Part II - Policyholders Surplus Account

Any stock life insurance company that had an existing PSA on December 31, 1983, will continue to maintain the account. See section 815(d)(1). While no additions can be made to this account, it must be decreased by amounts specified in section 815(d)(3). Also, section 815(f) provides that, in general, the provisions of subsections (d), (e), (f), and (g) of section 815 as in effect before the enactment of the Tax Reform Act of 1984 (Act of 1984) continue to apply to any PSA that had a balance as of December 31,1983.

Amounts subtracted from the PSA for a tax year are added to LICTI and are subject to tax under section 801.

Line 8.   If the balance at the end of the preceding tax year differs from the balance at the beginning of the current tax year (for example, due to section 815(d)(5) as in effect prior to the Act of 1984), attach a schedule showing the adjustments made. Prior to the Act of 1984, section 815(d)(5) provided that if any addition to the PSA increases or creates a loss from operations and part or all of the loss cannot be used in any other year to reduce LICTI, then the loss will reduce the PSA at the time that the addition was made. In this case, the beginning balance of the PSA must be adjusted before any subtractions for the current tax year are made.

Line 9b.   To figure the tax increase due to the amount entered on line 9a:

1. Subtract the corporation's tax rate from 100%,
2. Divide the distributions on line 9a by the result of step 1,
3. Subtract the amount on line 9a from the result of step 2, and
4. Enter the result of step 3 on line 9b.

Line 9c.   To figure the amount to enter on line 9c:

1. Determine the total amount to be subtracted from the PSA under sections 815(d)(1) and 815(d)(4) as in effect prior to the Act of 1984 (do this only after the amounts on lines 9a and 9b are subtracted from the beginning balance in the PSA),
2. Add 100% to the corporation's tax rate,
3. Divide the result of step 1 by the result of step 2, and
4. Enter the result of step 3 on line 9c. The amount entered on line 9c must be added to the SSA at the beginning of the next tax year.

Line 9d.   Subtract the result of step 3, line 9c, from the result of step 1, line 9c. Enter the result on line 9d.

Line 9e.   Enter the total amount to be subtracted from the PSA under section 815(d)(2) as in effect prior to the Act of 1984. At that time, section 815(d)(2) provided that if, for any tax year, a corporation was not an insurance company, or if for any 2 successive tax years a corporation was not a life insurance company, then any balance remaining in the PSA at the end of the last tax year that the corporation was a life insurance company must be included in taxable income for that tax year.

Schedule K - Tax Computation

Line 1

Members of a controlled group.   A member of a controlled group, as defined in section 1563, must check the box on line 1 and complete lines 2a and 2b.

Line 2a

Members of a controlled group are entitled to one $50,000, one $25,000, and one $9,925,000 taxable income bracket amount (in that order) on line 2a.

When a controlled group adopts or later amends an apportionment plan, each member must attach to its tax return a copy of its consent to this plan. The copy (or an attached statement) must show the part of the amount in each taxable income bracket apportioned to that member. See Regulations section 1.1561-3(b) for other requirements and for the time and manner of making the consent.

Unequal apportionment plan.   Members of a controlled group may elect an unequal apportionment plan and divide the taxable income brackets as they want. There is no need for consistency among taxable income brackets. Any member may be entitled to all, some, or none of the taxable income bracket. However, the total amount for all members cannot be more than the total amount in each taxable income bracket.

Equal apportionment plan.   If no apportionment plan is adopted, members of a controlled group must divide the amount in each taxable income bracket equally among themselves. For example, Controlled Group AB consists of Corporation A and Corporation B. They do not elect an apportionment plan. Therefore, each corporation is entitled to:

• $25,000 (one-half of $50,000) on line 2a(1),
• $12,500 (one-half of $25,000) on line 2a(2), and
• $4,962,500 (one-half of $9,925,000) on line 2a(3).

Line 2b

Members of a controlled group are treated as one group to figure the applicability of the additional 5% tax and the additional 3% tax. If an additional tax applies, each member will pay that tax based on the part of the amount used in each taxable income bracket to reduce that member's tax. See section 1561(a). If an additional tax applies, attach a schedule showing the taxable income of the entire group and how the corporation figured its share of the additional tax.

Line 2b(1).   Enter the corporation's share of the additional 5% tax on line 2b(1).

Line 2b(2).   Enter the corporation's share of the additional 3% tax on line 2b(2).

Line 3

Most corporations figure their tax by using the Tax Rate Schedule below. Exceptions apply to members of a controlled group (see the worksheet below). Members of a controlled group must attach a statement showing the computation of the tax entered on line 3.

