(Rev. December 2025)

Instructions for

Schedule M-3 (Form

1120-PC)

(Rev. December 2025)

(For use with the December 2021 revision of Schedule M-3 (Form 1120-PC))

Net Income (Loss) Reconciliation for U.S. Property and Casualty Insurance

Companies With Total Assets of $10 Million or More

Section references are to the Internal Revenue Code

unless otherwise noted.

Future Developments

For the latest information about developments related to

Schedule M-3 (Form 1120-PC) and its instructions, such

as legislation enacted after they were published, go to

IRS.gov/Form1120PC.

What’s New

Domestic research and experimental expenditures.

P.L. 119-21 adds new section 174A to the Internal

Revenue Code. Section 174A(a) allows corporations to

deduct amounts paid or incurred for domestic research

and experimental expenditures in tax years beginning

after December 31, 2024. Alternatively, under section

174A(c), a corporation may elect to charge such

expenditures to a capital account and amortize such

expenditures ratably over a period of not less than 60

months, beginning with the month in which the corporation

first realizes benefits from such expenditures. In addition,

section 70302(f) of P.L. 119-21 provides corporations with

various transition options that may be applied to recover

unamortized amounts paid or incurred in tax years

beginning after December 31, 2021, and before January

1, 2025, that were capitalized and amortized for such

taxable years. See Rev. Proc. 2025-28 for information

regarding the transition options contained in section

70302(f) of P.L. 119-21, as well as the procedures to

follow to begin applying either section 174A(a) or (c) for

the corporation’s first tax year beginning after December

31, 2024. See Revenue Procedure 2025-28, available at

IRS.gov/irb/2025-38_IRB#REV-PROC-2025-28 for

information regarding both elections. See Line 37, later,

for more information.

General Instructions

Purpose of Schedule

Schedule M-3, Part I, asks certain questions about the

corporation’s financial statements and reconciles financial

statement net income (loss) for the corporation (or

consolidated financial statement group, if applicable), as

reported on Schedule M-3, Part I, line 4a, to net income

(loss) of the corporation for U.S. taxable income purposes,

as reported on Schedule M-3, Part I, line 11.

Dec 16, 2025

Schedule M-3, Parts II and III, reconcile financial

statement net income (loss) for the U.S. corporation (or

consolidated tax group, if applicable), as reported on

Schedule M-3, Part I, line 11, to the subtotal on Form

1120-PC, Schedule A, line 35 (or Schedule B, line 19, if

applicable). For property and casualty insurance

companies that prepare an annual statement, financial

statement net income (loss) should be reported on the

statutory basis on Schedule M-3, Part I, line 11.

Where To File

If the corporation is required to file (or voluntarily files)

Schedule M-3 (Form 1120-PC), the corporation must file

Form 1120-PC and all attachments and schedules,

including Schedule M-3 (Form 1120-PC), at the following

address.

Department of the Treasury

Internal Revenue Service Center

Ogden, UT 84201-0012

Who Must File

• Any domestic corporation or group of corporations

required to file Form 1120-PC, U.S. Property and Casualty

Insurance Company Income Tax Return, that reports on

the balance sheet, Schedule L of Form 1120-PC, total

assets at the end of the corporation’s tax year that equal

or exceed $10 million must complete and file

Schedule M-3 instead of Schedule M-1, Reconciliation of

Income (Loss) per Books With Income (Loss) per Return.

• A corporation filing a non-consolidated Form 1120-PC

that reports on Schedule L for Form 1120-PC total assets

that equal or exceed $10 million must complete and file

Schedule M-3 instead of Schedule M-1. The corporation

must check box (1), Non-consolidated return, at the top of

page 1 of Schedule M-3.

• Any U.S. consolidated tax group consisting of a U.S.

parent corporation and additional includible corporations

listed on Form 851, Affiliations Schedule, required to file

Form 1120-PC that reports on Schedule L of Form

1120-PC total consolidated assets at the end of the tax

year that equal or exceed $10 million must complete and

file Schedule M-3 instead of Schedule M-1, and must

check box (2), Consolidated return (Form 1120-PC only),

or (3), Mixed 1120/L/PC group, as applicable, at the top of

page 1 of Schedule M-3.

Instructions for Schedule M-3 (Form 1120-PC) (Rev. 12-2025) Catalog Number 39943A

Department of the Treasury Internal Revenue Service www.irs.gov

A U.S. property and casualty insurance company filing

Form 1120-PC that is not required to file Schedule M-3

may voluntarily file Schedule M-3 in place of

Schedule M-1. A property and casualty insurance

company filing Schedule M-3 must check Item A, box 3,

on Form 1120-PC, page 1, indicating that Schedule M-3 is

attached, whether required or voluntary. A property and

casualty insurance company filing Schedule M-3 must not

file Schedule M-1.

Example 1.

1. U.S. corporation A owns U.S. subsidiary B and

foreign subsidiary F. For its current tax year, A prepares

consolidated financial statements with B and F that report

total assets of $12 million. A files a consolidated U.S.

income tax return with B and reports total consolidated

assets on Schedule L of $8 million. A’s U.S. consolidated

tax group is not required to file Schedule M-3 for the

current tax year.

2. U.S. property and casualty insurance company C

owns U.S. property and casualty insurance company D.

For its current tax year, C prepares consolidated financial

statements with D but C and D file separate U.S. income

tax returns. The consolidated accrual basis financial

statements for C and D report total assets at the end of

the tax year of $12 million after intercompany eliminations.

C reports separate company total year-end assets on its

Schedule L of $7 million. D reports separate company

total year-end assets on its Schedule L of $6 million.

Neither C nor D is required to file Schedule M-3 for the

current tax year.

