Part II must be indicated by checking box (3) Consolidated

eliminations, and box (5) Mixed 1120/L/PC group.

Life/Non-Life Loss Limitation and Carryforward Used Calculations

The applicable life/non-life loss limitation and all carryforward used calculations are made using the amounts determined for taxable income in the three subgroup sub-consolidations and other applicable amounts separately reported on Form 8916. The calculated life/non-life loss limitation or carryforward used amounts, if any, are not entered on Schedule M-3. The calculated amounts, if any, are entered on Form 8916.

Generally, a corporation (or any member of a U.S. consolidated tax group) required to file Schedule M-3 must complete the form in its entirety. In particular, a corporation filing a nonconsolidated return that meets the filing requirements for Schedule M-3 must complete Parts I, II, and III. Such a corporation does not check any of the checkboxes at the top of Parts II and III. In the case of a U.S. consolidated tax group, Part I must be completed once, on the consolidated Schedule M-3, by the parent corporation. Parts II and III must be completed by the parent corporation, each includible corporation, and a consolidating eliminations entity.

Except as otherwise provided in these instructions, when a Schedule M-3 (Form 1120-PC) is filed, all applicable Part I questions must be answered; all applicable columns in Parts II and III must be completed; all numerical data required in Parts I, II, and III must be provided; and any statement required to support a line item in Parts I, II, or III must be attached and must provide the information for that line item.

All detailed statements for Part II and Part III of Schedule M-3 must be attached for each separate entity included in the consolidated Part II and Part III, including those for the parent company and the eliminations entity, if applicable. It is not required that the same supporting detailed information be presented for Part II and Part III of the consolidated Schedule M-3.

If an item attributable to an includible corporation is not shared by or allocated to the appropriate member of the group but is retained in the parent corporation’s financial statements (or books and records, if applicable), then the item must be reported by the parent corporation in its separate Schedule M-3. For example, if the parent of a U.S. consolidated tax group prepares financial statements that include all members of the U.S. consolidated tax group and the parent does not allocate the group’s income tax expense, as reflected in the financial statements, among the members of the group but retains it in the parent corporation, the parent corporation must report on its separate Schedule M-3 the U.S. consolidated tax group’s income tax expense, as reflected in the financial statements.

Any adjustments made at the consolidated group level that are not attributable to any specific member of the U.S. consolidated tax group (for example, disallowance of net capital losses, contribution deduction carryovers, and limitation of contribution deductions) must not be reported on the separate consolidating parent or subsidiary Schedules M-3 but rather on the consolidated Schedule M-3 and on the consolidating Schedule M-3 for consolidation eliminations (or on Form 8916 in the case of a mixed group).

If an includible corporation has (1) no activity for the tax year (for example, because the corporation is a dormant or inactive corporation), (2) no amount for the corporation was included in Part I, line 11, and (3) the corporation has no amounts to report on Part II and Part III of Schedule M-3 for the tax year, the parent corporation of the U.S. consolidated tax group may attach to the consolidated Schedule M-3 a statement that provides the name and employer identification number (EIN) of the includible corporation instead of filing a blank Part II and Part III of Schedule M-3 for the entity. On page 1, check box (4) Dormant subsidiaries schedule attached.

For U.S. consolidated tax returns, file supporting statements for each includible corporation. See Consolidated Return in the Instructions for Form 1120-PC.

Check the applicable box(es) at the top of pages 2 and 3 of Schedule M-3 to indicate whether the Schedule M-3 is for the:

1. Consolidated group,
2. Parent corporation,
3. Consolidated eliminations,
4. Subsidiary corporation, or
5. Mixed 1120/L/PC group.

Also, check the applicable box to indicate whether the Schedule M-3 is for a sub-consolidated (6) 1120-PC group; or (7) 1120-PC eliminations. See Consolidated Schedule M-3 Versus Consolidating Schedules M-3 for Form 1120-PC Groups , and Schedule M-3 Consolidation for Mixed Groups (1120/L/PC) , earlier.

For each line item in Parts II and III, report in column (a) the amount of net income (loss) included on Part I, line 11, and report in column (d) the amount included in the subtotal on Form 1120-PC, Schedule A, line 35 (or Schedule B, line 19, if applicable).

Note: A statement or explanation may be attached to any line even if none is required.

