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Effective Date: January 23, 2008.
Applicability Date: November 24, 2006.
FOR FURTHER INFORMATION CONTACT:
Ainars Rodins, Director, Public and
Indian Housing Special Application
Center, Department of Housing and
Urban Development, Ralph H. Metcalfe
Federal Building, 77 West Jackson
Boulevard, Room 2401, Chicago, IL
60604–3507; telephone: (312) 353–6236
(this is not a toll-free number). Persons
with hearing or speech impairments
may access that number toll-free
through TTY by calling the Federal
Relay Service at (800) 877–8339.
SUPPLEMENTARY INFORMATION:
DATES:

sroberts on PROD1PC70 with RULES

I. Background
On October 24, 2006 (71 FR 62354),
HUD published a final rule revising the
Department’s regulations governing
demolition or disposition of public
housing projects. This final rule
followed a December 15, 2004 (69 FR
75188), proposed rule. The final rule
became effective on November 24, 2006.
These HUD regulations implement
section 18 of the United States Housing
Act of 1937 (42 U.S.C. 1437p) (1937
Act), and are codified at 24 CFR part
970.
A. Technical Corrections
After publication, it came to HUD’s
attention that certain typographical and
technical errors had occurred in items
in the regulatory text.
• 24 CFR 970.3(b)(4) (71 FR 62362).
The phrase ‘‘incident to the normal
operation * * *’’ found in this section
should have read ‘‘incidental to the
normal operation. * * *’’ This
grammatical correction does not change
the meaning or function of the
paragraph and is a technical correction.
• 24 CFR 970.3(b)(13) (71 FR 62363).
Section 970.3(b)(13) refers to
environmental review provisions,
including the provisions at
§ 970.7(a)(16). The environmental
provision is in paragraph (15), not
paragraph (16), and therefore the
intended reference should have been to
§ 970.7(a)(15). Section 970.7(a)(16)
relates to civil rights. Because it is clear
from the text that § § 970.7(a)(15) was
the intended reference, this rule makes
that technical correction.
• 24 CFR 970.9(b)(3)(vi) (71 FR
62365). Paragraph (b)(3)(vi) paragraph is
out of sequence and was therefore
incorrectly and inadvertently
designated. This paragraph is correctly
redesignated as § 970.9(b)(3)(v). This
change does not alter the meaning or
function of the paragraph and is a
technical correction.
• 24 CFR 970.15(a) (71 FR 62367).
This section makes a cross-reference to

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‘‘the criteria for disapproval under 24
CFR 270.29.’’ There is no 24 CFR part
270. Furthermore, 24 CFR 970.29 is
entitled ‘‘Criteria for disapproval of
demolition or disposition applications.’’
The intended reference was to part 970.
This reference is a typographical error
and this rule corrects this error and
references 24 CFR 970.29.
• 24 CFR 970.27 (71 FR 62369). This
section is missing a paragraph
designation. The paragraph as published
in the final rule is designated as
§ 970.27(1). However the correct
designation is § 970.27(c)(1). This
appears to have been the result of a GPO
error. This rule makes that technical
correction.
List of Subjects in 24 CFR Part 970
Grant programs—housing and
community development, Public
housing, Reporting and recordkeeping
requirements.
The Catalog of Federal Domestic
Assistance program number for the program
affected by this final rule is 14.850.

Accordingly, HUD correctly amends
24 CFR part 970 as follows:

■

PART 970—PUBLIC HOUSING
PROGRAM—DEMOLITION OR
DISPOSITION OF PUBLIC HOUSING
PROJECTS
1. The authority citation for part 970
continues to read as follows:

■

Authority: 42 U.S.C. 1437p and 3535(d).
§ 970.3

[Amended]

2. Amend § 970.3 as follows:
a. In paragraph (b)(4), revise the
phrase ‘‘incident to the normal
operation’’ to read ‘‘incidental to the
normal operation;’’ and
■ b. In paragraph (b)(13), revise the
reference to ‘‘§§ 970.7(a)(16) and
970.13(b) of this part’’ with the
reference ‘‘§§ 970.7(a)(15) and (b)(13) of
this part.’’
■
■

§ 970.9

[Amended]

3. In 970.9, redesignate paragraph
(b)(3)(vi) as paragraph (b)(3)(v).

■

§ 970.15

[Amended]

4. In, § 970.15(a), revise the reference
to ‘‘24 CFR 270.29’’ to read ‘‘24 CFR
970.29.’’

■

§ 970.27

[Amended]

5. In § 970.27 redesignate paragraphs
(b)(1) and (b)(2) as paragraphs (c)(1) and
(c)(2), respectively.

■

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Dated: January 2, 2008.
Orlando J. Cabrera,
Assistant Secretary for Public and Indian
Housing.
[FR Doc. E8–1014 Filed 1–22–08; 8:45 am]
BILLING CODE 4210–67–P

DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
[TD 9377]
RIN 1545–BF02

Application of Section 338 to
Insurance Companies
Internal Revenue Service (IRS),
Treasury.
ACTION: Final regulations and removal of
temporary regulations.
AGENCY:

SUMMARY: This document contains final
regulations under section 197 of the
Internal Revenue Code (Code) that apply
to a section 197 intangible resulting
from an assumption reinsurance
transaction, and under section 338 that
apply to reserve increases after a
deemed asset sale. The final regulations
also provide guidance with respect to
existing section 846(e) elections to use
historical loss payment patterns. The
final regulations apply to insurance
companies.

