Part II. Reconciliation of Net Income (Loss) per Income Statement of Includible…

Lines 1 Through 8. Additional Information for Each Property and Casualty Insurance Company For any item reported on Part II, lines 1, 3 through 6, or 8, attach a supporting statement that provides the name of the entity for which the item is reported, the type of entity (corporation, partnership, etc.), the entity’s EIN (if applicable), and the item amounts for columns (a) through (d). See the instructions for Part II, lines 2 and 7, for the specific information required for those particular lines.

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

Line 2. Gross Foreign Dividends Not Previously Taxed Except as otherwise provided in this paragraph, report on line 2, column (d), the amount (before any withholding tax) of any foreign dividends included in the subtotal on Form 1120-PC, Schedule A, line 35 (or Schedule B, line 19, if applicable), and report on line 2, column (a), the amount of dividends from any foreign corporation included on Part I, line 11. Do not report on Part II, line 2, any amounts that must be reported on Part II, line 3 or 4, or dividends that were previously taxed and must be reported on Part II, line 5. See the instructions for Part II, lines 3, 4, and 5, later. Report amounts in columns (b) and (c), as applicable.

For any dividends reported on Part II, line 2, that are received on a class of voting stock of which the property and casualty insurance company directly or indirectly owned 10% or more of the outstanding shares of that class at any time during the tax year, report on an attached supporting statement for Part II, line 2:

1. The name of the dividend payer,
2. The payer’s EIN (if applicable),
3. The class of voting stock on which the dividend was paid,

Line 3. Subpart F, QEF, and Similar Income Inclusions Report on line 3, column (d), the amount included in taxable income under section 951, relating to Subpart F; the amount included in income under section 951A, relating to global intangible low-taxed income (GILTI); gains or other income inclusions resulting from elections under sections 1291(d)(2) and 1298(b)(1); and any amount included in taxable income pursuant to section 1293 (relating to qualified electing funds). The amount included under section 951 corresponds to the total of the amounts reported by the property and casualty insurance company on line 6, Schedule I, of all Forms 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations. The amount of qualified electing fund (QEF) income corresponds to the total of the amounts reported by the property and casualty insurance company on all Forms 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund.

Also, include on line 3 passive foreign investment company mark-to-market gains and losses under section 1296. Do not report such gains and losses on Schedule M-3, Part II, line 15.

Line 4. Gross-Up for Foreign Taxes Deemed Paid Report on line 4, column (d), the amount of any gross-up for foreign taxes deemed paid not included on Part II, column (d) of lines 9, 10, and 11, Income (loss) from U.S. partnerships, foreign partnerships, and other pass-through entities. The gross-up amount on line 4 must correspond to the total gross-up amounts for foreign taxes deemed paid reported by the property and casualty insurance company on all Forms 1118, Foreign Tax Credit—Corporations, excluding the amounts reported on Schedule M-3, Part II, lines 9, 10, and 11, column (d).

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

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

4. The percentage of the class directly or indirectly owned, and

5. The item amounts for columns (a) through (d).

Instructions for Schedule M-3 (Form 1120-PC) 17

Line 7. U.S. Dividends Not Eliminated in Tax Consolidation Report on line 7, column (a), the amount of dividends included on Part I, line 11 that were received from any U.S. corporation. Report on line 7, column (d), the amount of any U.S. dividends included in the subtotal on Form 1120-PC, Schedule A, line 35 (or Schedule B, line 19, if applicable).

Usually, the amounts included on line 7, columns (a) and (d), include only dividends received from U.S. corporations that are not included in the U.S. consolidated tax group because intercompany dividends (dividends received from includible corporations listed on Form 851) are eliminated or excluded for financial accounting purposes and eliminated for the calculation of U.S. taxable income. In the case of an insurance company included in the consolidated U.S. income tax return required to report intercompany dividends as part of statutory accounting net income, include such intercompany dividends on Part II, line 7, column (a), and the taxable amount of those dividends on Part II, line 7, column (d). For insurance companies included in the consolidated U.S. income tax return, see the instructions for Part I, lines 10a, 10b, 10c, and 11.

file Schedule M-3 for its current tax year. G owns 90% of the stock of U.S. corporation DS1. G files a consolidated U.S. income tax return with DS1 as the GDS1 U.S. consolidated group. G prepares certified SAP/GAAP financial statements for the consolidated financial statement group consisting of G and DS1. G has no net income of its own, and G does not report its equity interest in the income of DS1 on its separate financial statements. DS1 has financial statement net income (before minority interests) and taxable income of $1,000 ($2,500 of revenue less $1,500 cost of goods sold).