3. Foreign corporation A owns 100% of both U.S.

property and casualty insurance company B and U.S.

property and casualty insurance company C. C owns

100% of U.S. property and casualty insurance company

D. For its current tax year, A prepares a consolidated

worldwide financial statement for the ABCD consolidated

group. The ABCD consolidated financial statement

reports total year-end assets of $25 million. A is not

required to file a U.S. income tax return. B files a separate

U.S. income tax return and reports separate company

total year-end assets on its Schedule L of $12 million. C

files a consolidated U.S. income tax return with D and,

after eliminating intercompany transactions between C

and D, reports consolidated total year-end assets on

Schedule L of $8 million. B is required to file

Schedule M-3 because its total year-end assets reported

on Schedule L equal at least $10 million. The CD U.S.

consolidated tax group is not required to file Schedule M-3

because its total year-end assets reported on Schedule L

do not equal at least $10 million.

Special Filing Requirements for Mixed Groups

If the parent company of a U.S. consolidated tax group

files Form 1120-PC and files Schedule M-3, all members

of the group must file Schedule M-3. However, if the

parent corporation of a U.S. consolidated tax group files

Form 1120-PC and any member of the group files a Form

1120 or Form 1120-L, U.S. Life Insurance Company

Income Tax Return, that member must file a Form 1120

Schedule M-3 or a Form 1120-L Schedule M-3,

respectively, and the group must comply with the mixed

group consolidated Schedule M-3 reporting described

2

under Schedule M-3 Consolidation for Mixed Groups

(1120/L/PC), later. A mixed group must also file Form

8916, Reconciliation of Schedule M-3 Taxable Income

With Tax Return Taxable Income for Mixed Groups, and, if

applicable, Form 8916-A, Supplemental Attachment to

Schedule M-3.

If the parent company of a U.S. consolidated tax group

files Form 1120-PC, and any member of the group files

Form 1120 or Form 1120-L, and the consolidated

Schedule L reported in the return includes the assets of all

of the companies (insurance companies as well as the

non-insurance companies), in order to determine if the

group meets the $10 million threshold test for the

requirement to file Schedule M-3, use the amount of total

assets reported on Schedule L of the consolidated return.

If the parent company of a U.S. consolidated tax group

files Form 1120-PC and any member of the group files

Form 1120 or Form 1120-L, and the consolidated

Schedule L reported in the return does not include the

assets of one or more of the insurance companies in the

U.S. consolidated tax group, in order to determine if the

group meets the $10 million threshold test for the

requirement to file Schedule M-3, use the sum of the

amount of total assets reported on the consolidated

Schedule L plus the amounts of all assets reported on

Forms 1120 and 1120-L that are included in the

consolidated return but not included on the consolidated

Schedule L.

For insurance companies included in the consolidated

U.S. income tax return, see instructions for Part I, lines

10a, 10b, 10c, and 11, and Part II, line 7, for guidance on

Schedule M-3 reporting of intercompany dividends and

statutory accounting adjustments.

Other Issues Affecting Schedule M-3

Filing Requirements

If a property and casualty insurance company was

required to file Schedule M-3 for the preceding tax year

but reports on Schedule L of Form 1120-PC total

consolidated assets at the end of the current tax year of

less than $10 million, the property and casualty insurance

company is not required to file Schedule M-3 for the

current tax year. The property and casualty insurance

company may voluntarily file Schedule M-3 for the current

tax year. If for a subsequent tax year the property and

casualty insurance company is required to file

Schedule M-3, the property and casualty insurance

company must complete Schedule M-3 in its entirety for

that subsequent tax year.

In the case of a U.S. consolidated tax group, total

assets at the end of the tax year must be determined

based on the total year-end assets of all includible

corporations listed on Form 851, net of eliminations for

intercompany transactions and balances between the

includible corporations. In addition, for purposes of

determining for Schedule M-3 whether the corporation (or

U.S. consolidated tax group) has total assets at the end of

the current tax year of $10 million or more, the

corporation’s total consolidated assets must be

determined on an overall accrual method of accounting

unless both of the following apply: (a) the tax returns of all

includible corporations in the U.S. consolidated tax group

Instructions for Schedule M-3 (Form 1120-PC)

are prepared using an overall cash method of accounting,

and (b) no includible corporation in the U.S. consolidated

tax group prepares or is included in financial statements

prepared on an accrual basis.

Note: See the instructions for Part I, line 1, for a

discussion of non-tax-basis income statements and

related non-tax-basis balance sheets to be used in the

preparation of Schedule M-3 and Form 1120-PC,

Schedule L.

Other Form 1120-PC Schedules

Affected by Schedule M-3

Requirements

Report on Schedules L and Form 1120-PC, Schedule A

(or Schedule B, if applicable), amounts for the U.S.

corporation or, if applicable, the U.S. consolidated tax

group.

Schedule L, Balance Sheet

If a non-tax-basis income statement and related

non-tax-basis balance sheet are prepared for any purpose

for a period ending with or within the tax year, the

Schedule L Balance Sheet must be prepared showing

non-tax-basis amounts. See the instructions for

Schedule M-3, Part I, line 1, for the discussion of

non-tax-basis income statements and related

non-tax-basis balance sheets prepared for any purpose

and the impact on the selection of the income statement

used for Schedule M-3 and the related non-tax-basis

balance sheet amounts that must be used for Schedule L.

