that this regulation (1) is not a
‘‘significant regulatory action’’ under
Executive Order 12866; (2) is not a
‘‘significant rule’’ under DOT
Regulatory Policies and Procedures (44
FR 11034; February 26, 1979); and (3) if
promulgated, will not have a significant
economic impact, positive or negative,
on a substantial number of small entities
under the criteria of the Regulatory
Flexibility Act. Since this rule involves
routine matters that will only affect air
traffic procedures and air navigation, it
does not warrant preparation of a
Regulatory Flexibility Analysis because
the anticipated impact is so minimal.

701

*

*

*

*

ASW TX E5 Bonham, TX [Revised]
Bonham, Jones Field, TX
(Lat. 33°36′42′′N., long. 96°10′46′′W.)
Bonham VORTAC
(Lat. 33°32′15′′N., long. 96°14′03′′W.)
Rayburn NDB
(Lat. 33°36′50′′N., long. 96°10′34′′W.)
That airspace extending upward from 700
feet above the surface within a 6.4-mile
radius of Jones Field and within 4 miles east
and 8 miles west of the 030° radial of the
Bonham VORTAC extending from the 6.4mile radius to 15 miles northeast of the
airport and within 2.5 miles each side of the
347° bearing from the Rayburn NDB
extending from the 6.4-mile radius to 7.5
miles northwest of the airport.

*

*

*

*

*

Issued in Fort Worth, TX, on December 27,
1999.
JoEllen Casilio,
Assistant Manager, Air Traffic Division,
Southwest Region.
[FR Doc. 00–242 Filed 1–5–00; 8:45 am]
BILLING CODE 4910–13–M

DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 8857]

List of Subjects in 14 CFR Part 71

RIN 1545–AU60

Airspace, Incorporation by reference,
Navigation (air).

Determination of Underwriting Income

Adoption of the Amendment
Accordingly, pursuant to the
authority delegated to me, the Federal
Aviation Administration amends 14
CFR part 71 as follows:
PART 71—DESIGNATION OF CLASS A,
CLASS B, CLASS C, CLASS D, AND
CLASS E AIRSPACE AREAS;
AIRWAYS; ROUTES; AND REPORTING
POINTS
1. The authority citation for 14 CFR
part 71 continues to read as follows:
Authority: 49 U.S.C. 106(g), 40103, 40113,
40120; E.O. 10854; 24 FR 9565, 3 CFR, 1959–
1963 Comp., p. 389.
§ 71.1

[Amended]

2. The incorporation by reference in
14 CFR 71.1 of the Federal Aviation
Administration Order 7400.9G,
Airspace Designations and Reporting
Points, dated September 1, 1999, and
effective September 16, 1999, is
amended as follows:

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AGENCY: Internal Revenue Service (IRS),
Treasury.
ACTION: Final regulations.
SUMMARY: This document contains final
regulations relating to the determination
of underwriting income by insurance
companies other than life insurance
companies. In computing underwriting
income, non-life insurance companies
are required to reduce by 20 percent
their deductions for increases in
unearned premiums. This requirement
was enacted as part of the Tax Reform
Act of 1986. These regulations provide
guidance to non-life insurance
companies for purposes of determining
the amount of unearned premiums that
are subject to the 20 percent reduction
rule.
DATES: The regulations are effective
January 5, 2000.
FOR FURTHER INFORMATION CONTACT: Gary
Geisler, (202) 622–3970 (not a toll-free
number).
SUPPLEMENTARY INFORMATION:

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

Background
On January 2, 1997, the IRS published
in the Federal Register a notice of
proposed rulemaking (REG–209839–96,
1997–1 C.B. 780 [62 FR 72]) proposing
amendments to the Income Tax
Regulations (26 CFR part 1) under
section 832(b) of the Internal Revenue
Code. The IRS received a number of
written comments on the proposed
regulations. On April 30, 1997, the IRS
held a public hearing on the proposed
regulations. After consideration of all
written and oral comments regarding
the proposed regulations, those
regulations are adopted as revised by
this Treasury decision.
Explanation of Revisions and Summary
of Comments Underwriting Income
A non-life insurance company’s
underwriting income equals its
premiums earned on insurance
contracts during the taxable year less its
losses incurred on insurance contracts
and its expenses incurred.1 See section
832(b)(3). To compute premiums
earned, the company starts with the
gross premiums written on insurance
contracts during the taxable year,
subtracts return premiums and
premiums paid for reinsurance, and
makes an adjustment to reflect the
change in its unearned premiums over
the course of the taxable year. See
section 832(b)(4). This computation
results in premiums being recognized in
underwriting income over the term of
the insurance contract, rather than in
the taxable year in which the premiums
are billed or received from the
policyholder.
Prior to 1987, 100 percent of the
change in unearned premiums during
the taxable year was taken into account
as an increase or decrease to written
premiums in computing premiums
earned. This treatment ‘‘generally
reflect[ed]’’ the accounting conventions
(often referred to as ‘‘statutory
accounting principles’’) used to prepare
a non-life insurance company’s annual
statement for state insurance regulatory
purposes. See 2 H.R. Conf. Rep. No. 841,
99th Cong., 2d Sess. II–354 (1986),
1986–3 C.B. (Vol. 4) 354; S. Rep. No.
313, 99th Cong., 2d Sess. 495 (1986),
1986–3 C.B. (Vol. 3) 495, H.R. Rep. No.
426, 99th Cong., 1st Sess. 668 (1985),
1 For this purpose, expenses incurred generally
refers to the expenses reported on the company’s
annual statement approved by the National
Association of Insurance Commissioners (NAIC)
and filed for state insurance regulatory purposes,
less expenses incurred which are not allowed as
deductions under section 832(c). See section
832(b)(6). Expenses incurred generally include
premium acquisition expenses attributable to
unearned premiums on insurance contracts.

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1986–3 C.B. (Vol. 2) 668. Because
unearned premiums are computed on
the basis of the gross premiums for an
insurance contract, the amount of
unearned premiums reflects not only
the portion of the gross premium
allocable to future insurance claims but
also the portion allocable to the
insurance company’s expenses and
profit on the insurance contract.
In 1986, Congress determined that
deferring unearned premium income
and currently deducting premium
acquisition expenses attributable to
unearned premiums resulted in a
mismatch of an insurance company’s
net income and expense. Congress
decided to require a better measurement
of net income for Federal income tax
purposes. See H.R. Rep. No. 426, 1986–
3 C.B. (Vol. 2) at 669; S. Rep. No. 313,
1986–3 C.B. (Vol. 3) at 496. Rather than
defer the deduction for premium
acquisition expenses attributable to
unearned premiums, Congress reduced
by 20 percent the adjustment for
unearned premiums. For taxable years
beginning on or after January 1, 1993, a
non-life insurance company’s premiums
earned is an amount equal to: (1) its
gross premiums written, less both return
premiums and premiums paid for
reinsurance; plus (2) 80 percent of
unearned premiums at the end of the
prior taxable year, less 80 percent of
unearned premiums at the end of the
current taxable year. Section 832(b)(4).
The acceleration of income that is
typically generated by the 20 percent
reduction of unearned premiums is
intended to be roughly equivalent to
denying current deductibility for the
portion of the insurance company’s
premium acquisition expenses allocable
to the unearned premiums. See 2 H.R.
Conf. Rep. No. 841, 1986–3 C.B. (Vol. 4)
at 354–55; S. Rep. No. 313, 1986–3 C.B.
(Vol. 3) at 495–98; H.R. Rep. No. 426,
1986–3 C.B. (Vol. 2) at 668–70.
Role of the Annual Statement
The proposed regulations provide
definitions of the items used to
determine premiums earned under
section 832(b)(4) and timing rules for
taking these items into account for
Federal income tax purposes. The
treatment provided in the proposed
regulations would apply regardless of
the classification or method of reporting
the items used on an insurance
company’s annual statement.
Several comments questioned
whether there is legal authority to
require an insurance company to use a
method to calculate premiums earned
for Federal income tax purposes that
differs from the method that the

