Notice 2002-69

Part III. Administrative, Procedural, and Miscellaneous
§

calculating their qualified insurance income under section 954(i) of the Internal
Revenue Code. Taxpayers may rely on the
guidance in this notice until regulations or
other guidance are published.
II. BACKGROUND

Interest Rates and Appropriate Foreign Loss Payment Patterns for
Determining the Qualified Insurance Income of Certain Controlled
Corporations Under Section 954(i)

Notice 2002–69
I. PURPOSE
This notice provides interim guidance for
determining the interest rates and appropriate foreign loss payment patterns to be
used by controlled foreign corporations in

October 28, 2002

In general, a United States shareholder
of a controlled foreign corporation (“CFC”)
must include in gross income its pro rata
share of the CFC’s Subpart F income for
each year. I.R.C. Sec. 951(a). Subpart F income includes, among other types of income, foreign base company income. Sec.
952(a). Section 954(a)(1) defines the term
“foreign base company income” to include,
among other types of income, foreign personal holding company income. Section
954(c)(1) sets forth the types of income
(e.g., interest and dividends) that are considered to be foreign personal holding company income. Sec. 954(c)(1)(A).
Section 954(i)(1) provides that for purposes of section 954(c)(1), foreign personal holding company income does not
include “qualified insurance income” of a
“qualifying insurance company”. Section

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954(i)(2) defines the term “qualified insurance income” to mean income of a qualifying insurance company falling into either
of two categories. First, income received
from unrelated persons and derived from investments made by a qualifying insurance
company or qualifying insurance company branch (collectively referred to as a
“QIC”) either of its reserves allocable to exempt contracts or of 80 percent of its unearned premiums from exempt contracts (as
both are determined in accordance with section 954(i)(4)). Sec. 954(i)(2)(A). Second, income received from unrelated
persons and derived from investments made
by a QIC of an amount of its assets allocable to exempt contracts equal to: (1) in
the case of property, casualty, or health insurance contracts, one-third of the premiums earned on those contracts during such
year; and (2) in the case of life insurance
or annuity contracts, 10 percent of the reserves described in section 954(i)(2)(A) for
such contracts. Sec. 954(i)(2)(B).
For purposes of determining the first category of qualified insurance income, section 954(i)(4)(A) provides that the unearned
premiums and reserves of a QIC with re-

2002–43 I.R.B.

spect to property, casualty, or health insurance contracts shall be determined using the
same methods and interest rates that would
be used if such QIC were subject to tax under Subchapter L, subject to two modifications, discussed below. Under the general
rules of Subchapter L, an insurance company (other than a life insurance company)
determines its “discounted unpaid losses”
(as defined under section 846), which is a
type of insurance reserve, at the end of each
taxable year by taking the sum of discounted unpaid losses separately computed
with respect to unpaid losses in each line
of business attributable to each accident
year. Sec. 846(a)(1). The amount of discounted unpaid losses as of the end of any
taxable year attributable to any accident year
is the present value of such unpaid losses
determined by using: (1) the amount of undiscounted unpaid losses; (2) the applicable interest rate; and (3) the applicable
loss payment pattern. Sec. 846(a)(2).
For purposes of determining the unearned premiums and reserves of a QIC,
section 954(i)(4)(A) makes two modifications to these general Subchapter L rules,
as stated above. First, the QIC must use the
interest rate determined for the functional
currency of a QIC calculated in the same
manner as the Federal mid-term rate under section 1274(d), except as provided by
the Secretary. Sec. 954(i)(4)(A)(i). Second, the QIC must use the “appropriate foreign loss payment pattern”. Sec.
954(i)(4)(A)(ii).
This notice provides rules for computing the discounted unpaid losses of a CFC
by applying the general rules of section 846,
as modified by section 954(i)(4), when
determining: (1) the amount of undiscounted
unpaid losses; (2) the applicable interest
rate; and (3) the applicable loss payment
pattern.
III. UNDISCOUNTED UNPAID
LOSSES
A. General Rule
The term “undiscounted unpaid losses”
means the unpaid losses shown on the annual statement filed by the taxpayer for the
year ending with or within the taxable year
of the taxpayer. Sec. 846(b)(1). The term
“annual statement” means the annual statement approved by the National Association of Insurance Commissioners which the

2002–43 I.R.B.

taxpayer is required to file with the insurance regulatory authorities of the State. Sec.
846(f)(3).

functional currency of the QIC determined
in accordance with Treas. Reg. § 1.1274–
4(d) (using annual compounding).

