Part III. — Internal Revenue Bulletin 2002-10

life insurance company for which the deduction for policyholder dividends is reduced pursuant to §§ 808(c)(2) and 809.

As described above, the differential earnings rate for 2001 and the recomputed differential earnings rate for 2000 affect the income and deductions reported by mutual life insurance companies on their federal income tax returns for the 2001 taxable year. Data necessary to determine the tentative differential earnings rate for 2001 and the tentative recomputed differential earnings rate for 2000 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, 2002, due date for filing 2001 calendar year returns.

NOTICE OF TENTATIVE RATES

This notice publishes a tentative determination of the differential earnings rate for 2001 and of the recomputed differential earnings rate for 2000. This notice also publishes a tentative determination of the rates on which the calculation of the differential earnings rate for 2001 and the recomputed differential earnings rate for 2000 are based. The final determination of these rates is expected to be published before September 1, 2002.

The tentative determination of the differential earnings rate for 2001 and the tentative determination of the recomputed differential earnings rate for 2000 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 2001 (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 2001 (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

Differential Earnings Rate for Mutual Life Insurance Companies

Notice 2002–19

This notice publishes a tentative determination under § 809 of the Internal Revenue Code of the “differential earnings rate” for 2001 and the rate that is used to calculate the “recomputed differential earnings amount” for 2000. (The latter rate is referred to in this notice as the “recomputed differential earnings rate” for 2000.) These rates are used by mutual life insurance companies to calculate their federal income tax liability for taxable years beginning in 2001.

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.

Rev. Rul. 99–3 (1999–1 C.B. 313) provides that a life insurance subsidiary of a mutual holding company is not a mutual

March 11, 2002 619 2002–10 I.R.B.

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.

beginning in 2001 and the failure is attributable to a difference between (a) the tentative determination of the differential earnings rate for 2001 and recom

puted differential earnings rate for 2000 and (b) the final determination of these rates, then any such failure through September 16, 2002, will be treated as due to

Notice 2002–19 Table 1

Tentative Determination of Rates To Be Used For Taxable Years Beginning in 2001

Differential earnings rate for 2001 ....................................................................................................................... 0

Recomputed differential earnings rate for 2000 .................................................................................................. 0

Imputed earnings rate for 2000 ............................................................................................................................ 15.358

Imputed earnings rate for 2001 ............................................................................................................................ 12.540

Base period stock earnings rate ........................................................................................................................... 18.221

Current stock earnings rate for 2001 ................................................................................................................... 13.848

Stock earnings rate for 1998 ................................................................................................................................ 15.836

Stock earnings rate for 1999 ................................................................................................................................ 15.724

Stock earnings rate for 2000 ................................................................................................................................ 9.983

Average mutual earnings rate for 1999 ................................................................................................................ 16.164

Average mutual earnings rate for 2000 ................................................................................................................ 15.788

DRAFTING INFORMATION

The principal author of this notice is Katherine A. Hossofsky of the Office of the Associate Chief Counsel (Financial Institutions and Products). For further information regarding this notice, contact Ms. Hossofsky at (202) 622–3477 (not a toll-free call).

2002–10 I.R.B. 620 March 11, 2002