n-01-24.pdf

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# Differential Earnings Rate for Mutual Life Insurance Companies

Notice 2001-24

This notice publishes a tentative determination under § 809
of the Internal Revenue Code of the "differential earnings rate"
for 2000 and the rate that is used to calculate the "recomputed
differential earnings amount" for 1999. (The latter rate is
referred to in this notice as the "recomputed differential
earnings rate" for 1999.) These rates are used by mutual life
insurance companies to calculate their federal income tax
liability for taxable years beginning in 2000.

BACKGROUND

Section 809 (a) provides that, in the case of any mutual life
insurance company, the amount of the deduction allowable under
§ 808 for policyholder dividends is reduced (but not below zero)
by the "differential earnings amount." Any excess of the
differential earnings amount over the amount of the deduction
allowable under § 808 is taken into account as a reduction in the
closing balance of reserves under subsections (a) and (b) of
§ 807. The "differential earnings amount" for any taxable year

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is the amount equal to the product of (a) the life insurance
company's average equity base for the taxable year multiplied by
(b) the "differential earnings rate" for that taxable year. The
"differential earnings rate" for the taxable year is the excess
of (a) the "imputed earnings rate" for the taxable year over (b)
the "average mutual earnings rate" for the second calendar year
preceding the calendar year in which the taxable year begins.
The "imputed earnings rate" for any taxable year is the amount
that bears the same ratio to 16.5 percent as the "current stock
earnings rate" for the taxable year bears to the "base period
stock earnings rate."

Section 809 (f) provides that, in the case of any mutual life
insurance company, if the "recomputed differential earnings
amount" for any taxable year exceeds the differential earnings
amount for that taxable year, the excess is included in life
insurance gross income for the succeeding taxable year. If the
differential earnings amount for any taxable year exceeds the
recomputed differential earnings amount for that taxable year,
the excess is allowed as a life insurance deduction for the
succeeding taxable year. The "recomputed differential earnings
amount" for any taxable year is an amount calculated in the same
manner as the differential earnings amount for that taxable year,
except that the average mutual earnings rate for the calendar
year in which the taxable year begins is substituted for the

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average mutual earnings rate for the second calendar year
preceding the calendar year in which the taxable year begins.
The stock earnings rates and mutual earnings rates taken
into account under § 809 generally are determined by dividing
statement gain from operations by the average equity base. For
this purpose, the term "statement gain from operations" means
"the net gain or loss from operations required to be set forth in
the annual statement, determined without regard to Federal income
taxes, and ... properly adjusted for realized capital gains and
losses .... " See § 809 (g) (1). The term "equity base" is defined
as an amount determined in the manner prescribed by regulations
equal to surplus and capital increased by the amount of
nonadmitted financial assets, the excess of statutory reserves
over the amount of tax reserves, the sum of certain other
reserves, and 50 percent of any policyholder dividends (or other
similar liability) payable in the following taxable year. See
§ 809(b) (2), (3), (4), (5) and (6). Section 1.809-10 of the
Income Tax Regulations provides that the equity base includes
both the asset valuation reserve and the interest maintenance
reserve for taxable years ending after December 31, 1991.

Section 1.809-9 (a) of the regulations provides that neither
the differential earnings rate under § 809 (c) nor the recomputed
differential earnings rate that is used in computing the

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recomputed differential earnings amount under § 809 (f) (3) may be
less than zero.

Rev. Rul. 99-3, 1999-1 C.B. 313, provides that a life
insurance subsidiary of a mutual holding company is not a mutual
life insurance company for which the deduction for policyholder
dividends is reduced pursuant to §§ 808 (c) (2) and 809.

As described above, the differential earnings rate for 2000
and the recomputed differential earnings rate for 1999 affect the
income and deductions reported by mutual life insurance companies
on their federal income tax returns for the 2000 taxable year.

Data necessary to determine the tentative differential
earnings rate for 2000 and the tentative recomputed differential
earnings rate for 1999 have been compiled from returns filed by
mutual life insurance companies and certain stock life insurance
companies. The Internal Revenue Service is currently examining
these returns. This examination will not be completed before the
March 15, 2001, due date for filing 2000 calendar year returns.

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# NOTICE OF TENTATIVE RATES

This notice publishes a tentative determination of the
differential earnings rate for 2000 and of the recomputed
differential earnings rate for 1999. This notice also publishes
a tentative determination of the rates on which the calculation
of the differential earnings rate for 2000 and the recomputed
differential earnings rate for 1999 are based. The final
determination of these rates is expected to be published before
September 1, 2001.

The tentative determination of the differential earnings
rate for 2000 and the tentative determination of the recomputed
differential earnings rate for 1999 that are published in this
notice should be used by mutual life insurance companies to
calculate the amount of tax liability for taxable years beginning
in 2000 (in the case of companies that file returns before
publication of the final determination of these rates) or to
calculate the amount of estimated unpaid tax liability for
taxable years beginning in 2000 (in the case of companies that
are allowed an extension of time to file returns). Companies
that file returns before publication of the final determination
of these rates should file amended returns after the final
determination of these rates is published. If there is a failure
to pay tax for a taxable year beginning in 2000 and the failure
is attributable to a difference between (a) the tentative

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determination of the differential earnings rate for 2000 and
recomputed differential earnings rate for 1999 and (b) the final
determination of these rates, then any such failure through
September 17, 2001, will be treated as due to reasonable cause
and will not give rise to any addition to tax under § 6651.

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The tentative determination of the rates is set forth in
Table 1.

Notice 2001- 24

Table 1

Tentative Determination of Rates To Be Used For Taxable Years Beginning in 2000

Differential earnings rate for 2000 0

Recomputed differential earnings rate for 1999 0

Imputed earnings rate for 1999

15.815

Imputed earnings rate for 2000

15.358

Base period stock earnings rate

18.221

Current stock earnings rate for

2000 16.960

Stock earnings rate for 1997

19.321

Stock earnings rate for 1998

15.836

Stock earnings rate for 1999

15.724

Average mutual earnings rate for 1998 16.011

Average mutual earnings rate for 1999 16.164

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# DRAFTING INFORMATION

The principal author of this notice is Katherine A.
Hossofsky of the Office of the Associate Chief Counsel (Financial
Institutions and Products) . For further information regarding
this notice, contact Ms. Hossofsky on (202) 622-3477 (not a toll-
free call) .