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company is permitted to use to calculate
premiums earned on its annual
statement. As noted in the preamble to
the proposed regulations, the existing
regulations under § 1.832–4(a)(2) state
that the annual statement ‘‘* * *
insofar as it is not inconsistent with the
provisions of the Code * * *’’ will be
recognized and used as a basis for
computing the net income of a non-life
insurance company. Also, if statutory
accounting principles permit alternative
practices, one or more of which do not
clearly reflect income as defined by the
Code, the company is required for
Federal income tax purposes to use a
method that clearly reflects income.
Section 446(b) and § 1.446–1(a)(2).
Gross Premiums Written
The proposed regulations generally
define gross premiums written as the
total amounts payable for insurance
coverage under insurance or reinsurance
contracts issued or renewed during the
taxable year. The proposed regulations,
however, do not address situations
where the amounts charged for
insurance coverage may change due to
increases or decreases in coverage
limits, additions or deletions in
property or risks covered, changes in
location or status of insureds, or other
similar factors.
The final regulations define an
insurance company’s ‘‘gross premiums
written’’ on insurance contracts (which
includes premiums attributable to
reinsurance contracts) as amounts
payable for insurance coverage for the
effective periods of the contracts. The
label placed on a payment in a contract
does not determine whether an amount
is a gross premiums written. The
effective period of a contract is the
period over which one or more rates for
insurance coverage are guaranteed in
the contract. If a new rate for insurance
coverage is guaranteed after the effective
date of an insurance contract, the
making of the guarantee generally is
treated as the issuance of a new
insurance contract with an effective
period equal to the duration of the new
guaranteed rate for insurance coverage.
Under the final regulations, gross
premiums written include: (1)
Additional premiums resulting from
increases in risk exposure during the
effective period of an insurance
contract; (2) amounts subtracted from a
premium stabilization reserve that are
used to pay premiums; and (3)
consideration for assuming insurance
liabilities under contracts not issued by
the insurance company (that is, a
payment or transfer of property in an
assumption reinsurance transaction).

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Federal Register / Vol. 65, No. 4 / Thursday, January 6, 2000 / Rules and Regulations
Gross premiums written, however, do
not include other items of gross income
described in section 832(b)(1)(C). To the
extent that amounts paid or payable to
an insurance company with respect to
an arrangement are not gross premiums
written, the insurance company may not
treat amounts payable to customers with
respect to the applicable portion of such
arrangements as losses incurred
described in section 832(b)(5).
Method of Reporting Gross Premiums
Written
The proposed regulations provide that
a non-life insurance company reports
the full amount of gross premiums
written for an insurance contract for the
earlier of the taxable year which
includes the effective date of the
contract or the year in which all or a
portion of the premium for the contract
is received. A variety of comments were
received with respect to the application
of this timing rule to insurance contracts
with installment premiums. In response
to comments, the final regulations
provide a number of exceptions from
the general rule with respect to when an
insurance company reports gross
premiums written.
Advance Premiums
Under the proposed regulations, a
non-life insurance company that
receives a portion of the premium for an
insurance contract prior to the effective
date of the contract includes the full
amount of the premium in gross
premiums written for the taxable year
during which the portion of the
premium was received.
Several comments addressed the
treatment of advance premiums in the
proposed regulations. One comment
endorsed the proposed treatment of
advance premiums, noting that it is
proper under statutory accounting
principles to record the full amount of
gross premiums written and expenses
incurred with respect to a casualty
insurance policy for the year in which
an advance premium is received.2 Other
comments argued that since the
policyholder may demand a refund of
an advance premium prior to the
policy’s effective date, the company
should be permitted to treat an advance
2 Prior to 1989, advance premiums were required
to be reported in written premiums and unearned
premiums on a non-life insurance company’s
annual statement. However, statutory accounting
principles were later modified to permit advance
premiums to be accumulated in a suspense account
and reported as a write-in liability on the annual
statement. A company electing to use this
alternative treatment would not report advance
premiums in either written premiums or unearned
premiums on its annual statement until the
effective date of the underlying coverage.

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premium as a nontaxable deposit until
such time as coverage begins under the
contract. Alternatively, these comments
urged that the company be permitted to
report only the advance premium
(rather than the entire gross premium
for the contract) in gross premiums
written for the taxable year of receipt,
and to report the remainder of the gross
premium for the taxable year that
includes the contract’s effective date.
These comments also indicated that
companies generally do not deduct the
full amount of premium acquisition
expenses for the contract in the taxable
year in which they receive advance
premiums.
In response to comments, the final
regulations permit an insurance
company that receives part of the gross
premium for an insurance contract prior
to the effective date of the contract to
report only the advance premium
(rather than the full amount of the gross
premium written for the contract) in
gross premiums written for the taxable
year of receipt. The remainder of the
gross premium for the insurance
contract is included in gross premiums
written for the taxable year which
includes the effective date of the
contract. This method of reporting gross
premiums written is available only if
the company’s deduction for premium
acquisition expenses attributable to the
contract does not exceed a limitation
specified in the regulations, which is
intended to ensure that a company does
not deduct premium acquisition
expenses attributable to an insurance
contract more rapidly than the company
includes premiums for the insurance
contract in its gross premiums written.
Companies that adopt this method of
reporting gross premiums written must
use this method for all insurance
contracts with advance premiums.
Accident and Health Insurance
Contracts
The proposed regulations have no
special rules for determining gross
premiums written with respect to
accident and health insurance contracts.
Several comments indicated that the
longstanding practice of insurance
companies that issue accident and
health insurance contracts with
installment premiums is to include
amounts in gross premiums written for
the taxable year in which the
installment premiums become due
under the contracts. These comments
also stated that companies generally do
not deduct premium acquisition
expenses allocable to installment
premiums not yet due or received with

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703

respect to accident and health insurance
contracts.
In response to comments, the final
regulations permit a non-life insurance
company that either issues or
proportionally reinsures cancellable
accident and health insurance contracts
with installment premiums to report the
installment premiums in gross
premiums written for the earlier of the
taxable year in which the installment
premiums become due under the terms
of the contract or the taxable year in
which the installment premiums are
received. This method of reporting gross
premiums written for cancellable
accident and health insurance contracts
with installment premiums is available
only if the company’s deduction for
premium acquisition expenses
attributable to those contracts does not
exceed the matching limitation
specified in the regulations. Companies
that adopt this method of reporting
gross premiums written must use it for
all cancellable accident and health
insurance contracts with installment
premiums.
Multi-year Contracts With Installment
Premiums
The final regulations also provide an
exception with respect to the reporting
of gross premiums written for a multiyear insurance contract for which the
gross premium is payable in
installments over the effective period of
the contract. Under the final regulations,
a company may treat this type of multiyear insurance contract as a series of
separate insurance contracts. The first
insurance contract in the series will be
treated as having an effective period of
12 months. Subsequent insurance
contracts in the series will be treated as
having an effective period equal to the
lesser of 12 months or the remainder of
the period for which the rates for
insurance coverage are guaranteed in
the multi-year insurance contract. This
method of reporting gross premium
written for a multi-year insurance
contract with installment premiums is
available only if the company’s
deduction for premium acquisition
expenses attributable to the contract
does not exceed the matching limitation
specified in the regulations. Companies
that adopt this method of reporting
gross premiums written for a multi-year
insurance contract must use it for all
multi-year contracts with installment
premiums.
Contracts That Give Rise to Life
Insurance Reserves
Some insurance companies that are
taxable under Part II of Subchapter L