On the consolidated Schedule M-3, Part I, line 4a, Worldwide consolidated net income (loss) per income statement, and on line 11, Net income (loss) per income statement of includible corporations, the U.S. consolidated tax group GDS1 must report $900 of financial statement net income ($1,000 net income less $100 minority interest).

The GDS1 group must prepare one consolidated Schedule M-3, Parts II and III, and three additional Schedules M-3, Parts II and III: one for G, one for DS1, and one for consolidation eliminations.

For any intercompany dividends (dividends received from includible corporations listed on Form 851) included on Part II, line 7, report on an attached supporting statement for Part II, line 7:

1. The name of the dividend payer,

2. The payer’s EIN,

3. The class of stock or security on which the dividends were paid,

4. The amount of any net adjustment included on Part I, line 10a, for such dividends, and

5. The amounts for columns (a) through (d).

For any dividends included on Part II, line 7, that are not intercompany dividends (dividends received from includible corporations listed on Form 851) that are received on classes of voting stock in which the corporation directly or indirectly owned 10% or more of the outstanding shares of that class at any time during the tax year, report on an attached supporting statement for Part II, line 7:

1. The name of the dividend payer,
2. The payer’s EIN (if applicable),
3. The class of voting stock on which the dividend was paid,

On the Schedule M-3, Parts II and III, for DS1, $1,000 is reported on Part II, line 28 and line 30, in both columns (a) and (d). On G’s Schedule M-3, Parts II and III, zero is reported on Part II, line 30, in both columns (a) and (d). On the consolidation eliminations Schedule M-3, Parts II and III, on Part II, line 8 and line 30, the minority interest elimination for the U.S. consolidated tax group is reported as ($100) in column (a), $100 in column (c), and $0 in column (d).

On the Schedule M-3, Parts II and III for the U.S. consolidated tax group, on Part II, line 8, Minority interest for includible corporations, ($100) is reported in column (a), $100 in column (c), and $0 in column (d). On Part II, line 28, the U.S. consolidated tax group reports $1,000 in both columns (a) and (d). As a result, financial statement net income on Part II, line 30, column (a), will total $900; net permanent differences on Part II, line 30, column (c), will total $100; and taxable income on line 30, column (d), will total $1,000.

Line 9. Income (Loss) From U.S. Partnerships and Line 10. Income (Loss) From Foreign Partnerships For any interest owned by the corporation or a member of the U.S. consolidated tax group that is treated as an investment in a partnership for U.S. income tax purposes (other than an interest in a disregarded entity), report amounts on Part II, line 9 or 10, as described below.

4. The percentage of the class directly or indirectly owned, and

5. The amounts for columns (a) through (d).

Line 8. Minority Interest for Includible Corporations Report on line 8, column (a), the minority interest included in the income statement income (loss) on Part I, line 11, for any member of the U.S. consolidated tax group that is less than 100% owned.

Example 11. Property and casualty insurance company G is a calendar year taxpayer that is required to

1. In column (a) the sum of the corporation’s distributive share of income or loss from a U.S. or foreign partnership that is included on Part I, line 11;

2. In column (b) or (c), as applicable, the sum of all differences, if any, attributable to the corporation’s distributive share of income or loss from a U.S. or foreign partnership; and

3. In column (d), the sum of all amounts of income, gain, loss, or deduction attributable to the corporation’s distributive share of income or loss from a U.S. or foreign partnership (that is, the sum of all amounts reportable on

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

the corporation’s Schedule(s) K-1 received from the partnership (if applicable)), without regard to any limitations computed at the partner level (for example, limitations on utilization of charitable contributions, capital losses, and interest expense).

For each partnership reported on line 9 or 10, attach a supporting statement that provides the name, EIN (if applicable), end of year profit-sharing percentage (if applicable), end of year loss-sharing percentage (if applicable), and the amount reported in column (a), (b), (c), or (d) of line 9 or 10, as applicable.