Effective Date: These regulations
are effective on January 23, 2008.
Applicability Date: For date of
applicability of these regulations, see
§ 1.197–2(g)(5)(ii)(E), § 1.338–11(d)(7)
and § 1.846–4(b).
FOR FURTHER INFORMATION CONTACT:
William T. Sullivan (202) 622–7052 or
Donald J. Drees, Jr. (202) 622–3970 (not
toll-free numbers).
SUPPLEMENTARY INFORMATION:
DATES:

Paperwork Reduction Act
The collection of information in these
final regulations has been reviewed and
approved by the Office of Management
and Budget in accordance with the
Paperwork Reduction Act of 1995 (44
U.S.C. 3507(d)) under control number
1545–1990.
The collection of information in these
final regulations is in § 1.338–11(e)(2).
This information is required by the IRS
to allow an insurance company to
choose to cease using its historical loss
payment pattern, and instead use
industry-wide factors, to discount
unpaid losses.
An agency may not conduct or
sponsor, and the person is not required

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to respond to a collection of information
unless the collection of information
displays a valid control number.
Books or records relating to a
collection of information must be
retained as long as their contents may
become material in the administration
of any internal revenue law. Generally,
tax returns and tax information are
confidential, as required by 26 U.S.C.
6103.
Background and Explanation of
Provisions
On March 8, 2002, the IRS and the
Treasury Department published a notice
of proposed rulemaking REG–118861–
00 in the Federal Register (67 FR 10640)
(2002–1 Cumulative Bulletin (CB) 651)
(the 2002 proposed regulations) that set
forth rules applying to taxable
acquisitions and dispositions of
insurance businesses, including those
that are deemed to occur when an
election under section 338 of the Code
is made. (See § 601.601(d)(2)(ii)(b)). The
CB is made available by the
Superintendent of Documents, U.S.
Government Printing Office,
Washington, DC 20402. Written
comments were received in response to
the 2002 proposed regulations, and a
public hearing was held. After
consideration of all the comments, the
IRS and the Treasury Department
published final regulations in the
Federal Register on April 10, 2006, (TD
9257) (71 FR 17990), as corrected in the
Federal Register (TD 9257) (71 FR
26826) to remove an error that might
have proven to be misleading.
TD 9257 also contains temporary
regulations under sections 197, 338, and
846, which serve as the basis for a crossreference notice of proposed rulemaking
published in the Federal Register (REG–
146384–05) (71 FR 18053) with respect
to issues that were the subject of
comments on the 2002 proposed
regulations. Specifically, § 1.197–
2T(g)(5)(ii) provides guidance with
regard to the interplay between section
197(f)(5) (concerning the treatment of
certain reinsurance transactions) and
section 848 (requiring the capitalization
of certain policy acquisition expenses);
§ 1.338–11T(d) addresses reserve
increases after a deemed asset sale that
results from a section 338 election; and
§ 1.338–11T(e) provides guidance on the
effect of a section 338 election on an
insurance company’s election under
section 846(e) to use its historical loss
payment pattern to discount certain
unpaid losses.
Although the 2002 proposed
regulations generated a number of
comments which are discussed in detail
in the preamble to TD 9257, no new

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comments were received with respect to
the temporary regulations that served as
a cross-reference notice of proposed
rulemaking in 2006. Accordingly, this
Treasury decision adopts the proposed
regulations without substantive change
and removes the corresponding
temporary regulations. This Treasury
decision also revises cross-references
where appropriate to reflect the removal
of temporary regulations and their
replacement with final regulations and
corrects two obvious errors, one a
mathematical error in the last sentence
of § 1.381(c)(22)–1(b)(7)(v), Example 3,
the other an error in the captioning of
§ 1.338(i)–1(c)(2)(ii)(B).
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
is hereby certified that the collection of
information requirement in these
regulations will not have a significant
economic impact on a substantial
number of small entities. This
certification is based on the fact that
these regulations do not have a
substantial economic impact because
they merely provide guidance about the
operation of the tax law in the context
of acquisitions of insurance companies
and businesses. Moreover, they are
expected to apply predominantly to
transactions involving larger businesses.
In addition, the collection of
information requirement merely
requires a taxpayer to prepare a written
representation that contains minimal
information relating to the making of an
election. Therefore, a Regulatory
Flexibility Analysis under the
Regulatory Flexibility Act (5 U.S.C.
chapter 6) is not required. Under section
7805(f) of the Code, the notice of
proposed rulemaking preceding this
regulation 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 the final
regulations is William T. Sullivan,
Office of Chief Counsel (Financial
Institutions and Products). However,
other personnel from the IRS and the
Treasury Department participated in the
development of these regulations.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and
recordkeeping requirements.

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3869

26 CFR Part 602
Reporting and recordkeeping
requirements.
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 1 and 602
are amended as follows:

■

PART 1—INCOME TAXES
Paragraph 1. The authority citation
for part 1 is amended by removing the
entries for §§ 1.197–2T, 1.338–1T, and
1.338–11T to read, in part, as follows:

■

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

Par. 2. Section 1.197–0 is amended
by:
■ 1. Revising the introductory text and
the entries for § 1.197–2(g)(5)(ii).
■ 2. Removing the entries for § 1.197–
2T.
The revisions read as follows:
■

§ 1.197–0

Table of contents.

This section lists the headings that
appear in § 1.197–2.
§ 1.197–2 Amortization of goodwill and
certain other intangibles.

*

*

*

*

*

(g) * * *
(5) * * *
(ii) Determination of adjusted basis of
amortizable section 197 intangible resulting
from an assumption reinsurance transaction.
(A) In general.
(B) Amount paid or incurred by acquirer
(reinsurer) under the assumption reinsurance
transaction.
(C) Amount required to be capitalized
under section 848 in connection with the
transaction.
(1) In general.
(2) Required capitalization amount.
(3) General deductions allocable to the
assumption reinsurance transaction.
(4) Treatment of a capitalization shortfall
allocable to the reinsurance agreement.
(i) In general.
(ii) Treatment of additional capitalized
amounts as the result of an election under
§ 1.848–2(g)(8).
(5) Cross references and special rules.
(D) Examples
(E) Effective/applicability date.
■ Par. 3. Section 1.197–2(g)(5)(ii) is
revised to read as follows:

§ 1.197–2 Amortization of goodwill and
certain other intangibles.

