IRS Revenue Ruling
1997-35

Code Sec. 809

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26 CFR 1.809-9: Computation of the differential earnings rate and the
recomputed differential earnings rate.

Mutual life insurance companies; differential earnings rate. The
differential earnings rate for 1996 and the recomputed differential
earnings rate for 1995 are set forth for use by mutual life insurance
companies to compute their income tax liabilities for 1996.


REV. RUL. 97-35

This revenue ruling contains the differential earnings rate for 1996
and the recomputed differential earnings rate for 1995. Under section 809
of the Internal Revenue Code, mutual life insurance companies use these
rates in computing their Federal income tax liability for taxable years
beginning in 1996. This revenue ruling also contains the figures on which
the determinations of these rates are based. Notice 97-17, 1997-10 I.R.B.
34, contained tentative determinations of these rates.

Section 809(a) provides that, in the case of any mutual life insurance
company, the amount of the deduction allowable under section 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 section 808 is
taken into account as a reduction in the closing balance of reserves under
subsections (a) and (b) of section 807. The "differential earnings amount"
for any taxable year 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 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 section 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 section 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 section 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 section 809(c) nor the recomputed
differential earnings rate that is used in computing the recomputed
differential earnings amount under section 809(f)(3) may be less than
zero.

For purposes of section 809, the differential earnings rate for 1996
and the rate used to calculate the recomputed differential earnings amount
for 1995 (the recomputed differential earnings rate for 1995), and the
figures on which these two rates are based are set forth in Table 1.


REV. RUL. 97-35 TABLE 1

DETERMINATION OF RATES TO BE USED FOR TAXABLE YEARS BEGINNING IN 1996

Differential earnings rate for 1996 6.447
Recomputed differential earnings rate for 1995 0
Imputed earnings rate for 1995 12.625
Imputed earnings rate for 1996 15.669
Base period stock earnings rate 18.221
Current stock earnings rate for 1996 17.303
Stock earnings rate for 1993 23.385
Stock earnings rate for 1994 11.437
Stock earnings rate for 1995 17.087
Average mutual earnings rate for 1994 9.222
Average mutual earnings rate for 1995 16.477


DRAFTING INFORMATION

The principal author of this revenue ruling is Katherine A. Hossofsky
of the Assistant Chief Counsel (Financial Institutions and Products). For
further information regarding this revenue ruling contact Ms. Hossofsky on
(202) 622-3477 (not a toll-free number).

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