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

Example 13. Assume the same facts as Example 12, except that corporation H’s charitable contribution deduction is wholly attributable to its partnership interest in USP and is limited to $90 pursuant to section 170(b)(2) due to other investment losses incurred by H. In its financial statements, H treated this limitation as a temporary difference. H must not report the charitable contribution limitation of $3,910 ($4,000 - $90) on Part II, line 9. H must report the limitation on Part III, line 20, and report the disallowed charitable contributions of ($3,910) in columns (b) and (d).

company’s end of year profit-sharing percentage (if applicable), the property and casualty insurance company’s end of year loss-sharing percentage (if applicable), and the amounts reported by the property and casualty insurance company on line 11, column (a), (b), (c), or (d), as applicable.

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

Each difference attributable to a reportable transaction must be separately stated and adequately disclosed. A property and casualty insurance company will be considered to have separately stated and adequately disclosed a reportable transaction on line 12 if the property and casualty insurance company sequentially numbers each Form 8886 and lists by identifying number on the supporting statement for Part II, line 12, each sequentially numbered reportable transaction and the amounts required for Part II, line 12, columns (a) through (d).

Instead of the requirements of the preceding paragraph, a property and casualty insurance company will be considered to have separately stated and adequately disclosed a reportable transaction if the property and casualty insurance company attaches a supporting statement that provides the following for each reportable transaction.

Line 11. Income (Loss) From Other Pass-Through Entities For any interest in a pass-through entity (other than an interest in a partnership reportable on Part II, line 9 or 10, as applicable) owned by a member of the U.S. consolidated tax group (other than an interest in a disregarded entity), report the following on line 11.

1. In column (a) the sum of the corporation’s distributive share of income or loss from the pass-through entity that is included on Part I, line 11;

2. A description of the reportable transaction disclosed on Form 8886 for which amounts are reported on Part II, line 12;

3. In column (b) or (c), as applicable, except for amounts described in item 4 below, the sum of all differences, if any, attributable to the pass-through entity; and

4. In column (d), except for amounts described in item 4 below, the sum of all taxable amounts of income, gain, loss, or deduction reportable on the corporation’s Schedules K-1 received from the pass-through entity (if applicable).

For each pass-through entity reported on line 11, attach a supporting statement that provides that entity’s name, EIN (if applicable), the property and casualty insurance

2. The name and reportable transaction or tax shelter registration number, if applicable, as reported on Form 8886; and
3. The type of reportable transaction (for example, listed transaction, confidential transaction, transaction with contractual protection, etc.) as reported on Form

If a transaction is a listed transaction described in Regulations section 1.6011-4(b)(2), the description must also include the published guidance number provided on Form 8886. In addition, if the reportable transaction involves an investment in the transaction through another entity such as a partnership, the description must include the name and EIN (if applicable) of that entity as reported on Form 8886.

Example 14. Property and casualty insurance company J is a calendar year taxpayer that is required to file Schedule M-3 for its current tax year. J incurred seven

Instructions for Schedule M-3 (Form 1120-PC) 19

different abandonment losses during its current tax year. One loss of $12 million results from a reportable transaction described in Regulations section 1.6011-4(b) (5), another loss of $5 million results from a reportable transaction described in Regulations section 1.6011-4(b) (4), and the remaining five abandonment losses are not reportable transactions. J discloses the reportable transactions giving rise to the $12 million and $5 million losses on separate Forms 8886 and sequentially numbers them X1 and X2, respectively. J must separately state and adequately disclose the $12 million and $5 million losses on Part II, line 12. The $12 million loss and the $5 million loss will be adequately disclosed if J attaches a supporting statement for line 12 that lists each of the sequentially numbered forms, Form 8886-X1 and Form 8886-X2, and with respect to each reportable transaction reports the appropriate amounts required for Part II, line 12, columns (a) through (d). Alternatively, J’s disclosures will be adequate if the description provided for each loss on the supporting statement includes the names and reportable transaction or tax shelter registration numbers, if any, disclosed on the applicable Form 8886, identifies the type of reportable transaction for the loss, and reports the appropriate amounts required for Part II, line 12, columns (a) through (d). J must report the losses attributable to the other five abandonment losses on Part II, line 23e, regardless of whether a difference exists for any or all of those abandonment losses.