Total assets shown on Schedule L, line 15, column (d),

must equal the total assets of the property and casualty

insurance company (or, in the case of a U.S. consolidated

tax group, the total assets of all members of the group

listed on Form 851) as of the last day of the tax year. The

same amount of total assets must be reported by the

property and casualty insurance company (or by each

member of the U.S. consolidated tax group) in the

non-tax-basis financial statements, if any, used for

Schedule M-3. If the property and casualty insurance

company prepares non-tax-basis financial statements,

Schedule L must equal the sum of the non-tax-basis

financial statement total assets for each corporation listed

on Form 851 and included in the consolidated U.S.

income tax return (includible corporation) net of

eliminations for intercompany transactions between

includible corporations. If the property and casualty

insurance company does not prepare non-tax-basis

financial statements, Schedule L must be based on the

property and casualty company’s books and records. The

Schedule L balance sheet may show tax-basis balance

sheet amounts if the property and casualty insurance

company is allowed to use books and records for

Schedule M-3 and the property and casualty insurance

company’s books and records reflect only tax-basis

amounts.

Generally, total assets at the beginning of the year

(Schedule L, line 15, column (b)) must equal total assets

at the close of the prior year (Schedule L, line 15, column

(d)). For each Schedule L balance sheet item reported for

which there is a difference between the current-year

Instructions for Schedule M-3 (Form 1120-PC)

opening balance sheet amount and the prior-year closing

balance sheet amount, attach a statement that reports the

balance sheet item, the prior closing amount, the current

opening amount, and a short explanation of the change.

Reasons for these differences include mergers and

acquisitions.

For purposes of measuring total assets at the end of

the year, the corporation’s assets may not be netted or

reduced by the corporation’s liabilities. In addition, total

assets may not be reported as a negative amount. If

Schedule L is prepared on a non-tax-basis method, an

investment in a partnership may be shown, as

appropriate, under the corporation’s non-tax-basis method

of accounting, including, if required by the corporation’s

reporting methodology, the equity method of accounting

for investments. If Schedule L is prepared on a tax basis,

an investment by the corporation in a partnership must be

shown as an asset and measured by the corporation’s

adjusted basis in its partnership interest. Any liabilities

contributing to such adjusted basis must be shown on

Schedule L as corporate liabilities.

Schedule M-2

The amount shown on Schedule M-2, line 2, Net income

(loss) per books, must equal the amount shown on

Schedule M-3, Part I, line 11. Schedule M-2 must reflect

activity only of corporations included in the consolidated

U.S. income tax return.

Consolidated Return (Form 1120-PC)

Report on Form 1120-PC each item of income, gain, loss,

expense, or deduction net of elimination entries for

intercompany transactions between includible

corporations. The corporation must not report as

dividends on Form 1120-PC, Schedule A, any amounts

received from an includible corporation unless the

corporation receiving the intercompany dividends is an

insurance company and only to the extent that the

insurance company is required to include intercompany

dividends in taxable income. (See the instructions for Part

I, lines 10a, 10b, 10c, and 11, for a discussion of

intercompany dividends and insurance company statutory

accounting.) In general, dividends received from an

includible corporation must be eliminated in consolidation

rather than offset by the dividends-received deduction.

Entity Considerations for

Schedule M-3

For purposes of Schedule M-3, references to the

classification of an entity (for example, as a corporation, a

partnership, or a trust) are references to the treatment of

the entity for U.S. income tax purposes. An entity that is

generally disregarded as separate from its owner for U.S.

income tax purposes (disregarded entity) must not be

separately reported on Schedule M-3 except, if required,

on Part I, line 7a or 7b. On Schedule M-3, Parts II and III,

any item of income, gain, loss, deduction, or credit of a

disregarded entity must be reported as an item of its

owner. In particular, the income or loss of a disregarded

entity must not be reported on Part II, line 9, 10, or 11 as a

separate partnership or other pass-through entity. The

financial statement income or loss of a disregarded entity

3

is included on Part I, line 7a or 7b, only if its financial

statement income or loss is included on Part I, line 11, but

not on Part I, line 4a.

Reportable Entity Partner Reporting

Responsibilities

A reportable entity partner with respect to a partnership

filing Form 1065, U.S. Return of Partnership Income, is an

entity that:

• Owns or is deemed to own, directly or indirectly, under

these instructions a 50% or greater interest in the income,

loss, or capital of the partnership on any day of the tax

year; and

• Was required to file Schedule M-3 on its most recently

filed U.S. income tax return or return of income filed prior

to that day.

For the purposes of these instructions, the following

rules apply.

1. The parent corporation of a consolidated tax group

is deemed to own all corporate and partnership interests

owned or deemed to be owned under these instructions

by any member of the tax consolidated group.

2. The owner of a disregarded entity is deemed to own

all corporate and partnership interests owned or deemed

to be owned under these instructions by the disregarded

entity.

3. The owner of 50% or more of a corporation by vote

on any day of the corporation’s tax year is deemed to own

all corporate and partnership interests owned or deemed

to be owned under these instructions by the corporation

during the corporation’s tax year.

4. The owner of 50% or more of partnership income,

loss, or capital on any day of the partnership tax year is

deemed to own all corporate and partnership interests

owned or deemed to be owned under these instructions

by the partnership during the partnership tax year.

5. The beneficial owner of 50% or more of the

beneficial interest of a trust or nominee arrangement on

any day of the trust or nominee arrangement tax year is

deemed to own all corporate and partnership interests

owned or deemed to be owned under these instructions

by the trust or nominee arrangement.

A reportable entity partner with respect to a partnership

(as defined above) must report the following to the

partnership within 30 days of first becoming a reportable

entity partner and, after first reporting to the partnership

under these instructions, thereafter within 30 days of the

date of any change in the interest it owns or is deemed to

own, directly or indirectly, under these instructions, in the

partnership.

1. Name.

2. Mailing address.

3. Taxpayer identification number (TIN or EIN), if

applicable.

4. Entity or organization type.

5. State or country in which it is organized.

6. Date on which it first became a reportable entity

partner.

4

7. Date with respect to which it is reporting a change in

its ownership interest in the partnership, if applicable.

8. The interest in the partnership it owns or is deemed

to own in the partnership, directly or indirectly (as defined

under these instructions) as of the date with respect to

which it is reporting.