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

issue or reinsure risks relating to
guaranteed renewable accident and
health insurance contracts or other
contracts that give rise to ‘‘life insurance
reserves’’ (as defined in section 816(b)).
For these companies, section 832(b)(4)
provides that unearned premiums
includes the amount of the company’s
life insurance reserves, as determined
under section 807. However, under
section 832(b)(7), the unearned
premiums for contracts giving rise to life
insurance reserves are not reduced by
20 percent. Instead, an amount of
otherwise deductible expenses equal to
a percentage of the net premiums for the
contracts must be capitalized and
amortized as specified policy
acquisition expenses under section
848.3 For purposes of determining the
amount of specified policy acquisition
expenses under section 848, a non-life
insurance company computes net
premiums for the contracts in
accordance with section 811(a). See
section 848(d)(2). Thus, with respect to
contracts described in section 832(b)(7),
a non-life insurance company does not
take into account unpaid premiums
attributable to insurance coverage not
yet provided (such as deferred and
uncollected premium installments) in
determining the amount of specified
policy acquisition expenses required to
be amortized under section 848.
The proposed regulations do not
provide special rules for determining
gross premiums written with respect to
contracts described in section 832(b)(7).
Under the final regulations, a non-life
insurance company that issues or
reinsures the risks related to a contract
described in section 832(b)(7) may
report gross premiums written for the
contract in the manner required for life
insurance companies under sections 803
and 811. This method of reporting gross
premiums written for contracts
described in section 832(b)(7) is
available only if the company also
determines its deduction for premium
acquisition expenses for the contracts in
accordance with section 811(a), as
adjusted by the amount required to be
amortized under section 848 based on
the net premiums of the contracts. Thus,
the final regulations ensure that the
rules for determining premium income
and amortizing premium acquisition
expenses for contracts described in
section 832(b)(7) operate consistently,
whether the issuing company is a nonlife insurance company or a life
insurance company.
3 Under section 848(e)(5), a contract that reinsures
a contract subject to section 848 is treated in the
same manner as the reinsured contract.

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Fluctuating Risk Contracts
The method of reporting gross
premiums written for certain insurance
contracts covering fluctuating risks is
reserved in the proposed regulations.
Some comments requested that the final
regulations not address the method of
reporting gross premiums written for
insurance contracts covering fluctuating
risks, noting that the method of
recording gross written premiums for
these policies for annual statement
reporting purposes was being
considered by the NAIC as part of its
project to codify statutory accounting
principles. Subsequently, the NAIC
issued guidance permitting an insurance
company for annual statement purposes
to report written premiums on workers’
compensation policies (but not on other
casualty contracts involving
‘‘fluctuating risks,’’ such as commercial
automobile liability and product
liability policies) either on the effective
date of the insurance contract or based
on installment billings to the
policyholder. By contrast, with respect
to other types of casualty insurance
policies, the NAIC reaffirmed the
general rule that gross premiums with
respect to these policies must be
recorded on the annual statement on the
effective date of the insurance contract.
The final regulations do not permit a
non-life insurance company to report
gross premiums written for a fluctuating
risk contract based on installment
billings to the policyholder. Rather, the
final regulations require a company
generally to report the gross premiums
written for the contract for the earlier of
the taxable year which includes the
effective date of the contract or the year
in which all or a portion of the premium
for the contract is received, with special
rules for advance premiums, cancellable
accident and health contracts, multiyear insurance contracts, and contracts
described in section 832(b)(7). The
company reports any additional
premiums resulting from an increase in
risk exposure in gross premiums written
for the taxable year in which the change
in risk exposure occurs. Unless the
increase in risk exposure is of temporary
duration, the company determines the
additional premium resulting from a
change in risk exposure based on the
remainder of the effective period of the
contract.
Return Premiums
The proposed regulations define
return premiums as amounts (other than
policyholder dividends or claims and
benefit payments) paid or credited to
the policyholder in accordance with the
terms of an insurance contract. Under

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the final regulations, return premiums
are amounts previously included in an
insurance company’s gross premiums
written, which are refundable to the
policyholder (or the ceding company
with respect of a reinsurance agreement)
if the amounts are fixed by the
insurance contract and do not depend
on the experience of the insurance
company or the discretion of its
management. This rule incorporates a
specific definition of policyholder
dividends.
The final regulations list a number of
items which are included in return
premiums, to the extent they have
previously been included in gross
premiums written. These items include:
(1) amounts that are refundable due to
policy cancellations or decreases in risk
exposure during the effective period of
an insurance contract; (2) the unearned
portion of unpaid premiums for an
insurance contract that is canceled or
for which there is a decrease in risk
exposure during its effective period; and
(3) amounts that are either refundable or
that reflect the unearned portion of
unpaid premiums for an insurance
contract, arising from the
redetermination of the premium due to
correction of posting or other similar
errors.
In addition, the final regulation
provides timing rules for the deduction
of return premiums. If a contract is
canceled, the return premium arising
from that cancellation is deducted in the
taxable year in which the contract is
canceled. If there is a reduction in risk
exposure under an insurance contract
that gives rise to a return premium, such
return premium is deductible in the
taxable year in which the reduction in
risk exposure occurs.
Retrospectively Rated Insurance
Contracts
The proposed regulations provide that
gross written premiums include an
insurance company’s estimate of
additional premiums (retro debits) to be
received with regard to the expired
portion of a retrospectively rated
insurance or reinsurance contract. The
proposed regulations also provide that
return premiums include an insurance
company’s estimate of amounts to be
refunded to policyholders (retro credits)
with regard to the expired portion of a
retrospectively rated insurance or
reinsurance contract. The proposed
regulations, therefore, would modify the
treatment of retro credits under § 1.832–
4(a)(3)(ii) of the existing regulations,
which treat retro credits as unearned
premiums. At the option of the
taxpayer, however, the proposed

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regulations permit a company to
continue to include gross retro credits
(but not gross retro debits) in the
amount of unearned premiums subject
to the 20 percent reduction under
section 832(b)(4)(B).
A variety of comments were received
with respect to the treatment of retro
debits and retro credits in the proposed
regulations. Most comments approved
of the proposed rule to modify the
treatment of retro credits in § 1.832–
4(a)(3)(ii) and, instead, to permit retro
credits to be accounted for as part of
return premiums. Some comments
contended, however, that the method of
netting retro debits and retro credits as
an adjustment to unearned premiums
was required under NAIC accounting
rules, prior case law, and the Service’s
published rulings interpreting § 1.832–
4(a)(3)(ii). These comments argued that
the enactment of the 20 percent
reduction rule in 1986 did not authorize
the Service to change the items included
in unearned premiums, including the
historical treatment of retro debits and
retro credits as part of unearned
premiums. Other comments contended
that retro debits (but not retro credits)
should be discounted using the
applicable discount factors for unpaid
losses under section 846. These
comments argued that there is a direct
correlation between amounts reported
by an insurance company as retro debits
and the company’s related liabilities for
unpaid losses and unpaid loss
adjustment expenses. Therefore, the
comments urged that, to achieve proper
matching of these items, a non-life
insurance company should be permitted
either to report retro debits as a
subtraction from unearned premiums or
to discount the retro debits using the
applicable discount factors under
section 846 for the related line of
business.
The treatment of retro debits and retro
credits in the proposed regulations was
premised on the assumptions that
retrospectively rated arrangements
could qualify as insurance contracts for
tax purposes, and that all amounts
payable under such arrangements could
be considered to have been paid for
insurance coverage. The final
regulations provide that gross premiums
are amounts paid for insurance
coverage. Similarly, unearned premiums
and return premiums only include
amounts included in gross written
premiums. The final regulations also
provide that retro credits are not
included in unearned premiums, and
retro debits cannot be subtracted from
unearned premiums. The final
regulations do not permit amounts