Example 15. Property and casualty insurance company K is a calendar year taxpayer that is required to file Schedule M-3 for its current tax year. K enters into a transaction with contractual protection that is a reportable transaction described in Regulations section 1.6011-4(b) (4). This reportable transaction is the only reportable transaction for K’s current tax year and results in a $7 million capital loss for both statutory accounting purposes and U.S. income tax purposes. Although the transaction does not result in a difference, K is required to report on Part II, line 12, the following amounts: ($7 million) in column (a), zero in columns (b) and (c), and ($7 million) in column (d). The transaction will be adequately disclosed if K attaches a supporting statement for line 12 that (a) sequentially numbers the Form 8886 and refers to the sequentially numbered Form 8886-X1, and (b) reports the applicable amounts required for line 12, columns (a) through (d). Alternatively, the transaction will be adequately disclosed if the supporting statement for line 12 includes a description of the transaction, the name and tax shelter registration number, if any, and the type of reportable transaction disclosed on Form 8886.

Line 13. Interest Income Report in Part II, line 13, column (a), the total amount of interest income included in Part I, line 11. Report on Part II, line 13, column (d), the total amount of interest income included on Form 1120-PC, Schedule A, line 35 (or Schedule B, line 19, if applicable), that is not required to be reported elsewhere on Schedule M-3. In column (b) or (c), as applicable, adjust for any amounts treated for U.S. income tax purposes as interest income that are treated as some other form of income for statutory accounting purposes, or vice versa. For example, adjustments to interest income resulting from adjustments made in

accordance with instructions for Part II, line 17, should be made in columns (b) and (c) of this line 13.

Complete Part II of Form 8916-A. Enter the amounts from Form 8916-A, Part II, line 6, columns (a) through (d), in Schedule M-3, Part II, line 13, columns (a) through (d), as applicable. Attach Form 8916-A.

Do not report on line 13 or include on Form 8916-A amounts reported in accordance with the instructions for Part II, lines 9, 10, 11, 12, and 21.

Line 14. Hedging Transactions Report in line 14, column (a), the net gain or loss from hedging transactions included on Part I, line 11. Report in column (d) the amount of taxable income from hedging transactions, as defined in section 1221(b)(2). Use columns (b) and (c) to report all differences caused by treating hedging transactions differently for statutory accounting purposes and for U.S. income tax purposes. For example, if a portion of a hedge is considered ineffective under SAP but still is a valid hedge under section 1221(b)(2), the difference must be reported on line 14. The hedge of a capital asset, which is not a valid hedge for U.S. income tax purposes but may be considered a hedge for SAP purposes, must also be reported here.

Report hedging gains and losses computed under the mark-to-market method of accounting on line 14 and not on Part II, line 15.

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

Report hedging gains and losses computed under the mark-to-market method of accounting on Part II, line 14, and not on line 15.

Traders in securities or commodities. For a trader in securities or commodities that made a valid election under section 475(f) to use the mark-to-market method to account for securities or commodities held in connection with a trading business that files Form 4797, Sales of Business Property, any Schedule M-3 entries required as a result of marking to market these securities or commodities are reported as follows: (a) mark-to-market gains and losses from Form 4797, line 10, are included on Part II, line 15, of Schedule M-3 (Form 1120-PC), and (b) any other Schedule M-3 entries required based on other results (non-mark-to-market gains and losses) included in the total reported on Form 4797, line 17, should be reported on Part II, line 23d, of Schedule M-3 (Form 1120-PC), unless the instructions for Schedule M-3 require the amounts to be reported on another line.

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

Line 16. Premium Income Report on line 16, column (a), the amount of earned premiums included in Part I, line 11. Include on line 16, column (d), the amount of earned premiums included on Form 1120-PC, Schedule A, line 35 (or Schedule B, line 19, if applicable). Complete columns (b) and (c), as appropriate. Attach a detailed statement separately stating amounts included on line 16 attributable to the change in:

1. Advanced premiums,
2. Earned but unbilled premiums,
3. Retrospective premium accruals,
4. Unearned premiums, and
5. Other premium accounts.

Line 17. Sale Versus Lease (for Sellers and/or Lessors) Note: Also, see the instructions in Part III, line 35, Purchase Versus Lease (for Purchasers and/or Lessees) , later.

Asset transfer transactions with periodic payments characterized for statutory accounting purposes as either a sale or a lease may, under some circumstances, be characterized as the opposite for tax purposes. If the transaction is treated as a lease, the seller/lessor reports the periodic payments as gross rental income and also reports depreciation expense or deduction. If the transaction is treated as a sale, the seller/lessor reports gross profit (sale price less cost of goods sold) from the sale of assets and reports the periodic payments as payments of principal and interest income.

