Rev. Rul. 69-444

Advice has been requested whether an increase in reserves due to the addition of benefits during the taxable year under existing insurance policies is attributable to a change of basis in computing reserves within the meaning of sections 806(b) and 810(d) of the Internal Revenue Code of 1954.

In 1966 the taxpayer, a life insurance company taxable under section 802 of the Code, announced to certain of its policyholders that their policies would, at no increase in premium, henceforth carry an additional indemnity benefit should death result from a non-occupational vehicular accident. At the end of 1966 the taxpayer, in order to provide for the new contractual obligation, established out of surplus a reserve in an amount equal to the present value of the future unaccrued obligation. The total reserves attributable to each such policy were less than the gross contract premium.

Section 806(b) of the Code provides that if the basis for determining the amount of any item referred to in section 810(c) of the Code 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 determining taxable investment income under subpart B, part 1, of subchapter L, chapter 1 of the Code the amount of such item (1) as of the close of the taxable year shall be computed on the old basis, and (2) as of the beginning of the next taxable year shall be computed on the new basis.

Section 810(d)(1) of the Code provides, in pertinent part, that if the basis for determining any item referred to in subsection (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, and the amount of the item at the close of the taxable year, computed on the new basis, exceeds the amount of the item at the close of the taxable year, computed on the old basis, then so much of such excess as is attributable to contracts issued before the taxable year shall be taken into account for purposes of subpart C, part 1, subchapter L of the Code over the succeeding 10 taxable years, as a net increase to which section 809(d)(2) of the Code applies.

Sections 806(b) and 810(d) of the Code are applicable only if the basis for determining the amount of "any item" referred to in section 810(c) of the Code as of the close of the taxable year differs, in the case of section 806(b) of the Code, from the basis for such determination as of the beginning of the taxable year and, in the case of section 810(d) of the Code, from the basis for such determination as of the close of the preceding taxable year.

Section 1.801-5(c) of the Income Tax Regulations concerning the definition of total reserves requires detailed information to be filed with respect to all changes in basis for determining the amount of the life insurance reserves including, among other things, the mortality or morbidity tables, assumed rate of interest, method used in computing or estimating the reserve, and the amount of such reserve at the beginning and close of the taxable year computed on the old basis; and the mortality or morbidity table, assumed rate of interest, method used in computing the reserve and the amount of such reserve at the close of the taxable year computed on the new basis.

In the instant case, the additional indemnity benefit, although payable only as the result of a particular type of accidental death of the insured, is nevertheless insurance on life. Therefore the reserve established to provide for such additional benefit is a life insurance reserve (assuming it meets the definition therefor set forth in section 801(b) of the Code) and constitutes one of the items referred to in section 810(c) of the Code.

Since the new life benefit did not exist before the announcement that made the company contractually liable therefor, there was no reserve attributable to such benefit prior to the end of the taxable year in which the benefit was announced. In this respect the new reserve is similar to a reserve established at the end of the taxable year for any new business coming on the books during the taxable year. A life insurance reserve established at the end of the taxable year attributable to new policies sold during the taxable year has no effect on mortality tables, rates of interest, or actuarial assumptions upon which existing life insurance reserves are based and, therefore, does not constitute a change in basis with respect to items that did not exist at the beginning of the taxable year or the close of the preceding taxable year.

Similarly, a new life insurance reserve attributable to new life benefits for which the company was not contractually liable at the beginning of the taxable year likewise does not constitute a change in basis since it does not affect actuarial assumptions on which the life insurance reserves attributable to existing policies are predicated even though such new benefits are made a part of policies in force at the beginning of the taxable year. Accordingly, the increase in reserves to provide solely for the additional contractual obligation of the taxpayer pursuant to announced additional benefits during the taxable year under existing policies is not attributable to a change of basis in computing reserves within the meaning of section 806(b) and 810(d) of the Code.