For any item of income, gain, loss, expense, or deduction for which there is a difference between columns (a) and (d), the portion of the difference that is temporary must be entered in column (b) and the portion of the difference that is permanent must be entered in column (c).

If financial statements are prepared by the property and casualty insurance company in accordance with statutory accounting principles (SAP), differences that are treated as temporary for SAP must be reported in column (b) and differences that are permanent (that is, not temporary for SAP) must be reported in column (c). Generally, pursuant to SAP, a temporary difference affects (creates, increases, or decreases) a deferred tax asset or liability.

If the property and casualty insurance company does not prepare financial statements, or the financial statements are not prepared in accordance with SAP, report in column (b) any difference that the property and casualty insurance company believes will reverse in a future tax year (that is, have an opposite effect on taxable income in a future tax year (or years) due to the difference in timing of recognition for financial accounting and U.S. income tax purposes) or is the reversal of such a difference that arose in a prior tax year. Report in column (c) any difference that the property and casualty insurance company believes will not reverse in a future tax year (and

is not the reversal of such a difference that arose in a prior tax year).

If the property and casualty insurance company is unable to determine whether a difference between column (a) and column (d) for an item will reverse in a future tax year or is the reversal of a difference that arose in a prior tax year, report the difference for that item in column (c).

Example 6. In its first year of operation, property and casualty insurance company A is not required to file a Schedule M-3. If A voluntarily files Schedule M-3, all applicable Part I questions must be answered and all applicable columns in Parts II and III must be completed.

Example 7. Property and casualty insurance company B is a U.S. publicly traded corporation that files a U.S. consolidated tax return and prepares consolidated SAP/ GAAP financial statements. In prior years, B acquired intellectual property (IP) and goodwill through several corporate acquisitions. The IP is amortizable for both U.S. income tax and financial statement purposes. In the current year, B’s annual amortization expense for IP is $9,000 for U.S. income tax purposes and $6,000 for financial statement purposes. In its financial statements, B treats the difference in IP amortization as a temporary difference. The goodwill is not amortizable for U.S. income tax purposes and is subject to impairment for financial statement purposes. In the current year, B records an impairment charge on the goodwill of $5,000. In its financial statements, B treats the goodwill impairment as a permanent difference. B must report the amortization attributable to the IP on Part III, line 28, and report $6,000 in column (a), a temporary difference of $3,000 in column (b), and $9,000 in column (d). B must report the goodwill impairment on Part III, line 27, and report $5,000 in column (a), a permanent difference of ($5,000) in column (c), and $0 in column (d).

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

General Reporting Requirements If an amount is attributable to a reportable transaction described in Regulations section 1.6011-4(b), the amount must be reported in Part II, line 12 columns (a), (b), (c), and (d), as applicable, regardless of whether the amount would otherwise be reported on Schedule M-3, Part II or Part III. Thus, if a taxpayer files Form 8886, Reportable Transaction Disclosure Statement, the amounts attributable to that reportable transaction must be reported on Part II, line 12.

A property and casualty insurance company is required to report in Parts II and III, column (a) the amount of any item specifically listed on Schedule M-3 that is in any manner included in the property and casualty insurance company’s current-year annual statement net income (loss) or in an income or expense account maintained in the property and casualty insurance company’s books and records. The amount should be reported even if there is no difference between that amount and the amount

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

included in taxable income unless (a) otherwise provided in these instructions or (b) the amount is attributable to a reportable transaction described in Regulations section 1.6011-4(b) and is therefore reported in Part II, line 12. For example, with the exception of interest income reflected on a Schedule K-1 received by a property and casualty insurance company as a result of the property and casualty insurance company’s investment in a partnership or other pass-through entity, all interest income, whether from unconsolidated affiliated companies, third parties, banks, or other entities; whether imputed interest or not; whether from foreign or domestic sources; whether taxable or exempt from tax; and regardless of how or where the income is classified in the property and casualty insurance company’s annual statement, must be included on Part II, line 13, column (a). Likewise, all fines and penalties paid to a government or other authority for the violation of any law for which fines or penalties are assessed must be included on Part III, line 11, column (a), regardless of the government authority that imposed the fines or penalties; regardless of whether the fines or penalties are civil or criminal; regardless of the classification, nomenclature, or terminology attached to the fines or penalties by the imposing authority in its actions or documents; and regardless of how or where the fines or penalties are classified in the property and casualty insurance company’s summary of operations or the income and expense accounts maintained in the property and casualty insurance company’s books and records.