In Part II, line 17, in column (a), report the gross profit or gross rental income for statutory accounting purposes for all sale or lease transactions that must be given the opposite characterization for U.S. income tax purposes. In column (d), report the gross profit or gross rental income for U.S. income tax purposes. Interest income amounts for such transactions must be reported on Part II, line 13, in column (a) or (d), as applicable. Depreciation expense for such transactions must be reported on Part III, line 31, in column (a) or (d), as applicable. Use columns (b) and (c) of Part II, lines 13 and 17, and Part III, line 31, as applicable, to report the differences between columns (a) and (d).

Example 16. Property and casualty insurance company M sells and leases property to customers. M is a calendar year taxpayer that is required to file Schedule M-3 for its current tax year. For statutory accounting purposes, M accounts for each transaction as a sale. For U.S. income tax purposes, each of M’s transactions must be treated as a lease. In its annual statement, M treats the difference in the statutory accounting and the U.S. income tax treatment of these transactions as temporary. During its current year, M reports in its annual statement $1,000 of sales and $700 of cost of goods sold with respect to current-year lease transactions. M receives periodic payments of $500 in its current year with respect to these current year transactions and similar transactions from prior years and treats $400 as principal and $100 as interest income. For statutory accounting purposes, M reports gross profit of

$300 ($1,000 - $700) and interest income of $100 from these transactions. For U.S. income tax purposes, M reports $500 of gross rental income (the periodic payments) and (based on other facts) $200 of depreciation deduction on the property. On Schedule M-3, M must report on Part II, line 13, $100 in column (a), ($100) in column (b), and zero in column (d). In addition, M must report on Part II, line 17, $300 of gross profit in column (a), $200 in column (b), and $500 of gross rental income in column (d). Lastly, M must report on Part III, line 31, $200 in columns (b) and (d).

Line 18. Section 481(a) Adjustments With the exception of a section 481(a) adjustment that is required to be reported on Part II, line 12, for reportable transactions, any difference between an income or expense item attributable to an authorized (or unauthorized) change in method of accounting made for U.S. income tax purposes that results in a section 481(a) adjustment must be reported on Part II, line 18, regardless of whether a separate line for that income or expense item exists in Part II or Part III.

Example 17. Property and casualty insurance company N is a calendar year taxpayer that is required to file Schedule M-3 for its current tax year. N was depreciating certain fixed assets over an erroneous recovery period and, effective for its current tax year, N receives IRS consent to change its method of accounting for the depreciable fixed assets and begins using the proper recovery period. The change in method of accounting results in a positive section 481(a) adjustment of $100,000 that is required to be spread over 4 tax years, beginning with the current tax year. In its annual statement, N treats the section 481(a) adjustment as a temporary difference. N must report on Part II, line 18, $25,000 in columns (b) and (d) for its current tax year and each of the subsequent 3 tax years (unless N is otherwise required to recognize the remainder of the section 481(a) adjustment earlier). N must not report the section 481(a) adjustment on Part III, line 31.

Line 19. Reserved for Future Use This line is reserved for future use. Do not include any amounts on this line.

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

Line 21. Original Issue Discount and Other Imputed Interest Report on line 21 any amounts of original issue discount (OID) and other imputed interest. The term “original issue discount and other imputed interest” includes, but is not limited to:

1. The excess of a debt instrument’s stated redemption price at maturity over its issue price, as determined under section 1273;

Instructions for Schedule M-3 (Form 1120-PC) 21

2. Amounts that are imputed interest on a deferred sales contract under section 483;

3. Amounts treated as interest or OID under the stripped bond rules under section 1286; and

4. Amounts treated as OID under the below-market interest rate rules under section 7872.

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

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

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

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

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

Note: Traders in securities or commodities that have made a valid election under section 475(f) to use the mark-to-market method to account for securities or commodities, see the instructions for Part II, line 15, earlier.

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

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

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

Line 24. Capital Loss Limitation and Carryforward Used Report as a positive amount on line 24, column (b) or (c), as applicable, and column (d) the excess of the net capital losses over the net capital gains reported on Schedule D, by the corporation. For a U.S. consolidated tax group, the Schedule M-3 adjustment for the amount of the consolidated net capital loss that is disallowed should not be made on the separate consolidating Schedules M-3 of the includible corporations, but on the separate Schedule M-3 for consolidated eliminations (or on Form 8916 in the case of a mixed group) as described under Completion of Schedule M-3 and Certain Allocations, Limitations, and Carryovers , earlier.

