26 Cfr 1.832-4

§ 1.832–4 Gross income., 26 C.F.R. § 1.832–4

Code of Federal Regulations
Title 26. Internal Revenue
Chapter I. Internal Revenue Service, Department of the Treasury
Subchapter A. Income Tax
Part 1. Income Taxes (Refs & Annos)
Normal Taxes and Surtaxes
Insurance Companies
Other Insurance Companies
26 C.F.R. § 1.832–4, Treas. Reg. § 1.832–4
§ 1.832–4 Gross income.
Currentness
(a)(1) Gross income as defined in section 832(b)(1) means the gross amount of income earned during the taxable year from
interest, dividends, rents, and premium income, computed on the basis of the underwriting and investment exhibit of the annual
statement approved by the National Convention of Insurance Commissioners, as well as the gain derived from the sale or other
disposition of property, and all other items constituting gross income under section 61, except that in the case of a mutual fire
insurance company described in section 831(a)(3)(A) the amount of single deposit premiums received, but not assessments,
shall be excluded from gross income. Section 832(b)(1)(D) provides that in the case of a mutual fire or flood insurance company
described in section 831(a)(3)(B), there shall be included in gross income an amount equal to 2 percent of the premiums earned
during the taxable year on contracts described in section 831(a)(3)(B) after deduction of premium deposits returned or credited
during such taxable year with respect to such contracts. Gross income does not include increase in liabilities during the year on
account of reinsurance treaties, remittances from the home office of a foreign insurance company to the United States branch,
borrowed money, or gross increase due to adjustments in book value of capital assets.
(2) The underwriting and investment exhibit is presumed to reflect the true net income of the company, and insofar as it
is not inconsistent with the provisions of the Code will be recognized and used as a basis for that purpose. All items of
the exhibit, however, do not reflect an insurance company's income as defined in the Code. By reason of the definition of
investment income, miscellaneous items which are intended to reflect surplus but do not properly enter into the computation
of income, such as dividends declared to shareholders in their capacity as such, home office remittances and receipts,
and special deposits, are ignored. Gain or loss from agency balances and bills receivable not admitted as assets on the
underwriting and investment exhibit will be ignored, excepting only such agency balances and bills receivable as have been
allowed as deductions for worthless debts or, having been previously so allowed, are recovered during the taxable year.
(3) Premiums earned. The determination of premiums earned on insurance contracts during the taxable year begins
with the insurance company's gross premiums written on insurance contracts during the taxable year, reduced by return
premiums and premiums paid for reinsurance. Subject to the exceptions in sections 832(b)(7), 832(b)(8), and 833(a)(3),
this amount is increased by 80 percent of the unearned premiums on insurance contracts at the end of the preceding taxable
year, and is decreased by 80 percent of the unearned premiums on insurance contracts at the end of the current taxable year.
(4) Gross premiums written—(i) In general. Gross premiums written are amounts payable for insurance coverage. The
label placed on a payment in a contract does not determine whether an amount is a gross premium written. Gross premiums
written do not include other items of income described in section 832(b)(1)(C) (for example, charges for providing loss

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§ 1.832–4 Gross income., 26 C.F.R. § 1.832–4

adjustment or claims processing services under administrative services or cost-plus arrangements). Gross premiums written
on an insurance contract include all amounts payable for the effective period of the insurance contract. To the extent that
amounts paid or payable with respect to an arrangement are not gross premiums written, the insurance company may
not treat amounts payable to customers under the applicable portion of such arrangements as losses incurred described
in section 832(b)(5).
(ii) Items included. Gross premiums written include—
(A) Any additional premiums resulting from increases in risk exposure during the effective period of an insurance
contract;
(B) Amounts subtracted from a premium stabilization reserve to pay for insurance coverage; and
(C) Consideration in respect of assuming insurance liabilities under insurance contracts not issued by the taxpayer
(such as a payment or transfer of property in an assumption reinsurance transaction).
(5) Method of reporting gross premiums written—(i) In general. Except as otherwise provided under this paragraph
(a)(5), an insurance company reports gross premiums written for the earlier of the taxable year that includes the effective
date of the insurance contract or the year in which the company receives all or a portion of the gross premium for the
insurance contract. The effective date of the insurance contract is the date on which the insurance coverage provided by the
contract commences. The effective period of an insurance contract is the period over which one or more rates for insurance
coverage are guaranteed in the contract. If a new rate for insurance coverage is guaranteed after the effective date of an
insurance contract, the making of such a guarantee generally is treated as the issuance of a new insurance contract with an
effective period equal to the duration of the new guaranteed rate for insurance coverage.
(ii) Special rule for additional premiums resulting from an increase in risk exposure. An insurance company reports
additional premiums that result from an increase in risk exposure during the effective period of an insurance contract
in gross premiums written for the taxable year in which the change in risk exposure occurs. Unless the increase in risk
exposure is of temporary duration (for example, an increase in risk exposure under a workers' compensation policy due to
seasonal variations in the policyholder's payroll), the company reports additional premiums resulting from an increase in
risk exposure based on the remainder of the effective period of the insurance contract.
(iii) Exception for certain advance premiums. If an insurance company receives a portion of the gross premium for an
insurance contract prior to the first day of the taxable year that includes the effective date of the contract, the company
may report the advance premium (rather than the full amount of the gross premium for the contract) in gross premiums
written for the taxable year in which the advance premium is received. An insurance company may adopt this method of
reporting advance premiums only if the company's deduction for premium acquisition expenses for the taxable year in
which the company receives the advance premium does not exceed the limitation of paragraph (a)(5)(vii) of this section.
A company that reports an advance premium in gross premiums written under this paragraph (a)(5)(iii) takes into account
the remainder of the gross premium written and premium acquisition expenses for the contract in the taxable year that
includes the effective date of the contract. A company that adopts this method of reporting advance premiums must use
the method for all contracts with advance premiums.

