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'I ITLE 26-INTERNAL REVENUE CODE sured under a conventional coinsurance con- tract. (2) Consent of reinsured and reinsurer Paragraph (1) shall apply to an insurance or annuity policy reinsured under a modified coinsurance contract only if the reinsured and reinsurer consent, in such manner as the Secretary shall prescribe by regulations- (A) to the application of paragraph (1) to all insurance and annuity policies reinsured under such modified coinsurance contract, and (B) to the application of the rules pro- vided by subsection (c) and the rules pre- scribed under such subsection. Such consent, once given, may not be rescind- ed except with the approval of the Secretary. (b) Definition of modified coinsurance contract For purposes of this section, the term "modi- fied coinsurance contract" means an indemnity reinsurance contract under the terms of which- (1) a life insurance company (hereinafter referred to as "the reinsurer") agrees to in- demnify another life insurance company (her- einafter referred to as "the reinsured") against a risk assumed by the reinsured under the Insurance or annuity policy reinsured, (2) the reinsured retains ownership of the assets in relation to the reserve on the policy reinsured, (3) all or part of the gross investment income derived from such assets is paid by the reinsured to the reinsurer as a part of the consideration for the reinsurance of such policy, and (4) the reinsurer is obligated for expenses incurred, and for Federal income taxes im- posed, in respect of such gross investment income. (c) Special rules Under regulations prescribed by the Secre- tary, in applying subsection (a)(1) with respect to any insurance or annuity policy the follow- ing rules shall (to the extent not improper under the terms of the modified coinsurance contract under which such policy is reinsured) be applied in respect of the amount of such policy reinsured: (1) Premiums and gross investment income The premiums (to the extent allocable to the participation of the reinsurer therein) re- ceived for the policy reinsured shall be treat- ed as received by the reinsurer and not by the reinsured. The gross investment income (to the extent allocable to the participation of the reinsurer therein) derived from the assets in relation to the reserve on the policy rein- sured shall be treated as gros3 investment income of the reinsurer and not of the rein- sured. The gross investment income so treat- ed shall be considered as derived proportion- ately from each of the various sources of gross investment income of the reinsured. (2) Capital gains and losses The gains and losses from sales and ex- changes of capital assets, and gains and losses considered as gains and losses from sales and exchanges of capital assets, of the reinsured shall (to the extent of the participation therein by the reinsurer under the terms of the modified coinsurance contract) be treated as gains and losses from sales and exchanges of capital assets of the reinsurer and not of the reinsured. (3) Reserves and assets The reserve on the policy reinsured shall be treated as a part of the reserves of the rein- surer and not of the reinsured, and the assets In relation to such reserve shall be treated as owned by the reinsurer and not by the rein- sured. (4) Expenses The expenses (to the extent jeimbursable by the reinsurer) incurred with respect to the policy reinsured and with respect to the assets referred to in paragraph 1.3) shall be treated as incurred by the reinsurer and not by the reinsured. (5) Dividends to policyholders The dividends to policyholders paid in re- spect of the policy reinsured shall be treated as paid by the reinsurer and not by the rein- sured. For purposes of the preceding sen- tence, the amount of dividends to policy- holders treated as paid by the reinsurer shall be the amount paid, in respect of the policy reinsured, by the reinsurer to the reinsured as reimbursement for dividends to policy- holders paid by the reinsured. This para- graph shall apply also in respect of an insur- ance or annuity policy reinsured under a con- ventional coinsurance contract. (6) Rules prescribed by the Secretary Such other rules as may be prescribed by the Secretary. In applying the rules provided by paragraphs (1), (2), (3), (4), and (5) and the rules prescribed under paragraph (6), an item shall be taken into account as income only once under subpart B and only once under subpart C by both the reinsured and the reinsurer, and an item shall be allowed as a deduction only once under sub- part B and only once under subpart C to both the reinsured and the reinsurer. (Added Pub. L. 86-69, § 2(a), June 25, 1959, 73 Stat. 137, and amended Pub. L. 94-455, title XIX, §§ 1901(a)(103), 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1782, 1834.) AMENDMENTS 1976-Subsee. (a). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary" wherever appearing. Subsec. (c). Pub. L. 94-455, § 1901(a)(103), struck out "or his delegate" following "Secretary" in two places, redesignated former par. (7) as (6), and substituted in material following par. (6), "and (5) and the rules pre- scribed under paragraph (6)" for "(5), and (6) and the riles prescribed under paragraph (7). Former par. (6), which related to reimbursement for 1957 Federal income tax, was struck out. EFFECTIVE DATE OF 1976 AMENDMENT Amendment of subsec. (c) by section 1901(a)(103) of Pub. L. 94-455 effective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94- 455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. Page 519 § 820