26 CFR 1.806-3 – Certain changes in reserves and assets
(a) In general. For purposes of part I, subchapter L, chapter 1 of the Code, section 806(a) provides that if there is a change in life insurance reserves (as defined in section 801(b)), during the taxable year, which is attributable to the transfer between the taxpayer and another person of liabilities under contracts taken into account in computing such life insurance reserves, then the means of such reserves, and the mean of the assets, shall be appropriately adjusted to reflect the amounts involved in such transfer. For example, the adjustments required under section 806(a) are applicable to transfers in which one life insurance company purchases or acquires a part or all of the business of another life insurance company under an arrangement whereby the purchaser or transferee becomes solely liable on the contracts transferred. This provision shall apply in the case of assumption reinsurance but not in the case of indemnity reinsurance or reinsurance ceded. Thus, no adjustments shall be required under section 806(a) when, in the ordinary course of business, an indemnity reinsurance contract is entered into with another company (on a yearly renewable term basis, on a coinsurance basis, or otherwise) whereby there is a sharing of risks under one or more individual contracts. It will be necessary for each life insurance company participating in a transfer described in section 806(a) to make the adjustments required by such section. Such adjustments shall be made without regard to whether or not the transferor of the liabilities was the original insurer.
(b) Manner in which adjustments shall be made—(1) Daily basis. The means of the life insurance reserves, and the mean of the assets, shall be appropriately adjusted, on a daily basis, to reflect the amounts involved in a transfer described in section 806(a) and paragraph (a) of this section. The transferor and the transferee shall be treated as having held such life insurance reserves and assets for a fraction of the year in which the transfer occurs.
(2) Determination of period held. In determining the fraction which represents the fractional year that such reserves and assets were held, the numerator shall be the number of days during the taxable year which such reserves and assets were actually held, and the denominator shall be the number of days in the calendar year of the transfer. In computing the period held for purposes of the numerator, the day on which such reserves and assets are transferred is included by the transferor and excluded by the transferee.
(3) Adjustments to the means of life insurance reserves and assets not transferred. All life insurance reserves and assets transferred during the taxable year, within the meaning of section 806(a), shall be excluded from the beginning and end of the taxable year balances of the transferor and transferee, respectively. The amount of assets to be excluded from the beginning of the taxable year balance of the transferor shall be an amount equal to the value of such reserves at the beginning of the taxable year. The amount of assets to be excluded from the end of the taxable year balance of the transferee shall be an amount equal to the value of such reserves at the end of the taxable year. The means of the life insurance reserves and assets not so transferred shall be determined in the ordinary manner, that is, the arithmetic means. There shall be added to these means an amount to appropriately adjust them, on a daily basis, for the life insurance reserves and assets that were transferred during the taxable year. This adjustment shall be determined by multiplying (i) the mean of the transferred life insurance reserves (or assets, as the case may be) at the beginning of the taxable year (or, if acquired later, at the beginning of the period held as defined in subparagraph (2) of this paragraph) and the end of the period held as defined in subparagraph (2) of this paragraph (or at the end of the taxable year, if held at such time) by (ii) the fraction determined under subparagraph (2) of this paragraph.
(4) Examples. The application of this paragraph may be illustrated by the following examples:
Reserves at 1-1-58 $1,000,000 Exclude reserves (at beginning of year) on contracts transferred to N 60,000 Recomputed amount at 1-1-58 $940,000 Reserves at 12-31-58 1,040,000 Sum 1,980,000 Mean 990,000 Adjustment for reserves transferred on 8-14-58: Reserves at 1-1-58 on contracts transferred to N $60,000 Reserves at 3-14-58 on such contracts 64,000 Sum 124,000 Mean 62,000 Fraction taken into account 73/365 Adjustment (73/365 × $62,000) $12,400 Mean of M’s life insurance reserves after section 806(a) adjustment 1,002,400 Assets at 1-1-58 $1,300,000 Exclude assets (at beginning of year) on contracts transferred to N 60,000 Recomputed amount at 1-1-58 $1,240,000 Assets at 12-31-58 1,380,000 Sum 2,620,000 Mean 1,310,000 Adjustments for assets transferred on 3-14-58: Assets at 1-1-58 on contracts transferred to N $60,000 Assets at 3-14-58 on such contracts 64,000 Sum 124,000 Mean 62,000 Fraction taken into account 73/365 Adjustment (73/365 × $62,000)? $12,400 Mean of M’s assets after section 806(a) adjustment 1,322,400 Reserves at 1-1-58 $6,000,000 Reserves at 12-31-58 $6,400,000 Exclude reserves (at end of year) on contracts transferred from M 80,000 Recomputed amount at 12-31-58 6,320,000 Sum 12,320,000 Mean 6,160,000 Adjustment for reserves transferred on 3-14-58: Reserves at 3-14-58 on contracts transferred from M $64,000 Reserves at 12-31-58 on such contracts 80,000 Sum 144,000 Mean 72,000 Fraction taken into account 292/365 Adjustment (292/365 × $72,000) 57,600 Mean of N’s life insurance reserves after section 806(a) adjustment 6,217,600 Assets at 1-1-58 $6,800,000 Assets at 12-31-58 $7,300,000 Exclude assets (at end of year) on contracts transferred from M 80,000 Recomputed amount at 12-31-58 7,220,000 Sum 14,020,000 Mean 7,010,000 Adjustments for assets transferred on 3-14-58: Assets at 3-14-58 on contracts transferred from M $64,000 Assets at 12-31-58 on such contracts 80,000 Sum 144,000 Mean 72,000 Fraction taken into account 292/365 Adjustment (292/365 × $72,000) $57,600 Mean of N’s assets after section 806(a) adjustment 7,067,600