REVENUE RULING 74-344
1974-2 C.B. 273

[IRS Annotation]
Life insurance company; eligibility for subchapter S election. A life insurance company does not qualify as a "small business corporation" as defined in section 1371(a) of the Code and is therefore not eligible to make an election under section 1372(a).

Rev. Rul. 74-344
Advice has been requested whether a life insurance company, as defined in section 801 of the Internal Revenue Code of 1954, may elect to be treated as a small business corporation under the provisions of subchapter S of the Code.

A stock life insurance company incorporated under State law has only one class of stock, less than ten individual shareholders, and otherwise meets the technical requirements under subchapter S of the Code to qualify as a small business corporation as defined in section 1371(a).

Section 1372(a) of the Code allows, with a certain exception not pertinent to this case, any small business corporation, as defined by section 1371(a), to elect not to be subject to the taxes imposed by chapter 1 of subtitle A of the Code. Its income is thus taxed directly to its shareholders by the rules provided in sections 1373 through 1375.

Under section 802(b) of the Code, life insurance company taxable income is the sum of (1) the lesser of taxable investment income or gain from operations, (2) if gain from operations exceeds taxable investment income, an amount equal to 50 percent of such excess, plus (3) the amount subtracted from the policyholders' surplus account for the taxable year, as determined under section 815.

Section 812(d)(1) of the Code as well as section 1.802-4(a) of the Income Tax Regulations provide that any amount taxable to a life insurance company under section 802(b)(3) as a result of the operation of section 815 shall not be reduced or offset by the application of the operations loss deduction allowed under section 812(a). The amounts subtracted from the policyholders' surplus account under section 815 are included in life insurance company taxable income under section 802(b)(3) regardless of whether there is a loss from operations as defined in section 809(b)(2) for such year. See section 1.802-4(b)(4) of the regulations.

Section 1374 of the Code provides the rules necessary for the net operating loss of a small business corporation as computed under section 172 to be passed through to the shareholders. Section 812(f) provides generally that subtitle A and subtitle F will apply with respect to section 812 operations loss deductions for life insurance companies in the same manner and to the same extent as such subtitles apply to section 172 net operating loss deductions. Subchapter S is within subtitle A of the Code.

If the technical rules applicable only to life insurance companies under part I of subchapter L of chapter 1 of the Code including section 812 and section 815 were applied to a small business corporation under subchapter S, there could result an offset of the section 812(c) current operations loss against amounts subtracted from the policyholders' surplus account, in the hands of the shareholders by operation of subchapter S. Such a result is clearly prohibited by section 812(d)(1) and section 1.802-4(a) of the regulations.

Furthermore, assuming section 812 of the Code is not substituted for section 172 where reference to that section is made in subchapter S, there would be no restriction under section 1373(d) upon a stock life insurance [274] company as an electing small business corporation from using the section 812 operations loss provision in computing its taxable income. This would allow such a stock life insurance company having made an election under section 1372(a) to carry operating losses back or forward to years for which an election has not been made. This is contrary to the intent of section 1373(d)(1) and section 172(h).

The provisions of part 1 of subchapter L of the Code are inconsistent with those of subchapter S in that the application of part 1 of subchapter L to subchapter S would produce a tax effect not intended by Congress in enacting part 1 of subchapter L. Accordingly, it is held that a life insurance company does not qualify as a "small business corporation" as defined in section 1371(a), and is therefore not eligible to make an election under section 1372(a).