*

*
*
*
*
(g) * * *
(5) * * *
(ii) Determination of adjusted basis of
amortizable section 197 intangible
resulting from an assumption
reinsurance transaction—(A) In general.
Section 197(f)(5) determines the basis of
an amortizable section 197 intangible
for insurance or annuity contracts

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acquired in an assumption reinsurance
transaction. The basis of such intangible
is the excess, if any, of—
(1) The amount paid or incurred by
the acquirer (reinsurer) under the
assumption reinsurance transaction;
over
(2) The amount, if any, required to be
capitalized under section 848 in
connection with such transaction.
(B) Amount paid or incurred by
acquirer (reinsurer) under the
assumption reinsurance transaction.
The amount paid or incurred by the
acquirer (reinsurer) under the
assumption reinsurance transaction is—
(1) In a deemed asset sale resulting
from an election under section 338, the
amount of the adjusted grossed-up basis
(AGUB) allocable thereto (see §§ 1.338–
6 and 1.338–11(b)(2));
(2) In an applicable asset acquisition
within the meaning of section 1060, the
amount of the consideration allocable
thereto (see §§ 1.338–6, 1.338–11(b)(2),
and 1.1060–1(c)(5)); and
(3) In any other transaction, the excess
of the increase in the reinsurer’s tax
reserves resulting from the transaction
(computed in accordance with sections
807, 832(b)(4)(B), and 846) over the
value of the net assets received from the
ceding company in the transaction.
(C) Amount required to be capitalized
under section 848 in connection with
the transaction—(1) In general. The
amount required to be capitalized under
section 848 for specified insurance
contracts (as defined in section 848(e))
acquired in an assumption reinsurance
transaction is the lesser of—
(i) The reinsurer’s required
capitalization amount for the
assumption reinsurance transaction; or
(ii) The reinsurer’s general deductions
(as defined in section 848(c)(2))
allocable to the transaction.
(2) Required capitalization amount.
The reinsurer determines the required
capitalization amount for an assumption
reinsurance transaction by multiplying
the net positive or net negative
consideration for the transaction by the
applicable percentage set forth in
section 848(c)(1) for the category of
specified insurance contracts acquired
in the transaction. See § 1.848–2(g)(5). If
more than one category of specified
insurance contracts is acquired in an
assumption reinsurance transaction, the
required capitalization amount for each
category is determined as if the transfer
of the contracts in that category were
made under a separate assumption
reinsurance transaction. See § 1.848–
2(f)(7).
(3) General deductions allocable to
the assumption reinsurance transaction.
The reinsurer determines the general

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deductions allocable to the assumption
reinsurance transaction in accordance
with the procedure set forth in § 1.848–
2(g)(6). Accordingly, the reinsurer must
allocate its general deductions to the
amount required under section 848(c)(1)
on specified insurance contracts that the
reinsurer has issued directly before
determining the general deductions
allocable to the assumption reinsurance
transaction. For purposes of allocating
its general deductions under § 1.848–
2(g)(6), the reinsurer includes premiums
received on the acquired specified
insurance contracts after the assumption
reinsurance transaction in determining
the amount required under section
848(c)(1) on specified insurance
contracts that the reinsurer has issued
directly. If the reinsurer has entered into
multiple reinsurance agreements during
the taxable year, the reinsurer
determines the general deductions
allocable to each reinsurance agreement
(including the assumption reinsurance
transaction) by allocating the general
deductions allocable to reinsurance
agreements under § 1.848–2(g)(6) to
each reinsurance agreement with a
positive required capitalization amount.
(4) Treatment of a capitalization
shortfall allocable to the reinsurance
agreement—(i) In general. The reinsurer
determines any capitalization shortfall
allocable to the assumption reinsurance
transaction in the manner provided in
§§ 1.848–2(g)(4) and 1.848–2(g)(7). If the
reinsurer has a capitalization shortfall
allocable to the assumption reinsurance
transaction, the ceding company must
reduce the net negative consideration
(as determined under § 1.848–2(f)(2)) for
the transaction by the amount described
in § 1.848–2(g)(3) unless the parties
make the election provided in § 1.848–
2(g)(8) to determine the amounts
capitalized under section 848 in
connection with the transaction without
regard to the general deductions
limitation of section 848(c)(2).
(ii) Treatment of additional
capitalized amounts as the result of an
election under § 1.848–2(g)(8). The
additional amounts capitalized by the
reinsurer as the result of the election
under § 1.848–2(g)(8) reduce the
adjusted basis of any amortizable
section 197 intangible with respect to
specified insurance contracts acquired
in the assumption reinsurance
transaction. If the additional capitalized
amounts exceed the adjusted basis of
the amortizable section 197 intangible,
the reinsurer must reduce its deductions
under section 805 or section 832 by the
amount of such excess. The additional
capitalized amounts are treated as
specified policy acquisition expenses
attributable to the premiums and other

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consideration on the assumption
reinsurance transaction and are
deducted ratably over a 120-month
period as provided under section
848(a)(2).
(5) Cross references and special rules.
In general, for rules applicable to the
determination of specified policy
acquisition expenses, net premiums,
and net consideration, see section 848(c)
and (d), and § 1.848–2(a) and (f).
However, the following special rules
apply for purposes of this paragraph
(g)(5)(ii)(C)—
(i) The amount required to be
capitalized under section 848 in
connection with the assumption
reinsurance transaction cannot be less
than zero;
(ii) For purposes of determining the
company’s general deductions under
section 848(c)(2) for the taxable year of
the assumption reinsurance transaction,
the reinsurer takes into account a
tentative amortization deduction under
section 197(a) as if the entire amount
paid or incurred by the reinsurer for the
specified insurance contracts were
allocated to an amortizable section 197
intangible with respect to insurance
contracts acquired in an assumption
reinsurance transaction; and
(iii) Any reduction of specified policy
acquisition expenses pursuant to an
election under § 1.848–2(i)(4) (relating
to an assumption reinsurance
transaction with an insolvent insurance
company) is disregarded.
(D) Examples. The following
examples illustrate the principles of this
paragraph (g)(5)(ii):
Example 1. (i) Facts. On January 15, 2006,
P acquires all of the stock of T, an insurance
company, in a qualified stock purchase and
makes a section 338 election for T. T issues
individual life insurance contracts which are
specified insurance contracts as defined in
section 848(e)(1). P and new T are calendar
year taxpayers. Under §§ 1.338–6 and 1.338–
11(b)(2), the amount of AGUB allocated to
old T’s individual life insurance contracts is
$300,000. On the acquisition date, the tax
reserves for old T’s individual life insurance
contracts are $2,000,000. After the
acquisition date, new T receives $1,000,000
of net premiums with respect to new and
renewal individual life insurance contracts
and incurs $100,000 of general deductions
under section 848(c)(2) through December 31,
2006. New T engages in no other reinsurance
transactions other than the assumption
reinsurance transaction treated as occurring
by reason of the section 338 election.
(ii) Analysis. The transfer of insurance
contracts and the assumption of related
liabilities deemed to occur by reason of the
election under section 338 is treated as an
assumption reinsurance transaction. New T
determines the adjusted basis under section
197(f)(5) for the life insurance contracts
acquired in the assumption reinsurance