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§ 1.832–4 Gross income., 26 C.F.R. § 1.832–4

(iv) Exception for certain cancellable accident and health insurance contracts with installment premiums. If an
insurance company issues or proportionally reinsures a cancellable accident and health insurance contract (other than a
contract with an effective period that exceeds 12 months) for which the gross premium is payable in installments over the
effective period of the contract, the company may report the installment premiums (rather than the total gross premium
for the contract) in gross premiums written for the earlier of the taxable year in which the installment premiums are due
under the terms of the contract or the year in which the installment premiums are received. An insurance company may
adopt this method of reporting installment premiums for a cancellable accident and health insurance contract only if the
company's deduction for premium acquisition expenses for the first taxable year in which an installment premium is due or
received under the contract does not exceed the limitation of paragraph (a)(5)(vii) of this section. A company that adopts
this method of reporting installment premiums for a cancellable accident and health contract must use the method for all
of its cancellable accident and health insurance contracts with installment premiums.
(v) Exception for certain multi-year insurance contracts. If an insurance company issues or proportionally reinsures
an insurance contract, other than a contract described in paragraph (a)(5)(vi) of this section, with an effective period that
exceeds 12 months, for which the gross premium is payable in installments over the effective period of the contract,
the company may treat the insurance coverage provided under the multi-year contract as a series of separate insurance
contracts. The first contract in the series is treated as having been written for an effective period of twelve months. Each
subsequent contract in the series is treated as having been written for an effective period equal to the lesser of 12 months or
the remainder of the period for which the rates for insurance coverage are guaranteed in the multi-year insurance contract.
An insurance company may adopt this method of reporting premiums on a multi-year contract only if the company's
deduction for premium acquisition expenses for each year of the multi-year contract does not exceed the limitation of
paragraph (a)(5)(vii) of this section. A company that adopts this method of reporting premiums for a multi-year contract
must use the method for all multi-year contracts with installment premiums.
(vi) Exception for insurance contracts described in section 832(b)(7). If an insurance company issues or reinsures
the risks related to a contract described in section 832(b)(7), the company may report gross premiums written for the
contract in the manner required by sections 803 and 811(a) for life insurance companies. An insurance company may adopt
this method of reporting premiums on contracts described in section 832(b)(7) only if the company also determines the
deduction for premium acquisition costs for the contract in accordance with section 811(a), as adjusted by the amount
required to be taken into account under section 848 in connection with the net premiums of the contract. A company that
adopts this method of reporting premiums for a contract described in section 832(b)(7) must use the method for all of its
contracts described in that section.
(vii) Limitation on deduction of premium acquisition expenses. An insurance company's deduction for premium
acquisition expenses (for example, commissions, state premium taxes, overhead reimbursements to agents or brokers, and
other similar amounts) related to an insurance contract is within the limitation of this paragraph (a)(5)(vii) if—
(A) The ratio obtained by dividing the sum of the company's deduction for premium acquisition expenses related
to the insurance contract for the taxable year and previous taxable years by the total premium acquisition expenses
attributable to the insurance contract; does not exceed
(B) The ratio obtained by dividing the sum of the amounts included in gross premiums written with regard to the
insurance contract for the taxable year and previous taxable years by the total gross premium written for the insurance
contract.

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§ 1.832–4 Gross income., 26 C.F.R. § 1.832–4

(viii) Change in method of reporting gross premiums. An insurance company that adopts a method of accounting for
gross premiums written and premium acquisition expenses described in paragraph (a)(5)(iii), (iv), (v), or (vi) of this section
must continue to use the method to report gross premiums written and premium acquisition expenses unless the company
obtains the consent of the Commissioner to change to a different method under section 446(e) and § 1.446–1(e).
(6) Return premiums—(i) In general. An insurance company's liability for return premiums includes amounts previously
included in an insurance company's gross premiums written, which are refundable to a policyholder or ceding company,
provided that the amounts are fixed by the insurance contract and do not depend on the experience of the insurance company
or the discretion of its management.
(ii) Items included. Return premiums include amounts—
(A) Which were previously paid and become refundable due to policy cancellations or decreases in risk exposure
during the effective period of an insurance contract;
(B) Which reflect the unearned portion of unpaid premiums for an insurance contract that is canceled or for which
there is a decrease in risk exposure during its effective period; or
(C) Which are either previously paid and refundable or which reflect the unearned portion of unpaid premiums for an
insurance contract, arising from the redetermination of a premium due to correction of posting or other similar errors.
(7) Method of reporting return premiums. An insurance company reports the liability for a return premium resulting
from the cancellation of an insurance contract for the taxable year in which the contract is canceled. An insurance company
reports the liability for a return premium attributable to a reduction in risk exposure under an insurance contract for the
taxable year in which the reduction in risk exposure occurs.
(8) Unearned premiums—(i) In general. The unearned premium for a contract, other than a contract described in section
816(b)(1)(B), generally is the portion of the gross premium written that is attributable to future insurance coverage during
the effective period of the insurance contract. However, unearned premiums held by an insurance company with regard
to the net value of risks reinsured with other solvent companies (whether or not authorized to conduct business under
state law) are subtracted from the company's unearned premiums. Unearned premiums also do not include any additional
liability established by the insurance company on its annual statement to cover premium deficiencies. Unearned premiums
do not include an insurance company's estimate of its liability for amounts to be paid or credited to a customer with regard
to the expired portion of a retrospectively rated contract (retro credits). An insurance company's estimate of additional
amounts payable by its customers with regard to the expired portion of a retrospectively rated contract (retro debits) cannot
be subtracted from unearned premiums.
(ii) Special rules for unearned premiums. For purposes of computing “premiums earned on insurance contracts during
the taxable year” under section 832(b)(4), the amount of unearned premiums includes—
(A) Life insurance reserves (as defined in section 816(b), but computed in accordance with section 807(d) and sections
811(c) and (d));

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§ 1.832–4 Gross income., 26 C.F.R. § 1.832–4

