26 U.S.C. § 834 — Determination of taxable investment income

(a) General rule. For purposes of section 831(b), “taxable investment income” means the company’s gross investment income minus the deductions provided in subsection (c). (b) Gross investment income. For purposes of subsection (a), “gross investment income” means the total of: (1) The gross amount of income during the taxable year from— (A) interest, dividends, rents, and royalties; (B) entering into any lease, mortgage, or other instrument or agreement from which the insurance company receives interest, rents, or royalties; (C) changing or ending any instrument or agreement described in subparagraph (B); and (D) gains from sales or exchanges of capital assets, to the extent provided in subchapter P, which relates to capital gains and losses. (2) The gross income during the taxable year from any trade or business, other than an insurance business, carried on by the insurance company or by a partnership of which the insurance company is a partner. When gross income is computed under this paragraph, any item described in paragraph (1) must be left out. (c) Deductions. In computing taxable investment income, the following deductions must be allowed: (1) Tax-free interest. The amount of interest that section 103 excludes from gross income for the taxable year. (2) Investment expenses. Investment expenses paid or accrued during the taxable year. If general expenses are partly assigned to or included in investment expenses, the total deduction under this paragraph cannot be more than the following amount: one-fourth of 1 percent of the average of the book value of invested assets held at the beginning and end of the taxable year, plus one-fourth of the amount by which taxable investment income—computed without deducting investment expenses under this paragraph, tax-free interest under paragraph (1), or dividends received under paragraph (7)—is more than 3¾ percent of the average book value of the invested assets held at the beginning and end of the taxable year. (3) Real estate expenses. Taxes, as provided in section 164, and other expenses paid or accrued during the taxable year exclusively on or with respect to the real estate owned by the company. This paragraph does not allow a deduction for money paid for new buildings or for permanent improvements or betterments made to increase the value of any property. (4) Depreciation. The depreciation deduction allowed by section 167. (5) Interest paid or accrued. All interest paid or accrued during the taxable year on indebtedness, except interest on indebtedness incurred or continued to buy or carry obligations whose interest is wholly exempt from taxation under this subtitle. (6) Capital losses. Capital losses to the extent provided in subchapter P (sections 1201 and following), plus losses from capital assets sold or exchanged to obtain funds to meet abnormal insurance losses and to pay dividends and similar distributions to policyholders. Capital assets are treated as sold or exchanged to obtain funds to meet abnormal insurance losses and to pay dividends and similar distributions to policyholders to the extent that the gross receipts from their sale or exchange are no greater than the excess, if any, for the taxable year of the total of dividends and similar distributions paid to policyholders, losses paid, and expenses paid over the total of the items described in subsection (b), other than paragraph (1)(D) of that subsection, and net premiums received. When section 1212 is applied for purposes of this section, the net capital loss for the taxable year is the amount by which losses for that year from sales or exchanges of capital assets exceed the total of the gains from those sales or exchanges and the lesser of these two amounts: (A) taxable investment income, computed without regard to gains or losses from sales or exchanges of capital assets; or (B) losses from the sale or exchange of capital assets sold or exchanged to obtain funds to meet abnormal insurance losses and to pay dividends and similar distributions to policyholders. (7) Special deductions. The special deductions allowed by part VIII, except section 248, of subchapter B (sections 241 and following, relating to dividends received). When section 246(b), relating to the limitation on the total amount of deductions for dividends received, is applied for purposes of this paragraph, the reference in that section to “taxable income” is treated as a reference to “taxable investment income.” (8) Trade or business deductions. The deductions allowed by this subtitle, without regard to this part, that are attributable to any trade or business, other than an insurance business, carried on by the insurance company or by a partnership of which the insurance company is a partner. For purposes of this paragraph: (A) an item must not be taken into account to the extent it is attributable to carrying on the insurance business; and (B) the deduction for net operating losses provided in section 172 is not allowed. (9) Depletion. The deduction allowed by section 611, which relates to depletion. (d) Other applicable rules. (1) Rental value of real estate. The deduction under subsection (c)(3) or (4) for real estate owned and occupied in whole or in part by a mutual insurance company subject to the tax imposed by section 831 is limited to an amount that bears the same ratio to the deduction, computed without regard to this paragraph, as the rental value of the space not occupied bears to the rental value of the entire property. (2) Amortization of premium and accrual of discount. The gross amount of income during the taxable year from interest and the deduction provided in subsection (c)(1) must each be decreased to reflect the appropriate amortization of premium and increased to reflect the appropriate accrual of discount attributable to the taxable year on bonds, notes, debentures, or other evidence of indebtedness held by a mutual insurance company subject to the tax imposed by section 831. The company’s amortization and accrual must be determined— (A) under the method the company regularly uses, if that method is reasonable; and (B) in all other cases, under regulations prescribed by the Secretary. This paragraph does not require accrual of discount on any bond, as defined in section 171(d), except discount that is original issue discount, as defined in section 1273. (3) Double deductions. Nothing in this part allows the same item to be deducted more than once. (e) Definitions. For purposes of this part: (1) Net premiums. “Net premiums” means gross premiums, including deposits and assessments, written or received on insurance contracts during the taxable year, minus return premiums and premiums paid or incurred for reinsurance. Amounts returned when the amount is not fixed in the insurance contract but depends on the company’s experience or management’s discretion are not included in return premiums. They are treated as dividends to policyholders under paragraph (2). (2) Dividends to policyholders. “Dividends to policyholders” means dividends and similar distributions paid or declared to policyholders. For the preceding sentence, “paid or declared” is construed according to the method the insurance company regularly uses to keep its books.