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Federal Register / Vol. 73, No. 15 / Wednesday, January 23, 2008 / Rules and Regulations
transaction as follows. The amount paid or
incurred for the individual life insurance
contracts is $300,000. To determine the
amount required to be capitalized under
section 848 in connection with the
assumption reinsurance transaction, new T
compares the required capitalization amount
for the assumption reinsurance transaction
with the general deductions allocable to the
transaction. The required capitalization
amount for the assumption reinsurance
transaction is $130,900, which is determined
by multiplying the $1,700,000 net positive
consideration for the transaction ($2,000,000
reinsurance premium less $300,000 ceding
commission) by the applicable percentage
under section 848(c)(1) for the acquired
individual life insurance contracts (7.7
percent). To determine its general
deductions, new T takes into account a
tentative amortization deduction under
section 197(a) as if the entire amount paid or
incurred for old T’s individual life insurance
contracts ($300,000) were allocable to an
amortizable section 197 intangible with
respect to insurance contracts acquired in the
assumption reinsurance transaction.
Accordingly, for the year of the assumption
reinsurance transaction, new T is treated as
having general deductions under section
848(c)(2) of $120,000 ($100,000 + $300,000/
15). Under § 1.848–2(g)(6), these general
deductions are first allocated to the $77,000
capitalization requirement for new T’s
directly written business ($1,000,000 × .077).
Thus, $43,000 ($120,000 ¥ $77,000) of the
general deductions are allocable to the
assumption reinsurance transaction. Because
the general deductions allocable to the
assumption reinsurance transaction ($43,000)
are less than the required capitalization
amount for the transaction ($130,900), new T
has a capitalization shortfall of $87,900
($130,900 ¥ $43,000) with regard to the
transaction. Under § 1.848–2(g), this
capitalization shortfall would cause old T to
reduce the net negative consideration taken
into account with respect to the assumption
reinsurance transaction by $1,141,558
($87,900 ÷ .077) unless the parties make the
election under § 1.848–2(g)(8) to capitalize
specified policy acquisition expenses in
connection with the assumption reinsurance
transaction without regard to the general
deductions limitation. If the parties make the
election, the amount capitalized by new T
under section 848 in connection with the
assumption reinsurance transaction would be
$130,900. The $130,900 capitalized by new T
under section 848 would reduce new T’s
adjusted basis of the amortizable section 197
intangible with respect to the specified
insurance contracts acquired in the
assumption reinsurance transaction.
Accordingly, new T would have an adjusted
basis under section 197(f)(5) with respect to
the individual life insurance contracts
acquired from old T of $169,100 ($300,000 ¥
$130,900). New T’s actual amortization
deduction under section 197(a) with respect
to the amortizable section 197 intangible for
insurance contracts acquired in the
assumption reinsurance transaction would be
$11,273 ($169,100 ÷ 15).
Example 2. (i) Facts. The facts are the same
as Example 1, except that T only issues

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accident and health insurance contracts that
are qualified long-term care contracts under
section 7702B. Under section 7702B(a)(5), T’s
qualified long-term care insurance contracts
are treated as guaranteed renewable accident
and health insurance contracts, and,
therefore, are considered specified insurance
contracts under section 848(e)(1). Under
§§ 1.338–6 and 1.338–11(b)(2), the amount of
AGUB allocable to T’s qualified long-term
care insurance contracts is $250,000. The
amount of T’s tax reserves for the qualified
long-term care contracts on the acquisition
date is $7,750,000. Following the acquisition,
new T receives net premiums of $500,000
with respect to qualified long-term care
contracts and incurs general deductions of
$75,000 through December 31, 2006.
(ii) Analysis. The transfer of insurance
contracts and the assumption of related
liabilities deemed to occur by reason of the
election under section 338 is treated as an
assumption reinsurance transaction. New T
determines the adjusted basis under section
197(f)(5) for the insurance contracts acquired
in the assumption reinsurance transaction as
follows. The amount paid or incurred for the
insurance contracts is $250,000. To
determine the amount required to be
capitalized under section 848 in connection
with the assumption reinsurance transaction,
new T compares the required capitalization
amount for the assumption reinsurance
transaction with the general deductions
allocable to the transaction. The required
capitalization amount for the assumption
reinsurance transaction is $577,500, which is
determined by multiplying the $7,500,000
net positive consideration for the transaction
($7,750,000 reinsurance premium less
$250,000 ceding commission) by the
applicable percentage under section 848(c)(1)
for the acquired insurance contracts (7.7
percent). To determine its general
deductions, new T takes into account a
tentative amortization deduction under
section 197(a) as if the entire amount paid or
incurred for old T’s insurance contracts
($250,000) were allocable to an amortizable
section 197 intangible with respect to
insurance contracts acquired in the
assumption reinsurance transaction.
Accordingly, for the year of the assumption
reinsurance transaction, new T is treated as
having general deductions under section
848(c)(2) of $91,667 ($75,000 + $250,000/15).
Under § 1.848–2(g)(6), these general
deductions are first allocated to the $38,500
capitalization requirement for new T’s
directly written business ($500,000 × .077).
Thus, $53,167 ($91,667 ¥ $38,500) of general
deductions are allocable to the assumption
reinsurance transaction. Because the general
deductions allocable to the assumption
reinsurance transaction ($53,167) are less
than the required capitalization amount for
the transaction ($577,500), new T has a
capitalization shortfall of $524,333 ($577,500
¥ $53,167) with regard to the transaction.
Under § 1.848–2(g), this capitalization
shortfall would cause old T to reduce the net
negative consideration taken into account
with respect to the assumption reinsurance
transaction by $6,809,519 ($524,333 ÷ .077)
unless the parties make the election under
§ 1.848–2(g)(8) to capitalize specified policy