B. Undiscounted Unpaid Losses for a
QIC

V. APPLICABLE LOSS PAYMENT
PATTERN

A QIC does not file an annual statement as defined under section 843(f)(3). As
a result, a QIC shall use the undiscounted
unpaid losses reflected on the statement or
report filed with a foreign regulatory authority. If no statement or report is filed with
a foreign regulatory authority, or if the statement or report that is filed does not reflect undiscounted unpaid losses, a QIC
shall use the undiscounted unpaid losses
used for financial reporting purposes in the
United States.
IV. APPLICABLE INTEREST RATE
A. General Rule
The amount of discounted unpaid losses
as of the end of any taxable year is the
present value of the unpaid losses calculated by using the “applicable interest rate”.
Sec. 846(a)(2). The applicable interest rate
for purposes of section 846 is the average of the applicable Federal mid-term rates
(as defined in section 1274(d), but based on
annual compounding) effective as of the beginning of each of the calendar months in
the test period. Sec. 846(c)(2)(A). The test
period is the most recent 60-calendar-month
period ending before the beginning of the
calendar year for which the determination is made. Sec. 846(c)(1)(B).
A. Applicable Interest Rate For A
QIC
Section 954(i)(4)(A) provides that the
unearned premiums and reserves of a QIC
shall be determined using the same methods and interest rates as if such QIC were
subject to Subchapter L, except that the interest rate determined for the functional currency of a QIC, except as provided by the
Secretary, is substituted for the applicable
Federal interest rate. Accordingly, if the
functional currency of a QIC is the U.S.
dollar, the applicable interest rate is a 60month average of the applicable federal
mid-term rates published in accordance with
Treas. Reg. § 1.1274–4(b) (using annual
compounding). If the functional currency
of the QIC is a currency other than the U.S.
dollar, the applicable interest rate is a 60month average of the interest rates for the

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A. General Rule
Section 846(d)(1) directs the Secretary
to determine a loss payment pattern for each
line of insurance business for each determination year. Any loss payment pattern determined by the Secretary shall apply to the
accident year ending with the determination year and to each of four succeeding accident years. Sec. 846(d)(1). The term “line
of business” means a category for the reporting of loss payment patterns determined on the basis of the annual statement
for fire and casualty insurance companies
for the calendar year ending with or within
the taxable year, except that multiple peril
lines of business are treated as a single line
of business. Sec. 846(f)(4). The term “determination year” means calendar year 1987
and each fifth calendar year thereafter. Sec.
846(d)(4).
Determinations under section 846(d)(1)
for any determination year are made by the
Secretary: (1) by using the aggregate experience reported on the annual statements
of insurance companies; (2) on the basis of
the most recently published data from such
annual statements relating to loss payment patterns available on the first day of
the determination year; (3) as if losses paid
or treated as paid during any year were paid
during the middle of such year; and (4) in
accordance with the computational rules set
forth in section 846(d)(3). Sec. 846(d)(2).
Under section 846(e)(1), a taxpayer may
elect to use a loss payment pattern for lines
of business determined by reference to the
taxpayer’s loss payment patterns for the
most recent calendar year for which an annual statement was filed before the beginning of the determination year. Sec.
846(e)(1). Any determination must be made
with the application of the rules of section 846(d)(2)(C) and 846(d)(3). Sec.
846(e)(1). A taxpayer may elect to discount unpaid losses using its own historical loss payment pattern instead of the
industry-wide pattern determined by the
Secretary if it has one or more eligible lines
of business. Treas. Reg. § 1.846–2(a). A taxpayer’s election applies to all eligible lines
of business. Treas. Reg. § 1.846–2(a). A line
of business is an eligible line of business