9. Any change in that interest as of the date with

respect to which it is reporting.

The reportable entity partner must retain copies of

required reports it makes to partnerships under these

instructions. Each partnership must retain copies of the

required reports it receives under these instructions from

reportable entity partners.

Example 2.

1. Z, a U.S. property and casualty insurance company,

owns 50% of A, an LLC filing Form 1065 for 2025. A owns

50% of B, C, D, and E, which are also LLCs filing a Form

1065 for calendar year 2025. Z was first required to file

Schedule M-3 (Form 1120-PC) for its corporate tax year

ended December 31, 2024, and filed its Schedule M-3

with Form 1120-PC for 2024 on October 15, 2025. As of

October 16, 2025, Z was a reportable entity partner with

respect to A and, through A, with respect to B, C, D, and

E. On November 5, 2024, Z reports to A, B, C, D, and E,

as it is required to do within 30 days of October 16, that Z

is a reportable entity partner directly owning (with respect

to A) or deemed to own indirectly (with respect to B, C, D,

and E) a 50% interest. Therefore, because Z was a

reportable entity partner for 2025, each of A, B, C, D, and

E is required to file Schedule M-3 (Form 1065), for 2025,

regardless of whether they would otherwise be required to

file Schedule M-3 for that year.

2. P, a U.S. property and casualty insurance company,

is the parent of a financial consolidation group with 50

domestic subsidiaries, DS1 through DS50, and 50 foreign

subsidiaries, FS1 through FS50, all 100% owned on

October 16, 2025. On October 15, 2025, P filed a

consolidated tax return on Form 1120-PC and was

required to file Schedule M-3 for the tax year ending

December 31, 2024. On October 16, 2025, DS1, DS2,

DS3, FS1, and FS2 each acquire a 10% partnership

interest in partnership K, which files Form 1065 for the tax

year ending December 31, 2025. P is deemed to own,

directly or indirectly (under these instructions), all

corporate and partnership interests of DS1, DS2, and

DS3, as the parent of the tax consolidation group and

therefore is deemed to own 30% of K on October 16,

2025. P is deemed to own, directly or indirectly (under

these instructions), all corporate and partnership interests

of FS1 and FS2 as the owner of 50% or more of each

corporation by vote and therefore is deemed to own 20%

of K on October 16, 2025. P is therefore deemed to own

50% of K on October 16, 2025. Since P owns or is

deemed to own, directly or indirectly (under these

instructions), 50% or more of K on October 16, 2025, and

was required to file Schedule M-3 with its most recently

filed U.S. income tax return filed prior to that date, P is a

reportable entity partner of K as of October 16, 2025. On

November 5, 2025, P reports to K that P is a reportable

entity partner as of October 16, 2025, deemed to own

(under these instructions) a 50% interest in K. K is,

Instructions for Schedule M-3 (Form 1120-PC)

therefore, required to file Schedule M-3 when it files its

Form 1065 for its tax year ending December 31, 2025.

Schedule M-3 Consolidation for Mixed Groups

(1120/L/PC)

Consolidated Schedule M-3 Versus

Consolidating Schedules M-3 for

Form 1120-PC Groups

A consolidated tax return group with a parent corporation

that files a Form 1120-PC is a mixed group if any member

is a life insurance company (files Form 1120-L, U.S. Life

Insurance Company Income Tax Return) or is not an

insurance company. See Schedule M-3 Consolidation for

Mixed Groups (1120/L/PC), later.

Special Schedule M-3 consolidation rules apply to a

mixed group, that is, a consolidated tax group that:

1. Includes both a corporation that is an insurance

company and a corporation that is not an insurance

company, or

2. Includes both a life insurance company and a

property and casualty insurance company, or

3. Includes a life insurance company, a property and

casualty insurance company, and a corporation that is not

an insurance company.

A U.S. consolidated tax group must file a consolidated

Schedule M-3. Parts I, II, and III of the consolidated

Schedule M-3 must reflect the activity of the entire U.S.

consolidated tax group. The parent corporation must also

complete Parts II and III of a separate Schedule M-3 to

reflect the parent’s own activity. In addition, Parts II and III

of a separate Schedule M-3 must be completed by each

includible corporation to reflect the activity of that

includible corporation. Lastly, it will generally be

necessary to complete Parts II and III of a separate

Schedule M-3 for consolidation eliminations.

Mixed group consolidation for Schedule M-3, Parts II

and III, requires:

1. Subgroup sub-consolidation of the 1120 subgroup,

the 1120-PC subgroup, and the 1120-L subgroup, each

with its own sub-consolidated Schedule M-3, Parts II and

III, and

2. Consolidation of the subgroup sub-consolidation

totals on a consolidated Schedule M-3, Part II, that ties to

a consolidated Schedule M-3, Part I, and a consolidated

Form 8916, Reconciliation of Schedule M-3 Taxable

Income with Tax Return Taxable Income for Mixed Groups.

If a U.S. consolidated tax group that is not a mixed

group consists of four includible corporations (the parent

and three subsidiaries) all filing Form 1120-PC, the U.S.

consolidated tax group must complete six Schedules M-3

as follows.

• One consolidated Schedule M-3 with Parts I, II, and III

completed to reflect the activity of the entire U.S.

consolidated tax group.

• Parts II and III of a separate Schedule M-3 for each of

the four includible corporations to reflect the activity of

each includible corporation.

• Parts II and III of a separate Schedule M-3 to eliminate

intercompany transactions between includible

corporations and to include limitations on deductions (for

example, charitable contribution limitations and capital

loss limitations) and carryover amounts (for example,

charitable contribution carryovers and capital loss

carryovers).

See Completion of Schedule M-3 and Certain Allocations,

Limitations, and Carryovers, later.