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includable in gross premiums written to
be discounted, regardless of when such
amounts are paid to the insurance
company.
The final regulations do not provide
any inference as to whether some or all
of a retrospective arrangement can
qualify as an insurance contract, or as to
whether or the extent to which amounts
paid or payable to an insurance
company with respect to a retrospective
arrangement are for insurance coverage.
Premium Stabilization Reserves
Several comments asked for
clarification of the treatment of
premium stabilization reserves.4 As
noted below, the final regulations
provide that retro credits are not
unearned premiums for Federal income
tax purposes. Thus, retro credits added
to premium stabilization reserves are
not unearned premiums for Federal
income tax purposes. The final
regulations also provide that amounts
withdrawn from a premium
stabilization reserve to pay premiums
are included in gross premiums written
for the taxable year in which these
amounts are withdrawn from the
stabilization reserve for that purpose.
Unearned Premiums
The proposed regulations define
unearned premiums as the portion of
the gross premiums written that is
attributable to future insurance coverage
to be provided under an insurance or
reinsurance contract. The final
regulations generally retain the rules
relating to unearned premiums.
Consistent with the existing regulations
under § 1.801–4(a), the final regulations
provide that an insurance company
must exclude from unearned premiums
amounts attributable to the net value of
risks reinsured with, or retroceded to,
another insurance company. The final
regulations also provide that unearned
premiums do not include a liability
established by an insurance company on
its annual statement to cover premium
deficiencies.
The proposed regulations provide that
an insurance company may consider the
incidence or pattern of the insured risks
in determining the portion of the gross
premium written that is attributable to
the unexpired portion of the insurance
coverage. The final regulations clarify
4 In Rev. Rul. 97–5, 1997–1 C.B. 136, the Service
revoked Rev. Rul. 70–480, 1970–2 C.B. 142, which
had held that amounts held by a non-life insurance
company in a premium stabilization reserve funded
by retro credits are not unearned premiums under
section 832(b)(4). Rev. Rul. 97–5 reasoned that the
assumption in Rev. Rul. 70–480 that stabilization
reserves are part of the insurance company’s
surplus was erroneous.

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705

that, if the risk of loss under an
insurance contract does not vary
significantly over the effective period of
the contract, the unearned premium
attributable to the unexpired portion of
the effective period of the contract is
determined on a pro rata basis.
However, if the risk of loss under an
insurance contract varies significantly
over the effective period of the contract,
the insurance company may consider
the pattern and incidence of the risk in
determining the portion of gross
premium which are attributable to the
unexpired portion of the effective
period of the contract, provided that the
company maintains sufficient
information to demonstrate that its
method of computing unearned
premiums accurately reflects the pattern
and incidence of the risk for the
insurance contract.
Effective Date and Transition Rules
Under the proposed regulations, the
new rules apply to the determination of
premiums earned for insurance
contracts issued or renewed during
taxable years beginning after the date on
which final regulations are published in
the Federal Register. Several comments
requested that the regulations permit an
insurance company to adopt the new
rules for determining premiums earned
as a change in method of accounting
deemed made with the Commissioners’
consent, with audit protection for prior
years. These comments also urged that
the insurance company be given the
option of either implementing the
change in method of accounting on a
cut-off basis or spreading the section
481(a) adjustments resulting from the
change over a number of years
consistent with the Commissioner’s
general administrative procedures when
a taxpayer files a request to change a
method of accounting under section
446(e).
In response to these comments, the
final regulations permit taxpayers to
change their method of accounting for
determining premiums earned to
comply with the final regulations under
the automatic change in method of
accounting provisions of Rev. Proc. 99–
49, 1999–52 I.R.B. 725, subject to certain
limitations. A taxpayer makes the
automatic change in method of
accounting on its Federal income tax
return for the first taxable year
beginning after December 31, 1999. The
scope limitations in section 4.02 of Rev.
Proc. 99–49 do not apply to a taxpayer’s
automatic change in method of
accounting pursuant to this regulation.
The timely duplicate filing requirement
in section 6.02 of Rev. Proc. 99–49 also

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does not apply to this change. If the
taxpayer’s method of computing earned
premiums was an issue under
consideration (within the meaning of
section 3.09 of Rev. Proc. 99–49) on
January 5, 2000, however, then the audit
protection rule in section 7.01 of Rev.
Proc. 99–49 does not apply to the
taxpayer’s change in method of
accounting.
Special Analyses
It has been determined that this
Treasury Decision is not a significant
regulatory action as defined in
Executive Order 12866. Therefore, a
regulatory assessment is not required. It
also has been determined that section
553(b) of the Administrative Procedure
Act (5 U.S.C. chapter 5) does not apply
to these regulations, and, because these
regulations do not impose on small
entities a collection of information
requirement, the Regulatory Flexibility
Act (5 U.S.C. chapter 6) does not apply.
Therefore, a Regulatory Flexibility
Analysis is not required. Pursuant to
section 7805(f) of the Internal Revenue
Code, the notice of proposed rulemaking
preceding these regulations was
submitted to the Chief Counsel for
Advocacy of the Small Business
Administration for comment on its
impact on small business.
Drafting Information. The principal
author of these regulations is Gary
Geisler, Office of the Assistant Chief
Counsel (Financial Institutions and
Products), IRS. However, other
personnel from the IRS and Treasury
Department participated in their
development.
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is
amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation
for part 1 continues to read in part as
follows:
Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 1.832–4 is amended as
follows:
1. Paragraph (a)(3) is revised.
2. Paragraphs (a)(4) and (a)(5) are
redesignated as paragraphs (a)(13) and
(a)(14).
3. New paragraphs (a)(4) through
(a)(12) are added.
The additions and revisions read as
follows:
§ 1.832–4

Gross income.

(a) * * *

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(3) Premiums earned. The
determination of premiums earned on
insurance contracts during the taxable
year begins with the insurance
company’s gross premiums written on
insurance contracts during the taxable
year, reduced by return premiums and
premiums paid for reinsurance. Subject
to the exceptions in sections 832(b)(7),
832(b)(8), and 833(a)(3), this amount is
increased by 80 percent of the unearned
premiums on insurance contracts at the
end of the preceding taxable year, and
is decreased by 80 percent of the
unearned premiums on insurance
contracts at the end of the current
taxable year.
(4) Gross premiums written—(i) In
general. Gross premiums written are
amounts payable for insurance coverage.
The label placed on a payment in a
contract does not determine whether an
amount is a gross premium written.
Gross premiums written do not include
other items of income described in
section 832(b)(1)(C) (for example,
charges for providing loss adjustment or
claims processing services under
administrative services or cost-plus
arrangements). Gross premiums written
on an insurance contract include all
amounts payable for the effective period
of the insurance contract. To the extent
that amounts paid or payable with
respect to an arrangement are not gross
premiums written, the insurance
company may not treat amounts payable
to customers under the applicable
portion of such arrangements as losses
incurred described in section 832(b)(5).
(ii) Items included. Gross premiums
written include—
(A) Any additional premiums
resulting from increases in risk exposure
during the effective period of an
insurance contract;
(B) Amounts subtracted from a
premium stabilization reserve to pay for
insurance coverage; and
(C) Consideration in respect of
assuming insurance liabilities under
insurance contracts not issued by the
taxpayer (such as a payment or transfer
of property in an assumption
reinsurance transaction).
(5) Method of reporting gross
premiums written—(i) In general.
Except as otherwise provided under this
paragraph (a)(5), an insurance company
reports gross premiums written for the
earlier of the taxable year that includes
the effective date of the insurance
contract or the year in which the
company receives all or a portion of the
gross premium for the insurance
contract. The effective date of the
insurance contract is the date on which
the insurance coverage provided by the