(B) In the case of a mutual flood or fire insurance company described in section 832(b)(1)(D) (with respect to contracts
described in that section), the amount of unabsorbed premium deposits that the company would be obligated to return
to its policyholders at the close of the taxable year if all its insurance contracts were terminated at that time;
(C) In the case of an interinsurer or reciprocal underwriter that reports unearned premiums on its annual statement
net of premium acquisition expenses, the unearned premiums on the company's annual statement increased by the
portion of premium acquisition expenses allocable to those unearned premiums; and
(D) In the case of a title insurance company, its discounted unearned premiums (computed in accordance with section
832(b)(8)).
(9) Method of determining unearned premiums. If the risk of loss under an insurance contract does not vary significantly
over the effective period of the contract, the unearned premium attributable to the unexpired portion of the effective period
of the contract is determined on a pro rata basis. If the risk of loss varies significantly over the effective period of the
contract, the insurance company may consider the pattern and incidence of the risk in determining the portion of the gross
premium that is attributable to the unexpired portion of the effective period of the contract. An insurance company that
uses a method of computing unearned premiums other than the pro rata method must maintain sufficient information to
demonstrate that its method of computing unearned premiums accurately reflects the pattern and incidence of the risk for
the insurance contract.
(10) Examples. The provisions of paragraphs (a)(4) through (a)(9) of this section are illustrated by the following examples:
Example 1. (i) IC is a non-life insurance company which, pursuant to section 843, files its returns on a calendar year basis. IC
writes a casualty insurance contract that provides insurance coverage for a one-year period beginning on July 1, 2000 and ending
on June 30, 2001. IC charges a $500 premium for the insurance contract, which may be paid either in full by the effective date
of the contract or in quarterly installments over the contract's one year term. The policyholder selects the installment payment
option. As of December 31, 2000, IC collected $250 of installment premiums for the contract.
(ii) The effective period of the insurance contract begins on July 1, 2000 and ends on June 30, 2001. For the taxable year ending
December 31, 2000, IC includes the $500 gross premium, based on the effective period of the contract, in gross premiums
written under section 832(b)(4)(A). IC's unearned premium with respect to the contract was $250 as of December 31, 2000.
Pursuant to section 832(b)(4)(B), to determine its premiums earned, IC deducts $200 ($250 x .8) for the insurance contract at
the end of the taxable year.
Example 2. (i) The facts are the same as Example 1, except that the insurance contract has a stated term of 5 years. On each
contract anniversary date, IC may adjust the rate charged for the insurance coverage for the succeeding 12 month period. The
amount of the adjustment in the charge for insurance coverage is not substantially limited under the insurance contract.
(ii) Under paragraph (a)(5)(i) of this section, IC is required to report gross premiums written for the insurance contract based on
the effective period for the contract. The effective period of the insurance contract is the period for which a rate for insurance
coverage is guaranteed in the contract. Although the insurance contract issued by IC has a stated term of 5 years, a rate for
insurance coverage is guaranteed only for a period of 12 months beginning with the contract's effective date and each anniversary
date thereafter. Thus, for the taxable year ending December 31, 2000, IC includes the $500 gross premium for the 12 month
period beginning with the contract's effective date in gross premiums written. IC's unearned premium with respect to the contract

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§ 1.832–4 Gross income., 26 C.F.R. § 1.832–4

was $250 as of December 31, 2000. Pursuant to section 832(b)(4)(B), to determine its premiums earned, IC deducts $200 ($250
x .8) for the insurance contract at the end of the taxable year.
Example 3. (i) The facts are the same as Example 1, except that coverage under the insurance contract begins on January 1,
2001 and ends on December 31, 2001. On December 15, 2000, IC collects the first $125 premium installment on the insurance
contract. For the taxable year ended December 31, 2000, IC deducts $20 of premium acquisition expenses related to the insurance
contract. IC's total premium acquisition expenses, based on the insurance contract's $500 gross premium, are $80.
(ii) Under paragraph (a)(5)(iii) of this section, IC may elect to report only the $125 advance premium (rather than the contract's
$500 gross premium) in gross premiums written for the taxable year ended December 31, 2000, provided that IC's deduction
for the premium acquisition expenses related to the insurance contract does not exceed the limitation in paragraph (a)(5)(vii).
IC's deduction for premium acquisition expenses is within this limitation only if the ratio of the insurance contract's premium
acquisition expenses deducted for the taxable year and any previous taxable year to the insurance contract's total premium
acquisition expenses does not exceed the ratio of the amounts included in gross premiums written for the taxable year and any
previous taxable year for the contract to the total gross premium written for the contract.
(iii) For the taxable year ended December 31, 2000, IC deducts $20 of premium acquisition expenses related to the insurance
contract. This deduction represents 25% of the total premium acquisition expenses for the insurance contract ($20/$80 = 25%).
This ratio does not exceed the ratio of the $125 advance premium to the insurance contract's $500 gross premium ($125/$500
= 25%). Therefore, under paragraph (a)(5)(iii) of this section, IC may elect to report only the $125 advance premium (rather
than the $500 gross premium) in gross premiums written for the taxable year ending December 31, 2000. IC reports the balance
of the gross premium for the insurance contract ($375) and deducts the remaining premium acquisition expenses ($60) for the
insurance contract in the taxable year ending December 31, 2001.
Example 4. (i) The facts are the same as Example 3, except that for the taxable year ending December 31, 2000, IC deducts
$60 of premium acquisition expenses related to the insurance contract.
(ii) For the taxable year ended December 31, 2000, IC deducted 75% of total premium acquisition expenses for the insurance
contract ($60/$80 = 75%). This ratio exceeds the ratio of the $125 advance premium to the $500 gross premium ($125/$500 =
25%). Because IC's deduction for premium acquisition expenses allocable to the contract exceeds the limitation in paragraph
(a)(5)(vii) of this section, paragraph (a)(5)(i) of this section requires IC to report the $500 gross premium in gross premiums
written for the taxable year ending December 31, 2000. IC's unearned premium with respect to the contract was $500 as of
December 31, 2000. Pursuant to section 832(b)(4)(B), to determine its premiums earned, IC deducts $400 ($500 x .8) for the
insurance contract at the end of the taxable year.
Example 5. (i) IC is a non-life insurance company which, pursuant to section 843, files its returns on a calendar year basis.
On August 1, 2000, IC issues a one-year cancellable accident and health insurance policy to X, a corporation with 80 covered
employees. The gross premium written for the insurance contract is $320,000. Premiums are payable in monthly installments.
As of December 31, 2000, IC has collected $150,000 of installment premiums from X. For the taxable year ended December
31, 2000, IC has paid or incurred $21,000 of premium acquisition expenses related to the insurance contract. IC's total premium
acquisition expenses for the insurance contract, based on the $320,000 gross premium, are $48,000.
(ii) Under paragraph (a)(5)(iv) of this section, IC may elect to report only the $150,000 of installment premiums (rather than
the $320,000 estimated gross premium) in gross premiums written for the taxable year ended December 31, 2000, provided that
its deduction for premium acquisition expenses allocable to the insurance contract does not exceed the limitation in paragraph
(a)(5)(vii). For the taxable year ended December 31, 2000, IC deducts $21,000 of premium acquisition expenses related to the
insurance contract, or 43.75% of total premium acquisition expenses for the insurance contract ($21,000/$48,000 = 43.75%).
This ratio does not exceed the ratio of installment premiums to the gross premium for the contract ($150,000/$320,000 = 46.9%).
Therefore, under paragraph (a)(5)(iv) of this section, IC may elect to report only $150,000 of installment premiums for the

