REVENUE RULING 78-150
1978-1 C.B. 214

[IRS Annotation]
Life insurance companies; accounting method; market discount accrued on taxable bonds. Life insurance companies that changed to the method of accounting for market discount on taxable bonds provided by section 818(b)(3) of the Code for taxable years that began after 1962 and ended before the publication of Rev. Rul. 73-60 are deemed to have received permission for the change. However, a life insurance company that ceased accruing market discount on bonds held on or after December 31, 1962, must include in the adjusted basis of such bonds only the market discount included in income prior to the change. Rev. Rul. 73-60 clarified.

Rev. Rul. 78-150
Rev. Rul. 73-60, 1973-1 C.B. 332, holds that a life insurance company must obtain permission to change its method of accounting from accruing market discount on taxable bonds to the method provided by section 818(b)(3) of the Internal Revenue Code of 1954. Section 818(b)(3) provides, in part, that for all taxable years beginning after December 31, 1962, no accrual of discount shall be required on certain bonds (as defined in section 171(d)), except in the case of discount that is interest to which section 103 applies, or that is original issue discount as defined in section 1232(b).

Numerous life insurance companies have asked the Internal Revenue Service whether permission to change their method of accounting was required when they ceased accruing market discount for taxable years beginning after December 31, 1962, in conformity with section 818(b)(3) of the Code, based on their interpretation that such change was mandatory. In the years after the taxable years in which they made the change, these companies have consistently adhered to the new method of accounting and did not accrue market discount.

Under section 446(e) of the Code an insurance company is required to secure the Commissioner's permission before it changes its method of accounting from accruing market discount to the method provided by section 818(b)(3). However, the Service recognizes that before publication of Rev. Rul. 73-60 many life insurance companies, believing the method under section 818(b)(3) to be mandatory, incorrectly changed to the method of accounting for market discount provided in section 818(b)(3) without obtaining the Commissioner's permission.

Held, life insurance companies that changed to the method of accounting for market discount provided by section 818(b)(3) of the Code for taxable years ending before the publication of Rev. Rul. 73-60 are deemed to have received the Commissioner's permission for this change in method of accounting. However, a life insurance company that ceased accruing market discount on bonds held on or after December 31, 1962, must include in the adjusted basis of such bonds only the market discount that was included in income prior to the change in method. Any change by a life insurance company in its treatment of market discount after January 29, 1973, the date of publication of Rev. Rul. 73-60 in the Internal Revenue Bulletin, is subject to section 446(e) of the Code and the regulations thereunder.

Rev. Rul. 73-60 is clarified.