In addition to one Schedule M-3, Part II, and one

Schedule M-3, Part III, for each corporation in the three

subgroup sub-consolidations, there will generally be a

total of six additional Schedule M-3, Parts II, and six

additional Schedule M-3, Parts III, for the subgroup

sub-consolidations. Specifically, there must be one

Schedule M-3 Part II, and one Schedule M-3 Part III, for

each subgroup’s sub-consolidated amounts and one

Schedule M-3 Part II, and one Schedule M-3 Part III, for

each subgroup’s sub-consolidation eliminations amounts.

Note: Complete only one Schedule M-3, Part I, for each

consolidated group. A subsidiary of a consolidated group

does not complete Schedule M-3, Part I. Enter on Part I

the name and EIN of the common parent of the

consolidated group.

Indicate on each Schedule M-3, Parts II and III, on the

line after the common parent’s name and EIN, whether the

Schedule M-3, Parts II and III, is for the:

1. Consolidated group,

2. Parent corporation,

3. Consolidation eliminations, or

4. Subsidiary corporation,

by checking the appropriate box. If Parts II and III are for a

subsidiary in a consolidated return, also enter the name

and EIN of the subsidiary.

Instructions for Schedule M-3 (Form 1120-PC)

At the mixed group consolidated level, there must be a

consolidated Schedule M-3, Part II, and, if applicable, a

Schedule M-3 Part II, for consolidation eliminations not

includible in the subgroup eliminations. At the

consolidated level there must also be a consolidated

Schedule M-3, Part I, and a consolidated Form 8916. For

a mixed group, there is no Schedule M-3, Part III, at the

consolidated level. At the consolidated level, use the

Schedule M-3 (Form 1120, 1120-PC, or 1120-L), Parts I

and II, that match the form on which the parent corporation

reports and the entire consolidated group files.

The corporation must check the applicable mixed group

checkboxes on all Schedules M-3, Parts I, II, and III, as

discussed below.

Subgroup Sub-Consolidation: 1120 Subgroup,

1120-PC Subgroup, and 1120-L Subgroup

A subgroup Schedule M-3, Parts II and III,

sub-consolidation must be prepared with all necessary

eliminations within the subgroup for each of the three

possible subgroups that are, in fact, present.

• One subgroup for those corporations reporting on Form

1120,

• One subgroup for those corporations reporting on Form

1120-PC, and

5

• One subgroup for those reporting on Form 1120-L.

The parent corporation is included in the subgroup that

corresponds to the form on which it reports and the entire

consolidated group files. For example, in the case of a

Form 1120-PC parent and Form 1120-PC consolidated

group, the parent is included in the Form 1120-PC

subgroup sub-consolidation. Each subgroup uses its own

Schedule M-3 (Form 1120, 1120-PC, or 1120-L), Parts II

and III, for each corporation within the subgroup and for

the subgroup sub-consolidation and the subgroup

eliminations.

For mixed groups, the consolidated Part II, line 30,

column (a), must equal Part I, line 11, with appropriate

adjustments for statutory accounting requirements

reflected on Part I, lines 10a and 10b. The consolidated

taxable income indicated on Part II, line 30, column (d),

must equal the amount shown on Form 8916, line 1. Form

8916, line 8, must equal taxable income reported on the

tax return.

The three subgroup sub-consolidation taxable income

calculations on Schedule M-3 must follow the separate

return requirements of the regulations under section 1502

and all other applicable regulations taking into account the

amounts separately reported on Form 8916. Capital loss

limitation and carryforward used and charitable deduction

limitation and carryforward used are not taken into

account in the determination of the three subgroup

sub-consolidated taxable incomes on Schedule M-3, but

are reflected on Form 8916 and in the calculation of the

life/non-life loss limitation and carryforward used. See

Life/Non-Life Loss Limitation and Carryforward Used

Calculations, later.

Note: The following discussion of checkboxes will assume

that the 1120-PC subgroup includes the corporate parent

of the mixed group.

The reconciliation totals for book, temporary difference,

permanent difference, and taxable income for each

subgroup are reported on Form 1120, 1120-PC, or

1120-L, as applicable, Schedule M-3, Part II, line 29a,

columns (a), (b), (c), and (d), and equal the sum of the line

amounts on Part II, lines 26 through 28. For a mixed

group, Schedule M-3, Part II, lines 29b, 29c, and 30 are

blank on the Form 1120, 1120-PC, or 1120-L, as

applicable, for the separate corporations (parent and

subsidiary) and for the three subgroup sub-consolidations.

Note: A sub-consolidation is required for every subgroup,

even if the subgroup consists of only one corporation. In

addition, Form 8916-A, if applicable, is required at the

sub-consolidated level and the sub-consolidated

elimination level.

Reconciliation of Mixed Group Subgroup

Sub-Consolidation Amounts to Schedule M-3, Part

I, Line 11, and to Tax Return Taxable Income

At the consolidated level, use the Schedule M-3 (Form

1120, 1120-PC, or 1120-L), Parts I and II, that matches

the form on which the parent corporation reports and the

entire consolidated group files. For a mixed group, the

consolidated Schedule M-3, Part II, lines 29a, 29b, and

29c amounts report the applicable amounts from the three

subgroup sub-consolidation Part II, line 29a, amounts. (If a

consolidated level Part II for consolidation eliminations not

includible in the subgroup eliminations is applicable, the

applicable amounts must be adjusted by the applicable

elimination amounts.) The consolidated Schedule M-3,

Part II, line 30, amounts are the sums of the applicable

amounts on the consolidated Part II, lines 29a, 29b, and

29c. For a mixed group, the consolidated Part II, lines 1

through 28, are blank and no consolidated Part III is

required to be completed.