If a property and casualty insurance company would be required to report in Parts II and III, column (a), the amount of any item specifically listed on Schedule M-3 in accordance with the preceding paragraph, except that the property and casualty insurance company has capitalized the item of income or expense and reports the amount in its annual statement or in asset and liability accounts maintained in the property and casualty insurance company’s books and records, the property and casualty insurance company must report the proper tax treatment of the item in columns (b), (c), and (d), as applicable.

Furthermore, in applying the two preceding paragraphs, a property and casualty insurance company is required to report in Parts II and III, column (a), the amount of any item specifically listed on Schedule M-3 that is included in the property and casualty insurance company’s annual statement or exists in the property and casualty insurance company’s books and records, regardless of the nomenclature associated with that item in the annual statement or books and records. Accurate completion of Schedule M-3 requires reporting amounts according to the substantive nature of the specific line items included on Schedule M-3 and consistent reporting of all transactions of like substantive nature that occurred during the tax year. For example, all expense amounts that are included in the annual statement or exist in the books and records that represent some form of “Bad debt expense,” except write-offs of premium receivables, must be reported on Part III, line 32, in column (a), regardless of whether the amounts are recorded or stated under different nomenclature in the annual statement or the books and records, such as “Provision for doubtful accounts” or “Expense for uncollectible notes receivable.”

Likewise, as stated in the preceding paragraph, all fines and penalties must be included in Part III, line 11, column (a), regardless of the terminology or nomenclature attached to them by the property and casualty insurance company in its books and records or annual statement.

With limited exceptions, Part II includes lines for specific items of income, gain, or loss (income items). See Part II, lines 1 through 24. If an income item is described on Part II, lines 1 through 24, report the amount of the item on the applicable line, regardless of whether there is a difference for the item. If there is a difference for the income item, or only a portion of the income item has a difference and a portion of the item does not have a difference, and the item is not described on Part II, lines 1 through 24, report and describe the entire amount of the item on Part II, line 25.

With limited exceptions, Part III includes lines for specific items of expense or deduction (expense items). See Part III, lines 1 through 38. If an expense item is described on Part III, lines 1 through 38, report the amount of the item on the applicable line, regardless of whether there is a difference for the item. If there is a difference for the expense item, or only a portion of the expense item has a difference and a portion of the item does not have a difference and the item is not described in Part III, lines 1 through 38, report and describe the entire amount of the item in Part III, line 39.

If there is no difference between the annual statement amount and the taxable amount of an entire item of income, loss, expense, or deduction and the item is not described or included on Part II, lines 1 through 25, or Part III, lines 1 through 39, report the entire amount of the item in Part II, line 28, columns (a) and (d).

Special instructions for Part II, lines 25 and 28, and Part III, line 39. Whether an income (loss) item is reported on Part II, line 25, or on Part II, line 28, or an expense/deduction item on Part III, line 39, or on Part II, line 28, is determined separately by each member of the U.S. consolidated tax group and not at the U.S. consolidated tax group level. For example, U.S. corporation P has two subsidiaries, A and B, that are included in P’s consolidated financial statements and in P’s consolidated U.S. income tax return. For financial statement purposes, P, A, and B recognize real estate tax expense when accrued. For U.S. income tax purposes, P and A recognize such expense consistent with the method used for financial statement purposes, whereas B recognizes such deduction based on a method different from that used for financial statement purposes. P and A must report this expense/deduction in Part II, line 28, columns (a) and (d). B must report the following on Part III, line 39, in column (a), B’s expense recognized in the financial statements when accrued; in column (d), B’s real estate tax expense recognized for U.S. income tax purposes; and in column (b) or (c), as applicable, the difference between B’s real estate tax expense in its financial statements and its real estate tax deduction recognized for U.S. taxable income purposes.

