marine insurance companies, and foreign mutual fire insurance companies described in subsection (a), not carrying on an insurance business within the United States, shall not be subject to this part but shall be taxable as other foreign corporations.

(c) Election for multiple line company to be taxed on total income.

(1) In general.

Any mutual insurance company engaged in writing marine, fire, and casualty insurance which for any 5-year period beginning after December 31, 1941, and ending before January 1, 1962, was subject to the tax imposed by section 831 (or the tax imposed by corresponding provisions of prior law) may elect, in such manner and at such time as the Secretary or his delegate may by regulations prescribe, to be subject to the tax imposed by section 831, whether or not marine insurance is its predominant source of premium income.

(2) Effect of election.

If an election is made under paragraph (1), the electing company shall (in lieu of being subject to the tax imposed by section 821) be subject to the tax imposed by this section for taxable years beginning after December 31, 1961. Such election shall not be revoked except with the consent of the Secretary or his delegate.

(d) Alternative tax on capital gains.

For alternative tax in case of capital gains, see section 1201 (a).

(Aug. 16, 1954, ch. 736, 68A Stat 264; Oct. 16, 1962, Pub. L. 87-834, § 8(e) (1), (f), (g) (4) (B), 76 Stat. 997-999.)

AMENDMENTS

1962-Pub. L. 87-834, § 8(g)(4)(B), substituted "and certain mutual fire or flood insurance companies" for "and mutual fire insurance companies issuing perpetual policies" in the section catchline.

Subsec. (a). Pub. L. 87-834, § 8(e) (1), included flood insurance companies, and substituted provisions authorizing imposition of the tax on those companies whose principal business is the issuance of policies for which the premium deposits are the same, regardless of the length of the term for which the policies are written, if the unabsorbed portion of such premium deposits not required for losses, expenses, or establishment of reserves is returned or credited to the policyholder on cancellation or expiration of the policy for provisions which authorized imposition of tax on those companies which issued policies for which the sole premium charged is a single deposit which (except for such deduction of underwriting costs as may be provided) is refundable on cancellation or expiration of the policy.

Subsec. (c). Pub. L. 87-834, § 8(f), added subsec. (c) and redeginated former subsec. (c) as (d).

Subsec. (d). Pub. L. 87-834, § 8(f), redesignated former subsec. (c) as (d).

EFFECTIVE Date of 1962 AMENDMENT Amendment of subsec. (a) of this section by Pub. L. 87-834 applicable with respect to taxable years beginning after Dec. 31, 1962, see section 8 (h) of Pub. L. 87-834, set out as a note under section 821 of this title.

CROSS REFERENCES

Alternative tax, see section 1201 of this title. Burial or funeral benefit insurance company as taxable under this section or section 821, see section 801(f) of this title.

Consolidated returns, see section 1503 of this title. Doubling of tax rates on citizens and corporations of certain foreign countries, see section 891 of this title. Tax on mutual insurance companies to which part II applies, see section 821 of this title.

§ 832. Insurance company taxable income. (a) Definition of taxable income.

In the case of an insurance company subject to the tax imposed by section 831, the term "taxable income" means the gross income as defined in subsection (b) (1) less the deductions allowed by subsection (c).

(b) Definitions.

In the case of an insurance company subject to the tax imposed by section 831

(1) Gross income.

The term "gross income" means the sum of— (A) the combined gross amount earned during the taxable year, from investment income and from underwriting income as provided in this subsection, computed on the basis of the underwriting and investment exhibit of the annual statement approved by the National Convention of Insurance Commissioners,

(B) gain during the taxable year from the sale or other disposition of property, and

(C) all other items constituting gross income under subchapter B, except that, in the case of a mutual fire insurance company described in section 831(a)(3)(A), the amount of single deposit premiums paid to such company shall not be included in gross income, and

(D) in the case of a mutual fire or flood insurance company described in section 831(a) (3) (B), an amount equal to 2 percent of the premiums earned on insurance contracts during the taxable year with respect to policies described in section 831(a) (3) (B) after deduction of premium deposits returned or credited during the same taxable year.