October 28, 2002

in a determination year if, on the most recent annual statement filed by the taxpayer before the beginning of that
determination year, the taxpayer reports
losses and loss expenses for at least the
number of accident years for which those
losses and loss expenses are required to be
reported on an annual statement. Treas. Reg.
§ 1.846–2(b).
An election is made separately for each
determination year. Sec. 846(e)(2)(A). Unless revoked with consent of the Secretary, this election applies to accident years
ending with the determination year and to
each of the four succeeding accident years.
Sec. 846(e)(2)(B). An election is made on
the taxpayer’s return for the taxable year in
which the determination year ends. Sec.
846(e)(2)(C). No election is allowed for any
international or reinsurance line of business. Sec. 846(e)(3).
B. Appropriate Foreign Loss Payment
Pattern for a QIC
Section 954(i)(4)(A)(ii) states that a QIC
shall use the “appropriate foreign loss payment pattern.” A QIC may determine the
appropriate foreign loss payment patterns
for each respective line of insurance business under either of the following two options.
(1) A QIC may elect to use the
most recent loss payment patterns for one
or more lines of business published by the
foreign country provided the Secretary has
approved the use of such patterns in a Revenue Ruling or other published guidance.
(Hereinafter referred to as Option 1.) Treasury and the Internal Revenue Service invite taxpayers to submit information
regarding any existing or subsequently published foreign loss payment pattern so that
the Secretary can make a determination and,
if appropriate, issue guidance indicating that
such foreign loss payment pattern may be
used by a QIC under Option 1.
(2) A QIC may elect to use its own
loss payment patterns for any lines of business sold by the QIC in a foreign country. (Hereinafter referred to as Option 2.)
In general, to make this election, a QIC
must have sufficient historical information for a line of business to qualify as an
eligible line of business under Treas. Reg.
§ 1.846–2(b). However, for this purpose a

October 28, 2002

line of business corresponding to one listed
in section 846(d)(3)(A)(ii) may qualify as
an eligible line of business if a QIC has historical data for that line of business for at
least four years after the accident year.
As stated above, a QIC may make different elections for each separate line of
business. Notwithstanding section 846(e)(3),
an election may be made for any line of
business conducted by a QIC, including any
international or nonproportional reinsurance line of business. A QIC that makes an
election to apply Option 1 or 2 for a taxable year with respect to a line of business must treat as a determination year for
that line of business the accident year with
which or during which the taxable year of
the election ends. The election applies to
the determination year and to each of the
four succeeding accident years, unless the
election is revoked with consent of the Secretary. If a QIC does not make an election to apply either Option 1 or 2 for one
or more lines of business, then the appropriate foreign loss payment pattern for such
line or lines of business shall be the applicable loss payment patterns set forth in
the tables published by the Secretary under section 846(d).
Except as otherwise provided in section 954(i) and this Notice, section 846 and
the regulations promulgated thereunder apply in determining the amount of a QIC’s
discounted unpaid losses.
Special Rules for Applying Option 2
For purposes of Option 2, the computational rules in section 846(d)(3) shall be
followed in determining the appropriate foreign loss payment pattern for an eligible line
of business, subject to the following modifications for lines of business corresponding to those listed in section
846(d)(3)(A)(ii). First, the period taken into
account under section 846(d)(3)(A)(ii) shall
be extended to at least the tenth year after the accident year, but not beyond the
15th year after the accident year. Second,
the amount paid in the last year after the
accident year for which data are available
shall be treated as paid in each subsequent
year (or, if lesser, the portion of the unpaid losses not theretofore taken into account shall be treated as being paid).
However, if application of the previous sen-