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contract commences. The effective
period of an insurance contract is the
period over which one or more rates for
insurance coverage are guaranteed in
the contract. If a new rate for insurance
coverage is guaranteed after the effective
date of an insurance contract, the
making of such a guarantee generally is
treated as the issuance of a new
insurance contract with an effective
period equal to the duration of the new
guaranteed rate for insurance coverage.
(ii) Special rule for additional
premiums resulting from an increase in
risk exposure. An insurance company
reports additional premiums that result
from an increase in risk exposure during
the effective period of an insurance
contract in gross premiums written for
the taxable year in which the change in
risk exposure occurs. Unless the
increase in risk exposure is of temporary
duration (for example, an increase in
risk exposure under a workers’
compensation policy due to seasonal
variations in the policyholder’s payroll),
the company reports additional
premiums resulting from an increase in
risk exposure based on the remainder of
the effective period of the insurance
contract.
(iii) Exception for certain advance
premiums. If an insurance company
receives a portion of the gross premium
for an insurance contract prior to the
first day of the taxable year that
includes the effective date of the
contract, the company may report the
advance premium (rather than the full
amount of the gross premium for the
contract) in gross premiums written for
the taxable year in which the advance
premium is received. An insurance
company may adopt this method of
reporting advance premiums only if the
company’s deduction for premium
acquisition expenses for the taxable year
in which the company receives the
advance premium does not exceed the
limitation of paragraph (a)(5)(vii) of this
section. A company that reports an
advance premium in gross premiums
written under this paragraph (a)(5)(iii)
takes into account the remainder of the
gross premium written and premium
acquisition expenses for the contract in
the taxable year that includes the
effective date of the contract. A
company that adopts this method of
reporting advance premiums must use
the method for all contracts with
advance premiums.
(iv) Exception for certain cancellable
accident and health insurance contracts
with installment premiums. If an
insurance company issues or
proportionally reinsures a cancellable
accident and health insurance contract

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(other than a contract with an effective
period that exceeds 12 months) for
which the gross premium is payable in
installments over the effective period of
the contract, the company may report
the installment premiums (rather than
the total gross premium for the contract)
in gross premiums written for the earlier
of the taxable year in which the
installment premiums are due under the
terms of the contract or the year in
which the installment premiums are
received. An insurance company may
adopt this method of reporting
installment premiums for a cancellable
accident and health insurance contract
only if the company’s deduction for
premium acquisition expenses for the
first taxable year in which an
installment premium is due or received
under the contract does not exceed the
limitation of paragraph (a)(5)(vii) of this
section. A company that adopts this
method of reporting installment
premiums for a cancellable accident and
health contract must use the method for
all of its cancellable accident and health
insurance contracts with installment
premiums.
(v) Exception for certain multi-year
insurance contracts. If an insurance
company issues or proportionally
reinsures an insurance contract, other
than a contract described in paragraph
(a)(5)(vi) of this section, with an
effective period that exceeds 12 months,
for which the gross premium is payable
in installments over the effective period
of the contract, the company may treat
the insurance coverage provided under
the multi-year contract as a series of
separate insurance contracts. The first
contract in the series is treated as having
been written for an effective period of
twelve months. Each subsequent
contract in the series is treated as having
been written for an effective period
equal to the lesser of 12 months or the
remainder of the period for which the
rates for insurance coverage are
guaranteed in the multi-year insurance
contract. An insurance company may
adopt this method of reporting
premiums on a multi-year contract only
if the company’s deduction for premium
acquisition expenses for each year of the
multi-year contract does not exceed the
limitation of paragraph (a)(5)(vii) of this
section. A company that adopts this
method of reporting premiums for a
multi-year contract must use the method
for all multi-year contracts with
installment premiums.
(vi) Exception for insurance contracts
described in section 832(b)(7). If an
insurance company issues or reinsures
the risks related to a contract described
in section 832(b)(7), the company may

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report gross premiums written for the
contract in the manner required by
sections 803 and 811(a) for life
insurance companies. An insurance
company may adopt this method of
reporting premiums on contracts
described in section 832(b)(7) only if the
company also determines the deduction
for premium acquisition costs for the
contract in accordance with section
811(a), as adjusted by the amount
required to be taken into account under
section 848 in connection with the net
premiums of the contract. A company
that adopts this method of reporting
premiums for a contract described in
section 832(b)(7) must use the method
for all of its contracts described in that
section.
(vii) Limitation on deduction of
premium acquisition expenses. An
insurance company’s deduction for
premium acquisition expenses (for
example, commissions, state premium
taxes, overhead reimbursements to
agents or brokers, and other similar
amounts) related to an insurance
contract is within the limitation of this
paragraph (a)(5)(vii) if—
(A) The ratio obtained by dividing the
sum of the company’s deduction for
premium acquisition expenses related to
the insurance contract for the taxable
year and previous taxable years by the
total premium acquisition expenses
attributable to the insurance contract;
does not exceed
(B) The ratio obtained by dividing the
sum of the amounts included in gross
premiums written with regard to the
insurance contract for the taxable year
and previous taxable years by the total
gross premium written for the insurance
contract.
(viii) Change in method of reporting
gross premiums. An insurance company
that adopts a method of accounting for
gross premiums written and premium
acquisition expenses described in
paragraph (a)(5)(iii), (iv), (v), or (vi) of
this section must continue to use the
method to report gross premiums
written and premium acquisition
expenses unless the company obtains
the consent of the Commissioner to
change to a different method under
section 446(e) and § 1.446–1(e).
(6) Return premiums—(i) In general.
An insurance company’s liability for
return premiums includes amounts
previously included in an insurance
company’s gross premiums written,
which are refundable to a policyholder
or ceding company, provided that the
amounts are fixed by the insurance
contract and do not depend on the
experience of the insurance company or
the discretion of its management.

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707

(ii) Items included. Return premiums
include amounts—
(A) Which were previously paid and
become refundable due to policy
cancellations or decreases in risk
exposure during the effective period of
an insurance contract;
(B) Which reflect the unearned
portion of unpaid premiums for an
insurance contract that is canceled or
for which there is a decrease in risk
exposure during its effective period; or
(C) Which are either previously paid
and refundable or which reflect the
unearned portion of unpaid premiums
for an insurance contract, arising from
the redetermination of a premium due
to correction of posting or other similar
errors.
(7) Method of reporting return
premiums. An insurance company
reports the liability for a return
premium resulting from the cancellation
of an insurance contract for the taxable
year in which the contract is canceled.
An insurance company reports the
liability for a return premium
attributable to a reduction in risk
exposure under an insurance contract
for the taxable year in which the
reduction in risk exposure occurs.
(8) Unearned premiums—(i) In
general. The unearned premium for a
contract, other than a contract described
in section 816(b)(1)(B), generally is the
portion of the gross premium written
that is attributable to future insurance
coverage during the effective period of
the insurance contract. However,
unearned premiums held by an
insurance company with regard to the
net value of risks reinsured with other
solvent companies (whether or not
authorized to conduct business under
state law) are subtracted from the
company’s unearned premiums.
Unearned premiums also do not include
any additional liability established by
the insurance company on its annual
statement to cover premium
deficiencies. Unearned premiums do
not include an insurance company’s
estimate of its liability for amounts to be
paid or credited to a customer with
regard to the expired portion of a
retrospectively rated contract (retro
credits). An insurance company’s
estimate of additional amounts payable
by its customers with regard to the
expired portion of a retrospectively
rated contract (retro debits) cannot be
subtracted from unearned premiums.
(ii) Special rules for unearned
premiums. For purposes of computing
‘‘premiums earned on insurance
contracts during the taxable year’’ under
section 832(b)(4), the amount of
unearned premiums includes—