(2) Investment income.

The term "investment income" means the gross amount of income earned during the taxable year 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.

(3) Underwriting income.

The term "underwriting income" means the premiums earned on insurance contracts during the taxable year less losses incurred and expenses incurred.

(4) Premiums earned.

The term "premiums earned on insurance contracts during the taxable year" means an amount computed as follows:

(A) From the amount of gross premiums written on insurance contracts during the taxable year, deduct return premiums and premiums paid for reinsurance.

(B) To the result so obtained, add unearned premiums on outstanding business at the end of the preceding taxable year and deduct unearned premiums on outstanding business at the end of the taxable year.

For purposes of this subsection, unearned premiums shall include life insurance reserves, as defined in section 801 (b), pertaining to the life, burial, or funeral insurance, or annuity business of an insurance company subject to the tax imposed by section 831 and not qualifying as a life insurance company under section 801. For purposes of this subsection, unearned premiums of mutual fire or flood insurance companies described in section 831(a)(3)(B) means (with respect to the policies described in section 831(a) (3) (B)) the amount of unabsorbed premium deposits which the company would be obligated to return to its policyholders at the close of the taxable year if all of its policies were terminated at such time; and the determination of such amount shall be based on the schedule of unabsorbed premium deposit returns for each such company then in effect. Premiums paid by the subscriber of a mutual flood insurance company referred to in paragraph (3) of section 831(a) shall be treated, for purposes of computing the taxable income of such subscriber, in the same manner as premiums paid by a policyholder to a mutual fire insurance company referred to in such paragraph (3). (5) Losses incurred.

The term "losses incurred" means losses incurred during the taxable year on insurance contracts, computed as follows:

(A) To losses paid during the taxable year, add salvage and reinsurance recoverable outstanding at the end of the preceding taxable year and deduct salvage and reinsurance recoverable outstanding at the end of the taxable year.

(B) To the result so obtained, add all unpaid losses outstanding at the end of the taxable year and deduct unpaid losses outstanding at the end of the preceding taxable year.

(6) Expenses incurred.

The term "expenses incurred" means all expenses shown on the annual statement approved by the National Convention of Insurance Commissioners, and shall be computed as follows: To all expenses paid during the taxable year, add expenses unpaid at the end of the taxable year and deduct expenses unpaid at the end of the preceding taxable year. For the purpose of computing the taxable income subject to the tax imposed by section 831, there shall be deducted from expenses incurred (as defined in this paragraph) all expenses incurred which are not allowed as deductions by subsection (c).

(c) Deductions allowed.

In computing the taxable income of an insurance company subject to the tax imposed by section 831, there shall be allowed as deductions:

(1) all ordinary and necessary expenses incurred, as provided in section 162 (relating to trade or business expenses);

(2) all interest, as provided in section 163;
(3) taxes, as provided in section 164;

(4) losses incurred, as defined in subsection (b) (5) of this section;

(5) capital losses to the extent provided in subchapter P (sec. 1201 and following, relating to capital gains and losses) plus losses from capital assets sold or exchanged in order to obtain funds to meet abnormal insurance losses and to provide for the payment of dividends and similar distributions to policyholders. Capital assets shall be considered as sold or exchanged in order to obtain funds to meet abnormal insurance losses and to provide for the payment of dividends and similar distributions to policyholders to the extent that the gross receipts from their sale or exchange are not greater than the excess, if any, for the taxable year of the sum of dividends and similar distributions paid to policyholders in their capacity as such, losses paid, and expenses paid over the sum of the items described in section 822 (b) (other than paragraph (1) (D) thereof) and net premiums received. In the application of section 1212 for purposes of this section, the net capital loss for the taxable year shall be the amount by which losses for such year from sales or exchanges of capital assets exceeds the sum of the gains from such sales or exchanges and whichever of the following amounts is the lesser:

(A) the taxable income (computed without regard to gains or losses from sales or exchanges of capital assets or to the deductions provided in section 242 for partially tax-exempt interest);

or

(B) losses from the sale or exchange of capital assets sold or exchanged to obtain funds to meet abnormal insurance losses and to provide for the payment of dividends and similar distributions to policyholders;

