§817A Special Rules for Modified Guaranteed Contracts

Summary

Treats life-insurance-type contracts that put money into special, state‑segregated accounts valued by market as "modified guaranteed contracts" and sets tax rules for them. For these contracts, one existing reserve rule in section 807(e)(1)(A)(ii) does not apply. Any gain or loss on assets held in those segregated accounts counts as ordinary income or loss. If a segregated asset is still held at the end of a taxable year, the company must treat it as if sold at its fair market value on the last business day of that year and include that gain or loss on the return for that year. Any later real gain or loss must be adjusted to avoid double counting. Assumed interest rates for reserve calculations may be set with reference to market rates. A "modified guaranteed contract" means a contract (or a part treated separately) where some payments go into a segregated, market‑valued account under state law, and the contract pays annuities, is life insurance, or is a certain pension contract; its reserves are valued at market for annual statements; and it offers a net surrender value or a policyholder’s fund. The Treasury can make rules to handle market value adjustments, set interest rates yearly for these contracts, limit ordinary gain/loss treatment to the assets that back these reserves, deal with transfers into and out of the segregated account, and issue other necessary regulations.