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§ 1.832–4 Gross income., 26 C.F.R. § 1.832–4

insurance contract (rather than $320,000 of gross premium) in gross premiums written for the taxable year ending December
31, 2000.
Example 6. (i) IC is a non-life insurance company which, pursuant to section 843, files its returns on a calendar year basis.
On July 1, 2000, IC issues a one-year workers' compensation policy to X, an employer. The gross premium for the policy is
determined by applying a monthly rate of $25 to each of X's employees. This rate is guaranteed for a period of 12 months,
beginning with the effective date of the contract. On July 1, 2000, X has 1,050 employees. Based on the assumption that X's
payroll would remain constant during the effective period of the contract, IC determines an estimated gross premium for the
contract of $315,000 (1,050 x $25 x 12 = $315,000). The estimated gross premium is payable by X in equal monthly installments.
At the end of each calendar quarter, the premiums payable under the contract are adjusted based on an audit of X's actual payroll
during the preceding three months of coverage.
(ii) Due to an expansion of X's business in 2000, the actual number of employees covered under the contract during each month
of the period between July 1, 2000 and December 31, 2000 is 1,050 (July), 1,050 (August), 1,050 (September), 1,200 (October),
1,200 (November), and 1,200 (December). The increase in the number of employees during the year is not attributable to a
temporary or seasonal variation in X's business activities and is expected to continue for the remainder of the effective period
of the contract.
(iii) Under paragraph (a)(5)(i) of this section, IC is required to report gross premiums written for the insurance contract based
on the effective period of the contract. The effective period of X's contract is based on the 12 month period for which IC has
guaranteed rates for insurance coverage. Under paragraph (a)(5)(ii), IC must also report the additional premiums resulting from
the change in risk exposure under the contract for the taxable year in which the change in such exposure occurs. Unless the
change in risk exposure is of temporary duration, the additional gross premiums are included in gross premiums written for
the remainder of the effective period of the contract. Thus, for the taxable year ending December 31, 2000, IC reports gross
premiums written of $348,750 with respect to the workers' compensation contract issued to X, consisting of the sum of the
initial gross premium for the contract ($315,000) plus the additional gross premium attributable to the 150 employees added to
X's payroll who will be covered during the last nine months of the contract's effective period (150 x $25 (monthly premium)
x 9 = $33,750). IC's unearned premium with respect to the contract was $180,000 as of December 31, 2000, which consists of
the sum of the remaining portion of the original gross premium ($315,000 x 6/12 = $157,500), plus the additional premiums
resulting from the change in risk exposure ($33,750 x 6/9 = $22,500) that are allocable to the remaining six months of the
contract's effective period. Pursuant to section 832(b)(4)(B), to determine its premiums earned, IC deducts $144,000 ($180,000
x .8) for the insurance contract at the end of the taxable year.
Example 7. (i) The facts are the same as Example 6, except that the increase in the number of X's employees for the period
ending December 31, 2000 is attributable to a seasonal variation in X's business activity.
(ii) Under paragraph (a)(5)(ii) of this section, for the taxable year ending December 31, 2000, IC reports gross premiums
written of $326,500, consisting of the sum of the initial gross premium for the contract ($315,000) plus the additional premium
attributable to the temporary increase in risk exposure during the taxable year (150 x $25 x 3 = $11,250). The unearned premium
that is allocable to the remaining six months of the effective period of the contract is $157,500. Pursuant to section 832(b)(4)(B),
to determine its premiums earned, IC deducts $126,000 ($157,500 x .8) for the insurance contract at the end of the taxable year.
Example 8. (i) IC, a non-life insurance company, issues a noncancellable accident and health insurance contract (other than a
qualified long-term care insurance contract, as defined in section 7702B(b)) to A, an individual, on July 1, 2000. The contract
has an entry-age annual premium of $2,400, which is payable by A in equal monthly installments of $200 on the first day of
each month of coverage. IC incurs agents' commissions, premium taxes, and other premium acquisition expenses equal to 10%
of the gross premiums received for the contract. As of December 31, 2000, IC has collected $1,200 of installment premiums
for the contract.

