REVENUE RULING 72-115
1972-1 C.B. 200

[IRS Annotation]
Reserves for unpaid losses established for certain life insurance contracts upon notification of an insured's death are not includible in the fraction to determine qualification as a life insurance company; Revenue Ruling 70-415 superseded.

Rev. Rul. 72-115
Advice has been requested whether reserves for unpaid losses relating to life insurance contracts issued by the taxpayer, an insurance company, are includible in the numerator and the denominator of the qualifying fraction under sections 801(a) and 801(c) of the Internal Revenue Code of 1954 respectively in determining whether it qualifies as a life insurance company for Federal income tax purposes.

In addition to a substantial cancellable health and accident insurance business written during the taxable year, the taxpayer issues policies of ordinary life and group life insurance that cannot be cancelled by the insurer. With respect to these life insurance policies, an unpaid loss reserve is established by the taxpayer on a case by case basis equal to the face amount of the coverage upon notification of the insured's death.

Section 801(a) of the Code provides that the term "life insurance company" means an insurance company which is engaged in the business of issuing life insurance and annuity contracts (either separately or combined with health and accident insurance), or noncancellable contracts of health and accident insurance, if (1) its life insurance reserves, plus (2) unearned premiums, and unpaid losses (whether or not ascertained), on noncancellable life, health, or accident policies not included in life insurance reserves, comprise more than 50 percent of its total reserves as defined in section 801(c) of the Code.

Section 801(b)(1) of the Code provides that for purposes of part I, subchapter L of the Code, the term "life insurance reserves" means amounts (A) which are computed or estimated on the basis of recognized mortality or morbidity tables and assumed rates of interest, and (B) which are set aside to [201] mature or liquidate, either by payment or reinsurance, future unaccrued claims arising from life insurance, annuity, and noncancellable health and accident insurance contracts (including life insurance or annuity contracts combined with noncancellable health and accident insurance) involving at the time with respect to which the reserve is computed, life, health, or accident contingencies. In section 801(b)(2) of the Code it is provided in pertinent part that life insurance reserves must be required by law.

Section 801(c) of the Code provides, in pertinent part, that the term "total reserves" means (1) life insurance reserves, (2) unearned premiums, and unpaid losses (whether or not ascertained), not included in life insurance reserves, and (3) all other insurance reserves required by law.

Section 1.801-3(c) of the Income Tax Regulations provides, in pertinent part, that the term "noncancellable life, health, or accident insurance policy" means a health and accident contract, or a health and accident contract combined with a life insurance or annuity contract, which the insurance company is under an obligation to renew or continue at a specified premium and with respect to which a reserve in addition to the unearned premiums must be carried to cover that obligation.

In order to be included in the numerator of the qualifying fraction as set forth in section 801(a) of the Code, the reserves in question must either be (1) life insurance reserves as defined in section 801(b) of the Code, or (2) unearned premiums, and unpaid losses on noncancellable life, health, or accident policies not included in life insurance reserves.

Reserves for unpaid losses would not meet the test of life insurance reserves under section 801(b)(1) of the Code since they are neither computed nor estimated on the basis of recognized mortality or morbidity tables, nor are they set aside to mature or liquidate future unaccrued claims. Instead, such reserves represent accrued liabilities in that they were not established until the death of the insureds. See Revenue Ruling 67-129, C.B. 1967-1, 170.

Also, such reserves for unpaid losses would not be includible under section 801(a)(2) of the Code as unpaid losses on noncancellable life, health and accident policies. The phrase "noncancellable life, health, or accident insurance" as used in section 801(a)(2) of the Code means a policy that provides not only health and accident benefits but also a lump sum payment in the event of death during the policy period. The word "life" is used in this phrase so as not to disqualify a company from satisfying the definition of a life insurance company merely because it issues such policies.

In order to be included in the denominator of the qualifying fraction as set forth in section 801(c) of the Code, the reserves in question must either be (1) life insurance reserves, (2) unearned premiums and unpaid losses (whether or not ascertained), not included in life insurance reserves, or (3) all other insurance reserves required by law.

Reserves for unpaid losses do not meet the test of life insurance reserves under section 801(c)(1) of the Code for the same reasons stated above that indicated that such reserves could not be treated as life insurance reserves under section 801(a)(1) of the Code.

Also, reserves for unpaid losses could not constitute other insurance reserves under section 801(c)(3) of the Code for the reason that they represent accrued liabilities that were not established until the death of the insured.

In addition, such reserves for unpaid losses would not be includible under section 801(c)(2) of the Code as such section has reference only to unearned premiums and unpaid losses on cancellable and noncancellable health and accident contracts and does not pertain to straight life insurance contracts.

Accordingly, it is concluded that the reserves for unpaid losses relating to ordinary life and group life insurance contracts are not includible in either the numerator or the denominator of the qualifying fraction under sections 801(a) and 801(c) of the Code.

Revenue Ruling 70-415, C.B. 1970-2, 135, which covered only the numerator question is hereby superseded.