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3871

acquisition expenses in connection with the
assumption reinsurance transaction without
regard to the general deductions limitation. If
the parties make the election, the amount
capitalized by new T under section 848 in
connection with the assumption reinsurance
transaction would increase from $53,167 to
$577,500. Pursuant to paragraph
(g)(5)(ii)(C)(4) of this section, the additional
$524,333 ($577,500 ¥ $53,167) capitalized
by new T under section 848 would reduce
new T’s adjusted basis of the amortizable
section 197 intangible with respect to the
insurance contracts acquired in the
assumption reinsurance transaction.
Accordingly, new T’s adjusted basis of the
section 197 intangible with regard to the
insurance contracts is reduced from $196,833
($250,000 ¥ $53,167) to $0. Because the
additional $524,333 capitalized pursuant to
the § 1.848–2(g)(8) election exceeds the
$196,833 adjusted basis of the section 197
intangible before the reduction, new T is
required to reduce its deductions under
section 805 by the $327,500 ($524,333 ¥
$196,833).

(E) Effective/applicability date. This
section applies to acquisitions and
dispositions of insurance contracts on or
after April 10, 2006.
*
*
*
*
*
§ 1.197–2T
■

[Removed]

Par. 4. Section 1.197–2T is removed.

Par. 5. Section 1.338–0 is amended by
revising the entries for § 1.338–11(d)
and (e) to read as follows:
■

§ 1.338–0

*

*

Outline of topics.

*

*

*

§ 1.338–11 Effect of section 338 election on
insurance company targets.

*

*

*

*

*

(d) Reserve increases by new target after
the deemed asset sale.
(1) In general.
(2) Exceptions.
(3) Amount of additional premium.
(i) In general.
(ii) Increases in unpaid loss reserves.
(iii) Increases in other reserves.
(4) Limitation on additional premium.
(5) Treatment of additional premium under
section 848.
(6) Examples.
(7) Effective/applicability date.
(i) In general.
(ii) Application to pre-effective date
increases to reserves.
(e) Effect of section 338 election on section
846(e) election.
(1) In general.
(2) Revocation of existing section 846(e)
election.

*

*

*

*

*

■ Par. 6. Section 1.338–1 is amended by
adding paragraph (b)(2)(vii) to read as
follows:

§ 1.338–1 General principles; status of old
target and new target.

*

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*

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*

3872

Federal Register / Vol. 73, No. 15 / Wednesday, January 23, 2008 / Rules and Regulations

(b) * * *
(2) * * *
(vii) Section 846(e) (relating to an
election to use an insurance company’s
historical loss payment pattern).
*
*
*
*
*
§ 1.338–1T
■

[Removed]

Par. 7. Section 1.338–1T is removed.

Par. 8. Section 1.338–11 is amended
by revising paragraphs (d) and (e) to
read as follows:
■

§ 1.338–11 Effect of section 338 election
on insurance company targets.

sroberts on PROD1PC70 with RULES

*

*
*
*
*
(d) Reserve increases by new target
after the deemed asset sale—(1) In
general. If in new target’s first taxable
year or any subsequent year, new target
increases its reserves for any acquired
contracts, new target is treated as
receiving an additional premium, which
is computed under paragraph (d)(3) of
this section, in the assumption
reinsurance transaction described in
paragraph (c)(1) of this section. New
target includes the additional premium
in gross income for the taxable year in
which new target increases its reserves
for acquired contracts. New target’s
increase in reserves for the insurance
contracts acquired in the deemed asset
sale is a liability of new target not
originally taken into account in
determining AGUB that is subsequently
taken into account. Thus, AGUB is
increased by the amount of the
additional premium included in new
target’s gross income. See §§ 1.338–
5(b)(2)(ii) and 1.338–7. Old target has no
deduction under this paragraph (d) and
makes no adjustments under §§ 1.338–
4(b)(2)(ii) and 1.338–7.
(2) Exceptions. New target is not
treated as receiving additional premium
under paragraph (d)(1) of this section
if—
(i) It is under state receivership as of
the close of the taxable year for which
the increase in reserves occurs; or
(ii) It is required by section 807(f) to
spread the reserve increase over the 10
succeeding taxable years.
(3) Amount of additional premium—
(i) In general. The additional premium
taken into account under this paragraph
(d) is an amount equal to the sum of the
positive amounts described in
paragraphs (d)(3)(ii) and (d)(3)(iii) of
this section. However, the additional
premium cannot exceed the limitation
described in paragraph (d)(4) of this
section.
(ii) Increases in unpaid loss reserves.
The positive amount with respect to
unpaid loss reserves is computed using
the formula A/B × (C¥[D + E]) where—

