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TITLE 26-INTERNAL REVENUE CODE be treated in the same manner as noncancella- ble life, health, and accident insurance. (f) Burial and funeral benefit insurance companies. A burial or funeral benefit insurance compa- ny engaged directly in the manufacture of fu- neral supplies or the performance of funeral services shall not be taxable under this part but shall be taxable under section 821 or section 831. (g) Contracts with reserves based on segregated asset accounts (1) Definitions (A) Annuity contracts include variable annuity contracts For purposes of this part, an "annuity contract" includes a contract which pro- vides for the payment of a variable annuity computed on the basis of recognized mortal- ity tables and the investment experience of the company issuing the contract. (B) Contracts with reserves based on a segregated asset account For purposes of this part, a "contract with reserves based on a segregated asset account" is a contract- (I) which provides for the allocation of all or part of the amounts received under the contract to an account which, pursu- ant to State law or regulation, is segregat- ed from the general asset accounts of the company, (ii) which is described in subparagraph (A), (B), (C), (D), or (E) of section 805(d)(1) (other than a life, health or acci- dent, property, casualty, or liability insur- ance contract) or which provides for the payment of annuities, and (iii) under which the amounts paid in, or the amount paid out, reflect the invest- ment return and the market value of the segregated asset account. If a contract ceases to reflect current invest- ment return and current market value, such contract shall not be considered as meeting the requirements of clause (iii) after such cessation. (2) Life insurance reserves For purposes of subsection (b)(1)(A) of this section, the reflection of the investment return and the market value of the segregat- ed asset account shall be considered an as- sumed rate of interest. (3) Separate accounting For purposes of this part, a life insurance company which issues contracts with reserves based on segregated asset accounts shall sepa- rately account for the various income, exclu- sion, deduction, asset, reserve, and other li- ability items properly attributable to such segregated asset accounts. For such items as are not accounted for directly, separate ac- counting shall be made- (A) in accordance with the method regu- larly employed by such company, if such method is reasonable, and (B) in all other cases, in accordance with regulations prescribed by the Secretary. (4) Investment yield (A) In general For purposes of this part, the policy and other contract liability requirements, and the life insurance company's share of in- vestment yield, shall be separately comput- ed- (i) with respect to the items separately accounted for in accordance with para- graph (3). and (0i) excluding the items taken into ac- count under clause (i). (B) Capital gains and losses If, without regard to subparagraph (A), the net short-term capital gain exceeds the net long-term capital loss, such excess shall be allocated between clauses (i) and (ii) of subparagraph (A) in proportion to the re- spective contributions to such excess of the items taken into account under each such clause. (5) Policy and other contract liability requirements For purposes of this part- (A) with respect to life insurance reserves based on segregated asset accounts, the ad- justed reserves rate and the current earn- ings rate for purposes of section 805(b), and the rate of interest assumed by the taxpay- er for purposes of sections 805(c) and 809(a)(2), shall be a rate equal to the cur- rent earnings rate determined under section 805(b)(2) with respect to the items separate- ly accounted for in accordance with para- graph (3) reduced by the percentage ob- tained by dividing- (i) any amount retained with respect to such reserves by the life insurance compa- ny from gross investment income (as de- fined in section 804(b) on segregated assets, to the extent such retained amount exceeds the deductions allowable under section 804(c) which are attribut- able to such reserves, by (ii) the means of such reserves; and (B) with respect to reserves based on seg- regated asset accounts other than life insur- ance reserves, an amount equal to the prod- uct of- (i) the rate of interest assumed as de- fined in subparagraph (A), and (it) the means of such reserves, shall be included as interest paid within the meaning of section 805(e)(1). (6) Increases and decreases in reserves For purposes of subsections (a) and (b) of sec- tion 810, the sum of the items described in sec- tion 810(c) taken into account as of the close of the taxable year shall, under regulations pre- scribed by the Secretary, be adjusted- (A) by subtracting therefrom an amount equal to the sum of the amounts added from time to time (for the taxable year) to the re- serves separately accounted for in accordance with paragraph (3) by reason of appreciation in value of assets (whether or not the assets have been disposed of), and (B) by adding thereto an amount equal to the sum of the amounts subtracted from time to time (for the taxable year) from such re- serves by reason of depreciation in value of Page 496