Rev. Rul. 65-233

Advice has been requested as to the taxable year in which reserve strengthening occurs under section 1.818-2(c) of the Income Tax Regulations for purposes of sections 806(b) and 810(d) of the Internal Revenue Code of 1954.

X corporation is a life insurance company subject to the tax imposed by section 802 of the Code. In 1959, the Directors of X authorized and directed the officers to take all necessary steps to change the reserve basis for group annuity reserves and to initiate a program for strengthening reserves on individual contracts, both in accord with specifically stated recognized annuity tables and at specifically stated rates of interest. At the same time the Directors authorized and directed the transfer to the required annuity reserve of the amount necessary to accomplish the reserve strengthening. All the necessary steps to change the reserve basis for group annuity reserves and to strengthen the reserves on individual annuity contracts were completed by X prior to December 31, 1959.

The 1959 Annual Statement of X reflected the strengthened annuity reserves. Such statement was filed with the various State Insurance Commissioner in February 1960. The Insurance Commissioner of the State in which X is domiciled, certified to the accuracy of the valuation of the annuities on the new basis in March 1960.

Section 1.818-2(c)(1) of the regulations provides as follows:

(c) Change of basis in computing reserves. (1) Section 806(b) provides that if the basis for determining the amount of any item referred to in section 810(c) as of the close of the taxable year differs from the basis for such determination as of the beginning of the taxable year, then for purposes of subpart B, part I, subchapter L, chapter 1 of the Code (relating to the determination of taxable investment income), the amount of such item shall be the amount computed on the old basis as of the close of the taxable year and the amount computed on the new basis as of the beginning of the next taxable year. Similarly, section 810(d)(1) provides rules for determining the amount of the adjustment to be made for purposes of subpart C, part I, subchapter L, chapter 1 of the Code (relating to the determination of gain or loss from operations), if the basis for determining any item referred to in section 810(c) as of the close of any taxable year differs from the basis for such determination as of the close of the preceding taxable year. Under an accrual method of accounting, a change in the basis or method of computing the amount of liability of any item referred to in section 810(c) occurs in the taxable year in which all the events have occurred which determine the change in the basis or method of computing the amount of such liability and, in which, the amount thereof (whether increased or decreased) can be determined with reasonable accuracy.

Under State insurance statutes and regulations, life insurance companies are required to maintain reserves in order to meet their policy obligations. The requirements provide an objective standard for each company to apply in determining the legal minimum reserve necessary to meet its fixed liability to its policyholders. Thus, in establishing and computing any reserve required by law, the minimum standard for computation purposes is known by life insurance companies and the amount to be determined thereunder is known or knowable. It is the duty of the State Insurance Commissioner to ascertain the correctness of the formula and to enforce the State law with respect thereto in order to carry out his protective functions. This function, however, does not have any bearing upon the question of tax accrual with respect to an already fixed liability and, therefore, his approval with respect to the amount of the reserve, or the strengthening thereof, is more in the nature of a procedural function upon which accrual for tax purposes does not depend. See Continental Tie and Lumber Co. v. U.S. , 286 U.S. 290 (1932), Ct. D. 494, CB XI-1, 260 (1932).

In view of the above, it is concluded that, since X took all the necessary steps to strengthen its reserves by a change in the basis of computing such reserves prior to December 31, 1959, the `all events test' under section 1.818-2(c)(1) of the regulations was met in 1959.

Accordingly, under the facts of the instant case, the reserve strengthening by X occurred in 1959 for purposes of sections 806(b) and 810(d) of the Code.