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(A) A equals old target’s discounted
unpaid losses (determined under
section 846) included in AGUB under
paragraph 11(b)(1) of this section;
(B) B equals old target’s undiscounted
unpaid losses (determined under
section 846(b)(1)) as of the close of the
acquisition date;
(C) C equals new target’s
undiscounted unpaid losses
(determined under section 846(b)(1)) at
the end of the taxable year that are
attributable to losses incurred by old
target on or before the acquisition date;
(D) D (which may be a negative
number) equals old target’s
undiscounted unpaid losses as of the
close of the acquisition date, reduced by
the cumulative amount of losses, loss
adjustment expenses, and reinsurance
premiums paid by new target through
the end of the taxable year for losses
incurred by old target on or before the
acquisition date; and
(E) E equals the amount obtained by
dividing the cumulative amount of
reserve increases taken into account
under this paragraph (d) in prior taxable
years by A/B.
(iii) Increases in other reserves. The
positive amount with respect to reserves
other than discounted unpaid loss
reserves is the net increase of those
reserves due to changes in estimate,
methodology, or other assumptions used
to compute the reserves (including the
adoption by new target of a
methodology or assumptions different
from those used by old target).
(4) Limitation on additional premium.
The additional premium taken into
account by new target under paragraph
(d)(1) of this section is limited to the
excess, if any, of—
(i) The fair market value of old target’s
assets acquired by new target in the
deemed asset sale (other than Class VI
and Class VII assets); over
(ii) The AGUB allocated to those
assets (including increases in AGUB
allocated to those assets as the result of
reserve increases by new target in prior
taxable years).
(5) Treatment of additional premium
under section 848. If a portion of the
positive amounts described in
paragraphs (d)(3)(ii) and (iii) of this
section are attributable to an increase in
reserves for specified insurance
contracts (as defined in section 848(e)),
new target takes an allocable portion of
the additional premium in determining
its specified policy acquisition expenses
under section 848(c) for the taxable year
of the reserve increase.
(6) Examples. The following examples
illustrate this paragraph (d):
Example 1. (i) Facts. On January 1, 2006,
P purchases all of the stock of T, a non-life

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insurance company, for $120 and makes a
section 338 election for T. On the acquisition
date, old T has total reserve liabilities under
state law of $725, consisting of undiscounted
unpaid losses of $625 and unearned
premiums of $100. Old T’s tax reserves on
the acquisition date are $580, which consist
of discounted unpaid losses (as defined in
section 846) of $500 and unearned premiums
(as computed under section 832(b)(4)(B)) of
$80. Old T has Class I through Class V assets
with a fair market value of $800. Old T also
has a Class VI asset with a fair market value
of $75, consisting of the future profit stream
of certain insurance contracts. During 2006,
new T makes loss and loss adjustment
expense payments of $200 with respect to the
unpaid losses incurred by old T before the
acquisition date. As of December 31, 2006,
new T reports undiscounted unpaid losses of
$475 attributable to losses incurred before the
acquisition date. The related amount of
discounted unpaid losses (as defined in
section 846) for those losses is $390.
(ii) Computation and allocation of AGUB.
Under § 1.338–5 and paragraph (b)(1) of this
section, as of the acquisition date, AGUB is
$700, reflecting the sum of the amount paid
for old T’s stock ($120) and the tax reserves
assumed by new T in the transaction ($580).
The fair market value of old T’s Class I
through V assets is $800, whereas the AGUB
available for such assets under § 1.338–6 is
$700. There is no AGUB available for old T’s
Class VI assets, even though such assets have
a fair market value of $75 on the acquisition
date.
(iii) Adjustments for increases in reserves
for unpaid losses. Under paragraph (d) of this
section, new T must determine whether there
are any amounts by which it increased its
unpaid loss reserves that will be treated as
an additional premium and an increase in
AGUB. New T applies the formula of
paragraph (d)(3) of this section, where A
equals $500, B equals $625, C equals $475,
D equals $425 ($625 ¥ $200), and E equals
$0. Under this formula, new T is treated as
having increased its reserves for discounted
unpaid losses attributable to losses incurred
by old T by $40 ($500/$625 × ($475 ¥
[$425 + 0]). The limitation under paragraph
(d)(5) of this section based on the difference
between the fair market value of old T’s Class
I through Class V assets and the AGUB
allocated to such assets is $100. Accordingly,
new T includes an additional premium of
$40 in gross income for 2006, and increases
the AGUB allocated to old T’s Class I through
Class V assets to reflect this additional
premium.
Example 2. (i) Facts. Assume the same
facts as in Example 1. Further assume that
during 2007 new T deducts total loss and
loss expense payments of $375 with respect
to losses incurred by old T before the
acquisition date. On December 31, 2007, new
T reports undiscounted unpaid losses of $150
with respect to losses incurred before the
acquisition date. The related amount of
discounted unpaid losses (as defined in
section 846) for those unpaid losses is $125.
(ii) Analysis. New T must determine
whether any amounts by which it increased
its unpaid losses during 2007 will be treated
as an additional premium in paragraph (d)(3)

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Federal Register / Vol. 73, No. 15 / Wednesday, January 23, 2008 / Rules and Regulations
of this section. New T applies the formula
under paragraph (d)(3) of this section, where
A equals $500, B equals $625, C equals $150,
D equals $50 ($625 ¥ $575), and E equals
$50 ($40 divided by .8). In paragraph (d)(3)
of this section, new T is treated as increasing
its reserves for discounted unpaid losses by
$40 during 2007 with respect to losses
incurred by old T ($500/$625 × ($150¥[$50
+ $50]). New T determines the limitation of
paragraph (d)(5) of this section by comparing
the $800 fair market value of the Class I
through V assets on the acquisition date to
the $740 AGUB allocated to such assets
(which includes the $40 addition to AGUB
included during 2006). Thus, new T
recognizes $40 of additional premium as a
result of the increase in reserves during 2007,
and adjusts the AGUB allocable to the Class
I through V assets acquired from old T to
reflect such additional premium.

sroberts on PROD1PC70 with RULES

Example 3. (i) Facts. The facts are the same
as Example 2, except that on January 1, 2008,
new T reinsures the outstanding liability
with respect to losses incurred by old T
before the acquisition date through a
portfolio reinsurance transaction with R,
another non-life insurance company. R agrees
to assume any remaining liability relating to
losses incurred by old T before the
acquisition date in exchange for a
reinsurance premium of $200. Accordingly,
as of December 31, 2008, new T reports no
undiscounted unpaid losses with respect to
losses incurred by old T before the
acquisition date.
(ii) Analysis. New T must determine
whether any amount by which it increased
its unpaid loss reserves will be treated as an
additional premium under paragraph (d) of
this section. New T applies the formula of
paragraph (d)(3) of this section, where A
equals $500, B equals $625, C equals $0, and
D equals ¥$150 ($625 ¥ ($575 + $200), and
E equals $100 ($80 divided by .8). Thus, new
T is treated as having increased its
discounted unpaid losses by $40 in 2008
with respect to losses incurred by old T
before the acquisition date ($500/$625 × (0
¥[¥$150 + $100]). New T includes this
positive amount in gross income, subject to
the limitation of paragraph (d)(4) of this
section. The limitation of paragraph (d)(4) of
this section equals $20, which is computed
by comparing the $800 fair market value of
the Class I through V assets acquired from
old T with the $780 AGUB allocated to such
assets (which includes the $40 addition to
AGUB in 2006 and the $40 addition to AGUB
in 2007). Thus, New T includes $20 in
additional premium, and increases the AGUB
allocated to the Class I through V assets
acquired from old T by $20. As a result of
these adjustments, the limitation under
paragraph (d)(4) of this section is reduced to
zero.