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§ 1.832–4 Gross income., 26 C.F.R. § 1.832–4

(ii) A noncancellable accident and health insurance contract is a contract described in section 832(b)(7). Thus, under paragraph
(a)(5)(vi) of this section, IC may report gross premiums written in the manner required for life insurance companies under
sections 803 and 811. Accordingly, for the taxable year ending December 31, 2000, IC may report gross premiums written of
$1,200, based on the premiums actually received on the contract. Pursuant to section (a)(5)(vi) of this section, IC deducts a
total of $28 of premium acquisition costs for the contract, based on the difference between the acquisition costs actually paid
or incurred under section 811(a) ($1,200 x .10 = $120) and the amount required to be taken into account under section 848 in
connection with the net premiums for the contract ($1,200 x .077 = $92).
(iii) Under paragraph (a)(8)(ii)(A) of this section, IC includes the amount of life insurance reserves (as defined in section 816(b),
but computed in accordance with section 807(d) and sections 811(c) and (d)) in unearned premiums under section 832(b)(4)
(B). Section 807(d)(3)(A)(iii) requires IC to use a two-year preliminary term method to compute the amount of life insurance
reserves for a noncancellable accident and health insurance contract (other than a qualified long-term care contract). Under this
tax reserve method, no portion of the $1,200 gross premium received by IC for A's contract is allocable to future insurance
coverage. Accordingly, for the taxable year ending December 31, 2000, no life insurance reserves are included in IC's unearned
premiums under section 832(b)(4)(B) with respect to the contract.
Example 9. (i) IC, a non-life insurance company, issues an insurance contract with a twelve month effective period for $1,200
on December 1, 2000. Immediately thereafter, IC reinsures 90% of its liability under the insurance contract for $900 with IC–2,
an unrelated and solvent insurance company. On December 31, 2000, IC–2 has an $825 unearned premium with respect to the
reinsurance contract it issued to IC. In computing its earned premiums, pursuant to section 832(b)(4)(B), IC–2 deducts $660 of
unearned premiums ($825 x .8) with respect to the reinsurance contract.
(ii) Under paragraph (a)(8)(i) of this section, unearned premiums held by an insurance company with regard to the net value of
the risks reinsured in other solvent companies are deducted from the ceding company's unearned premiums taken into account
for purposes of section 832(b)(4)(B). If IC had not reinsured 90% of its risks, IC's unearned premium for the insurance contract
would have been $1,100 ($1,200 x 11/12) and IC would have deducted $880 ($1,100 x .8) of unearned premiums with respect
to such contract. However, because IC reinsured 90% of its risks under the contract with IC–2, as of December 31, 2000, the
net value of the risks retained by IC for the remaining 11 months of the effective period of the contract is $110 ($1,100 −
$990). For the taxable year ending December 31, 2000, IC includes the $1,200 gross premium in its gross premiums written and
deducts the $900 reinsurance premium paid to IC–2 under section 832(b)(4)(A). Pursuant to section 832(b)(4)(B), to determine
its premiums earned, IC deducts $88 ($110 x .8) for the insurance contract at the end of the taxable year.
(11) Change in method of accounting—(i) In general. A change in the method of determining premiums earned to
comply with the provisions of paragraphs (a)(3) through (a)(10) of this section is a change in method of accounting for
which the consent of the Commissioner is required under section 446(e) and § 1.446–1(e).
(ii) Application. For the first taxable year beginning after December 31, 1999, a taxpayer is granted consent of the
Commissioner to change its method of accounting for determining premiums earned to comply with the provisions of
paragraphs (a)(3) through (a)(10) of this section. A taxpayer changing its method of accounting in accordance with this
section must follow the automatic change in accounting provisions of Rev. Proc. 99–49, 1999–52 I.R.B. 725 (see §
601.601(d)(2) of this chapter), except that—
(A) The scope limitations in section 4.02 of Rev. Proc. 99–49 shall not apply;
(B) The timely duplicate filing requirement in section 6.02(2) of Rev. Proc. 99–49 shall not apply; and

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§ 1.832–4 Gross income., 26 C.F.R. § 1.832–4

(C) If the method of accounting for determining premiums earned is an issue under consideration within the meaning
of section 3.09 of Rev. Proc. 99–49 as of January 5, 2000, then section 7.01 of Rev. Proc. 99–49 shall not apply.
(12) Effective date. Paragraphs (a)(3) through (a)(11) of this section are applicable with respect to the determination of
premiums earned for taxable years beginning after December 31, 1999.
(13) In computing the amount of unabsorbed premium deposits which a mutual fire or flood insurance company described
in section 831(a)(3)(B) would be obligated to return to its policyholders at the close of its taxable year, the company must
use its own schedule of unabsorbed premium deposit returns then in effect. A copy of the applicable schedule must be
filed with the company's income tax return for each taxable year for which a computation based upon such schedule is
made. In addition, a taxpayer making such a computation must provide the following information for each taxable year
for which the computation is made:
(i) The amount of gross premiums received during the taxable year, and the amount of premiums paid for reinsurance
during the taxable year, on the policies described in section 831(a)(3)(B) and on other policies;
(ii) The amount of insurance written during the taxable year under the policies described in section 831(a)(3)(B) and under
other policies, and the amount of such insurance written which was reinsured during the taxable year. The information
required under this subdivision shall only be submitted upon the specific request of the district director for a statement
setting forth such information, and, if required, such statement shall be filed in the manner provided by this subparagraph
or in such other manner as is satisfactory to the district director;
(iii) The amount of premiums earned during the taxable year on the policies described in section 831(a)(3)(B) and on other
policies and the computations by which such amounts were determined, including sufficient information to support the
taxpayer's determination of the amount of unearned premiums on premium deposit plan and other policies at the beginning
and end of the taxable year, and the amount of unabsorbed premium deposits at the beginning and end of the taxable year
on policies described in section 831(a)(3)(B).
The information required by this subparagraph shall be set forth in a statement attached to the taxpayer's income tax return
for the taxable year for which such information is being provided. Such statement shall include the name and address of
the taxpayer, and shall be filed not later than the date prescribed by law (including extensions thereof) for filing the income
tax return for the taxable year.
(14) In computing “losses incurred” the determination of unpaid losses at the close of each year must represent actual
unpaid losses as nearly as it is possible to ascertain them.
(b) Losses incurred. Every insurance company to which this section applies must be prepared to establish to the satisfaction of
the district director that the part of the deduction for “losses incurred” which represents unpaid losses at the close of the taxable
year comprises only actual unpaid losses. See section 846 for rules relating to the determination of discounted unpaid losses.
These losses must be stated in amounts which, based upon the facts in each case and the company's experience with similar
cases, represent a fair and reasonable estimate of the amount the company will be required to pay. Amounts included in, or added
to, the estimates of unpaid losses which, in the opinion of the district director, are in excess of a fair and reasonable estimate will

