Content area
Full Text
Rev. Proc. 2002-46
SECTION 1. PURPOSE
This revenue procedure provides certain insurance companies subject to tax under 831 of the Internal Revenue Code with a safe harbor method of accounting for premium acquisition expenses. This revenue procedure also provides a procedure for insurance companies to obtain automatic consent of the Commissioner to change to this safe harbor method.
SECTION 2. BACKGROUND
.01 Section 832(b)(1) provides that the gross income of an insurance company subject to tax under sec 831 includes the company's "underwriting income."
.02 Section 832(b)(3) defines "underwriting income" as "premiums earned on insurance contracts during the taxable year, less losses incurred and expenses incurred."
.03 Section 832(b)(4) provides that to compute premiums earned, an insurance company reduces the amount of gross premiums written on insurance contracts during the taxable year by return premiums and premiums paid for reinsurance. Subject to the exceptions in secs 832(b)(7), (b)(8), and 833, this amount is increased by 80 percent of the unearned premiums on outstanding insurance contracts at the end of the preceding taxable year, and is decreased by 80 percent of the unearned premiums on outstanding insurance contracts at the end of the current year. This 20 percent reduction in the amount of an insurance company's deduction for increases in unearned premiums is intended to represent the allocable portion of the company's expenses incurred in generating the unearned premiums. S. Rep. No. 313, 99th Cong. 2d Sess. 496 (1986), 1986-3 (Vol. 3) C.B. 496; H. Rep. No. 426, 99th Cong. Ist Sess. 669 (1985), 1986-3 (Vol. 2) C.B. 669.
.04 Sections 1.832-4(a)(3) through (11) of the Income Tax Regulations, effective for taxable years beginning after December 31, 1999, prescribe specific rules regarding the manner in which an insurance company determines gross premiums written, return premiums, and unearned premiums for purposes of the calculation of premiums earned under sec 832(b)(4). These rules apply regardless of the accounting practices used by the insurance company to record gross premiums written and unearned premiums on its annual statement filed for state regulatory reporting purposes. Section 1.8324(a)(4) defines "gross premiums written" as "all amounts payable for the effective period of the insurance contract." Section 1.832-4(a)(5)(i) generally requires the insurance company to report gross premiums written "for the earlier of the...