REVENUE RULING 78-117
1978-1 C.B. 214

[IRS Annotation]
Casualty insurance company; dividends receivable. An accrual-method casualty insurance company taxable under section 831 of the Code is not required to accrue at the end of its taxable year and include in the computation of investment income under section 832(b)(2) dividends that have not been actually or constructively received.

Rev. Rul. 78-117
Advice has been requested whether a casualty insurance company, taxable under section 831 of the Internal Revenue Code of 1954, is required to accrue dividends at the end of its taxable year and to include such dividends in the computation of its investment income under section 832(b)(2) when the dividends have not been actually or constructively received.

The taxpayer is a casualty insurance company taxable under section 831 of the Code. The taxpayer operates solely as a reinsurer. Although the taxpayer generally uses an accrual method of accounting subject to the provisions of subchapter L, for the calendar year 1974 and all prior taxable years, the taxpayer reported dividend income as the dividends were received, that is, on the cash receipts and disbursements method of accounting.

Section 832(b)(2) of the Code provides that "The term 'investment income' means the gross amount of income earned during the taxable year [215] from interest, dividends, and rents, computed as follows: To all interest, dividends, and rents received during the taxable year, add interest, dividends, and rents due and accrued at the end of the taxable year, and deduct all interest, dividends, and rents due and accrued at the end of the preceding taxable year."

Because section 832(b)(2) of the Code requires the taxpayer to include all due and accrued dividends in its computation of investment income, it is necessary to consider the question when do dividends accrue under normal tax treatment.

Section 451(a) of the Code sets forth the general rule that the amount of any item of gross income shall be included in gross income for the taxable year in which received by the taxpayer, unless, under the method of accounting used in computing taxable income, such amount is to be properly accounted for as of a different period. Section 1.451-1(a) of the Income Tax Regulations provides, in part, that under the accrual method of accounting, income is includable in gross income when all the events have occurred that fix the right to receive such income and the amount thereof can be determined with reasonable accuracy.

Section 316(a) of the Code defines the term "dividend" as any distribution of property made by a corporation to its shareholders out of its earnings and profits accumulated after February 28, 1913, or out of its earnings and profits of the taxable year without regard to the amount of the earnings and profits at the time the distribution was made. Under section 317(a) the term "property" means money, securities, and any other property; except that such term does not include stock in the corporation making the distribution or rights to acquire such stock. Thus, a dividend can be paid either in cash or in property.

While section 451 of the Code sets forth the general rule for inclusions in gross income, section 301 provides specific rules for the tax treatment of distributions of property by a corporation to a shareholder, such as dividends. Section 301(b)(1)(B) provides, in part, that the amount of any distribution shall be, if the shareholder is a corporation, the amount of money received, plus whichever of the following is the lesser: (1) the fair market value of the other property received; or (2) the adjusted basis (in the hands of the distributing corporation immediately before the distribution) of the other property received, increased in the amount of gain to the distributing corporation that is recognized under specified sections of the Code. Section 301(b)(3) provides that for purposes of section 301, the fair market value shall be determined as of the date of the distribution.

Section 1.301-1(b) of the regulations provides further general guidelines for the time of inclusion in gross income of distributions of property by a corporation to a shareholder. Section 1.301-1(b) provides, in part, that a distribution made by a corporation to its shareholders shall be included in the gross income of the distributees when the cash or other property is unqualifiedly made subject to their demands. However, if such distribution is a distribution other than in cash, the fair market value of the property shall be determined as of the date of distribution without regard to whether such date is the same as that on which the distribution is includable in gross income.

Under the language of section 1.301-1(b) of the regulations, taxpayers that use the accrual method of accounting and taxpayers that use the cash receipts and disbursements method of accounting are subject to the same rule for including dividends in income upon receipt. See Avery v. Commissioner, 292 U.S. 210 (1934), XIII-1 C.B. 131 (1934); Tar Products Corporation v. Commissioner, 130 F.2d 866 (3d Cir. 1942); Commissioner v. American Light & Traction Company, 156 F.2d 398 (7th Cir. 1946), aff'g 3 T.C. 1048 (1944), acq. 1946-2 C.B. 1; Dynamics Corporation of America v. United States, 392 F.2d 241 (Ct. Cl. 1968); and Allied Fidelity Corporation v. Commissioner, 66 T.C. 1068 (1976). The cited cases point out that section 1.301-1(b) makes no reference to the shareholder's accounting method. In fact, sections 301, 116, and 243 of the Code all speak of distributions or dividends "received" by the shareholder, implying that there is to be no distinction between taxpayers that use the accrual method of accounting and taxpayers that use the cash receipts and disbursements method of accounting.

Section 243(a) of the Code allows corporations to deduct certain specified percentages of the amount received as dividends from a domestic corporation that is subject to Federal income taxation. This deduction should have an offsetting effect on dividend income in order to be consistent with the purpose of section 243(a), which is to mitigate the multiple taxation of corporate earnings. Therefore, because the dividends received deduction is based on a cash concept of receipt, dividends should be likewise included in income when received regardless of the taxpayer's accounting method. Because section 832(c)(12) specifically allows casualty insurance companies the same deduction provided by section 243(a), the same rationale is also applicable to such insurance companies.

The language of section 832(b)(2) of the Code should be read as requiring a casualty insurance company to account for interest, dividends, and rents on an accrual basis. However, that section's mechanical repetition of the word "dividends" as part of the phrase ". . . interest, dividends, and rents due and accrued . . ." should not be read as requiring a rule different from that applicable to any accrual basis taxpayer with regard to when dividends are includable in gross income. Thus a casualty insurance [216] company should include dividends in investment income only as they are received and only once to avoid duplication of income.

Accordingly, the taxpayer is not required to accrue dividends at the end of its taxable year and to include such dividends in the computation of its investment income under section 832(b)(2) of the Code, when the dividends have not been actually or constructively received. Thus, the taxpayer has properly been reporting dividends in investment income each taxable year.