Tax Rate Schedule

If taxable income on line 27, page 1 is:
Over -	But not over -	Tax is:	Of the amount over -
$0	$50,000	15%	$0
50,000	75,000	$ 7,500 + 25%	50,000
75,000	100,000	13,750 + 34%	75,000
100,000	335,000	22,250 + 39%	100,000
335,000	10,000,000	113,900 + 34%	335,000
10,000,000	15,000,000	3,400,000 + 35%	10,000,000
15,000,000	18,333,333	5,150,000 + 38%	15,000,000
18,333,333	- - - - -	35%	0

Tax Computation Worksheet for Members of a Controlled Group (keep for your records)

Note. Each member of a controlled group must compute its tax using this worksheet.
1.	Enter taxable income (line 27, page 1)
2.	Enter line 1 or the corporation's share of the $50,000 taxable income bracket, whichever is less
3.	Subtract line 2 from line 1
4.	Enter line 3 or the corporation's share of the $25,000 taxable income bracket, whichever is less
5.	Subtract line 4 from line 3
6.	Enter line 5 or the corporation's share of the $9,925,000 taxable income bracket, whichever is less
7.	Subtract line 6 from line 5
8.	Multiply line 2 by 15%
9.	Multiply line 4 by 25%
10.	Multiply line 6 by 34%
11.	Multiply line 7 by 35%
12.	If the taxable income of the controlled group exceeds $100,000, enter this member's share of the smaller of: 5% of the taxable income in excess of $100,000, or $11,750. (See instructions for line 2b above)
13.	If the taxable income of the controlled group exceeds $15 million, enter this member's share of the smaller of 3% of the taxable income in excess of $15 million, or $100,000. (See instructions for line 2b above)
14.	Total. Add lines 8 through 13. Enter here and on line 3, Schedule K

Note.   Gain recognized by a life insurance company from the redemption of market discount bond issued before July 19, 1984, and acquired on or before September 25, 1985, is taxed at a rate of 31.6% only if it is less than the tax that otherwise would be imposed. See section 1011(d) of the Tax Reform Act of 1986 as amended by The Technical and Miscellaneous Revenue Act of 1988. On the dotted line to the left of line 3, write Tax differential rate of 31.6% used and the amount.

Deferred tax under section 1291.   If the corporation was a shareholder in a passive foreign investment company (PFIC) and received an excess distribution or disposed of its investment in the PFIC during the year, it must include the total increase in taxes due under section 1291(c)(2) in the total for line 3. On the dotted line to the left of line 3, write Section 1291 and the amount.

Do not include on line 3 any interest due under section 1291(c)(3). Instead, show the amount of interest owed in the bottom margin of page 1, Form 1120-L, and write Section 1291 interest. For details, see Form 8621, Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund.

Additional tax under section 197(f).   A corporation that elects to pay tax on the gain from the sale of an intangible under the related person exception to the anti-churning rules should include any additional tax due under section 197(f)(9)(B) in the total for line 3. On the dotted line next to line 3, write Section 197 and the amount. For more information, see Pub. 535, Business Expenses.

Line 4. Alternative minimum tax (AMT).   Unless the corporation is treated as a small corporation exempt from the AMT, it may owe the AMT if it has any of the adjustments and tax preference items listed on Form 4626. The corporation must file Form 4626 if its taxable income (or loss) before the NOL deduction, combined with these adjustments and tax preference items, is more than the smaller of $40,000 or the corporation's allowable exemption amount (from Form 4626).

See Form 4626 for details.

Note.   See section 56(g)(4)(B)(ii) for special rules for life insurance companies for the computation of adjusted current earnings.

Exemption for small corporation.   A corporation is treated as a small corporation exempt from the AMT for its tax year beginning in 2002 if that year is the corporation's first tax year in existence (regardless of its gross receipts) or:

1. It was treated as a small corporation exempt from the AMT for all prior tax years beginning after 1997 and
2. Its average annual gross receipts for the 3-tax-year period (or portion thereof during which the corporation was in existence) ending before its tax year beginning in 2001 did not exceed $7.5 million ($5 million if the corporation had only 1 prior tax year).

Line 6a. Foreign tax credit.   To find out when a corporation can take this credit for payment of income tax to a foreign country or U.S. possession, see Form 1118, Foreign Tax Credit - Corporations.

Line 6b. Other credits

Include any other credits on line 6b. On the dotted line to the left of the entry space, write the amount of the credit and identify it.

