rp-98-31.pdf

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# REV. PROC. 98-31

## SECTION 1. PURPOSE

This revenue procedure provides the domestic asset/liability
percentages and domestic investment yields needed by foreign life
insurance companies and foreign property and liability insurance
companies to compute their minimum effectively connected net
investment income under section 842 (b) of the Internal Revenue
Code for taxable years beginning after December 31, 1996.
Instructions are provided for computing foreign insurance
companies' liabilities for the estimated tax and installment
payments of estimated tax for taxable years beginning after
December 31, 1996. For more specific guidance regarding the
computation of the amount of net investment income to be included
by a foreign insurance company on its U.S. income tax return, see
Notice 89-96, 1989-2 C.B. 417. For the domestic asset/liability
percentage and domestic investment yield, as well as instructions
for computing foreign insurance companies' liabilities for
estimated tax and installment payments of estimated tax for
taxable years beginning after December 31, 1995, see Rev. Proc.
97-16, 1997-5 I.R.B. 25.

## SECTION 2. CHANGES

. 01 DOMESTIC ASSET/LIABILITY PERCENTAGES FOR 1997. The
Secretary determines the domestic asset/liability percentage
separately for life insurance companies and property and
liability insurance companies. For the first taxable year
beginning after December 31, 1996, the relevant domestic
asset/liability percentages are:

117.3 percent for foreign life insurance companies, and
174.9 percent for foreign property and liability insurance
companies.

. 02 DOMESTIC INVESTMENT YIELDS FOR 1997. The Secretary is
required to prescribe separate domestic investment yields for
foreign life insurance companies and for foreign property and
liability insurance companies. For the first taxable year
beginning after December 31, 1996, the relevant domestic
investment yields are:

7.5 percent for foreign life insurance companies, and

5.9 percent for foreign property and liability insurance
companies.

. 03 SOURCE OF DATA FOR 1997. The 842 (b) percentages to be
used for the 1997 tax year are based on tax return data. For
recent years prior to 1997, the asset/liability percentage for
life insurance companies was based upon annual statement data
while the domestic investment yield was based upon tax return

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data. Both the asset/liability percentage and the domestic
investment yield for property and liability companies have been
based upon tax return data for several years. The use of tax
return data provides asset/liability percentages that are more
consistent with the domestic investment yield that is also based
on tax return data. The tax return data needed to calculate
asset/liability percentages have been available for several
years, however, the conversion from annual statement to tax data
had been delayed until the time that the switch was favorable to
taxpayers. Taxable year 1997 is the first year since the
availability of tax-return based, asset/liability data that the
switch would be favorable to taxpayers. All percentages for
future tax years will be based on tax return data.

With regard to future updates of the section 842 (b)
percentages, the Service is considering the use of statistical
sampling techniques to collect data from the tax returns of
domestic insurance companies. The sampling technique under
consideration is the same used to select insurance company tax
returns in IRS Statistics Division's Publication 16. Section 3
of that publication describes the sampling procedure. The
Service solicits comments addressing the use of this statistical
sampling technique to calculate the section 842 (b) percentages
from tax data. Comments may be addressed to CC: DOM: CORP : R (Rev.
Proc. 98-31), Room 5228, Internal Revenue Service, POB 7604, Ben
Franklin Station, Washington, DC 20044. In the alternative,
comments may be hand-delivered between the hours of 8 a.m. and 5
p.m. to CC: DOM: CORP:R (Rev. Proc. 98-31), Courier's Desk,
Internal Revenue Service, 1111 Constitution Avenue, NW,
Washington, DC.

# SECTION 3. APPLICATION -- ESTIMATED TAXES

To compute estimated tax and the installment payments of
estimated tax due for taxable years beginning after December 31,
1996, a foreign insurance company must compute its estimated tax
payments by adding to its income other than net investment income
the greater of (i) its net investment income as determined under
section 842 (b) (5), that is actually effectively connected with
the conduct of a trade or business within the United States for
the relevant period, or (ii) the minimum effectively connected
net investment income under section 842 (b) that would result from
using the most recently available domestic asset/liability
percentage and domestic investment yield. Thus, for installment
payments due after the release of this revenue procedure, the
domestic asset/liability percentages and the domestic investment
yields provided in this revenue procedure must be used to compute
the minimum effectively connected net investment income.
However, if the due date of an installment is less than 20 days
after the date this revenue procedure is published in the
Internal Revenue Bulletin, the asset/liability percentages and
domestic investment yields provided in Rev. Proc. 97-16 may be

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used to compute the minimum effectively connected net investment
income for such installment. For further guidance in computing
estimated tax, see Notice 89-96.

# SECTION 4. EFFECTIVE DATE

This revenue procedure is effective for taxable years
beginning after December 31, 1996.

## DRAFTING INFORMATION

The principal author of this revenue procedure is Roger M.
Brown of the Office of the Associate Chief Counsel
(International) . For further information regarding this revenue
procedure, please contact Mr. Brown at (202) 622-3870 (not a
toll-free call), or write to the Internal Revenue Service, Office
of the Associate Chief Counsel (International), 1111 Constitution
Avenue, NW, Washington, DC 20224, Attention: CC: INTL: Br5, Room
4562.