If the corporation utilizes a capital loss carryforward on Schedule D in the current tax year, report the carryforward utilized as a negative amount in Part II, line 24, column (b) or (c), as applicable, and column (d). For a U.S. consolidated tax group, the Schedule M-3 adjustment for the amount of the consolidated capital loss carryforward should not be made on the separate consolidating Schedules M-3 of the includible corporations, but on the separate Schedule M-3 for consolidation eliminations (or on Form 8916 in the case of a mixed group) as described under Completion of Schedule M-3 and Certain Allocations, Limitations, and Carryovers , earlier.

Line 25. Other Income (Loss) Items With Differences Separately state and adequately disclose on Part II, line 25, all items of income (loss) with differences that are not otherwise listed on Part II, lines 1 through 24. Attach a statement that describes and itemizes the type of income (loss) and the amount of each item and provides a description that states the income (loss) name for book purposes for the amount recorded in column (a) and describes the adjustment being recorded in column (b) or (c). The entire description completes the tax description

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

for the amount included in column (d) for each item separately stated on this line.

The attached statement should have five columns. The first column has the description for the next four columns. The second column is column (a), income (loss) per income statement; the third column is column (b), temporary difference; the fourth column is column (c), permanent difference; and the fifth column is column (d), income (loss) per tax return. Every item listed on the attached statement for line 25 always must have columns (a) + (b) + (c) = (d). Each item with amounts in columns (a), (b), (c), and (d) will be totaled and included as one line on Part II, line 25.

For insurance companies included in the consolidated U.S. income tax return, see instructions for Part I, lines 10a, 10b, 10c, and 11, and Part II, line 7, for guidance on the treatment of intercompany dividends and statutory accounting.

If any “comprehensive income” as defined by Statement of Financial Accounting Standards (SFAS) No. 130 is reported on this line, describe the item(s) in detail. Examples of sufficiently detailed descriptions include “foreign currency translation adjustments — comprehensive income” and “gains and losses on available-for-sale securities — comprehensive income.”

Whether an item of income (loss) is reported on line 25, or is reported on Part II, line 28, is determined separately by each member of the U.S. consolidated tax group and not at the U.S. consolidated tax group level.

Example 18. U.S. corporation P has two subsidiaries, corporations A and B, that are included in P’s consolidated financial statements and in P’s consolidated U.S. income tax return. For financial statement purposes, P, A, and B recognize revenue from the sale of inventory upon delivery to the customer. For U.S. income tax purposes, P and A recognize such revenue consistent with the method used for financial statement purposes, whereas B recognizes such revenue based upon customer acceptance. P and A must report this revenue in columns (a) and (d) on Part II, line 28. B must report the following on Part II, line 25: in column (a), B’s revenue recognized in the financial statements based upon delivery to the customer; in column (d), B’s revenue recognized for U.S. income tax purposes based upon customer acceptance; and in column (b) or (c), as applicable, the difference between B’s revenue recognized in its financial statements and in its U.S. taxable income.

Note: In this example, the first column of the attached statement for Part II, line 25, discussed earlier, must include an adequate description, such as, “Inventory Sales Revenue recognized upon acceptance, not delivery.”

Line 27. Total Expense/Deduction Items Report on Part II, line 27, columns (a) through (d), as applicable, the negative of the amounts reported on Part III, line 40, columns (a) through (d). For example, if Part III, line 40, column (a), reflects an amount of $1 million, then report on Part II, line 27, column (a), ($1 million). Similarly,

if Part III, line 40, column (b), reflects an amount of ($50,000), then report on Part II, line 27, column (b), $50,000.

Line 28. Other Items With No Differences If there is no difference between the statutory accounting amount and the taxable amount of an entire item of income, gain, loss, expense, or deduction and the item is not described or included in Part II, lines 1 through 25, or Part III, lines 1 through 39, report the entire amount of the item in columns (a) and (d) of line 28. If a portion of an item of income, loss, expense, or deduction has a difference and a portion of the item does not have a difference, do not report any portion of the item on line 28. Instead, report the entire amount of the item (for example, both the portion with a difference and the portion without a difference) on the applicable line of Part II, lines 1 through 25, or Part III, lines 1 through 39. See Example 10, earlier.

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

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

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