Possessions tax credit.   The Small Business Job Protection Act of 1996 repealed the possessions credit. However, existing credit claimants may qualify for a credit under the transitional rules. See Form 5735, Possessions Corporation Tax Credit (under sections 936 and 30A).

Nonconventional source fuel credit.   A credit is allowed for the sale of qualified fuels produced from a nonconventional source. Section 29 contains a definition of qualified fuels, provisions for figuring the credit, and other special rules. Attach a separate schedule to the return showing the computation of the credit.

Qualified electric vehicle (QEV) credit.   Include on line 6b any credit from Form 8834, Qualified Electric Vehicle Credit.

Line 6c. General Business Credit

Enter on line 6c the corporation's total general business credit.

If the corporation is filing Form 8844, Empowerment Zone and Renewal Community Employment Credit, or Form 8884, New York Liberty Zone Business Employee Credit, check the Form(s) box, write the form number in the space provided, and include the allowable credit on line 6c.

If the corporation is required to file Form 3800, General Business Credit, check the Form 3800 box and include the allowable credit on line 6c. If the corporation is not required to file Form 3800, check the Form(s) box, write the form number in the space provided, and include on line 6c the allowable credit from the applicable form listed below.

• Investment Credit (Form 3468).
• Work Opportunity Credit (Form 5884).
• Credit for Alcohol Used as Fuel (Form 6478).
• Credit for Increasing Research Activities (Form 6765).
• Low-Income Housing Credit (Form 8586).
• Orphan Drug Credit (Form 8820).
• Disabled Access Credit (Form 8826).
• Enhanced Oil Recovery Credit (Form 8830).
• Renewable Electricity Production Credit (Form 8835).
• Indian Employment Credit (Form 8845).
• Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips (Form 8846).
• Credit for Contributions to Selected Community Development Corporations (Form 8847).
• Welfare-to-Work Credit (Form 8861).
• New Markets Credit (Form 8874).
• Credit for Small Employer Pension Plan Startup Costs (Form 8881).
• Credit for Employer-Provided Child Care Facilities and Services (Form 8882).

Line 6d. Credit for prior year minimum tax.   To figure the minimum tax credit and any carryforward of that credit, use Form 8827, Credit for Prior Year Minimum Tax - Corporations. Also see Form 8827 if any of the corporation's 2001 nonconventional source fuel credit or qualified electric vehicle credit was disallowed solely because of the tentative minimum tax limitation. See section 53(d).

Line 6e. Qualified zone academy bond credit.   Enter the amount of any credit from Form 8860, Qualified Zone Academy Bond Credit.

Line 9. Foreign Corporations

A foreign corporation carrying on a life insurance business in the United States is taxed as a domestic life insurance company on its income effectively connected with the conduct of a trade or business in the United States. See sections 842 and 897 and Notice 89-96, 1989-2 C.B. 417, for more information. See Rev. Proc. 2002-58, 2002-40 I.R.B. 644, for the domestic asset/liability percentages and domestic investment yields needed by foreign insurance companies to compute their minimum effectively connected net investment income under section 842(b). Income from sources outside the United States from a U.S. business is treated as effectively connected with the conduct of a trade or business in the United States. For a definition of effectively connected income, see sections 864(c) and 897.

Generally, any other U.S.-source income received by a foreign corporation that is not effectively connected with the conduct of a business in the United States is taxed at 30% (or at a lower treaty rate). See section 881. If the corporation has this income, attach a schedule showing the kind and amount of income, the tax rate, and the amount of tax.

Note.   Interest received from certain portfolio debt investments that were issued after July 18, 1984, is not subject to the tax.

Additional taxes resulting from the net investment income adjustment may offset a corporation's 30% tax on U.S.-source income. The tax reduction is determined by multiplying the 30% tax by the ratio of the amount of income adjustment to income subject to the 30% tax, computed without the exclusion for interest on state and local bonds or income exempted from taxation by treaty (section 842(c)(2)). Attach a statement showing how the reduction of section 881 tax was figured. Enter the net tax imposed by section 881 on line 9.

Note.   Section 842(c)(1) requires that foreign life insurance companies make the investment income adjustment before claiming a small life insurance company deduction.

Note.   Section 953(d) allows a foreign life insurance company to elect to be taxed as a domestic corporation. If this election is made, include the additional tax required to be paid, on line 11. On the dotted line to the left of line 11, write Section 953(d) and the amount. Attach a schedule showing the computation. See section 953(d) for more details.