6

Completion of Mixed Group Checkboxes for

Schedule M-3, Part II and Part III

Forms 1120, 1120-PC, and 1120-L, Schedule M-3,

Parts II and III, each have a checkbox (5) at the top

indicating a mixed group. Checkbox (5) and one or more

other applicable checkboxes must be checked for a mixed

group.

For example, an 1120-PC parent corporation included

in the 1120-PC subgroup must check Form 1120-PC,

Schedule M-3, Parts II and III, box (2) Parent corporation,

and box (5) Mixed 1120/L/PC group. An 1120-PC

subsidiary corporation within the 1120-PC subgroup must

check Form 1120-PC, Schedule M-3, Parts II and III, box

(4) Subsidiary corporation, and box (5) Mixed 1120/L/PC

group. An 1120 subsidiary corporation within the 1120

subgroup must check Form 1120, Schedule M-3, Parts II

and III, box (4) Subsidiary corporation, and box (5) Mixed

1120/L/PC group. An 1120-L subsidiary corporation within

the 1120-L subgroup must check Form 1120-L,

Schedule M-3, Parts II and III, box (4) Subsidiary

corporation, and box (5) Mixed 1120/L/PC group.

The 1120 subgroup sub-consolidation Form 1120,

Schedule M-3, Parts II and III, must be indicated by

checking box (5) Mixed 1120/L/PC group, and box (6)

1120 group for the sub-consolidation, and by checking

box (5) Mixed 1120/L/PC group, and box (7) 1120

eliminations, for the eliminations. The 1120-PC subgroup

sub-consolidation Form 1120-PC, Schedule M-3, Parts II

and III, must be indicated by checking box (5) Mixed

1120/L/PC group, and box (6) 1120-PC group for the

sub-consolidation, and by checking box (5) Mixed

1120/L/PC group, and box (7) 1120-PC eliminations, for

the eliminations. The 1120-L subgroup sub-consolidation

Form 1120-L, Schedule M-3, Parts II and III, must be

indicated by checking box (5) Mixed 1120/L/PC group,

and box (6) 1120-L group for the sub-consolidation, and

by checking box (5) Mixed 1120/L/PC group, and box (7)

1120-L eliminations, for the eliminations.

A mixed group with a Form 1120-PC parent corporation

completes a consolidated level Form 1120-PC,

Schedule M-3, Parts I and II, and a consolidated Form

8916. The mixed group consolidated Schedule M-3, Part

II, must be indicated by checking box (1) Consolidated

group, and box (5) Mixed 1120/L/PC group. If a

consolidated level Part II for consolidation eliminations not

includible in the subgroup eliminations is applicable, that

Instructions for Schedule M-3 (Form 1120-PC)

Part II must be indicated by checking box (3) Consolidated

eliminations, and box (5) Mixed 1120/L/PC group.

Life/Non-Life Loss Limitation and Carryforward

Used Calculations

The applicable life/non-life loss limitation and all

carryforward used calculations are made using the

amounts determined for taxable income in the three

subgroup sub-consolidations and other applicable

amounts separately reported on Form 8916. The

calculated life/non-life loss limitation or carryforward used

amounts, if any, are not entered on Schedule M-3. The

calculated amounts, if any, are entered on Form 8916.

Completion of Schedule M-3 and

Certain Allocations, Limitations, and

Carryovers

Generally, a corporation (or any member of a U.S.

consolidated tax group) required to file Schedule M-3

must complete the form in its entirety. In particular, a

corporation filing a nonconsolidated return that meets the

filing requirements for Schedule M-3 must complete Parts

I, II, and III. Such a corporation does not check any of the

checkboxes at the top of Parts II and III. In the case of a

U.S. consolidated tax group, Part I must be completed

once, on the consolidated Schedule M-3, by the parent

corporation. Parts II and III must be completed by the

parent corporation, each includible corporation, and a

consolidating eliminations entity.

Except as otherwise provided in these instructions,

when a Schedule M-3 (Form 1120-PC) is filed, all

applicable Part I questions must be answered; all

applicable columns in Parts II and III must be completed;

all numerical data required in Parts I, II, and III must be

provided; and any statement required to support a line

item in Parts I, II, or III must be attached and must provide

the information for that line item.

All detailed statements for Part II and Part III of

Schedule M-3 must be attached for each separate entity

included in the consolidated Part II and Part III, including

those for the parent company and the eliminations entity, if

applicable. It is not required that the same supporting

detailed information be presented for Part II and Part III of

the consolidated Schedule M-3.

If an item attributable to an includible corporation is not

shared by or allocated to the appropriate member of the

group but is retained in the parent corporation’s financial

statements (or books and records, if applicable), then the

item must be reported by the parent corporation in its

separate Schedule M-3. For example, if the parent of a

U.S. consolidated tax group prepares financial statements

that include all members of the U.S. consolidated tax

group and the parent does not allocate the group’s income

tax expense, as reflected in the financial statements,

among the members of the group but retains it in the

parent corporation, the parent corporation must report on

its separate Schedule M-3 the U.S. consolidated tax

group’s income tax expense, as reflected in the financial

statements.

Instructions for Schedule M-3 (Form 1120-PC)

Any adjustments made at the consolidated group level

that are not attributable to any specific member of the U.S.

consolidated tax group (for example, disallowance of net

capital losses, contribution deduction carryovers, and

limitation of contribution deductions) must not be reported

on the separate consolidating parent or subsidiary

Schedules M-3 but rather on the consolidated

Schedule M-3 and on the consolidating Schedule M-3 for

consolidation eliminations (or on Form 8916 in the case of

a mixed group).

