Schedule E - Premiums Earned

Definitions

Undiscounted unearned premiums means the unearned premiums shown in the annual statement filed for the year ending with or in the tax year.

Applicable interest rate   means the annual rate determined under section 846(c)(2) for the calendar year the premiums are received.

Applicable statutory premium recognition pattern   means the statutory premium recognition pattern in effect for the calendar year the premiums are received, and is based on the statutory premium recognition pattern which applies to premiums received by the corporation in that calendar year. For purposes of the preceding sentence, premiums received during any calendar year will be treated as received in the middle of such year.

Line 1.   Enter gross premiums written on insurance contracts during the tax year, less return premiums and premiums paid for reinsurance. See Regulations section 1.832-4.

Lines 2a and 4a.   Include on lines 2a and 4a:

1. All life insurance reserves, as defined in section 816(b) (but determined under section 807) and
2. All unearned premiums of a Blue Cross or Blue Shield organization to which section 833 applies.

Lines 2b and 4b.   Include on lines 2b and 4b, 90% of unearned premiums for insurance against default in the payment of principal or interest on securities described in section 165(g)(2)(C) (relating to worthless securities) with maturities of more than 5 years.

Lines 2c and 4c.   The amount of discounted unearned premiums at the end of any tax year must be the present value of those premiums (as of such time and separately with respect to premiums received in each calendar year) determined by using:

1. The amount of the undiscounted unearned premiums at such time;
2. The applicable interest rate; and
3. The applicable statutory premium recognition pattern.

Lines 2d and 4d.   Include on lines 2d and 4d, 80% of the total of all unearned premiums not reported on lines 2a through 2c, or 4a through 4c, respectively.

A reciprocal or interinsurer required under state law to reflect unearned premiums on its annual statement net of premium acquisition expenses should increase its unearned premiums by the amount of such acquisition expenses prior to making the computation on lines 2d and 4d. See section 832(b)(7)(E).

Line 6.   Transitional adjustments apply to companies which become taxable under section 831(a). See section 832(b)(7)(D) for more information.

Schedule F - Losses Incurred

Line 1. Losses paid.   Enter the total losses paid on insurance contracts during the tax year less salvage and reinsurance recovered during the tax year.

Lines 2a and 4a. Unpaid losses on life insurance contracts.   Unpaid losses must be adjusted for recoveries of reinsurance. The amounts of expected recoveries should be estimated based on the facts in each case and the corporation's experience with similar cases. See Regulations section 1.832-4(b).

Lines 2b and 4b. Discounted unpaid losses outstanding.   Enter all discounted unpaid losses as defined in section 846.

Section 846 provides that the amount of discounted unpaid losses must be computed separately by each line of business (multiple peril lines must be treated as a single line of business) and by each accident year and must be equal to the present value of those losses determined by using the:

1. Amount of the undiscounted unpaid losses,
2. Applicable interest rate, and
3. Applicable loss payment pattern.

Special rules apply with respect to:

• Unpaid losses related to disability insurance (other than credit disability insurance),
• Noncancelable accident and health insurance,
• Cancelable accident and health insurance, and
• International and reinsurance lines of business.

With regard to the special rules for discounting unpaid losses on accident and health insurance (other than disability income insurance), unpaid losses are assumed to be paid in the middle of the year following the accident year.

Generally, the amount of undiscounted unpaid losses means the unpaid losses and unpaid loss adjustment expenses shown in the annual statement. However, see Regulations section 1.846-1(a)(1) referring to Regulations section 1.832-4(b) relating to the determination of unpaid losses.

Under section 832(b)(5)(A), unpaid losses must be adjusted to take into account estimated recoveries due to salvage and reinsurance for those losses. If the amounts shown in the annual statement were determined on a discounted basis and if the extent to which these losses were discounted can be determined on the basis of information disclosed on or with the annual statement, the amount of the undiscounted unpaid losses must be recomputed to eliminate any reduction caused by such discounting. In no event can the amount of discounted unpaid losses with respect to any line of business for an accident year exceed the total amount of unpaid losses with respect to any line of business for an accident year as reported on the annual statement. Also see Regulations section 1.832-4(d) regarding increasing unpaid losses shown on the annual statement by salvage recoverable. Also see Rev. Proc. 92-77, 1992-2 C.B. 454.

