Rev. Rul. 70-568

Advice has been requested whether pursuant to an election under section 818(c) of the Internal Revenue Code of 1954 all opening preliminary term reserves in the year of such election must be revalued or only those reserves with respect to policies remaining in force at the end of such year.

The taxpayer, a life insurance company taxable under section 802 of the Code, made a timely election under section 818(c) of the Code in its 1968 Federal income tax return to revalue its life insurance reserves computed on the preliminary term basis to the net level premium basis utilizing the exact method of revaluation. Pursuant to this election, the taxpayer revalued all of its preliminary term reserves held at the beginning of the year 1968 as well as at the end of that year. The taxpayer did not strengthen any portion of its life insurance reserves under sections 806(b) and 810(d)(1) of the Code during the taxable year 1968 by actually changing the basis in computing reserves.

Subsequent to filing its 1968 tax return, the taxpayer filed a claim for refund (Form 843) excluding from its reserves to be revalued at the beginning of the year 1968 those reserves with respect to policies that lapsed, were surrendered, or were otherwise not on hand as of December 31, 1968. The result of excluding such reserves from the revaluation is to decrease the amount of the taxpayer's reserves, as revalued, at the beginning of 1968 which has the effect of increasing the amount of the deduction in 1968 for "increases in certain reserves" under section 809(d)(2) of the Code by a like amount.

Section 818(c) of the Code permits a life insurance company issuing contracts with respect to which the life insurance reserves are computed on one of the recognized preliminary term bases to elect to revalue such reserves on the net level premium basis for purpose of determining the amount that may be taken into account as life insurance reserves for purposes of Part I, subchapter L of the Code, other than for purposes of section 801 of the Code (relating to the definition of a life insurance company).

Section 1.818-4(d)(1) of the Income Tax Regulations provides, in pertinent part, that for the first taxable year for which the election under section 818(c) of the Code applies, a company making such election must revalue all its life insurance reserves held with respect to contracts for which such reserves are computed on a preliminary term basis at the end of such taxable year.

Section 1.810-2(c)(3) of the regulations provides that if a company which computes its life insurance reserves on a preliminary term basis elects to revalue such reserves on a net level premium basis under section 818(c) of the Code, the sum of such reserves at the beginning and end of all taxable years (including the first taxable year) for which the election applies shall be the sum of such reserves computed on such net level premium basis. Section 1.810-3(e) of the regulations provides that an election under section 818(c) of the Code shall not be treated as change in basis in computing reserves under section 810(d)(1) of the Code.

The above regulations require a company making an election under section 818(c) of the Code to revalue all its life insurance reserves valued on a preliminary term basis at the beginning and end of the taxable year in which the election is made.

Accordingly, it is held that pursuant to the taxpayer's election under section 818(c) of the Code, all opening preliminary term reserves in the year of such election (1968) must be revalued irrespective of whether the policies to which such reserves are attributable were in force at the end of 1968.