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§ 1.832–4 Gross income., 26 C.F.R. § 1.832–4

be disallowed as a deduction. The district director may require any insurance company to submit such detailed information with
respect to its actual experience as is deemed necessary to establish the reasonableness of the deduction for “losses incurred.”
(c) Losses incurred are reduced by salvage. Under section 832(b)(5)(A), losses incurred are computed by taking into account
losses paid reduced by salvage and reinsurance recovered, the change in discounted unpaid losses, and the change in estimated
salvage and reinsurance recoverable. For purposes of section 832(b)(5)(A)(iii), estimated salvage recoverable includes all
anticipated recoveries on account of salvage, whether or not the salvage is treated, or may be treated, as an asset for state statutory
accounting purposes. Estimates of salvage recoverable must be based on the facts of each case and the company's experience
with similar cases. Except as otherwise provided in guidance published by the Commissioner in the Internal Revenue Bulletin,
estimated salvage recoverable must be discounted either—
(1) By using the applicable discount factors published by the Commissioner for estimated salvage recoverable; or
(2) By using the loss payment pattern for a line of business as the salvage recovery pattern for that line of business and by
using the applicable interest rate for calculating unpaid losses under section 846(c). For purposes of section 832(b)(5)(A)
and the regulations thereunder, the term “salvage recoverable” includes anticipated recoveries on account of subrogation
claims arising with respect to paid or unpaid losses.
(d) Increase in unpaid losses shown on annual statement in certain circumstances—(1) In general. An insurance company
that takes estimated salvage recoverable into account in determining the amount of its unpaid losses shown on its annual
statement is allowed to increase its unpaid losses by the amount of estimated salvage recoverable taken into account if the
company complies with the disclosure requirement of paragraph (d)(2) of this section. This adjustment shall not be used in
determining under section 846(d) the loss payment pattern for a line of business.
(2) Disclosure requirement. (i) In general. A company described in paragraph (d)(1) of this section is allowed to increase
the unpaid losses shown on its annual statement only if the company either—
(A) Discloses on its annual statement, by line of business and accident year, the extent to which estimated salvage
recoverable is taken into account in computing the unpaid losses shown on the annual statement filed by the company
for the calendar year ending with or within the taxable year of the company; or
(B) Files a statement on or before the due date of its Federal income tax return (determined without regard to
extensions) with the appropriate state regulatory authority of each state to which the company is required to
submit an annual statement. The statement must be contained in a separate document captioned “DISCLOSURE
CONCERNING LOSS RESERVES” and must disclose, by line of business and accident year, the extent to which
estimated salvage recoverable is taken into account in computing the unpaid losses shown on the annual statement
filed by the company for the calendar year ending with or within the taxable year of the company.
(ii) Transitional rule. For a taxable year ending before December 31, 1991, a taxpayer is deemed to satisfy the disclosure
requirement of paragraph (d)(2)(i)(B) of this section if the taxpayer files the statement described in paragraph (d)(2)(i)(B)
of this section before March 17, 1992.

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§ 1.832–4 Gross income., 26 C.F.R. § 1.832–4

(3) Failure to disclose in a subsequent year. If a company that claims the increase permitted by paragraph (d)(1) of this
section fails in a subsequent taxable year to make the disclosure described in paragraph (d)(2) of this section, the company
cannot claim an increase under paragraph (d)(1) of this section in any subsequent taxable year without the consent of the
Commissioner.
(e) Treatment of estimated salvage recoverable—(1) In general. An insurance company is required to take estimated salvage
recoverable (including that which cannot be treated as an asset for state statutory accounting purposes) into account in computing
the deduction for losses incurred. Except as provided in paragraph (e)(2)(iii) of this section, an insurance company must apply
this method of accounting to estimated salvage recoverable for all lines of business and for all accident years.
(2) Change in method of accounting—(i) If an insurance company did not take estimated salvage recoverable into account
as required by paragraph (c) of this section for its last taxable year beginning before January 1, 1990, taking estimated
salvage recoverable into account as required by paragraph (c) of this section is a change in method of accounting.
(ii) If a company does not claim the deduction under section 11305(c)(3) of the 1990 Act, the company must take into
account 13 percent of the adjustment that would otherwise be required under section 481 for pre–1990 accident years as
a result of the change in accounting method. This paragraph (e)(2)(ii) applies only to an insurance company subject to
tax under section 831.
(iii) If a company claims the deduction under section 11305(c)(3) of the 1990 Act and paragraph (f) of this section, the
company must implement the change in method of accounting for estimated salvage recoverable for post–1989 taxable
years pursuant to a “cut-off” method.
(3) Rule for overestimates. An insurance company is required under section 11305(c)(4) of the 1990 Act to include in
gross income 87 percent of any amount (adjusted for discounting) by which the section 481 adjustment is overestimated.
The rule is applied by comparing the amount of the section 481 adjustment (determined without regard to paragraph (e)(2)
(ii) of this section and any discounting) to the sum of the actual salvage recoveries and remaining undiscounted estimated
salvage recoverable that are attributable to losses incurred in accident years beginning before 1990. For any taxable year
beginning after December 31, 1989, any excess of the section 481 adjustment over this sum (reduced by amounts treated
as overestimates in prior taxable years pursuant to this paragraph (e)(3)) is an overestimate. To determine the amount to
be included in income, it is necessary to discount this excess and multiply the resulting amount by 87 percent.
(f) Special deduction—(1) In general. Under section 11305(c)(3) of the 1990 Act, an insurance company may deduct an
amount equal to 87 percent of the discounted amount of estimated salvage recoverable that the company took into account
in determining the deduction for losses incurred under section 832(b)(5) in the last taxable year beginning before January 1,
1990. A company that claims the special deduction must establish to the satisfaction of the district director that the deduction
represents only the discounted amount of estimated salvage recoverable that was actually taken into account by the company
in computing losses incurred for that taxable year.
(2) Safe harbor. The requirements of paragraph (f)(1) of this section are deemed satisfied and the amount that the company
reports as bona fide estimated salvage recoverable is not subject to adjustment by the district director, if—

