IRS Revenue Ruling
1999-3

 
 Code Sec. 809

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Section 809. This ruling 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 sections
808(c)(2) and 809 of the Code.


REV. RUL. 99-3

ISSUE

Whether a life insurance subsidiary of a mutual holding company is a
mutual life insurance company for which the deduction for policyholder
dividends is reduced pursuant to sections 808(c)(2) and 809 of the
Internal Revenue Code?


FACTS

For valid business reasons, MLIC, a mutual life insurance company,
restructures under the law of State X into three separate entities -- a
mutual holding company (MHC), a stock holding company (SHC), and a stock
life insurance company (SLIC). MHC initially owns all of the stock of SHC,
which owns all the stock of SLIC. MLIC and SLIC are life insurance
companies as defined in section 816(a) of the Code. Neither MHC nor SHC is
an insurance company for federal income tax purposes.

In connection with the restructuring, the policyholders' interests as
members of MLIC are replaced by memberships in MHC. The policyholders'
contractual rights as customers of MLIC remain with the reorganized life
insurance company (SLIC).

SHC or SLIC may issue stock to unrelated persons. However, MHC must at
all times own at least a majority of the voting shares of SHC, which must
at all times own at least a majority of the voting shares of SLIC.
Throughout SLIC's first taxable year following the reorganization, MHC
continues to own all the stock of SHC, which owns all the stock of SLIC.

The restructuring is entered into for valid business reasons, such as
providing the resulting entities with flexibility to raise capital in
subsequent years through the issuance of stock by SHC or SLIC.


ANALYSIS

Sections 801 through 818 of the Code (Subchapter L, Part I) provide
rules that govern the taxation of life insurance companies. Section
801(a)(1) imposes a tax "on the life insurance company taxable income of
every life insurance company." Section 801(b) defines "life insurance
taxable income" as "life insurance gross income, reduced by life insurance
deductions." "Life insurance gross income" is comprised of (1) premiums,
(2) decreases in certain reserves, and (3) other amounts. Section 803(a).
"Life insurance deductions" include "the general deductions provided in
section 805." Section 804. Among the general deductions allowed by section
805 is "the deduction for policyholder dividends (determined under section
808(c))." Section 805(a)(3).

Section 808(c) provides as follows:

(c) AMOUNT OF DEDUCTION.--

(1) IN GENERAL. -- Except as limited by paragraph (2), the deduction
for policyholder dividends for any taxable year shall be an amount equal
to the policyholder dividends paid or accrued during the taxable year.

(2) REDUCTION IN CASE OF MUTUAL COMPANIES. -- In the case of a mutual
life insurance company, the deduction for policyholder dividends for any
taxable year shall be reduced by the amount determined under section 809.


See also section 809(a)(1).

Section 809 identifies the nondeductible portion of policyholder
dividends issued by mutual companies to their policyholders as the owners
of the company. In American Mutual Life Ins. Co. v. United States, 43 F.3d
1172, 1173 (8th Cir. 1994), cert. denied, 516 U.S. 930 (1995), the court
explained the provision as follows:

Section 809 is an attempt to isolate the taxable component of dividends
that mutual life insurance companies . . . make to their policyholders.
Mutual life insurance companies make dividends to their policyholders that
contain both taxable and untaxable components. The taxable component is
the distribution of earnings to owners; the untaxable component consists
of price rebates to customers. The dividend that mutual life insurance
policyholders receive is not easily broken into its components because
mutual life insurance companies do not have separate groups of stockholder
owners and policy-holding customers. The customers own the company. By
contrast, stock life insurance companies pay earnings to stockholders as
nondeductible dividends, and refunds to their insurance policyholders as
deductible price rebates.


Similar explanations of section 809 can be found in Indianapolis Life Ins.
Co. v. United States, 115 F.3d 430, 431 (7th Cir. 1997); CUNA Mutual Life
Ins. Co. v. United States, 39 Fed. Cl. 660, 661 (1997); and Pan American
Life Ins. Co. v. United States, Civil No. 96-343 (E.D. La. 1997).

Except as otherwise provided in section 809(h) (relating to stock life
insurance subsidiaries of mutual life insurance companies), section 809 by
its terms applies only to mutual life insurance companies. Subsidiaries of
mutual life insurance companies are generally treated as stock life
insurance companies in computing the subsidiaries' entity level income tax
liability. H.R. Rep. No. 432 (Pt. 2), 98th Cong., 2d Sess., 1425-26
(1984); S. Prt. No. 169 (Vol. 1), 98th Cong., 2d Sess., 553 (1984).

Neither the Code nor the Income Tax Regulations define the term "mutual
life insurance company." In Pan American Life Ins. Co., the only case
interpreting "mutual life insurance company" for purposes of section 809,
the court determined that the critical feature distinguishing stock and
mutual life insurance companies is that "mutual companies do not have
stockholders."

In the present case, throughout SLIC's first taxable year following the
reorganization, MHC owns all the stock of SHC, which owns all the stock of
SLIC. As ownership of SLIC is evidenced not by membership interests on the
part of its policyholders, but by stock owned by SHC, SLIC is not a mutual
life insurance company for purposes of section 809.


CONCLUSION

In determining its life insurance company taxable income for the first
taxable year following the reorganization, SLIC is not a mutual life
insurance company for which the deduction for policyholder dividends is
reduced pursuant to sections 808(c)(2) and 809 of the Code. This
conclusion would apply to subsequent taxable years if SLIC continues to be
a subsidiary of a mutual holding company or other corporation. This
conclusion also would apply if MHC, not SHC, owned all of the stock of
SLIC.


CONTACT INFORMATION

For information regarding this revenue ruling, contact Branch 4 of the
Office of Assistant Chief Counsel (Financial Institutions & Products) at
(202) 622-3970 (not a toll-free call).

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