Part III. — Internal Revenue Bulletin 1996-13

Differential Earnings Rate for Mutual Life Insurance Companies

Notice 96–15

This notice publishes a tentative determination under § 809 of the Internal Revenue Code of the ‘‘differential earnings rate’’ for 1995 and the rate that is used to calculate the ‘‘recomputed differential earnings amount’’ for 1994. (The latter rate is referred to in this notice as the ‘‘recomputed differential earnings rate’’ for 1994.) These rates are used by mutual life insurance companies to calculate their federal income tax liability for taxable years beginning in 1995.

BACKGROUND

Section 809(a) provides that, in the case of any mutual life insurance company, the amount of the deduction allowable under § 808 for policyholder dividends is reduced (but not below zero) by the ‘‘differential earnings amount.’’ Any excess of the differential earnings amount over the amount of the deduction allowable under § 808 is taken into account as a reduction in the closing balance of reserves under subsections (a) and (b) of § 807. The ‘‘differential earnings amount’’ for any taxable year is the amount equal to the product of (a) the life insurance company’s average equity base for the taxable year multiplied by (b) the ‘‘differential earnings rate’’ for that taxable year. The ‘‘differential earnings rate’’ for the taxable year is the excess of (a) the ‘‘imputed earnings rate’’ for the taxable year over (b) the ‘‘average mutual earnings rate’’ for the second calendar year preceding the calendar year in which the taxable year begins. The ‘‘imputed earnings rate’’ for any taxable year is the amount that bears the same ratio to 16.5 percent as the ‘‘current stock earnings rate’’ for the taxable year bears to the ‘‘base period stock earnings rate.’’

Section 809(f) provides that, in the case of any mutual life insurance company, if the ‘‘recomputed differential earnings amount’’ for any taxable year exceeds the differential earnings amount for that taxable year, the excess is included in life insurance gross income for the succeeding taxable year.

If the differential earnings amount for any taxable year exceeds the recomputed differential earnings amount for that taxable year, the excess is allowed as a life insurance deduction for the succeeding taxable year. The ‘‘recomputed differential earnings amount’’ for any taxable year is an amount calculated in the same manner as the differential earnings amount for that taxable year, except that the average mutual earnings rate for the calendar year in which the taxable year begins is substituted for the average mutual earnings rate for the second calendar year preceding the calendar year in which the taxable year begins.

The stock earnings rates and mutual earnings rates taken into account under § 809 generally are determined by dividing statement gain from operations by the average equity base. For this purpose, the term ‘‘statement gain from operations’’ means ‘‘the net gain or loss from operations required to be set forth in the annual statement, determined without regard to Federal income taxes, and ... properly adjusted for realized capital gains and losses....’’ See § 809(g)(1). The term ‘‘equity base’’ is defined as an amount determined in the manner prescribed by regulations equal to surplus and capital increased by the amount of nonadmitted financial assets, the excess of statutory reserves over the amount of tax reserves, the sum of certain other reserves, and 50 percent of any policyholder dividends (or other similar liability) payable in the following taxable year. See § 809(b)(2), (3), (4), (5) and (6). Section 1.809–10 of the Income Tax Regulations provides that the equity base includes both the asset valuation reserve and the interest maintenance reserve for taxable years ending after December 31, 1991.

Section 1.809–9(a) of the regulations provides that neither the differential earnings rate under § 809(c) nor the recomputed differential earnings rate that is used in computing the recomputed differential earnings amount under § 809(f)(3) may be less than zero.

As described above, the differential earnings rate for 1995 and the recomputed differential earnings rate for 1994 affect the income and deductions reported by mutual life insurance com

panies on their federal income tax returns for the 1995 taxable year.

Data necessary to determine the tentative differential earnings rate for 1995 and the tentative recomputed differential earnings rate for 1994 have been compiled from returns filed by mutual life insurance companies and certain stock life insurance companies. The Internal Revenue Service is currently examining these returns. This examination will not be completed before the March 15, 1996, due date for filing 1995 calendar year returns.

NOTICE OF TENTATIVE RATES

This notice publishes a tentative determination of the differential earnings rate for 1995 and of the recomputed differential earnings rate for 1994. This notice also publishes a tentative determination of the rates on which the calculation of the differential earnings rate for 1995 and the recomputed differential earnings rate for 1994 are based. The final determination of these rates is expected to be published before September 1, 1996.