Line 10. Other Taxes

Include any of the following taxes and interest in the total on line 10. Check the appropriate box(es) for the form, if any, used to compute the total.

Recapture of investment credit.   If the corporation disposed of investment credit property or changed its use before the end of its useful life or recovery period, it may owe a tax. See Form 4255, Recapture of Investment Credit, for details.

Recapture of low-income housing credit.   If the corporation disposed of property (or there was a reduction in the qualified basis of the property) for which it took the low-income housing credit, it may owe a tax. See Form 8611, Recapture of Low-Income Housing Credit.

Other.   Additional taxes and interest amounts may be included in the total entered on line 10. Check the box for Other if the corporation includes any of the taxes and interest discussed below. See How to report below for details on reporting these amounts on an attached schedule.

• Recapture of qualified electric vehicle (QEV) credit. The corporation must recapture part of the QEV credit claimed in a prior year, if, within 3 years of the date the vehicle was placed in service, it ceases to qualify for the credit. See Regulations section 1.30-1 for details on how to figure the recapture.
• Recapture of Indian employment credit. Generally, if an employer terminates the employment of a qualified employee less than 1 year after the date of initial employment, any Indian employment credit allowed for a prior tax year because of wages paid or incurred to that employee must be recaptured. For details, see Form 8845 and section 45A.
• Recapture of new markets credit (see Form 8874).
• Interest on deferred tax attributable to certain nondealer installment obligations (section 453A(c)).
• Interest due on deferred gain (section 1260(b)).

How to report.   If the corporation checked the Other box, attach a schedule showing the computation of each item included in the total for line 10, and identify the applicable Code section and the type of tax or interest.

Line 11. Total Tax

Include any deferred tax on the termination of a section 1294 election applicable to shareholders in a qualified electing fund in the amount entered on line 11. See Form 8621, Part V, and How to report below.

Subtract any deferred tax on the corporation's share of undistributed earnings of a qualified electing fund (see Form 8621, Part II).

How to report.   Attach a schedule showing the computation of each item included in, or subtracted from, the total for line 11. On the dotted line next to line 11, specify (a) the applicable Code section, (b) the type of tax, and (c) the amount of tax.

Schedule L

All filers must complete Parts I and II of Schedule L.

Note.   Foreign life insurance companies should report assets and insurance liabilities for their U.S. business only.

Part I - Total Assets

For Schedule L, assets means all assets of the corporation. In valuing real property and stocks, use fair market value; for other assets, use the adjusted basis as determined under section 1011 and related sections, without regard to section 818(c). An interest in a partnership or trust is not itself treated as an asset of the corporation. Instead, the corporation is treated as actually owning its proportionate share of the assets held by the partnership or trust. The value of the corporation's share of these assets should be listed on line 3.

Part II - Total Assets and Total Insurance Liabilities

Foreign life insurance companies must maintain a minimum surplus of U.S. assets over their U.S. insurance liabilities. The minimum required surplus is determined by multiplying their U.S. insurance liabilities by a percentage determined by the IRS. The IRS determines the percentage from data supplied by domestic life insurance companies in Schedule L, Part II. See section 842.

For Schedule L, total insurance liabilities means the sum of the following amounts as of the end of the tax year:

1. Total reserves as defined in section 816(c); plus
2. The items referred to in paragraphs (3), (4), (5), and (6) of section 807(c), to the extent such amounts are not included in total reserves.

Foreign life insurance companies, see Notice 89-96 for more information on determining total insurance liabilities on U.S. business.

Schedule M - Other Information

The following instructions apply to page 8, Form 1120-L. Be sure to complete the items that apply to the corporation.

Question 6.   Check the Yes box if:

• The corporation is a subsidiary in an affiliated group (defined below), but is not filing a consolidated return for the tax year with that group or
• The corporation is a subsidiary in a parent-subsidiary controlled group (defined below).

Any corporation that meets either of the requirements above should check the Yes box. This applies even if the corporation is a subsidiary member of one group and the parent corporation of another.

Note.   If the corporation is an excluded member of a controlled group (see section 1563(b)(2)), it is still considered a member of a controlled group for this purpose.

Affiliated group.   An Affiliated group means one or more chains of includible corporations (section 1504(a)) connected through stock ownership with a common parent corporation. The common parent must be an includible corporation and the following requirements must be met.

1. The common parent must own directly stock that represents at least 80% of the total voting power and at least 80% of the total value of the stock of at least one of the other includible corporations and
2. Stock that represents at least 80% of the total voting power and at least 80% of the total value of the stock of each of the other corporations (except for the common parent) must be owned directly by one or more of the other includible corporations.