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§ 1.832–4 Gross income., 26 C.F.R. § 1.832–4

(i) The company files with the insurance regulatory authority of the company's state of domicile, on or before September
16, 1991, a statement disclosing the extent to which losses incurred for each line of business reported on its 1989 annual
statement were reduced by estimated salvage recoverable,
(ii) The company attaches a statement to its Federal income tax return filed for the first taxable year beginning after
December 31, 1989, agreeing to apply the special rule for overestimates under section 11305(c)(4) of the 1990 Act to the
amount of estimated salvage recoverable for which it has taken the special deduction, and
(iii) In the case of a company that is a member of a consolidated group, each insurance company subject to tax under
section 831 that is included in the consolidated group complies with paragraph (f)(2)(ii) of this section with respect to its
special deduction, if any.
(3) Limitations on special deduction—(i) The special deduction under section 11305(c)(3) of the 1990 Act is available
only to an insurance company subject to tax under section 831.
(ii) An insurance company that claimed the benefit of the “fresh start” with respect to estimated salvage recoverable under
section 1023(e) of the Tax Reform Act of 1986 may not claim the special deduction allowed by section 11305(c)(3) of the
1990 Act to the extent of the estimated salvage recoverable for which a fresh start benefit was previously claimed.
(iii) A company that claims the special deduction is precluded from also claiming the section 481 adjustment provided in
paragraph (e)(2)(ii) of this section for pre–1990 accident years.
(g) Effective date. Paragraphs (b) through (f) of this section are effective for taxable years beginning after December 31, 1989.
Credits
[T.D. 6681, 28 FR 11129, Oct. 17, 1963; T.D. 8171, 53 FR 118, Jan. 5, 1988; T.D. 8266, 54 FR 38970, Sept. 22, 1989; T.D.
8293, 55 FR 9425, March 14, 1990; T.D. 8390, 57 FR 3132, Jan. 28, 1992; T.D. 8390, 57 FR 6353, Feb. 24, 1992; T.D. 8857,
65 FR 706, Jan. 6, 2000]
SOURCE: T.D. 6500, 25 FR 11402, Nov. 26, 1960; 25 FR 14021, Dec. 21, 1960, unless otherwise noted.
AUTHORITY: Sections 1.267A–1 through 1.267A–7 also issued under 26 U.S.C. 267A(e).; Section 1.1502–59A also issued
under 26 U.S.C. 1502.

Relevant Notes of Decisions (15)
View all 43
Notes of Decisions listed below contain your search terms.

Construction and application

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§ 1.832–4 Gross income., 26 C.F.R. § 1.832–4

Fact that amount of unpaid loss reserves set forth in insurer's annual statement was selected by professional management and not
tax-motivated, certified as reasonable by a qualified actuary, within a range of reasonable actuarial estimates, and accepted by a
state regulator did not establish that amount was fair and reasonable, within meaning of treasury regulation permitting deduction
of fair and reasonable estimates of such reserves in computation of income tax. 26 U.S.C.A. § 832(b)(5), (c)(4); 26 C.F.R. §
1.832–4(b). Minnesota Lawyers Mut. Ins. Co. & Subsidiaries v. C.I.R., 2002, 285 F.3d 1086. Internal Revenue
3978
Mutual insurance company's determination and reporting of unpaid losses and loss expenses to state insurance commission does
not limit IRS's obligation to enforce regulations and to examine and adjust, as necessary, amounts claimed for federal income
tax purposes. 26 U.S.C.A. § 832(b, c); 26 C.F.R. § 1.832-4(a)(5), (b). Mn. Lawyers Mutual Ins. Co. v. C.I.R., 2000, 2000 WL
889739, Unreported, affirmed 285 F.3d 1086. Internal Revenue
3978
Computation of losses
Fair and reasonable estimates of mutual insurance company's unpaid losses were determined using point estimate selected by
company's qualified actuary, since it was best available estimates. 26 U.S.C.A. § 832(b, c); 26 C.F.R. § 1.832-4(a)(5), (b). Mn.
Lawyers Mutual Ins. Co. v. C.I.R., 2000, 2000 WL 889739, Unreported, affirmed 285 F.3d 1086. Internal Revenue
3978
Adverse development addition to case reserves for unpaid loss reserves, as estimated by taxpayer's claim department, was
not necessary or reasonable, since there was no concrete evidence or analysis showing that claim department's estimates of
unpaid losses were low or failed to reflect potential adverse development, department did not use consistent actuarial methods
or standard actuarial loss development techniques in estimating loss reserves, and state certification of reasonability of unpaid
losses was not controlling for tax purposes; for each year at issue taxpayer's recent historical experience had proved its case
reserves were generous. 26 U.S.C.A. § 832(b, c); 26 C.F.R. § 1.832-4(a)(5), (b). Mn. Lawyers Mutual Ins. Co. v. C.I.R., 2000,
2000 WL 889739, Unreported, affirmed 285 F.3d 1086. Internal Revenue
3978
Although annual statement methodology is normally controlling on insurance company for unpaid losses at close of taxable
year, for tax purposes, when annual statement methodology is predicated upon use of estimates, those estimates must be the
best possible. 26 U.S.C.A. § 832(b, c); 26 C.F.R. § 1.832-4(a)(5), (b). Mn. Lawyers Mutual Ins. Co. v. C.I.R., 2000, 2000 WL
889739, Unreported, affirmed 285 F.3d 1086. Internal Revenue
3978
Estimated salvage recoverable
Savings relating to coordination of benefits (COB) between health insurer and other insurance companies, including savings
related to Medicare, did not constitute “estimated salvage recoverable,” for purposes of special loss deduction, where insurer
used “pursue and pay” approach to amounts for which companies were primarily responsible, and for which they did pay;
insurer had no expectation of payment for amounts paid by primary plans, and accordingly, no corresponding salvage right. 26
U.S.C.A. § 832(b)(5)(A); 26 C.F.R. § 1.832–4; Omnibus Budget Reconciliation Act of 1990, § 11305(a), 26 U.S.C.A. § 832.
Blue Cross and Blue Shield of Texas, Inc. v. C.I.R., 2003, 328 F.3d 770. Internal Revenue
3977
“Estimated salvage recoverable,” for purposes of special deduction under transition rules for enacted change in accounting
method for insurers, must consist of amounts insurers expect to recover from amounts that they will pay or have paid, based
on insurer's experience and facts of case. 26 U.S.C.A. § 832(b)(5)(A); 26 C.F.R. § 1.832–4; Omnibus Budget Reconciliation
Act of 1990, § 11305(a), 26 U.S.C.A. § 832. Blue Cross and Blue Shield of Texas, Inc. v. C.I.R., 2003, 328 F.3d 770. Internal
Revenue
3977
Health insurer's letter filed with Texas Department of Insurance did not satisfy requirements for safe harbor for special deduction
of portion of “estimated salvage recoverable,” under transition rules for enacted change in accounting method for insurers;
language in letter to regulator was too broad to adequately inform regulator of extent that insurer's incurred losses were reduced

