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TITLE 26-INTERNAL REVENUE CODE L. 86-69, set out as a note under section 6072 of this title. SECTION REFEUVU TO IN OTHER SECTIONS This section is referred to in sections 80, 243, 542, 812, 815, 818, 819, 841, 891, 1351, 1503, 1504, 1563, 6501 of this title. SUBPART B-INVESTMENT INCOME Sec. 804. Taxable investment income. 805. Policy and other contract liability requirements. 806. Certain changes in reserves and assets. § 804. Taxable investment income (a) In general (1) Exclusion of policyholders' share of Investment yield The policyholders' share of each and every item of investment yield (including tax- exempt interest and dividends received) of any life insurance company shall not be in- cluded in taxable investment income. For pur- poses of the preceding sentence, the policy- holders' share of any item shall be that per- centage obtained by dividing the policy and other contract liability requirements by the investment yield; except that if the policy and other contract liability requirements exceed the investment yield, then the policy- holders' share of any item shall be 100 per- cent. (2) Taxable investment income defined For purposes of this part, the taxable in- vestment income for any taxable year shall be an amount (not less than zero) equal to the amount (if any) of the net capital gabn plus the sum of the life insurance company's share of each and every item of investment yield (including tax-exempt interest and dividends received), reduced by- (A) the sum of- (i) the life insurance company's share of interest which under section 103 is ex- cluded from gross income. (ii) the deductions for dividends re- ceived provided by sections 243, 244, and 245 (as modified by paragraph (4)) com- puted with respect to the life insurance company's share of the dividends re- ceived; and (B) the small business deduction provided by paragraph (3). For purposes of the preceding sentence, the life insurance company's share of any item shall be that percentage which, when added to the percentage obtained under the second sentence of paragraph (1), equals 100 percent. (3) Small business deduction For purposes of this part, the small busi- ness deduction is an amount equal to 10 per- cent of the investment yield for the taxable year. The deduction under this paragraph shall not exceed $25,000. (4) Application of section 246(b) In applying section 246(b) (relating to limi- tation on aggregate amount of deductions for dividends received) for purposes of this sub- section, the limit on the aggregate amount of the deductions allowed by sections 243(a)(1), 244(a), and 245 shall be 85 percent of the tax- able investment income computed without regard to the deductions allowed by such sec- tions. (b) Gross investment income For purposes of this part, the term "gross in- vestment income" means the sum of the follow- ing: (1) Interest, etc. The gross amount of income from- (A) interest, dividends, rents, and royal- ties, (B) the entering into of any lease, mort- gage, or other instrument or agreement from which the life insurance company de- rives interest, rents, or royalties, and (C) the alteration or termination of any instrument or agreement described in sub- paragraph (B). (2) Short-term capital gain The amount (if any) by which the net short-term capital gain exceeds the net long- term capital loss. (3) Trade or business Income The gross income from any trade or busi- ness (other than an insurance business) car- ried on by the life insurance company, or by a partnership of which the life insurance com- pany is a partner. In computing gross income under this paragraph, there shall be excluded any item described in paragraph (1). Except as provided in paragraph (2), in comput- ing gross investment income under this subsec- tion, there shall be excluded any gain from the sale or exchange of a capital asset, and any gain considered as gain from the sale or exchange of a capital asset. (c) Investment yield defined For purposes of this part, the term "invest- ment yield" means the gross investment income less the following deductions- (1) Investment expenses Investment expenses for the taxable year. If any general expenses are in part assigned to or included in the investment expenses, the total deduction under this paragraph shall not exceed the sum of- (A) one-fourth of one percent of the mean of the assets (as defined in section 805(b)(4)) held at the beginning and end of the taxable year, (B) the amount of the mortgage service fees for the taxable year, plus (C) whichever of the following is the greater: (i) one-fourth of the amount by which the investment yield (computed without any deduction for investment expenses al- lowed by this paragraph) exceeds 34 per- cent of the mean of the assets (as defined in section 805(b)(4)) held at the beginning and end of the taxable year, reduced by the amount described in subparagraph (B), or (ii) one-fourth of one percent of the mean of the value of mortgages held at the beginning and end of the taxable year for which there are no mortgage service fees for the taxable year. Page 499 § 804