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(A) Life insurance reserves (as defined
in section 816(b), but computed in
accordance with section 807(d) and
sections 811(c) and (d));
(B) In the case of a mutual flood or
fire insurance company described in
section 832(b)(1)(D) (with respect to
contracts described in that section), the
amount of unabsorbed premium
deposits that the company would be
obligated to return to its policyholders
at the close of the taxable year if all its
insurance contracts were terminated at
that time;
(C) In the case of an interinsurer or
reciprocal underwriter that reports
unearned premiums on its annual
statement net of premium acquisition
expenses, the unearned premiums on
the company’s annual statement
increased by the portion of premium
acquisition expenses allocable to those
unearned premiums; and
(D) In the case of a title insurance
company, its discounted unearned
premiums (computed in accordance
with section 832(b)(8)).
(9) Method of determining unearned
premiums. If the risk of loss under an
insurance contract does not vary
significantly over the effective period of
the contract, the unearned premium
attributable to the unexpired portion of
the effective period of the contract is
determined on a pro rata basis. If the
risk of loss varies significantly over the
effective period of the contract, the
insurance company may consider the
pattern and incidence of the risk in
determining the portion of the gross
premium that is attributable to the
unexpired portion of the effective
period of the contract. An insurance
company that uses a method of
computing unearned premiums other
than the pro rata method must maintain
sufficient information to demonstrate
that its method of computing unearned
premiums accurately reflects the pattern
and incidence of the risk for the
insurance contract.
(10) Examples. The provisions of
paragraphs (a)(4) through (a)(9) of this
section are illustrated by the following
examples:
Example 1. (i) IC is a non-life insurance
company which, pursuant to section 843,
files its returns on a calendar year basis. IC
writes a casualty insurance contract that
provides insurance coverage for a one-year
period beginning on July 1, 2000 and ending
on June 30, 2001. IC charges a $500 premium
for the insurance contract, which may be
paid either in full by the effective date of the
contract or in quarterly installments over the
contract’s one year term. The policyholder
selects the installment payment option. As of
December 31, 2000, IC collected $250 of
installment premiums for the contract.

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(ii) The effective period of the insurance
contract begins on July 1, 2000 and ends on
June 30, 2001. For the taxable year ending
December 31, 2000, IC includes the $500
gross premium, based on the effective period
of the contract, in gross premiums written
under section 832(b)(4)(A). IC’s unearned
premium with respect to the contract was
$250 as of December 31, 2000. Pursuant to
section 832(b)(4)(B), to determine its
premiums earned, IC deducts $200 ($250 x
.8) for the insurance contract at the end of the
taxable year.
Example 2. (i) The facts are the same as
Example 1, except that the insurance contract
has a stated term of 5 years. On each contract
anniversary date, IC may adjust the rate
charged for the insurance coverage for the
succeeding 12 month period. The amount of
the adjustment in the charge for insurance
coverage is not substantially limited under
the insurance contract.
(ii) Under paragraph (a)(5)(i) of this
section, IC is required to report gross
premiums written for the insurance contract
based on the effective period for the contract.
The effective period of the insurance contract
is the period for which a rate for insurance
coverage is guaranteed in the contract.
Although the insurance contract issued by IC
has a stated term of 5 years, a rate for
insurance coverage is guaranteed only for a
period of 12 months beginning with the
contract’s effective date and each anniversary
date thereafter. Thus, for the taxable year
ending December 31, 2000, IC includes the
$500 gross premium for the 12 month period
beginning with the contract’s effective date in
gross premiums written. IC’s unearned
premium with respect to the contract was
$250 as of December 31, 2000. Pursuant to
section 832(b)(4)(B), to determine its
premiums earned, IC deducts $200 ($250 x
.8) for the insurance contract at the end of the
taxable year.
Example 3. (i) The facts are the same as
Example 1, except that coverage under the
insurance contract begins on January 1, 2001
and ends on December 31, 2001. On
December 15, 2000, IC collects the first $125
premium installment on the insurance
contract. For the taxable year ended
December 31, 2000, IC deducts $20 of
premium acquisition expenses related to the
insurance contract. IC’s total premium
acquisition expenses, based on the insurance
contract’s $500 gross premium, are $80.
(ii) Under paragraph (a)(5)(iii) of this
section, IC may elect to report only the $125
advance premium (rather than the contract’s
$500 gross premium) in gross premiums
written for the taxable year ended December
31, 2000, provided that IC’s deduction for the
premium acquisition expenses related to the
insurance contract does not exceed the
limitation in paragraph (a)(5)(vii). IC’s
deduction for premium acquisition expenses
is within this limitation only if the ratio of
the insurance contract’s premium acquisition
expenses deducted for the taxable year and
any previous taxable year to the insurance
contract’s total premium acquisition
expenses does not exceed the ratio of the
amounts included in gross premiums written
for the taxable year and any previous taxable
year for the contract to the total gross
premium written for the contract.

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(iii) For the taxable year ended December
31, 2000, IC deducts $20 of premium
acquisition expenses related to the insurance
contract. This deduction represents 25% of
the total premium acquisition expenses for
the insurance contract ($20/$80 = 25%). This
ratio does not exceed the ratio of the $125
advance premium to the insurance contract’s
$500 gross premium ($125/$500 = 25%).
Therefore, under paragraph (a)(5)(iii) of this
section, IC may elect to report only the $125
advance premium (rather than the $500 gross
premium) in gross premiums written for the
taxable year ending December 31, 2000. IC
reports the balance of the gross premium for
the insurance contract ($375) and deducts the
remaining premium acquisition expenses
($60) for the insurance contract in the taxable
year ending December 31, 2001.
Example 4. (i) The facts are the same as
Example 3, except that for the taxable year
ending December 31, 2000, IC deducts $60 of
premium acquisition expenses related to the
insurance contract.
(ii) For the taxable year ended December
31, 2000, IC deducted 75% of total premium
acquisition expenses for the insurance
contract ($60/$80 = 75%). This ratio exceeds
the ratio of the $125 advance premium to the
$500 gross premium ($125/$500 = 25%).
Because IC’s deduction for premium
acquisition expenses allocable to the contract
exceeds the limitation in paragraph (a)(5)(vii)
of this section, paragraph (a)(5)(i) of this
section requires IC to report the $500 gross
premium in gross premiums written for the
taxable year ending December 31, 2000. IC’s
unearned premium with respect to the
contract was $500 as of December 31, 2000.
Pursuant to section 832(b)(4)(B), to determine
its premiums earned, IC deducts $400
($500 × .8) for the insurance contract at the
end of the taxable year.
Example 5. (i) IC is a non-life insurance
company which, pursuant to section 843,
files its returns on a calendar year basis. On
August 1, 2000, IC issues a one-year
cancellable accident and health insurance
policy to X, a corporation with 80 covered
employees. The gross premium written for
the insurance contract is $320,000. Premiums
are payable in monthly installments. As of
December 31, 2000, IC has collected $150,000
of installment premiums from X. For the
taxable year ended December 31, 2000, IC has
paid or incurred $21,000 of premium
acquisition expenses related to the insurance
contract. IC’s total premium acquisition
expenses for the insurance contract, based on
the $320,000 gross premium, are $48,000.
(ii) Under paragraph (a)(5)(iv) of this
section, IC may elect to report only the
$150,000 of installment premiums (rather
than the $320,000 estimated gross premium)
in gross premiums written for the taxable
year ended December 31, 2000, provided that
its deduction for premium acquisition
expenses allocable to the insurance contract
does not exceed the limitation in paragraph
(a)(5)(vii). For the taxable year ended
December 31, 2000, IC deducts $21,000 of
premium acquisition expenses related to the
insurance contract, or 43.75% of total
premium acquisition expenses for the
insurance contract ($21,000/
$48,000 = 43.75%). This ratio does not exceed

