Rev. Rul. 72-344

Advice has been requested as to the proper manner in which the increase or decrease in items referred to in section 810(c) of the Internal Revenue Code of 1954 are computed for purposes of section 381 of the Code by the acquiring life insurance company where such items are transferred in a complete liquidation of a subsidiary under section 332 of the Code.

S, a life insurance company wholly-owned by P, also a life insurance company, was liquidated during the taxable year 1967. All of the assets of S were distributed to P and P assumed all of the obligations, reserves, and liabilities of S. The liquidation under the provisions of section 332 of the Code and the basis of the property received was determined under section 334(b)(1) of the Code. P and S both had life insurance reserves, unearned premiums, unpaid losses not included in life insurance reserves, and other items described in section 810(c) of the Code. The transaction was one to which section 381 of the Code applies.

In computing gain or loss from operations under section 809(b) of the Code, a life insurance company must take into account as part of "gross amount" any net decrease in section 810(c) items pursuant to section 809(c)(2) of the Code, or must take into account as a deduction item any net increase in section 810(c) items pursuant to section 809(d)(2) of the Code.

Section 381(c) of the Code provides, in part, as follows:

(22) Successor Insurance Company.--If the acquiring corporation is an insurance company taxable under subchapter L, there shall be taken into account (to the extent proper to carry out the purposes of this section and of subchapter L, and under such regulations as may be prescribed by the Secretary or his delegate) the items required to be taken into account for purposes of subchapter L in respect of the distributor or transferor corporation.

Section 1.381(c)(22)-1 of the Income Tax Regulations provides, in part, as follows:

(a) Carryover requirement. If in a taxable year beginning after December 31, 1957, a distributor or transferor corporation which is a life insurance company (as defined in section 801(a)) is acquired by a corporation which is a life insurance company (as defined in section 801(a)), in a transaction to which section 381(a) applies, section 381(c)(22) provides that the acquiring corporation shall take into account the appropriate items which the distributor or transferor corporation was required to take into account for purposes of part I, subchapter L, chapter 1 of the Code. Furthermore, except as otherwise provided by this section, the acquiring corporation shall take into account the items described in paragraphs (2) through (21), other than paragraphs (14), (15), and (17), of section 381(c) and the regulations thereunder. For example, the acquiring corporation shall take into account the reserves described in section 810(c) distributed or transferred to it as of the close of the date of distribution or transfer by the distributor or transferor corporation in accordance with the provisions of section 381(c)(4) and the regulations thereunder. * * *

Section 1.381(c)(4)-1(a)(1) of the regulations provides, in pertinent part, as follows:

(ii) The acquiring corporation shall take into its accounts the dollar balances of those accounts of the distributor or transferor corporation representing items of income or deduction which, because of its method of accounting, were not required or permitted to be included or deducted by the distributor or transferor corporation in computing taxable income for taxable years ending on or before the date of distribution or transfer. The acquiring corporation shall similarly take into its accounts the dollar balances of those accounts of the distributor or transferor corporation which represent reserves in respect of which the distributor or transferor corporation has taken a deduction for taxable years ending on or before the date of distribution or transfer.* * *

Section 1.381(c)(4)-1(a)(ii) of the regulations sets forth the rules to carry out the purposes of section 381 of the Code and, with respect to those items that must be carried over for purposes of subchapter L, is applicable in transactions between life insurance companies to which section 381 of the Code applies.

Accordingly, it is held that to the opening balances of its own section 810(c) items, the acquiring life insurance company. P, shall add at the date of transfer, the dollar balances of the transferred section 810(c) items as of the close of the day of transfer. The difference between that sum and its closing balances of all the section 810(c) items shall be taken into account by P under section 809(c)(2) or section 809(d)(2) of the Code, as the case may be, in computing its gain and loss for the taxable year 1967, its first taxable year ending after the date of distribution or transfer.