(6) debts in the nature of agency balances and bills receivable which become worthless within the taxable year;

(7) the amount of interest earned during the taxable year which under section 103 is excluded from gross income;

(8) the depreciation deduction allowed by section 167 and the deduction allowed by section 611 (relating to depletion);

(9) charitable, etc., contributions, as provided in section 170;

(10) deductions (other than those specified in this subsection) as provided in part VI of subchapter B (sec. 161 and following, relating to itemized deductions for individuals and corporations) and in part I of subchapter D (sec. 401 and following, relating to pension, profit-sharing, stock bonus plans, etc.);

(11) dividends and similar distributions paid or declared to policyholders in their capacity as such, except in the case of a mutual fire insurance company described in section 831(a) (3) (A). For purposes of the preceding sentence, the term "dividends and similar distributions" includes amounts returned or credited to policyholders on cancellation or expiration of policies described in section 831 (a) (3) (B). For purposes of this paragraph, the term "paid or declared" shall be construed according to the method of accounting regularly employed in keeping the books of the insurance company; and

(12) the special deductions allowed by part VIII of subchapter B (sec. 241 and following, relating to partially tax-exempt interest and to dividends received).

(d) Taxable income of foreign insurance companies other than life or mutual and foreign mutual marine.

In the case of a foreign insurance company (other than a life or mutual insurance company), a foreign mutual marine insurance company, and a foreign mutual fire insurance company described in section 831 (a), the taxable income shall be the taxable income from sources within the United States. In the case of a company to which the preceding sentence applies, the deductions allowed in this section shall be allowed to the extent provided in subpart B of part II of subchapter N (sec. 881 and following) in the case of a foreign corporation engaged in trade or business within the United States.

(e) Double deductions.

Nothing in this section shall permit the same item to be deducted more than once. (Aug. 16, 1954, ch. 736, 68A Stat. 264; Mar. 13, 1956, ch. 83, § 3(b), 70 Stat. 48; Oct. 16, 1962, Pub. L. 87-834, § 8(e) (2—5), 76 Stat. 997, 998; Feb. 26, 1964, Pub. L. 88-272, title II, § 228 (c), 78 Stat. 99.)

AMENDMENTS

1964 Subsec. (c) (10). Pub. L. 88-272 inserted the reference to part I of subchapter D.

1962 Subsec. (b)(1) (C). Pub. L. 87-834, § 8(e) (3), (5), substituted "section 831(a)(3)(A)" for "section 831(a)."

Subsec. (b) (1) (D). Pub. L. 87-834, §8(e) (5), added subsec. (b) (1) (D).

Subsec. (b) (4). Pub. L. 87-834, § 8(e) (2), inserted provisions defining unearned premiums of mutual fire or flood insurance companies, and which require premiums paid by the subscriber of a mutual flood insurance company to be treated, for purposes of computing the taxable income of such subscriber, in the same manner as premiums paid by a policyholder to a mutual fire insurance company referred to in par. (3) of section 831(a) of this title.

Subsec. (c) (11). Pub. L. 87-834, § 8(e) (4), substituted "section 831 (a) (3) (A)" for "section 831(a)", and inserted the definition of "dividends and similar distributions." 1956 Subsec. (b) (4). Act Mar. 13, 1956, § 3(b) (1), substituted "section 801(b)" for "section 806".

Subsec. (c). Act Mar. 13, 1956, § 3(b)(2), (3), substituted "the items described in section 822(b) (other than paragraph (1) (D) thereof) and net premiums received. In the application of section 1212" for "interest, dividends, rents, and net premiums received. In the application of section 1211" in par. (5), and authorized the deduction for depletion in par. (8).

EFFECTIVE DATE OF 1964 AMENDMENT Amendment of section by Pub. L. 88-272 applicable to taxable years beginning after Dec. 31, 1953, and ending after Aug. 16, 1954, see section 228 (d) of Pub. L. 88-272, set out as a note under section 809 of this title.

