REVENUE RULING 73-510
1973-2 C.B. 386

[IRS Annotation]
Insurance company reorganization; return and tax computation for conversion year. An insurance company subject to tax as a mutual insurance company under section [387] 821 of the Code was converted to a stock casualty insurance company pursuant to a section 368(a)(1)(F) reorganization. The stock company as the acquiring corporation should file one tax return on Form 1120 for the full taxable year in which the reorganization takes place. It should attach to it as a separate schedule Form 1120M showing the income tax liability of the mutual company computed to the date of the reorganization and reflecting the proper adjustment for the balance in the protection against loss account.

Rev. Rul. 73-510
Advice has been requested regarding the Federal income tax return filing requirements and method of computing the Federal income tax liability of a corporation for the taxable year in which it changes its corporate organization from a domestic mutual casualty insurance company, subject to the provisions of section 821 of the Internal Revenue Code of 1954, to a domestic stock casualty insurance company, subject to tax under section 831.

X is a mutual casualty insurance company subject to tax under section 821 of the Code. For all taxable years since its incorporation X has filed Federal income tax returns on Form 1120M. On May 15, 1969, pursuant to a reorganization, X was converted from a mutual casualty insurance company to a stock casualty insurance company subject to tax under section 831. To effect the conversion, a new corporation, Y, was formed. Stock in the new company having a par value of $50 per share was exchanged at face value for all the assets and liabilities of X, and was then distributed to the policyholder members of X in exchange for their equity interests in the old company. All the policyholders of X received Y stock, and Y stock was not issued to anyone other than policyholder members of X. Upon completion of the conversion, X ceased to exist.

After the reorganization was consummated, the new stock casualty insurance company provided the same insurance coverage, at the same premium rates, to the former policyholder members of X as they had previously received from X. In addition, the dollar amount of the equity interests of the former policyholder members of X was treated as earnings and profits in the new stock insurance company while the $50 par value stock issued to the former policyholder members of X was assigned a book value of zero by Y.

Section 368(a)(1)(F) of the Code provides that the term "reorganization" means a mere change in identity, form, or place of organization, however effected.

Section 381(b) of the Code, relating to carryovers in certain corporate acquisitions, provides, in part, as follows:

(b) Operating Rules.—Except in the case of an acquisition in connection with a reorganization described in subparagraph (F) of section 368(a)(1)—

(1) The taxable year of the distributor or transferor corporation shall end on the date of distribution or transfer.

* * * * *

Rev. Rul. 57-276, 1957-1 C.B. 126, holds, in essence, that where a corporate reorganization comes within the provisions of section 368(a)(1)(F) of the Code, pursuant to section 381(b), that part of the taxable year before the reorganization, and that part of the taxable year after the reorganization, constitute a single taxable year of the acquiring corporation. Based on this conclusion, Rev. Rul. 57-276 holds that an income tax return is required to be filed for the full taxable year by the acquiring corporation, but that the transferor corporation is not required to file an income tax return for any portion of such year.

Rev. Rul. 69-405, 1969-2 C.B. 240, involves two situations in which a company ceased to be a life insurance company during the taxable year but continued in existence for the remainder of the taxable year. The Revenue Ruling holds that in the situation where a company retains some assets, after disposition of its life insurance business and life insurance reserves, such company would have only one taxable year and would file one return, Form 1120, for such year. However, for the portion of the taxable year during which it was a life insurance company, it would compute its income under subchapter L of the Code. For this purpose, it should attach Form 1120L as a schedule to the company's Form 1120.

In the instant case, it is concluded that the transfer by X of all its assets and liabilities to Y in exchange for Y stock incident to the conversion of X to a stock company was a mere change in form, and, thus, was a reorganization under section 368(a)(1)(F) of the Code in which X, as a mutual insurance company, is the transferor corporation, and Y, as a stock casualty insurance company, is the acquiring corporation. It follows that the conclusions of Rev. Rul. 57-276 and Rev. Rul. 69-405, cited herein, are applicable to this case.

Accordingly, it is held that Y, the acquiring stock casualty insurance company, must file one tax return, Form 1120, for the full taxable year in which the reorganization was consummated, and X, the transferor corporation, is not required to file an income tax return for any portion of such year. It is also held that for that portion of the taxable year in which X was a mutual casualty insurance company, the income from such business should be computed under the provisions of Part II of subchapter L, sections 821 through 826 of the Code, on Form 1120M attached as a schedule to Y's Form 1120 filed for the full taxable year. The tax computed is transferred to Form 1120. Thus, the Federal income tax liability for the [388] taxable year is reflected on Form 1120 and is composed of the tax computed on Form 1120M and the tax computed on Form 1120.

In addition, the balance in the protection against loss account, described in section 824 of the Code, at the close of the taxable year preceding the taxable year in which the reorganization was consummated shall be subtracted from that account in such preceding taxable year by X, as the mutual insurance company, as provided in section 824(d)(4) and included in mutual insurance company taxable income for that year in accordance with section 821(b)(1)(C).