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the ratio of installment premiums to the gross
premium for the contract ($150,000/
$320,000 = 46.9%). Therefore, under
paragraph (a)(5)(iv) of this section, IC may
elect to report only $150,000 of installment
premiums for the insurance contract (rather
than $320,000 of gross premium) in gross
premiums written for the taxable year ending
December 31, 2000.
Example 6. (i) IC is a non-life insurance
company which, pursuant to section 843,
files its returns on a calendar year basis. On
July 1, 2000, IC issues a one-year workers’
compensation policy to X, an employer. The
gross premium for the policy is determined
by applying a monthly rate of $25 to each of
X’s employees. This rate is guaranteed for a
period of 12 months, beginning with the
effective date of the contract. On July 1, 2000,
X has 1,050 employees. Based on the
assumption that X’s payroll would remain
constant during the effective period of the
contract, IC determines an estimated gross
premium for the contract of $315,000
(1,050 × $25 × 12 = $315,000). The estimated
gross premium is payable by X in equal
monthly installments. At the end of each
calendar quarter, the premiums payable
under the contract are adjusted based on an
audit of X’s actual payroll during the
preceding three months of coverage.
(ii) Due to an expansion of X’s business in
2000, the actual number of employees
covered under the contract during each
month of the period between July 1, 2000 and
December 31, 2000 is 1,050 (July), 1,050
(August), 1,050 (September), 1,200 (October),
1,200 (November), and 1,200 (December).
The increase in the number of employees
during the year is not attributable to a
temporary or seasonal variation in X’s
business activities and is expected to
continue for the remainder of the effective
period of the contract.
(iii) Under paragraph (a)(5)(i) of this
section, IC is required to report gross
premiums written for the insurance contract
based on the effective period of the contract.
The effective period of X’s contract is based
on the 12 month period for which IC has
guaranteed rates for insurance coverage.
Under paragraph (a)(5)(ii), IC must also
report the additional premiums resulting
from the change in risk exposure under the
contract for the taxable year in which the
change in such exposure occurs. Unless the
change in risk exposure is of temporary
duration, the additional gross premiums are
included in gross premiums written for the
remainder of the effective period of the
contract. Thus, for the taxable year ending
December 31, 2000, IC reports gross
premiums written of $348,750 with respect to
the workers’ compensation contract issued to
X, consisting of the sum of the initial gross
premium for the contract ($315,000) plus the
additional gross premium attributable to the
150 employees added to X’s payroll who will
be covered during the last nine months of the
contract’s effective period (150 × $25
(monthly premium) × 9 = $33,750). IC’s
unearned premium with respect to the
contract was $180,000 as of December 31,
2000, which consists of the sum of the
remaining portion of the original gross
premium ($315,000 × 6/12 = $157,500), plus

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the additional premiums resulting from the
change in risk exposure ($33,750 × 6/
9 = $22,500) that are allocable to the
remaining six months of the contract’s
effective period. Pursuant to section
832(b)(4)(B), to determine its premiums
earned, IC deducts $144,000 ($180,000 × .8)
for the insurance contract at the end of the
taxable year.
Example 7. (i) The facts are the same as
Example 6, except that the increase in the
number of X’s employees for the period
ending December 31, 2000 is attributable to
a seasonal variation in X’s business activity.
(ii) Under paragraph (a)(5)(ii) of this
section, for the taxable year ending December
31, 2000, IC reports gross premiums written
of $326,500, consisting of the sum of the
initial gross premium for the contract
($315,000) plus the additional premium
attributable to the temporary increase in risk
exposure during the taxable year
(150 × $25 × 3 = $11,250). The unearned
premium that is allocable to the remaining
six months of the effective period of the
contract is $157,500. Pursuant to section
832(b)(4)(B), to determine its premiums
earned, IC deducts $126,000 ($157,500 × .8)
for the insurance contract at the end of the
taxable year.
Example 8. (i) IC, a non-life insurance
company, issues a noncancellable accident
and health insurance contract (other than a
qualified long-term care insurance contract,
as defined in section 7702B(b)) to A, an
individual, on July 1, 2000. The contract has
an entry-age annual premium of $2,400,
which is payable by A in equal monthly
installments of $200 on the first day of each
month of coverage. IC incurs agents’
commissions, premium taxes, and other
premium acquisition expenses equal to 10%
of the gross premiums received for the
contract. As of December 31, 2000, IC has
collected $1,200 of installment premiums for
the contract.
(ii) A noncancellable accident and health
insurance contract is a contract described in
section 832(b)(7). Thus, under paragraph
(a)(5)(vi) of this section, IC may report gross
premiums written in the manner required for
life insurance companies under sections 803
and 811. Accordingly, for the taxable year
ending December 31, 2000, IC may report
gross premiums written of $1,200, based on
the premiums actually received on the
contract. Pursuant to section (a)(5)(vi) of this
section, IC deducts a total of $28 of premium
acquisition costs for the contract, based on
the difference between the acquisition costs
actually paid or incurred under section
811(a) ($1,200 × .10 = $120) and the amount
required to be taken into account under
section 848 in connection with the net
premiums for the contract
($1,200 × .077 = $92).
(iii) Under paragraph (a)(8)(ii)(A) of this
section, IC includes the amount of life
insurance reserves (as defined in section
816(b), but computed in accordance with
section 807(d) and sections 811(c) and (d)) in
unearned premiums under section
832(b)(4)(B). Section 807(d)(3)(A)(iii) requires
IC to use a two-year preliminary term method
to compute the amount of life insurance
reserves for a noncancellable accident and

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709

health insurance contract (other than a
qualified long-term care contract). Under this
tax reserve method, no portion of the $1,200
gross premium received by IC for A’s contract
is allocable to future insurance coverage.
Accordingly, for the taxable year ending
December 31, 2000, no life insurance reserves
are included in IC’s unearned premiums
under section 832(b)(4)(B) with respect to the
contract.
Example 9. (i) IC, a non-life insurance
company, issues an insurance contract with
a twelve month effective period for $1,200 on
December 1, 2000. Immediately thereafter, IC
reinsures 90% of its liability under the
insurance contract for $900 with IC–2, an
unrelated and solvent insurance company.
On December 31, 2000, IC–2 has an $825
unearned premium with respect to the
reinsurance contract it issued to IC. In
computing its earned premiums, pursuant to
section 832(b)(4)(B), IC–2 deducts $660 of
unearned premiums ($825 × .8) with respect
to the reinsurance contract.
(ii) Under paragraph (a)(8)(i) of this
section, unearned premiums held by an
insurance company with regard to the net
value of the risks reinsured in other solvent
companies are deducted from the ceding
company’s unearned premiums taken into
account for purposes of section 832(b)(4)(B).
If IC had not reinsured 90% of its risks, IC’s
unearned premium for the insurance contract
would have been $1,100 ($1,200 × 11/12) and
IC would have deducted $880 ($1,100 × .8) of
unearned premiums with respect to such
contract. However, because IC reinsured 90%
of its risks under the contract with IC–2, as
of December 31, 2000, the net value of the
risks retained by IC for the remaining 11
months of the effective period of the contract
is $110 ($1,100—$990). For the taxable year
ending December 31, 2000, IC includes the
$1,200 gross premium in its gross premiums
written and deducts the $900 reinsurance
premium paid to IC–2 under section
832(b)(4)(A). Pursuant to section 832(b)(4)(B),
to determine its premiums earned, IC deducts
$88 ($110 × .8) for the insurance contract at
the end of the taxable year.

