Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 68-60

1968-1 C.B. 322

Sec. 832

IRS Headnote

For purposes of determining whether the alternative tax under section 1201(a) of the Internal Revenue Code of 1954 is applicable, an insurance company taxable under section 831 of the Code must treat losses from capital assets sold or exchanged in order to obtain funds to meet abnormal insurance losses, etc., as provided in section 832(c)(5) of the Code, as capital losses and must first apply such losses against capital gains. If such losses exceed capital gains, the excess is deductible under section 832(c)(5) of the Code as an additional capital loss deduction for the taxable year.

Full Text

Rev. Rul. 68-60

Advice has been requested as to the proper application of section 832(c)(5) of the Internal Revenue Code of 1954 under the circumstances described below.

The taxpayer is an insurance company (other than life or mutual) and is taxable under section 831 of the Code. In its income tax return for the taxable year 1965 the taxpayer reported 600 x dollars as gross income of which 200 x dollars was gain from sales of capital assets held for more than six months. It deducted, pursuant to section 832(c)(5) of the Code, capital losses of 300 x dollars which were incurred on sales of capital assets in order to obtain funds to meet abnormal insurance losses. In computing its tax under the alternative tax method provided in section 1201 of the Code, the taxpayer did not apply the losses of 300 x dollars against the long-term capital gains of 200 x dollars to arrive at the excess of net long-term capital gain over the net short-term capital loss.

Section 832(b) of the Code provides, in part, that in the case of an insurance company taxable under section 831 of the Code the term `gross income' includes gain during the taxable year from the sale or other disposition of property.

Section 832(c) of the Code provides, in part, as follows:

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:

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(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 2112 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;

Section 1201 of the Code provides, in part, that corporations, including insurance companies taxable under section 831 of the Code, may compute their tax under an alternative tax method if for any taxable year the net long-term capital gain exceeds the net short-term capital loss.

Section 1212 of the Code permits corporate taxpayers a carryover of a net capital loss which will be treated as a short-term capital loss in each of the 5 succeeding taxable years.

It is apparent from the above provisions of section 832 of the Code that an insurance company taxable under section 831 of the Code must include in gross income the gains from the sale or other disposition of capital assets (undiminished by capital losses), and that, like other corporate taxpayers, it is allowed a deduction for capital losses to the extent of capital gains. In addition, if the losses from capital assets sold or exchanged in order to obtain funds to meet abnormal insurance losses, etc., exceed capital gains, such excess is allowed as an additional capital loss deduction under section 832(c)(5) of the Code. Also, in the application of section 1212 of the Code, 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 exceed the sum of the gains from such sales or exchanges and the lesser of (1) taxable income (computed without regard to gains or losses from sales or exchanges of capital assets, etc.), or (2) losses from the sale or exchange of capital assets sold or exchanged to obtain funds to meet abnormal insurance losses, etc.

In view of the above, it is concluded that section 832(c)(5) of the Code does not convert a capital loss into an ordinary loss but, instead, provides a current deduction for capital losses which otherwise would be carried forward and treated as a short-term capital loss under the provisions of section 1212 of the Code. Accordingly, losses from capital assets sold or exchanged in order to obtain funds to meet abnormal insurance losses, etc., as provided in section 832(c)(5) of the Code, are to be treated as capital losses for purposes of determining whether the alternative tax under section 1201(a) of the Code is applicable. Any such losses in excess of capital gains are deductible under section 832(c)(5) of the Code as an additional capital loss deduction for the taxable year.

On the basis of the facts of the instant case, the alternative tax under section 1201(a) of the Code is not applicable to the taxpayer since its net long-term capital gain does not exceed its net short-term capital loss. However, the excess of the capital loss over the capital gain, 100 x dollars, is deductible by the taxpayer under section 832(c)(5) of the Code as an additional capital loss deduction for the taxable year 1965.