(7) Effective/applicability date—(i) In
general. This section applies to
increases to reserves made by new target
after a deemed asset sale occurring on
or after April 10, 2006.
(ii) Application to pre-effective date
increases to reserves. If either new target
makes an election under § 1.338(i)–
1(c)(2) or old target makes an election
under § 1.338(i)–1(c)(3) to apply the
rules of this section, in whole, to a
qualified stock purchase occurring
before April 10, 2006, then the rules
contained in this section shall apply in
whole to the qualified stock purchase.
(e) Effect of section 338 election on
section 846(e) election—(1) In general.
New target and old target are treated as
the same corporation for purposes of an
election by old target to use its historical
loss payment pattern under section
846(e). See § 1.338–1(b)(2)(vii).
Therefore, if old target has a section
846(e) election in effect on the
acquisition date, new target will
continue to use the historical loss
payment pattern of old target to
discount unpaid losses incurred in
accident years covered by the election,
unless new target elects to revoke the
section 846(e) election. In addition, new
target may consider old target’s
historical loss payment pattern when
determining whether to make the
section 846(e) election for a
determination year that includes or is
subsequent to the acquisition date.
(2) Revocation of existing section
846(e) election. New target may revoke
old target’s section 846(e) election to use
its historical loss payment pattern to
discount unpaid losses. If new target
elects to revoke old target’s section
846(e) election, new target will use the
industry-wide patterns determined by
the Secretary to discount unpaid losses
incurred in accident years beginning on
or after the acquisition date through the
subsequent determination year. New
target may revoke old target’s section
846(e) election by attaching a statement
to new target’s original tax return for its
first taxable year.
*
*
*
*
*

1. Revising the section heading to read
as set forth below.
■ 2. Redesignating paragraph (c)(2)(ii)(b)
as paragraph (c)(2)(ii)(B).
The revisions read as follows:

§ 1.338–11T

Par. 15. For each entry in the
‘‘Section’’ column remove the phrase in
the ‘‘Remove’’ column and add the
phrase in the ‘‘Add’’ column in its
place.

■

[Removed]

§ 1.338(i)–1

Effective/applicability date.

*

*
*
*
*
■ Par. 11. Section 1.381(c)(22)–
1(b)(7)(v) is amended by revising the
last sentence of Example 3 to read as
follows:
§ 1.381(c)(22)–1
company.

Successor life insurance

*

*

*
*
(b) * * *
(7) * * *
(v) * * *

*

Example 3. * * * In that case, in the
taxable year of the indemnity reinsurance
transaction, S takes into account as ordinary
income the portion of the old T’s accounts
($1) that old T or S has not previously taken
into account as income.

*

*

§ 1.846–0

*

*

*

[Amended]

Par. 12. Section 1.846–0 is amended
by removing the entries for §§ 1.846–2T
and 1.846–4T.
■ Par. 13. Section 1.846–2(d) is revised
to read as follows:
■

§ 1.846–2 Election by taxpayer to use its
own historical loss payment pattern.

*

*
*
*
*
(d) Effect of section 338 election on
section 846(e) election. For rules
regarding qualified stock purchase
occurring on or after April 10, 2006, see
§§ 1.338–1(b)(2)(vii) and 1.338–11(e).
■ Par. 14. Section 1.846–4 is amended
by revising the section heading and
paragraph (b) to read as follows:
§ 1.846–4

Effective/applicability date.

*

*
*
*
*
(b) Section 338 election. Section
1.846–2(d) applies to section 846(e)
elections made with regard to a
qualified stock purchase made on or
after April 10, 2006.

■

Par. 9. Section 1.338–11T is removed.

Par. 10. Section 1.338(i)–1 is amended
by:

■

■

Section

Remove

§ 1.338(i)–1(c)(2)(i) ....................................................................
§ 1.338(i)–1(c)(2)(i) ....................................................................
§ 1.338(i)–1(c)(2)(ii) ...................................................................
§ 1.338(i)–1(c)(2)(ii) ...................................................................
§ 1.338(i)–1(c)(2)(ii)(B) (First sentence) ....................................
§ 1.338(i)–1(c)(2)(ii)(B) (First sentence) ....................................

§§ 1.338–11 and 1.338–11T(d) ................................................
1.197–2T(g)(5)(ii),
§§ 1.338–11 and 1.338–11T(d) ................................................
1.197–2T(g)(5)(ii),
§§ 1.338–11 and 1.338–11T(d) ................................................
1.197–2T(g)(5)(ii),

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§ 1.338–11
§ 1.338–11

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Federal Register / Vol. 73, No. 15 / Wednesday, January 23, 2008 / Rules and Regulations
Section

