§ 805 — General Deductions

(a) For purposes of this part, there shall be allowed the following deductions: (1) All claims and benefits accrued, and all losses incurred (whether or not ascertained), during the taxable year on insurance and annuity contracts. (2) The net increase in reserves which is required by section 807(b) to be taken into account under this paragraph. (3) The deduction for policyholder dividends (determined under section 808(c)). (A) The deductions provided by sections 243 and 245 (as modified by subparagraph (B))— (i) for 100 percent dividends received, and (ii) for the life insurance company’s share of the dividends (other than 100 percent dividends) received. (B) In applying section 246(b) (relating to limitation on aggregate amount of deductions for dividends received) for purposes of subparagraph (A), the limit on the aggregate amount of the deductions allowed by sections 243(a)(1) and 245 shall be the percentage determined under section 246(b)(3) of the life insurance company taxable income (and such limitation shall be applied as provided in section 246(b)(3)), computed without regard to— (i) the deduction allowed under section 172, (ii) the deductions allowed by sections 243(a)(1) and 245, and (iii) any capital loss carryback to the taxable year under section 1212(a)(1), (C) For purposes of subparagraph (A)— (i) Except as provided in clause (ii), the term “100 percent dividend” means any dividend if the percentage used for purposes of determining the deduction allowable under section 243 or 245(b) is 100 percent. (ii) The term “100 percent dividend” does not include any distribution by a corporation which is not an insurance company to the extent such distribution is out of tax-exempt interest, or out of the increase for the taxable year in policy cash values (within the meaning of subparagraph (F)) of life insurance policies and annuity and endowment contracts to which section 264(f) applies, or out of dividends which are not 100 percent dividends (determined with the application of this clause as if it applies to distributions by all corporations including insurance companies). (i) In the case of any 100 percent dividend paid to any life insurance company out of the earnings and profits for any taxable year beginning after December 31, 1983, of another life insurance company if— (I) the paying company’s share determined under section 812 for such taxable year, exceeds (II) the receiving company’s share determined under section 812 for its taxable year in which the dividend is received or accrued, (ii) The reduction under this clause for a dividend is an amount equal to— (I) the portion of such dividend attributable to prorated amounts, multiplied by (II) the percentage obtained by subtracting the share described in subclause (II) of clause (i) from the share described in subclause (I) of such clause. (iii) For purposes of this subparagraph, the term “prorated amounts” means tax-exempt interest, the increase for the taxable year in policy cash values (within the meaning of subparagraph (F)) of life insurance policies and annuity and endowment contracts to which section 264(f) applies, and dividends other than 100 percent dividends. (iv) For purposes of this subparagraph, in determining the portion of any dividend attributable to prorated amounts— (I) any dividend by the paying corporation shall be treated as paid first out of earnings and profits for taxable years beginning after December 31, 1983, attributable to prorated amounts (to the extent thereof), and (II) by determining the portion of earnings and profits so attributable without any reduction for the tax imposed by this chapter. (v) Rules similar to the rules of this subsection shall apply in the case of 100 percent dividends paid by an insurance company which is not a life insurance company. (E) Subparagraph (A)(i) (and not subparagraph (A)(ii)) shall apply to any dividend received by a foreign corporation from a domestic corporation which would be a 100 percent dividend if section 1504(b)(3) did not apply for purposes of applying section 243(b)(2). (F) For purposes of subparagraphs (C) and (D)— (i) The increase in the policy cash value for any taxable year with respect to policy or contract is the amount of the increase in the adjusted cash value during such taxable year determined without regard to— (I) gross premiums paid during such taxable year, and (II) distributions (other than amounts includible in the policyholder’s gross income) during such taxable year to which section 72(e) applies. (ii) For purposes of clause (i), the term “adjusted cash value” means the cash surrender value of the policy or contract increased by the sum of— (I) commissions payable with respect to such policy or contract for the taxable year, and (II) asset management fees, surrender charges, mortality and expense charges, and any other fees or charges specified in regulations prescribed by the Secretary which are imposed (or which would be imposed were the policy or contract canceled) with respect to such policy or contract for the taxable year. (6) The consideration (other than consideration arising out of indemnity reinsurance) in respect of the assumption by another person of liabilities under insurance and annuity contracts. (7) The amount of policyholder dividends which— (A) are paid or accrued by another insurance company in respect of policies the taxpayer has reinsured, and (B) are reimbursable by the taxpayer under the terms of the reinsurance contract. (8) Subject to the modifications provided by subsection (b), all other deductions allowed under this subtitle for purposes of computing taxable income. (b) The modifications referred to in subsection (a)(8) are as follows: (1) In applying section 163 (relating to deduction for interest), no deduction shall be allowed for interest in respect of items described in section 807(c). (2) In applying section 170— (A) the limit on the total deductions under such section provided by section 170(b)(2) shall be 10 percent of the life insurance company taxable income computed without regard to— (i) the deduction provided by section 170, (ii) the deductions provided by paragraphs (3) and (4) of subsection (a), (iii) any net operating loss carryback to the taxable year under section 172, and (iv) any capital loss carryback to the taxable year under section 1212(a)(1), and (B) (relating to special rule for net operating loss carryovers) shall be applied. (A) Section 171 shall not apply. (B) For rules relating to amortizable bond premium, see section 811(b). (4) Except as provided in subsection (a)(4), the deductions for dividends received provided by sections 243 and 245 shall not be allowed.