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tence results in a payment pattern that ends
before the tenth year after the accident year,
then the amount of unpaid losses remaining after the years for which loss payment data are available shall be treated as
paid equally in each year thereafter, ending in the tenth year after the accident year.
Example 1. A QIC has data for seven years after
the accident year (AY+0) for its “private passenger auto
liability” line. The percentage of losses paid are 32%
for AY+0, 27% for AY+1 (one year after the accident year), 14% for AY+2, 8% for AY+3, 5% for
AY+4, 3% for AY+5, 3% for AY+6, and 2% for AY+7.
This is an eligible line. The QIC elects Option 2 for
this line of business, and extends the payment period to AY+10. The payment percentages for the years
AY+8, AY+9, and AY+10 are 2% in each year.
Example 2. Assume the same facts as in Example
1, except that the payment percentage for year AY+7
is 3%. In this case, use of 3% for the remaining years
would terminate the payment pattern in AY+9. Accordingly, the QIC must treat 1.66% as being paid in
years AY+8, AY+9, and AY+10.
Example 3. Assume the same facts as in Example
1, except that the payment percentage for year AY+7
is 1%. In this case, the QIC must extend the payment period to AY+14 and use 1% for the remaining years from AY+8 through AY+14.

If a taxpayer elects Option 2 for a line
of business for which there are fewer than
nine years of historical data after the accident year, then the taxpayer shall determine a new payment pattern using the
computational rules of section 846(d)(3), as
modified by this notice, for each year after the determination year, until such time
that the taxpayer has historical data for nine
years after the accident year.
Example 4. Assume the same facts as in Example
1. The taxpayer has elected Option 2 for this line of
business, but has data in the determination year for
only seven years after the accident year. Accordingly, the taxpayer must determine a new payment pattern for the accident year immediately following the
determination year using updated information for the
accident year plus eight years after the accident year.
The taxpayer must also determine a new payment pattern for the second accident year following the determination year using updated information for the
accident year plus nine years after the accident year.
This last payment pattern shall apply to the last three
accident years for which the 5-year election to use Option 2 is applicable.

VI. MANNER FOR MAKING
ELECTION
Controlling U.S. shareholders shall make
the elections referred to in this notice on behalf of a QIC by applying the rules of
Treas. Reg. § 1.964–1(c)(3).

2002–43 I.R.B.

VII. EFFECTIVE DATE RULES
Regulations to be issued under section
954(i) concerning the issues addressed in
this notice will be effective for taxable years
beginning on or after the date such regulations are published as final in the Federal Register. Until such regulations are
issued, controlling shareholders of a QIC
may rely on this notice to determine the interest rates and appropriate foreign loss payment patterns of a QIC for purposes of
section 954(i). Controlling U.S. shareholders also may apply the guidance in this notice to prior taxable years.
VIII. PAPERWORK REDUCTION ACT
The collections of information contained
in the notice have been reviewed and approved by the Office of Management and
Budget for review in accordance with the
Paperwork Reduction Act (44 U.S.C. 3507)
under control number 1545–1799.
An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless
the collection of information displays a valid
OMB control number.
The collections of information in this notice are in section V headed Applicable Loss
Payment Patterns. This information is required by the IRS to determine whether a
QIC is allowed to determine its income by
using its own payment pattern data for a
particular line of business. The information will be used on examination to determine whether a QIC is calculating its
foreign loss payment patterns correctly. The
likely respondents are U.S. shareholders that
own foreign insurance companies.
The estimated total annual reporting burden is 300 hours.
The estimated average annual burden per
respondent is 1 hour.
The estimated number of respondents is
300.
The estimated annual frequency of responses is once.
Books or records relating to a collection of information must be retained as long
as their contents may become material in
the administration of any internal revenue
law. Generally, tax returns and tax return
information are confidential, as required by
26 U.S.C. 6103.

2002–43 I.R.B.

IX. REQUEST FOR COMMENTS AND
DRAFTING INFORMATION
The IRS and Treasury request comments
on the rules described in this notice and on
the additional issues, if any, that should be
addressed when regulations under section
954(i) are issued. Written comments may
be submitted to the Associate Chief Counsel (International), Attention: Steven Jensen
(Notice 2002–69), Room 4562, CC:INTL:
Br5, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington DC
20224. Alternatively, taxpayers may submit comments directly to the IRS Internet
site at http://www.irs.ustreas.gov/prod/
tax_regs/comments.html. Comments will be
available for public inspection and copying. Treasury and the IRS request comments by March 28, 2003. For further
information regarding this notice, contact
Steven Jensen of the Office of Associate
Chief Counsel (International) at 202–622–
3870 (not a toll-free call).

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October 28, 2002