Remove

§ 1.338(i)–1(c)(2)(ii)(B) (Second sentence) ...............................
§ 1.338(i)–1(c)(2)(ii)(B) (Second sentence) ...............................
§ 1.338(i)–1(c)(3)(i) ....................................................................
§ 1.338(i)–1(c)(3)(i) ....................................................................
§ 1.338(i)–1(c)(3)(ii) ...................................................................
§ 1.338(i)–1(c)(3)(ii) ...................................................................
§ 1.338(i)–1(c)(3)(ii)(B) (First sentence) ....................................
§ 1.338(i)–1(c)(3)(ii)(B) (First sentence) ....................................
§ 1.338(i)–1(c)(3)(ii)(B) (Second sentence) ...............................
§ 1.338(i)–1(c)(3)(ii)(B) (Second sentence) ...............................
§ 1.1060–1(a)(2)(i) .....................................................................
§ 1.1060–1(a)(2)(i) .....................................................................
§ 1.1060–1(a)(2)(ii) ....................................................................
§ 1.1060–1(a)(2)(ii) ....................................................................
§ 1.1060–1(a)(2)(ii)(B) ................................................................
§ 1.1060–1(a)(2)(ii)(B) ................................................................
§ 1.1060–1(a)(2)(iii) ....................................................................
§ 1.1060–1(a)(2)(iii) ....................................................................
§ 1.1060–1(a)(2)(iii)(B) ...............................................................
§ 1.1060–1(a)(2)(iii)(B) ...............................................................

§§ 1.338–11 and 1.338–11T(d) ................................................
1.197–2T(g)(5)(ii),
§§ 1.338–11 and 1.338–11T(d) ................................................
1.197–2T(g)(5)(ii),
§§ 1.338–11 and1.338–11T(d) .................................................
1.197–2T(g)(5)(ii),
§§ 1.338–11 and 1.338–11T(d) ................................................
1.197–2T(g)(5)(ii),
§§ 1.338–11 and 1.338–11T(d) ................................................
1.197–2T(g)(5)(ii),
§§ 1.338–11 and 1.338–11T(d) ................................................
1.197–2T(g)(5)(ii),
§§ 1.338–11 and 1.338–11T(d) ................................................
1.197–2T(g)(5)(ii),
§§ 1.338–11 and 1.338–11T(d) ................................................
1.197–2T(g)(5)(ii),
§§ 1.338–11T(d) and 1.338–11T(d) .........................................
1.197–2T(g)(5)(ii),
§§ 1.338–11 and 1.338–11T(d) ................................................
1.197–2T(g)(5)(ii),

PART 602—OMB CONTROL NUMBERS
UNDER PAPERWORK REDUCTION
ACT

DEPARTMENT OF HEALTH AND
HUMAN SERVICES

Par. 16. The authority citation for part
602 continues to read as follows:

RIN 0920–AA19

■

Authority: 26 U.S.C. 7805.

Par. 17. In § 602.101, paragraph (b) is
amended by removing the entry for
§ 1.338–11T from the table and adding
an entry to the table in numerical order
to read as follows:

■

§ 602.101

*

OMB Control numbers.

*
*
(b) * * *

*

*

CFR part or section where
identified and described

Current OMB
control No.

*
*
*
*
*
1.338–11 ................................. 1545–1990
*

*

*

*

Linda Stiff,
Deputy Commissioner for Services and
Enforcement.
Approved: January 9, 2008.
Eric Solomon,
Assistant Secretary of the Treasury (Tax
Policy).
[FR Doc. E8–729 Filed 1–22–08; 8:45 am]

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*

42 CFR PART 72

Interstate Shipment of Etiologic
Agents
Centers for Disease Control and
Prevention (CDC), HHS.
ACTION: Final rule.
AGENCY:

SUMMARY: HHS is removing Part 72 of
Title 42, Code of Federal Regulations,
which governs the interstate shipment
of etiologic agents, because the U.S.
Department of Transportation (DOT)
already has in effect a more
comprehensive set of regulations
applicable to the transport in commerce
of infectious substances. DOT
harmonizes its transport requirements
with international standards adopted by
the United Nations (UN) Committee of
Experts on the Transport of Dangerous
Goods for the classification, packaging,
and transport of infectious substances.
Rescinding the rule eliminates
duplication of the more current DOT
regulations that cover intrastate and
international, as well as interstate,
transport. HHS replaced those sections
of Part 72 that deal with select
biological agents and toxins with a new
set of regulations found in Part 73 of
Title 42. Removal of Part 72 alleviates
confusion and reduces the regulatory
burden with no anticipated adverse
impact on public health and safety.
DATES: Effective Date: This final rule is
effective 30 days after publication in the
Federal Register.
FOR FURTHER INFORMATION CONTACT: Dr.
Janet K. Nicholson, National Center for
Infectious Diseases/OD, Centers for

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§ 1.338–11
§ 1.338–11
§ 1.338–11
§ 1.338–11
§ 1.338–11
§ 1.338–11
§ 1.338–11
§ 1.338–11
§ 1.338–11(d)
§ 1.338–11

Disease Control and Prevention, U.S.
Department of Health and Human
Services, 1600 Clifton Rd., NE (MS–
D10), Atlanta, GA 30333; telephone:
404–639–2100; e-mail [email protected].
SUPPLEMENTARY INFORMATION: On
January 3, 2007, HHS published a notice
of proposed rulemaking (NPRM) to
remove Part 72 of Title 42 of the Code
of Federal Regulations. The comment
period for the proposed rule closed on
March 5, 2007. HHS received no
comments on the proposed rule.
With minor modification for
clarification, this supplementary
information is the same as was in the
NPRM.
Part 72 (being removed by this final
rule) provides minimal requirements for
packaging and shipping materials,
including diagnostic specimens and
biological products, reasonably believed
to contain an etiologic agent. It provides
more detailed requirements, including
labeling, for materials containing certain
etiologic agents, with a list of the
biological agents and toxins provided.
For agents on the list, the rule requires
reporting to HHS/CDC damaged
packages and packages not received.
The rule also requires sending certain
agents on the list by registered mail or
an equivalent system.
42 CFR 72, as currently promulgated,
is out-of-date, and duplicates more
current regulations of DOT. Further, the
regulation is inconsistent with the
procedures of other transport governing
bodies, such as the International Civil
Aviation Organization (ICAO) and the
International Air Transport Association
(IATA), for air, and the U.S. Postal
Service for ground.
Section 72.6, a major portion of 42
CFR 72 that dealt with transporting
select agents, was superseded by the

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