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§ 1.832–4 Gross income., 26 C.F.R. § 1.832–4

by estimated salvage recoverable. 26 U.S.C.A. § 832(b)(5)(A); 26 C.F.R. § 1.832–4(f)(2); Omnibus Budget Reconciliation Act
of 1990, § 11305(c), 26 U.S.C.A. § 832. Blue Cross and Blue Shield of Texas, Inc. v. C.I.R., 2003, 328 F.3d 770. Internal
Revenue
3977
Issue of whether “absence of fraud” or “bona fide” should be appropriate standard for determining applicability of safe harbor
for special deduction of portion of “estimated salvage recoverable,” under transition rules for enacted change in accounting
method for insurers, was legal issue, and not factual issue. 26 U.S.C.A. § 832(b)(5)(A); 26 C.F.R. § 1.832–4(f)(2); Omnibus
Budget Reconciliation Act of 1990, § 11305(a), 26 U.S.C.A. § 832. Blue Cross and Blue Shield of Texas, Inc. v. C.I.R., 2003,
328 F.3d 770. Internal Revenue
3977
Health insurer could not, pursuant to safe harbor for special deduction of portion of “estimated salvage recoverable,” take
deduction for savings relating to coordination of benefits (COB) between insurer and other insurance companies, on sole basis
that insurer believed in good faith and without fraud that such items were “estimated salvage recoverable,” when they were
in fact not; safe harbor provision allowed insurer to qualify for benefit despite technical errors in amount claimed, not item
claimed. 26 U.S.C.A. § 832(b)(5)(A); 26 C.F.R. § 1.832–4(f)(2); Omnibus Budget Reconciliation Act of 1990, § 11305(a), 26
U.S.C.A. § 832. Blue Cross and Blue Shield of Texas, Inc. v. C.I.R., 2003, 328 F.3d 770. Internal Revenue
3977
“Savings” relating to coordination of benefits (COB) between health insurer and Medicare did not constitute “estimated salvage
recoverable” for purposes of special loss deduction; portion of claims covered by Medicare gave rise to no right of recovery or
salvage in favor of insurer, since Medicare-related benefits were excluded from coverage under insurer's plans. 26 U.S.C.A. §
832(b)(5)(A); 26 C.F.R. § 1.832-4(c); Omnibus Budget Reconciliation Act of 1990, § 11305(c), 104 Stat. 1388–451. Blue Cross
& Blue Shield of Texas, Inc. v. C.I.R., 2000, 115 T.C. 148, Unreported, affirmed 328 F.3d 770. Internal Revenue
3399
Health insurer's letter filed with Texas Department of Insurance did not satisfy requirements for safe harbor for special deduction
of portion of “estimated salvage recoverable”; letter to regulators did not disclose losses incurred in each of its lines of business,
and did not use the term estimated salvage recoverable. 26 U.S.C.A. § 832(b)(5)(A); 26 C.F.R. § 1.832-4(c); Omnibus Budget
Reconciliation Act of 1990, § 11305(c), 104 Stat. 1388–451. Blue Cross & Blue Shield of Texas, Inc. v. C.I.R., 2000, 115 T.C.
148, Unreported, affirmed 328 F.3d 770. Internal Revenue
3399
Review
The determination of a fair and reasonable estimate of an insurance company taxpayer's unpaid losses is essentially a valuation
issue and a question of fact; thus, the scope of the appellate court's inquiry is limited to deciding whether the Tax Court's
determination on the issue was clearly erroneous. 26 U.S.C.A. § 832(b)(5), (c)(4); 26 C.F.R. § 1.832–4(b). Minnesota Lawyers
Mut. Ins. Co. & Subsidiaries v. C.I.R., 2002, 285 F.3d 1086. Internal Revenue
4707
Fairness and reasonableness of an insurance company taxpayer's estimate of its unpaid loss reserves, for purpose of income tax
deduction, is a factual issue to be determined on a case-by-case basis, and no one factor should be considered conclusive. 26
U.S.C.A. § 832(b)(5), (c)(4); 26 C.F.R. § 1.832–4(b). Minnesota Lawyers Mut. Ins. Co. & Subsidiaries v. C.I.R., 2002, 285
F.3d 1086. Internal Revenue
3978
Tax court's determination that insurance company taxpayer's unpaid loss reserve estimate was not fair and reasonable was not
clearly erroneous, in view of taxpayer's failure to adequately explain basis of “adverse loss development” (ALD) portion of its
unpaid loss estimates, which comprised a significant portion of taxpayer's total unpaid loss estimates. 26 U.S.C.A. § 832(b)
(5), (c)(4); 26 C.F.R. § 1.832–4(b). Minnesota Lawyers Mut. Ins. Co. & Subsidiaries v. C.I.R., 2002, 285 F.3d 1086. Internal
Revenue
3978; Internal Revenue
4743.1
Current through February 3, 2022; 87 FR 6077

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§ 1.832–4 Gross income., 26 C.F.R. § 1.832–4

End of Document

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