Separately stated and adequately disclosed. Each difference reported in Parts II and III must be separately stated and adequately disclosed. In general, a difference

Instructions for Schedule M-3 (Form 1120-PC) 15

is adequately disclosed if the difference is labeled in a manner that clearly identifies the item or transaction from which the difference arises. For further guidance about adequate disclosure, see Regulations section 1.6662-4(f). If a specific item of income, gain, loss, expense, or deduction is described on Part II, lines 9 through 24, or Part III, lines 1 through 38, and the line does not indicate to “attach statement” and the specific instructions for the line do not call for an attachment of a statement, then the item is considered separately stated and adequately disclosed if the item is reported on the applicable line and the amount(s) of the item(s) are reported in the applicable columns of the applicable line. See the instructions for Part II, lines 1 through 8, later, for specific additional information required to be provided for these particular lines.

Note: A statement or explanation may be attached to any line even if none is required.

Except as otherwise provided, differences for the same item must be combined or netted together and reported as one amount on the applicable line of Schedule M-3. However, differences for separate items must not be combined or netted together. Each item (and corresponding amount attributable to that item) must be separately stated and adequately disclosed on the applicable line of Schedule M-3, or any statement required to be attached, even if the amounts are below a certain dollar amount.

Required statements for Part II, line 25, and Part III, line 39. A separate statement must be attached to Schedule M-3 (Form 1120-PC) that includes a detailed description of each item and adjustment entered on Part II, line 25, and Part III, line 39.

The description for each amount entered in column (a) must be readily identifiable to the name of the account in the financial statements or books and records of the taxpayer, under which the amount in column (a) was recorded in the accounting records. Also, the description for each amount entered in column (a) must include detailed information supporting each adjustment reported in columns (b) and (c), including how the adjustment is identified in the accounting records. The entire description is considered the tax description for the amount reported in column (d) for each item reported on Part II, line 25, or Part III, line 39.

giving rise to temporary differences that will reverse in future years. C must combine all of its depreciation adjustments. Accordingly, C must report on Part III, line 31, for its current tax year income statement depreciation expense of $90,000 in column (a), a temporary difference of $10,000 in column (b), and U.S. income tax depreciation expense of $100,000 in column (d).

Example 9. Property and casualty insurance company D is a calendar year taxpayer that is required to file Schedule M-3 for its current tax year. On December 31, of the current year, D establishes two reserve accounts in the amount of $100,000 for each account. One reserve account is an allowance for agency balances that are estimated to be uncollectible. The second reserve is an estimate of future office closure expenses. In its annual statement, D treats the two reserve accounts as giving rise to temporary differences that will reverse in future years. The two reserves are expenses in D’s current annual statement but are not deductions for U.S. income tax purposes in the current year. D must not combine the Schedule M-3 differences for the two reserve accounts. D must report the amounts attributable to the allowance for bad debts on Part III, line 32, and must separately state and adequately disclose the amount attributable to the other reserve, future office closure expenses, on a required, attached statement that supports the amounts on Part III, line 39.

D must also provide a description for each reserve that meets the requirements for Part III, line 39, discussed earlier under Required statements for Part II, line 25, and Part III, line 39. In this example, an acceptable description would be “Future Office Closure Expense Reserve.”

Note: There is no need to add the title of the reserve account to the description if the account name for the amount in column (a) is already part of the adjustment description.

Example 10. Insurance company F had $100 of meal expenses, $100 of entertainment expenses, and therefore deducted $200 on its income statement. For federal income tax purposes, the entire $100 of meal expenses are subject to the 50% limitation under section 274(n). The $100 of entertainment expenses are nondeductible under section 274(a). F must report on Part III, line 10, $200 in column (a), $150 in column (c), and $50 in column (d). F must report all its meals and entertainment expenses only on this line whether there is a difference or not because meals and entertainment expenses are specifically described.

Each description should adequately describe all four columns of Part II, line 25, or Part III, line 39. If additional information is required to provide an acceptable description, attach a supporting statement.

Example 8. Property and casualty insurance company C is a calendar year taxpayer that is required to file Schedule M-3 for its current tax year. C placed in service ten depreciable assets in prior years. C’s total depreciation expense for its current tax year for five of the assets is $50,000 for income statement purposes and $70,000 for U.S. income tax purposes. C’s total annual depreciation expense for its current tax year for the other five assets is $40,000 for income statement purposes and $30,000 for U.S. income tax purposes. In its annual statement, C treats the differences between annual statement and U.S. income tax depreciation expense as

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