The applicable interest rate for each calendar year and the applicable loss payment pattern for each accident year for each line of business are determined by the IRS. The applicable interest rate and loss payment patterns for 2002 will be published in the Internal Revenue Bulletin when available. The applicable interest rates and loss payment pattern for 2000 and 2001 are published in Rev. Proc. 2000-44, 2000-43 I.R.B. 409 and Rev. Proc. 2001-60, 2001-53 I.R.B. 643.

Section 846(e) allows corporations having sufficient historical experience to determine a loss payment pattern to elect under certain circumstances to use their own historical experience. If this election is made, the loss payment patterns will be based on the most recent calendar year for which an annual statement was filed before the beginning of the accident year. The election will not apply to any international or reinsurance line of business. If the corporation makes this election, check the Yes column for question 7 in Schedule I, Other Information. For more information, see section 846(e), Regulations section 1.846-2, and Rev. Proc. 92-76, 1992-2 C.B. 453.

Note.   There is a special application of the Fresh Start provision for an insurance company that is not subject to tax under section 831(a) for its first tax year beginning after December 31, 1986, because (1) it is described in section 501(c) or (2) it is subject to tax under section 831(b) on its investment income.

If the insurance company later becomes subject to tax under section 831(a), the rules relating to the Fresh Start under the discounting provisions are applied by treating the last tax year before the year in which the insurance company becomes subject to tax under section 831(a) as the insurance company's last tax year beginning before 1987. See section 1010(e) of the Act of 1988 and Notice 88-100, 1988-2 C.B. 439.

Lines 6 and 7. Estimated salvage and reinsurance recoverable.   Enter on lines 6 and 7 the amount of estimated salvage and reinsurance recoverable. The amount of estimated salvage recoverable must be determined on a discounted basis. The estimated salvage discount factors for 2001 are published in Rev. Proc. 2001-61, 2001-53 I.R.B. 653. The 2002 estimated salvage and reinsurance rates will be published in the Internal Revenue Bulletin when available. Also see Regulations section 1.832-4.

Line 9. Tax-exempt interest subject to section 832(b)(5)(B).   Enter the amount of tax-exempt interest received or accrued during the tax year on investments made after August 7, 1986. For information regarding the determination of the acquisition date of an investment, see the instructions for Schedule C.

Schedule G - Other Capital Losses

Capital assets are considered sold or exchanged to provide funds to meet abnormal insurance losses and to pay dividends and make similar distributions to policyholders to the extent that the gross receipts from their sale or exchange are not more than the amount by which the sum of dividends and similar distributions paid to policyholders, losses paid, and expenses paid for the tax year is more than the total on line 9, Schedule G.

Total gross receipts from sales of capital assets (line 12, column (c)) must not be more than line 10. If necessary, the corporation may report part of the gross receipts from a particular sale of a capital asset on this schedule and the rest on Schedule D (Form 1120). Otherwise, do not include on Schedule D (Form 1120) any sales reported on this schedule.

Schedule H - Special Deduction and Ending Adjusted Surplus for Section 833 Organizations

Line 5. Beginning adjusted surplus.   If the corporation was a section 833 organization in 2001, it should enter the amount from Schedule H, line 10, of its 2001 Form 1120-PC.

Generally, the adjusted surplus as of the beginning of any tax year is an amount equal to the adjusted surplus as of the beginning of the preceding tax year:

1. Increased by the amount of any adjusted taxable income for the preceding tax year or
2. Decreased by the amount of any adjusted net operating loss for the preceding tax year.

If 2002 is the first tax year the taxpayer qualifies as a section 833 organization, see section 833(c)(3)(C) to determine the adjusted surplus as of the beginning of the 2002 tax year.