The tentative determination of the differential earnings rate for 1995 and the tentative determination of the recomputed differential earnings rate for 1994 that are published in this notice should be used by mutual life insurance companies to calculate the amount of tax liability for taxable years beginning in 1995 (in the case of companies that file returns before publication of the final determination of these rates) or to calculate the amount of estimated unpaid tax liability for taxable years beginning in 1995 (in the case of companies that are allowed an extension of time to file returns). Companies that file returns before publication of the final determination of these rates should file amended returns after the final determination of these rates is published. If there is a failure to pay tax for a taxable year beginning in 1995 and the failure is attributable to a difference between (a) the tentative determination of the differential earnings rate for 1995 and recomputed differential earnings rate for 1994 and (b) the final determination of these rates, then any such failure through September 16, 1996, will be treated as due to reasonable cause and will not give rise to any addition to tax under § 6651.

The tentative determination of the rates is set forth in Table 1.

Notice 96–15 Table 1

Tentative Determination of Rates To Be Used For Taxable Years Beginning in 1995

Differential earnings rate for 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 Recomputed differential earnings rate for 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.887 Imputed earnings rate for 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.109 Imputed earnings rate for 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.589 Base period stock earnings rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.221 Current stock earnings rate for 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.902 Stock earnings rate for 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.004 Stock earnings rate for 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23.385 Stock earnings rate for 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.317 Average mutual earnings rate for 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.406 Average mutual earnings rate for 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.222

Weighted Average Interest Rate Update

Notice 96–16

Notice 88–73 provides guidelines for determining the weighted average interest rate and the resulting permissible

range of interest rates used to calculate current liability for the purpose of the full funding limitation of § 412(c)(7) of the Internal Revenue Code as amended by the Omnibus Budget Reconciliation Act of 1987 and as further amended by the Uruguay Round Agreements Act, Pub. L. 103–465 (GATT).

The average yield on the 30-year Treasury Constant Maturities for February 1996 is 6.24 percent.

The following rates were determined for the plan years beginning in the month shown below.

90% to 108% 90% to 110% Weighted Permissible Permissible Month Year Average Range Range

March 1996 6.98 6.28 to 7.53 6.28 to 7.67

Drafting Information

The principal author of this notice is Donna Prestia of the Employee Plans Division. For further information regarding this notice, call (202) 622-6076 between 2:30 and 4:00 p.m. Eastern time (not a toll-free number). Ms. Prestia’s number is (202) 622-7377 (also not a toll-free number).

Recognition of Gain or Loss by Contributing Partner on Distribution of Contributed Property or Other Property; Correction

Notice 96–17

AGENCY: Internal Revenue Service, Treasury.

ACTION: Correction to final regulations.

SUMMARY: This document contains corrections to final regulations (TD 8642), which were published in the Federal Register on Tuesday, December 26, 1995, (60 FR 66727) relating to the recognition of gain or loss on certain distributions of contributed property by a partnership, and to the recognition of gain on certain distributions to a contributing partner.

EFFECTIVE DATE: January 9, 1995.

FOR FURTHER INFORMATION CONTACT: Stephen J. Coleman at (202) 622-3060 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

The final regulations that are the subject of these corrections are under sections 704 and 737 of the Internal Revenue Code.

Need for Correction

As published, the final regulations contain errors which may prove to be misleading and are in need of clarification.

Correction of Publication

Accordingly, the publication of the final regulations (TD 8642), which are the subject of FR Doc. 95–30870, is corrected as follows:

Cynthia E. Grigsby, Chief, Regulations Unit, Assistant Chief Counsel (Corporate).

(Filed by the Office of the Federal Register on

February 26, 1996, 8:45 a.m., and published in the issue of the Federal Register for February 27, 1996, 61 F.R. 7213)

§ 1.737–3 [Corrected]

On page 66737, column 2, § 1.737–3 (e), second paragraph from the bottom of the column, the paragraph designated ‘‘(e) Example 1. ’’ is correctly designated ‘‘ Example 1. ’’
On page 66737, column 3, § 1.737–3 (e), paragraph (i) of Example 2, line 4, the language ‘‘nondepreciable

real property to the’’ is corrected to read ‘‘nondepreciable real property located in the United States to the’’.

On page 66737, column 3, § 1.737–3 (e), paragraph (ii) of Exam- ple 2, line 2, the language ‘‘Property B, nondepreciable real property,’’ is corrected to read ‘‘Property B, nondepreciable real property located outside the United States,’’.