EFFECTIVE DATE OF 1962 AMENDMENT

Amendment of subsecs. (b) (1), (4) and (c) (11) of this section by Pub. L. 87-834 applicable with respect to taxable years beginning after Dec. 31, 1962, see section 8(h) of Pub. L. 87-834, set out as a note under section 821 of this title.

EFFECTIVE DATE OF 1956 AMENDMENT Amendment by act Mar. 13, 1956, applicable only to taxable years beginning after Dec. 31, 1954, see note set out under section 821 of this title.

CROSS REFERENCES

Consolidated returns, see section 1504 of this title. Credit on foreign taxes, see section 841 of this title.

Dividends defined in distributions by corporations, see section 316 of this title.

Personal holding company income, see section 543 of this title.

Tax imposed on corporations, see section 11 of this title. PART IV.-PROVISIONS OF GENERAL APPLICATION

Sec.

841. Credit for foreign taxes. 842. Computation of gross income. 843. Annual accounting period.

AMENDMENTS

1956-Act Mar. 13, 1956, ch. 83, § 4 (b), 70 Stat. 49, added item 843.

§ 841. Credit for foreign taxes.

The taxes imposed by foreign countries or possessions of the United States shall be allowed as a credit against the tax of a domestic insurance company subject to the tax imposed by section 802, 821, or 831, to the extent provided in the case of a domestic corporation in section 901 (relating to foreign tax credit). For purposes of the preceding sentence, the term "taxable income" as used in section 904 means

(1) in the case of the tax imposed by section 802, the life insurance company taxable income (as defined in section 802(b))

(2) in the case of the tax imposed by section 821(a), the mutual insurance company taxable income (as defined in section 821(b)); and in the case of the tax imposed by section 821 (c), the taxable investment income (as defined in section 822(a)), and

(3) in the case of the tax imposed by section 831, the taxable income (as defined in section 832(a)).

(Aug. 16, 1954, ch. 736, 68A Stat. 267; Mar. 13, 1956, ch. 83, § 5(4), 70 Stat. 49; June 25, 1959, Pub. L. 8669, § 3(b), 73 Stat. 139; Oct. 16, 1962, Pub. L. 87-834, § 8(g) (1), 76 Stat. 998.)

AMENDMENTS

1962-Pub. L. 87-834 added par. (2) and redesignated former par. (2) as (3).

1959 - Pub. L. 86-69 eliminated a reference to section 811 of this title in the first sentence, and substituted "section 802, the life insurance company taxable income (as defined in section 802(b)), and" for "section 802 or 811, the net investment income (as defined in section 803 (c))" in par. (1).

1956 Act Mar. 13, 1956, inserted references to section 811.

EFFECTIVE DATE OF 1962 AMENDMENT Amendment of section by Pub. L. 87-834 applicable with respect to taxable years beginning after Dec. 31, 1962, see section 8(h) of Pub. L. 87-834, set out as a note under section 821 of this title.

EFFECTIVE DATE OF 1959 AMENDMENT Amendment of section by Pub. L. 86-69 applicable only with respect to taxable years beginning after Dec. 31, 1957, see section 4 of Pub. L. 86-69, set out as a note under section 801 of this title.

EFFECTIVE DATE OF 1956 AMENDMENT Amendment by act Mar. 13, 1956 applicable only to taxable years beginning after Dec. 31, 1954, see note set out under section 821 of this title.

§ 842. Computation of gross income.

The gross income of insurance companies subject to the tax imposed by section 802 or 831 shall not be

determined in the manner provided in part I of subchapter N (relating to determination of sources of income). (Aug. 16, 1954, ch. 736, 68A Stat. 267; Mar. 13, 1956, ch. 83, § 5(5), 70 Stat. 49; June 25, 1959, Pub. L. 86-69, § 3(f) (1), 73 Stat. 140.)

AMENDMENTS

1959-Pub. L. 86-69 eliminated reference to section 811. 1956- -Act Mar. 13, 1956, inserted reference to section 811.

