Exception from the definition of passive income for active insurance income
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(b) Exclusion from passive income of active insurance income.— ***
(2) *** See paragraph (e)(2)(i) of this section for additional rules regarding the amount of income of a qualifying domestic insurance corporation that is treated as non-passive.
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(c) Exclusion of assets for purposes of the passive asset test under section 1297(a)(2).— ***
(2) *** See paragraph (e)(2)(ii) of this section for additional rules regarding the amount of assets of a qualifying domestic insurance corporation that are treated as non-passive.
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(e) Qualifying domestic insurance corporation.— ***
(2) Qualifying domestic insurance corporation non-passive asset and income limitations.— For purposes of section 1297 and §1.1297-1
(i) Qualifying domestic insurance corporation’s non-passive assets.— The amount of passive assets of a qualifying domestic insurance corporation that may be treated as non-passive is equal to the lesser of the passive assets of the corporation (determined without application of paragraph (c)(2) of this section) or the corporation’s non-passive asset limitation (as defined in paragraph (e)(2)(iii) of this section).
(ii) Qualifying domestic insurance corporation’s non-passive income.— The amount of passive income of a qualifying domestic insurance corporation that may be treated as non-passive is equal to the lesser of the passive income of the corporation (determined without application of paragraph (b)(2) of this section) or the corporation’s passive income multiplied by the proportion that its non-passive asset limitation (as defined in paragraph (e)(2)(iii) of this section) bears to its total passive assets (determined without application of paragraph (c)(2) of this section).
(iii) Non-passive asset limitation.— For purposes of paragraph (e) of this section, the non-passive asset limitation equals the corporation’s total insurance liabilities multiplied by the applicable percentage. The applicable percentage is—
(A) 400 percent of total insurance liabilities, for a company taxable under Part II of Subchapter L; and
(B) 200 percent of total insurance liabilities, for a company taxable under Part I of Subchapter L.
(iv) Total insurance liabilities.— For purposes of paragraph (e) of this section—
(A) Companies taxable under Part I of Subchapter L.— In the case of a company taxable under part I of Subchapter L, the term total insurance liabilities means the sum of the total reserves (as defined in section 816(c)) plus (to the extent not included in total reserves) the items referred to in paragraphs (3), (4), (5), and (6) of section 807(c).
(B) Companies taxable under Part II of Subchapter L.— In the case of a company taxable under part II of Subchapter L, the term total insurance liabilities means the sum of unearned premiums (determined under §1.832-4(a)(8)) and unpaid losses.
(3) Example.— The following example illustrates the application of this section.
(i) Facts. X, a qualifying domestic insurance corporation within the meaning of paragraph (e)(1) of this section, is a nonlife insurance company taxable under part II of Subchapter L. X has passive assets of $1000x, total insurance liabilities of $200x, and passive income of $100x.
(i) Result—
(A) Non-passive asset limitation. The applicable percentage for nonlife insurance companies is 400%. Pursuant to paragraph (e)(2)(iii) of this section, X has a non-passive asset limitation of $800x, which is equal to its total insurance liabilities of $200x multiplied by 400%. Under paragraph (e)(2)(i) of this section, $800x of X’s passive assets (equal to the lesser of the non-passive asset limitation ($800x) or passive assets ($1000x)) are treated as non-passive, and $200x remains passive.
(B) Non-passive income limitation. X has a non-passive asset limitation of $800x. The proportion of its non-passive asset limitation ($800x) to its total passive assets ($1000x) is 80%. Pursuant to paragraph (e)(2)(ii) of this section, X has $80x of passive income treated as non-passive (equal to the lesser of passive income ($100x) or 80% times $100x) and $20x remains passive.
(f) Applicability date.—
(1) General applicability date.— Except as provided in paragraph (f)(2) of this section, this section applies to taxable years of shareholders beginning on or after January 14, 2021.
(2) Exception. —Paragraphs (e)(2) and (e)(3) of this section apply to taxable years of shareholders beginning on or after [the date these
regulations are filed as final regulations in the Federal Register].
(3) Early application.— A shareholder may choose to apply the rules of this section (other than paragraphs (e)(2), and (e)(3) of this section) for any open taxable year beginning after December 31, 2017 and before January 14, 2021, provided that, with respect to a tested foreign corporation, it consistently applies those rules and the rules described in §1.1297-4(g)(3)(i) for such year and all subsequent years. [Prop. Reg. §1.1297-6.]
[Proposed 1-15-2021.]