If an includible corporation has (1) no activity for the tax

year (for example, because the corporation is a dormant

or inactive corporation), (2) no amount for the corporation

was included in Part I, line 11, and (3) the corporation has

no amounts to report on Part II and Part III of

Schedule M-3 for the tax year, the parent corporation of

the U.S. consolidated tax group may attach to the

consolidated Schedule M-3 a statement that provides the

name and employer identification number (EIN) of the

includible corporation instead of filing a blank Part II and

Part III of Schedule M-3 for the entity. On page 1, check

box (4) Dormant subsidiaries schedule attached.

Specific Instructions

Part I. Financial Information and Net

Income (Loss) Reconciliation

When To Complete Part I

Part I must be completed for any tax year for which the

property and casualty insurance company files

Schedule M-3. At the top of page 1, check either box (1)

Non-consolidated return, (2) Consolidated return (Form

1120-PC only), or (3) Mixed 1120/L/PC group, as

applicable. In addition, check box (4) Dormant

subsidiaries schedule attached, if applicable.

Line 1. Questions Regarding the Type of Income

Statement Prepared

For Schedule M-3, Part I, lines 1 through 12, use only the

financial statements of the U.S. property and casualty

insurance company filing the U.S. income tax return (or

the consolidated financial statements for the U.S. parent

corporation of a U.S. consolidated tax group). If the U.S.

property and casualty insurance company filing a U.S.

income tax return (or the U.S. parent corporation of a U.S.

consolidated tax group) prepares its own financial

statements but is controlled by another corporation (U.S.

or foreign) that prepares financial statements that include

the U.S. corporation, the U.S. corporation (or the U.S.

parent corporation of a U.S. consolidated tax group) must

use for its Schedule M-3, Part I, its own financial

statements and not the financial statements of the

controlling corporation.

If a non-publicly traded U.S. parent property and

casualty insurance company of a U.S. consolidated tax

group prepares financial statements and that group

includes a publicly traded subsidiary that files financial

statements with the Securities and Exchange Commission

(SEC), the consolidated financial statements of the parent

property and casualty insurance company are the

7

appropriate financial statements for purposes of

completing Part I. Do not use any separate company

financial statements that might be prepared for publicly

traded subsidiaries.

Non-Tax-Basis Financial Statements and Tax-Basis

Financial Statements

A tax-basis income statement for Schedule M-3 and a

tax-basis balance sheet for Schedule L are allowed only if

no non-tax-basis income statement and no non-tax-basis

balance sheet were prepared for any purpose and the

books and records of the corporation reflect only tax-basis

amounts. The corporation is deemed to have

non-tax-basis income statements and the related

non-tax-basis balance sheets for the current tax year for

purposes of Schedule M-3 and Schedule L if such

non-tax-basis financial statements were prepared for and

presented to management, creditors, shareholders,

government regulators, and any other third parties for a

period ending with or within the tax year.

If a Form 10-K is filed with the SEC for the period

ending with or within the tax year, the corporation must

check “Yes,” for Part I, line 1a, and use that income

statement for Schedule M-3. If Form 10-K is not filed and a

non-tax-basis income statement is prepared that is a

certified non-tax-basis income statement for the period

ending with or within the tax year, the corporation must

check “Yes,” for Part I, line 1b, and use that income

statement for Schedule M-3. If Form 10-K is not filed and

no certified non-tax-basis income statement is prepared

for the period ending with or within the tax year, the

corporation must check “Yes,” for Part I, line 1c, and use

that income statement for Schedule M-3.

Order of priority in accounting standards. If no Form

10-K is filed and two or more non-tax-basis income

statements are both certified non-tax-basis income

statements for the period, the income statement prepared

according to the following order of priority in accounting

standards must be used.

1. U.S. Generally Accepted Accounting Principles

(GAAP).

2. International Financial Reporting Standards (IFRS).

3. Any other International Accounting Standards (IAS).

4. Statutory accounting for insurance companies.

5. Other regulatory accrual accounting.

6. Any other accrual accounting standard.

7. Any fair market value standard.

8. Any cash basis standard.

If no non-tax-basis income statement is certified and

two or more non-tax-basis income statements are

prepared, the income statement prepared according to

the accounting standards first listed in the order of priority

above must be used.

If no non-tax-basis financial statements are prepared

for a U.S. property and casualty insurance company (or, in

the case of a U.S. consolidated tax group, for the U.S.

parent corporation’s consolidated group) filing

Schedule M-3, the U.S. property and casualty insurance

8

company (or the U.S. parent corporation of a U.S.

consolidated tax group) must check “No” on questions 1a,

1b, and 1c; skip Part I, lines 2a through 3c; and enter the

net income (loss) per the books and records of the U.S.

property and casualty insurance company (or U.S.

consolidated tax group) on Part I, line 4a.

If no non-tax-basis financial statements are prepared

for a U.S. property and casualty insurance company (or, in

the case of a U.S. consolidated tax group, for the U.S.

parent corporation’s consolidated group) filing

Schedule M-3, and the U.S. property and casualty

insurance company is owned by a foreign corporation that

prepares financial statements that include the U.S.

corporation (or the U.S. parent corporation’s consolidated

group), the U.S. corporation (or the U.S. parent

corporation of the U.S. consolidated tax group) must

check “No” on questions 1a, 1b, and 1c; skip Part I, lines

2a through 3c; and enter the net income (loss) per the

books and records of the U.S. corporation (or U.S.

consolidated tax group) on Part I, line 4a.

Line 2. Questions Regarding Income Statement

Period and Restatements

Enter the beginning and ending dates on line 2a for the

property and casualty insurance company’s income

statement period ending with or within this tax year.

The questions on Part I, lines 2b and 2c, regarding

income statement restatements, refer to the worldwide

consolidated income statement issued by the corporation

filing the U.S. income tax return (the consolidated financial

statements for the U.S. parent corporation of a U.S.

consolidated tax group) and used to prepare

Schedule M-3. Answer “Yes” on lines 2b and/or 2c if the

property and casualty insurance company’s income

statement has been restated for any reason. Attach a

short explanation of the reasons for the restatement in net

income for each annual income statement period that is

restated, including the original amount and restated

amount of each annual statement period’s net income.