EFFECTIVE DATE OF 1959 AMENDMENT Amendment of section by Pub. L. 86-69 applicable only with respect to taxable years beginning after Dec. 31, 1957, see section 4 of Pub. L. 86-69, set out as a note under section 801 of this title.

EFFECTIVE Date of 1956 AMENDMENT Amendment by act Mar. 13, 1956 applicable only to taxable years beginning after Dec. 31, 1954, see note set out under section 821 of this title.

1960-Pub. L. 86-779, § 10(b)(1), Sept. 14, 1960, 74 Stat. 1008, added "and Real Estate Investment Trusts" to the Subchapter M heading, Part I and Part II designations thereunder and Part I designation preceding table of sections numbered 851 to 855.

§851. Definition of regulated investment company. (a) General rule.

For purposes of this subtitle, the term "regulated investment company" means any domestic corporation (other than a personal holding company as defined in section 542)

(1) which, at all times during the taxable year, is registered under the Investment Company Act of 1940, as amended (54 Stat. 789; 15 U. S. C. 80 a-1 to 80 b-2) either as a management company or as a unit investment trust, or

(2) which is a common trust fund or similar fund excluded by section 3 (c) (3) of such Act (15 U. S. C. 80 a-3 (c)) from the definition of "investment company" and is not included in the definition of "common trust fund" by section 584 (a).

(b) Limitations.

A corporation shall not be considered a regulated investment company for any taxable year unless

(1) it files with its return for the taxable year an election to be a regulated investment company or has made such election for a previous taxable year which began after December 31, 1941;

(2) at least 90 percent of its gross income is derived from dividends, interests, and gains from the sale or other disposition of stock or securities; (3) less than 30 percent of its gross income is derived from the sale or other disposition of stock or securities held for less than 3 months; and

(4) at the close of each quarter of the taxable year

(A) at least 50 percent of the value of its total assets is represented by

(i) cash and cash items (including receivables), Government securities and securities of other regulated investment companies, and

(ii) other securities for purposes of this calculation limited, except and to the extent provided in subsection (e), in respect of any one issuer to an amount not greater in value than 5 percent of the value of the total assets of the taxpayer and to not more than 10 percent of the outstanding voting securities of such issuer, and

(B) not more than 25 percent of the value of its total assets is invested in the securities (other than Government securities or the securities of other regulated investment companies) of any one issuer, or of two or more issuers which the taxpayer controls and which are determined, under regulations prescribed by the Secretary or his delegate, to be engaged in the same or similar trades or businesses or related trades or businesses.

(c) Rules applicable to subsection (b) (4).

For purposes of subsection (b) (4) and this subsection

(1) In ascertaining the value of the taxpayer's investment in the securities of an issuer, for the purposes of subparagraph (B), there shall be included its proper proportion of the investment of any other corporation, a member of a controlled group, in the securities of such issuer, as determined under regulations prescribed by the Secretary or his delegate.

(2) The term "controls" means the ownership in a corporation of 20 percent or more of the total combined voting power of all classes of stock entitled to vote.

(3) The term "controlled group" means one or more chains of corporations connected through stock ownership with the taxpayer if—

(A) 20 percent or more of the total combined voting power of all classes of stock entitled to vote of each of the corporations (except the taxpayer) is owned directly by one or more of the other corporations, and

(B) the taxpayer owns directly 20 percent or more of the total combined voting power of all classes of stock entitled to vote, of at least one of the other corporations.

(4) The term "value" means, with respect to securities (other than those of majority-owned subsidiaries) for which market quotations are readily available, the market value of such securities; and with respect to other securities and assets, fair value as determined in good faith by the board of directors, except that in the case of securities of majority-owned subsidiaries which are investment companies such fair value shall not exceed market value or asset value, whichever is higher.

(5) All other terms shall have the same meaning as when used in the Investment Company Act of 1940, as amended.

(d) Determination of status.