For this purpose, stock generally does not include any stock that (a) is nonvoting, (b) is nonconvertible, (c) is limited and preferred as to dividends and does not participate significantly in corporate growth, and (d) has redemption and liquidation rights that do not exceed the issue price of the stock (except for a reasonable redemption or liquidation premium). See section 1504(a)(4).

Parent-subsidiary controlled group.   The term parent-subsidiary controlled group means one or more chains of corporations connected through stock ownership (section 1563(a)(1)). Both of the following requirements must be met.

1. At least 80% of the total combined voting power of all classes of voting stock, or at least 80% of the total value of all classes of stock of each corporation in the group (except the parent) must be owned by one or more of the other corporations in the group and
2. The common parent must own at least 80% of the total combined voting power of all classes of stock entitled to vote or at least 80% of the total value of all classes of stock one or more of the other corporations in the group. Stock owned directly by other members of the group is not counted when computing the voting power or value.

See section 1563(d)(1) for the definition of stock for purposes of determining stock ownership above.

Question 8.   Check the Yes box if one foreign person owned at least 25% of (a) the total voting power of all classes of stock of the corporation entitled to vote or (b) the total value of all classes of stock of the corporation.

The constructive ownership rules of section 318 apply in determining if a corporation is foreign owned. See section 6038A(c)(5) and the related regulations.

Enter on line 8a the percentage owned by the foreign person specified in question 8. On line 8b, write the name of the owner's country.

Note.   If there is more than one 25%-or-more foreign owner, complete lines 8a and 8b for the foreign person with the highest percentage of ownership.

Foreign person.   The term foreign person means:

• A foreign citizen or nonresident alien.
• An individual who is a citizen of a U.S. possession (but who is not a U.S. citizen or resident).
• A foreign partnership.
• A foreign corporation.
• Any foreign estate or trust within the meaning of section 7701(a)(31).
• A foreign government (or one of its agencies or instrumentalities) to the extent that it is engaged in the conduct of a commercial activity as described in section 892.

Owner's country.   For individuals, the term owner's country means the country of residence. For all others, it is the country where incorporated, organized, created, or administered.

Requirement to file Form 5472.   If the corporation checked Yes to Question 8, it may have to file Form 5472. Generally, a 25% foreign-owned corporation that had a reportable transaction with a foreign or domestic related party during the tax year must file Form 5472.

See Form 5472 for filing instructions and penalties for failure to file.

Item 12.   If the corporation has a operation loss deduction (OLD), it may elect under section 810(b)(3) to waive the entire carryback period for the OLD and instead carry the OLD forward to future tax years. To do so, check the box on line 12 and file the tax return by its due date, including extensions (do not attach the statement described in Temporary Regulations section 301.9100-12T). Once made, the election is irrevocable. See Pub. 542, section 810, and Form 1139 for more details.

Corporations filing a consolidated return must also attach the statement required by Regulations section 1.1502-21(b)(3)(i) or (ii).

Item 13.   Enter the amount of the operations loss carryover to the tax year from prior years, regardless of whether any of the loss is used to offset income on this return. The amount to enter is the total of all operating losses generated in prior years but not used to offset income (either as a carryback or carryover) in a tax year prior to 2002. Do not reduce the amount by any OLD reported on line 20, page 1.

Paperwork Reduction Act Notice.

We ask for the information on this form to carry out the Internal Revenue laws of the United States. You are required to give us the information. We need it to ensure that you are complying with these laws and to allow us to figure and collect the right amount of tax.

You are not required to provide the information requested on a form that is subject to the Paperwork Reduction Act unless the form displays a valid OMB control number. Books or records relating to a form or its instructions must be retained as long as their contents may become material in the administration of any Internal Revenue law. Generally, tax returns and return information are confidential, as required by section 6103.

The time needed to complete and file this form will vary depending on individual circumstances. The estimated average time is:

Recordkeeping	74 hr., 51 min.
Learning about the law or the form	40 hr.
Preparing the form	62 hr., 32 min.
Copying, assembling, and sending the form to the IRS	5 hr., 37 min.

If you have comments concerning the accuracy of these time estimates or suggestions for making this form simpler, we would be happy to hear from you. You can write to the Tax Forms Committee, Western Area Distribution Center, Rancho Cordova, CA 95743-0001.

Do not send the tax form to this office. Instead, see Where To File on page 3.

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