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TITLE 26-INTERNAL REVENUE CODE poses of computing the taxable income of such subscriber, in the same manner as pre- miums paid by a policyholder to a mutual fire insurance company referred to in such para- graph (3). (5) Losses incurred The term "losses incurred" means losses in- curred during the taxable year on insurance contracts, computed as follows: (A) To losses paid during the taxable year, add salvage and reinsurance recover- able outstanding at the end of the preced- ing taxable year and deduct salvage and re- insurance recoverable outstanding at the end of the taxable year. (B) To the result so obtained, add all unpaid losses outstanding at the end of the taxable year and deduct unpaid losses out- standing at the end of the preceding tax- able year. (6) Expenses incurred The term "expenses incurred" means all ex- penses shown on the annual statement ap- proved by the National Association of Insur- ance Commissioners, and shall be computed as follows: To all expenses paid during the taxable year, add expenses unpaid at the end of the taxable year and deduct expenses unpaid at the end of the preceding taxable year. For the purpose of computing the tax- able income subject to the tax Imposed by section 831, there shall be deducted from ex- penses incurred (as defined in this paragraph) all expenses incurred which are not allowed as deductions by subsection (c). (e) Deductions allowed In computing the taxable income of an insur- ance company subject to the tax imposed by section 831, there shall be allowed as deduc- tions: (1) all ordinary and necessary expenses in- curred, as provided in section 162 (relating to trade or business expenses); (2) all interest, as provided in section 163; (3) taxes, as provided in section 164; (4) losses incurred, as defined in subsection (b)(5) of this section; (5) capital losses to the extent provided in subchapter P (sec. 1201 and following, relat- ing to capital gains and losses) plus losses from capital assets sold or exchanged in order to obtain funds to meet abnormal insurance losses and to provide for the payment of divi- dends and similar distributions to policy- holders. Capital assets shall be considered as sold or exchanged in order to obtain funds to meet abnormal insurance losses and to pro- vide for the payment of dividends and similar distributions to policyholders to the extent that the gross receipts from their sale or ex- change are not greater than the excess, if any, for the taxable year of the sum of divi- dends and similar distributions paid to policy- holders in their capacity as such, losses paid, and expenses paid over the sum of the items described in section 822(b) (other than para- graph (1)(D) thereof) and net premiums re- ceived. In the application of section 1212 for purposes of this section, the net capital loss for the taxable year shall be the amount by which losses for such year from sales or ex- changes of capital assets exceeds the sum of the gains from such sales or exchanges and whichever of the following amounts is the lesser: (A) the taxable income (computed with- out regard to gains or losses from sales or exchanges of capital assets; or (B) losses from the sale or exchange of capital assets sold or exchanged to obtain funds to meet abnormal insurance losses and to provide for the payment of dividends and similar distributions to policyholders; (6) debts in the nature of agency balances and bills receivable which beconme worthless within the taxable year; (7) the amount of interest earned during the taxable year which under section 103 is excluded from gross income; (8) the depreciation deduction allowed by section 167 and the deduction allowed by sec- tion 611 (relating to depletion); (9) charitable, etc., contributions, as pro- vided in section 170; (10) deductions (other thqn those specified in this subsection) as pro,,.ed in part VI of subchapter B (sec. 161 and following, relating to itemized deductions for individuals and corporations) and in part I of subchapter D (see. 401 and following, relating to pension, profit-sharing, stock bonus plans, etc.); (11) dividends and similar distributions paid or declared to policyholders in their capacity as such, except in the case of a mutual fire in- surance company described in section 831(a)(3)(A). For purposes of the preceding sentence, the term "dividends and similar dis- tributions". includes amounts returned or credited to policyholders on cancellation or expiration of policies described in section 831(a)(3)(B). For purposes of this paragraph, the term "paid or declared" shall be con- strued according to the method of accounting regularly employed in keeping the books of the insurance company; (12) the special deductions allowed by part VIII of subchapter B (see. 241 and following, relating to dividends received); and (13) in the case of a company which writes mortgage guaranty insurance, the deduction allowed by subsection (e). (d) Double deductions Nothing in this section shall permit the same item to be deducted more than once. (e) Special deduction and income account In the case of taxable years beginning after December 31, 1966, of a company which writes mortgage guaranty insurance- (1) Additional deduction There shall be allowed as a deduction for the taxable year, if bonds are purchased as required by paragraph (2), the sum of- (A) an amount representing the amount required by State law or regulation to be set aside in a reserve for mortgage guaranty in- surance losses resulting from adverse eco- nomic cycles; and (B) an amount representing the aggregate of amounts so set aside in such reserve for the 8 preceding taxable years to the extent such amounts were not deducted under this paragraph in such preceding taxable years, Page 531 § 832