(11) Change in method of
accounting—(i) In general. A change in
the method of determining premiums
earned to comply with the provisions of
paragraphs (a)(3) through (a)(10) of this
section is a change in method of
accounting for which the consent of the
Commissioner is required under section
446(e) and § 1.446–1(e).
(ii) Application. For the first taxable
year beginning after December 31, 1999,
a taxpayer is granted consent of the
Commissioner to change its method of
accounting for determining premiums
earned to comply with the provisions of
paragraphs (a)(3) through (a)(10) of this
section. A taxpayer changing its method
of accounting in accordance with this
section must follow the automatic
change in accounting provisions of Rev.
Proc. 99–49, 1999–52 I.R.B. 725 (see
§ 601.601(d)(2) of this chapter), except
that—

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710

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

(A) The scope limitations in section
4.02 of Rev. Proc. 99–49 shall not apply;
(B) The timely duplicate filing
requirement in section 6.02(2) of Rev.
Proc. 99–49 shall not apply; and
(C) If the method of accounting for
determining premiums earned is an
issue under consideration within the
meaning of section 3.09 of Rev. Proc.
99–49 as of January 5, 2000, then
section 7.01 of Rev. Proc. 99–49 shall
not apply.
(12) Effective date. Paragraphs (a)(3)
through (a)(11) of this section are
applicable with respect to the
determination of premiums earned for
taxable years beginning after December
31, 1999.
*
*
*
*
*
Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
Approved: December 23, 1999.
Jonathan Talisman,
Acting Assistant Secretary of the Treasury.
[FR Doc. 00–13 Filed 1–5–00; 8:45 am]
BILLING CODE 4830–01–U

DEPARTMENT OF TRANSPORTATION
Coast Guard
33 CFR Part 177
[CGD01–99–193]

Drawbridge Operation Regulations:
Saugus River, MA
Coast Guard, DOT.
Notice of temporary deviation
from regulations.

except that, from October 1 through May
31, 7 p.m. to 5 a.m., daily, and all day
on December 25 and January 1, the draw
shall open as soon as possible, but not
more than one one-hour, after notice is
given to the drawtenders either at the
bridge during the time the drawtenders
are on duty or by calling the number
posted at the bridge.
The bridge owner, Massachusetts
Highway Department (MHD), asked the
Coast Guard to allow the bridge to open
on signal, only, at 6 a.m., 2 p.m., and 6
p.m., from January 3, 2000, through
March 2, 2000.
The purpose of this temporary
deviation is to facilitate necessary
repairs to the bridge. Structural steel,
floor beams, and the bridge wearing
surface will be replaced during the 60
day repair period. The bridge can not
open for vessel traffic during the
replacement of the above components.
Vessels that can pass under the bridge
without an opening may do so at all
times.
In accordance with 33 CFR 117.35(c),
this work will be performed with all due
speed in order to return the bridge to
normal operation as soon as possible.
This deviation is authorized under 33
CFR 117.35.
Dated: December 17, 1999.
R.M. Larrabee,
Rear Admiral, U.S. Coast Guard Commander,
First Coast Guard District.
[FR Doc. 00–257 Filed 1–5–00; 8:45 am]
BILLING CODE 4910–15–M

AGENCY:
ACTION:

SUMMARY: The Commander, First Coast
Guard District has issued a temporary
deviation from the existing drawbridge
regulations for the Fox Hill SR107
Bridge, mile 2.5, across the Saugus River
between Saugus and Lynn,
Massachusetts. This deviation allows
the bridge owner to open the bridge
only three times each day for vessel
traffic. This deviation is necessary to
facilitate repairs to replace structural
steel, floor beams and the wearing
surface at the bridge.
DATES: This deviation is effective from
January 3, 2000 to March 2, 2000.
FOR FURTHER INFORMATION CONTACT: Mr.
John McDonald, Project Officer, First
Coast Guard District, (617) 223–8364.
SUPPLEMENTARY INFORMATION: The Fox
Hill SR107 Bridge has a vertical
clearance of 6 feet at mean high water
and 16 feet at mean low water.
The existing regulations for the Fox
Hill SR107 Bridge in 33 CFR 117.618(c)
require the bridge to open on signal;

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DEPARTMENT OF TRANSPORTATION
Coast Guard
33 CFR Parts 154 and 155
[USCG–1998–3350]

Review of Cap Increases; Response
Plans for Marine TransportationRelated (MTR) Facilities and Tank
Vessels
Coast Guard, DOT.
Notice of decision.

AGENCY:
ACTION:

SUMMARY: Coast Guard response plan
regulations contain requirements for onwater oil recovery capacity (referred to
as caps). These caps were scheduled to
increase by 25 percent on February 18,
1998, provided the Coast Guard
completed a review of the cap increases.
The Coast Guard has completed its
review and the 25 percent increase for
on-water mechanical recovery will take
effect 90 days from the date of this
notice. The Coast Guard will consider a
2003 cap for mechanical on-water

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removal capability and requirements for
other removal technologies in a
subsequent notice of proposed
rulemaking.
DATES: The scheduled cap increase for
on-water mechanical recovery
requirements will take effect on April 5,
2000.
ADDRESSES: The Docket Management
Facility maintains the public docket for
this notice (USCG–1998–3350). The
Response Plan Equipment Cap Review
(Cap Review) is part of the docket and
is available for inspection or copying at
room PL–401 on the Plaza level of the
Nassif Building, 400 Seventh Street
SW., Washington, DC 20590–0001,
between 9 a.m. and 5 p.m., Monday
through Friday, except Federal holidays.
You may also find this docket on the
Internet at http://dms.dot.gov. The Cap
Review is also available for examination
on the Vessel Response Plan Internet
site at http://www.uscg.mil/vrp.
FOR FURTHER INFORMATION CONTACT: For
questions on this notice, call Lieutenant
Commander John Caplis, Office of
Response (G–MOR), Coast Guard,
telephone 202–267–6922 or by e-mail at
[email protected]. For questions
on viewing materials in the docket, call
Dorothy Walker, Chief, Dockets,
Department of Transportation,
telephone 202–366–9329.
SUPPLEMENTARY INFORMATION:
Regulatory History
In 1996, the Coast Guard published
two final rules entitled ‘‘Vessel
Response Plans’’ (61 FR 1052, January
12, 1996) and ‘‘Response Plans for
Marine Transportation-Related
Facilities’’ (61 FR 7890, February 29,
1996). Those rules finalized the 1993
interim rules (58 FR 7330, February 5,
1993, and 58 FR 7376, February 5, 1993,
for Marine Transportation-Related
Facilities and Vessels, respectively) and
are located in the Code of Federal
Regulations (CFR) in 33 CFR parts 154
and 155. 33 CFR 154.1045(m) and
155.1050(o) contain requirements for
on-water oil recovery capacity (referred
to as caps) that an owner or operator
must ensure is available, through
contract or other approved means, in
planning for a worst case discharge.
These caps were established taking into
account 1993 technology, deployment
capability, and availability of response
resources.
The 1993 and 1996 rules established
a 1998 cap, a 25 percent increase from
the 1993 levels, as a target for increasing
response capabilities. This increase was
endorsed by the Vessel Response Plan
Negotiated Rulemaking Committee as an
incentive to expand response

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