For purposes of the computation of the adjusted surplus, the terms adjusted taxable income and adjusted net operating loss mean the taxable income or the net operating loss, respectively, determined with the following modifications:

1. Without regard to the deduction determined under section 833(b)(1);
2. Without regard to any carryover or carryback to that tax year; and
3. By increasing gross income by an amount equal to the net exempt income for the tax year.

Line 6. Special deduction.   The deduction for any tax year is limited to taxable income for that tax year determined without regard to this deduction.

Note.   Under section 833(b)(4), any determination under section 833(b) must be made by only taking into account items from the health-related business of the corporation.

Line 8a. Adjusted tax-exempt income.   Reduce the total tax-exempt interest received or accrued during the tax year by any amount (not otherwise deductible) which would have been allowable as a deduction for the tax year if such interest were not tax-exempt. Enter the result on line 8a.

Line 8b. Adjusted dividends-received deduction.   Reduce the total amount allowed as a deduction under sections 243, 244, and 245 by the amount of any decrease in deductions allowable for the tax year because of section 832(b)(5)(B) when the decrease is caused by the deductions under sections 243, 244, and 245. Enter the result on line 8b.

Schedule I - Other Information

The following instructions apply to page 7, Form 1120-PC. Be sure to complete all of the items that apply to the corporation.

Question 4

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.   The term 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, the term 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 of 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 6

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 6a the percentage owned by the foreign person specified in question 6. On line 6b, write the name of the owner's country.

Note.   If there is more than one 25%-or-more foreign owner, complete lines 6a and 6b 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, 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 10

Show any tax-exempt interest income received or accrued. Include any exempt-interest dividends received as a shareholder in a mutual fund or other RIC.

Item 11

If the corporation has an NOL for its 2002 tax year, it may elect under section 172(b)(3) to waive the entire carryback period for the NOL and instead carry the NOL forward to future tax years. To do so, check the box on line 11 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 172, 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 12

Enter the amount of the NOL carryover to the tax year from prior years, even if some of the loss is used to offset income on this return. The amount to enter is the total of all NOLs generated in prior years but not used to offset income (either as a carryback or carryover) to a tax year prior to 2002. Do not reduce the amount by any NOL deduction reported on Schedule A, line 36b.

Schedule L - Balance Sheets per Books

Note.   All insurance companies required to file Form 1120-PC must complete Schedule L.

The balance sheet should agree with the corporation's books and records. Include certificates of deposit as cash on line 1, Schedule L.

Line 5. Tax-exempt securities.   Include on this line:

1. State and local government obligations, the interest on which is excludable from gross income under section 103(a) and
2. Stock in a mutual fund or other RIC that distributed exempt-interest dividends during the tax year of the corporation.

Line 18. Insurance liabilities.   Include on this line:

• Undiscounted unpaid losses.
• Loss adjustment expenses.
• Unearned premiums.

See section 846 for more information.

Line 27. Adjustments to shareholders' equity.   Some examples of adjustments to report on this line include:

• Unrealized gains and losses on securities held available for sale.
• Foreign currency translation adjustments.
• The excess of additional pension liability over unrecognized prior service cost.
• Guarantees of employee stock (ESOP) debt.
• Compensation related to employee stock award plans.

If the total adjustment to be entered on line 27 is a negative amount, enter the amount in parentheses.

Schedule M-1 - Reconciliation of Income (Loss) per Books With Income per Return

Line 5c. Travel and entertainment.   Include on line 5c any of the following:

• Meals and entertainment not deductible under section 274(n).
• Expenses for the use of an entertainment facility.
• The part of business gifts over $25.
• Expenses of an individual over $2,000 which are allocable to conventions on cruise ships.
• Employee achievement awards over $400.
• The cost of entertainment tickets over face value (also subject to 50% limit under section 274(n)).
• The cost of skyboxes over the face value of nonluxury box seat tickets.
• The part of luxury water travel not deductible under section 274(m).
• Expenses for travel as a form of education.
• Other nondeductible travel and entertainment expenses.

For more information, see Pub. 542.

Line 7a. Tax-exempt interest.   Include as interest on line 7a any exempt-interest dividends received as a shareholder in a mutual fund or other RIC.

Paperwork Reduction Act Notice.

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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 2.

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