A corporation which meets the requirements of subsections (b) (4) and (c) at the close of any quarter shall not lose its status as a regulated investment company because of a discrepancy during a subsequent quarter between the value of its various investments and such requirements unless such discrepancy exists immediately after the acquisition of any security or other property and is wholly or partly the result of such acquisition. A corporation which does not meet such requirements at the close of any quarter by reason of a discrepancy existing immediately after the acquisition of any security or other property which is wholly or partly the result of such acquisition during such quarter shall not lose its status for such quarter as a regulated investment company if such discrepancy is eliminated within 30 days after the close of such quarter and in such cases it shall be considered to have met such requirements at the close of such quarter for purposes of applying the preceding sentence.

(e) Investment companies furnishing capital to development corporations.

(1) General rule.

If the Securities and Exchange Commission determines, in accordance with regulations issued by it, and certifies to the Secretary or his delegate not earlier than 60 days prior to the close of the taxable year of a registered management company, that such investment company is principally engaged in the furnishing of capital to other corporations which are principally engaged in the development or exploitation of inventions, technological improvements, new processes, or products not previously generally available, such investment company may, in the computation of 50 percent of the value of its assets under subparagraph (A) of subsection (b) (4) for any quarter of such taxable year, include the value of any securities of an issuer, whether or not the investment company owns more than 10 percent of the outstanding voting securities of such issuer, the basis of which, when added to the basis of the investment company for securities of such issuer previously acquired, did not exceed 5 percent of the value of the total assets of the investment company at the time of the subsequent acquisition of securities. The preceding sentence shall not apply to the securities of an issuer if the investment company has continuously held any security of such issuer (or of any predecessor company of such issuer as determined under regulations pre

scribed by the Secretary or his delegate) for 10 or more years preceding such quarter of such taxable year.

(2) Limitation.

The provisions of this subsection shall not apply at the close of any quarter of a taxable year to an investment company if at the close of such quarter more than 25 percent of the value of its total assets is represented by securities of issuers with respect to each of which the investment company holds more than 10 percent of the outstanding voting securities of such issuer and in respect of each of which or any predecessor thereof the investment company has continuously held any security for 10 or more years preceding such quarter unless the value of its total assets so represented is reduced to 25 percent or less within 30 days after the close of such quarter.

(3) Determination of status.

For purposes of this subsection, unless the Securities and Exchange Commission determines otherwise, a corporation shall be considered to be principally engaged in the development or exploitation of inventions, technological improvements, new processes, or products not previously generally available, for at least 10 years after the date of the first acquisition of any security in such corporation or any predecessor thereof by such investment company if at the date of such acquisition the corporation or its predecessor was principally so engaged, and an investment company shall be considered at any date to be furnishing capital to any company whose securities it holds if within 10 years prior to such date it has acquired any of such securities, or any securities surrendered in exchange therefor, from such other company or predecessor thereof. For purposes of the certification under this subsection, the Securities and Exchange Commission shall have authority to issue such rules, regulations and orders, and to conduct such investigations and hearings, either public or private, as it may deem appropriate.

(4) Definitions.

The terms used in this subsection shall have the same meaning as in subsections (b) (4) and (c) of this section.

(Aug. 16, 1954, ch. 736, 68A Stat. 268; Sept. 2, 1958, Pub. L. 85-866, title I, § 38, 72 Stat. 1638.)

AMENDMENTS

1958 Subsec. (e) (1). Pub. L. 85-866, § 38(a), substituted in the first sentence "not earlier than 60 days" for "not less than 60 days".

Subsec. (e) (2). Pub. L. 85-866, § 38(b), substituted "issuer" for "issues".

EFFECTIVE DATE OF 1958 AMENDMENT Amendment of subsecs. (e) (1) and (e) (2) of this section by Pub. L. 85-866 applicable to taxable years beginning after Dec. 31, 1953, and ending after Aug. 16, 1954, see section 1 (c) of Pub. L. 85-866, set out as a note under section 165 of this title.

§ 852. Taxation of regulated investment companies and their shareholders.

(a) Requirements applicable to regulated investment companies.

The provisions of this part (other than subsection (c) of this section) shall not be applicable to a regu