The attached statement is not required to report

restatements on an entity-by-entity basis.

Line 3. Questions Regarding Publicly Traded

Voting Common Stock

The primary U.S. publicly traded voting common stock

class is the most widely held or most heavily traded within

the United States, as determined by the property and

casualty insurance company. If the property and casualty

insurance company has more than one class of publicly

traded voting common stock, attach a list of the classes of

publicly traded voting common stock and the trading

symbol and the nine-digit CUSIP number of each class.

Line 4. Worldwide Consolidated Net Income

(Loss) per Income Statement

Report on Part I, line 4a, the worldwide consolidated net

income (loss) per the income statement (or books and

records, if applicable). A corporation filing a

non-consolidated Form 1120-PC for itself must report its

worldwide income on Part I, line 4a.

In completing Schedule M-3, the property and casualty

insurance company must use financial statement amounts

Instructions for Schedule M-3 (Form 1120-PC)

from the financial statement type checked “Yes” on Part I,

line 1, or from its books and records if Part I, line 1c, is

checked “No.” If Part I, line 1a, is checked “Yes,” report on

Part I, line 4a, the net income amount reported in the

income statement presented to the SEC on the

corporation’s Form 10-K (the Form 10-K for the security

identified on Part I, line 3b, if applicable).

If a property and casualty insurance company prepares

non-tax-basis financial statements, the amount on Part I,

line 4a, must equal the financial statement net income

(loss) for the income statement period ending with or

within the tax year, as indicated on Part I, line 2a.

If the property and casualty insurance company

prepares non-tax-basis financial statements and the

income statement period differs from the corporation’s tax

year, the income statement period indicated on Part I,

line 2a, applies for purposes of Part I, lines 4a through 8.

If the property and casualty insurance company does

not prepare non-tax-basis financial statements, and has

checked “No” on Part I, line 1c, enter the net income (loss)

per the books and records of the U.S. corporation or the

U.S. consolidated tax group on Part I, line 4a.

Indicate on Part I, line 4b, which of the following

accounting standards were used for line 4a.

1. U.S. Generally Accepted Accounting Principles

(GAAP).

2. International Financial Reporting Standards (IFRS).

3. Statutory.

4. Other (specify).

Report on Part I, lines 5a through 10, as instructed

below, all adjustment amounts required to adjust

worldwide net income (loss) reported on this Part I, line 4a

(whether from financial statements or books and records),

to net income (loss) of includible corporations that must

be reported on Part I, line 11.

Report on line 12a the worldwide consolidated total

assets and total liabilities amounts for the corporation

using the same financial statements (or books and

records) used for the worldwide consolidated income

(loss) amount reported on Part I, line 4a.

If a U.S. property and casualty insurance company (a)

has net income (loss) included on Part I, line 4a, and

removed on Part I, line 6a or 6b, on another U.S.

corporation’s Schedule M-3, (b) files its own Form

1120-PC (separate or consolidated), (c) does not have a

separate non-tax-basis financial statement (certified or

otherwise) of its own, and (d) reports on Schedule L of its

own Form 1120-PC total consolidated assets that equal or

exceed $10 million at the end of the corporation’s tax year,

the property and casualty insurance company must

answer questions 1a, 1b, and 1c of Part I, as appropriate,

for its own Form 1120-PC and must report on Part I,

line 4a, the amount for the corporation’s net income (loss)

that is removed on Part I, line 6a or 6b, of the other

corporation’s Schedule M-3. However, if in the

circumstances described immediately above, the property

and casualty insurance company does have separate

non-tax-basis financial statements (certified or otherwise)

of its own, independent of the amount of the corporation’s

Instructions for Schedule M-3 (Form 1120-PC)

net income included on Part I, line 4a, of the other U.S.

corporation, the corporation must answer questions 1a,

1b, and 1c of Part I, as appropriate, for its own Form

1120-PC, based on its own separate income statement,

and must report on Part I, line 4a, the net income amounts

shown on its separate income statement.

Note: See the instructions for Part I, line 10, for

adjustments that may be necessary to reconcile financial

statement income to statutory income for the property and

casualty insurance company.

Line 5. Net Income (Loss) of Nonincludible

Foreign Entities

Remove the financial net income (line 5a) or loss (line 5b)

of each foreign entity that is included on Part I, line 4a, and

is not an includible corporation in the U.S. consolidated

tax group (nonincludible foreign entity). In addition, on Part

I, line 8, adjust for consolidation eliminations and correct

for minority interest and intercompany dividends between

any nonincludible foreign entity and any includible

corporation. Do not remove in Part I the financial net

income (loss) of any nonincludible foreign entity

accounted for on Part I, line 4a, using the equity method.

Attach a supporting statement that provides the name,

EIN (if applicable), and net income (loss) included on Part

I, line 4a, that is removed on line 5 for each separate

nonincludible foreign entity. Also state the total assets and

total liabilities for each such separate nonincludible

foreign entity and include those assets and liabilities

amounts in the total assets and total liabilities reported on

Part I, line 12b. The amounts of income (loss) detailed on

the supporting statement should be reported for each

separate nonincludible foreign entity without regard to the

effect of consolidation or elimination entries. If there are

consolidation or elimination entries relating to

nonincludible foreign entities whose income (loss) is

reported on the attached statement that are not reportable

on Part I, line 8, the net amounts of all such consolidation

and elimination entries must be reported on a separate

line on the attached statement, so that the separate

financial accounting income (loss) of each nonincludible

foreign entity remains separately stated.

For example, if the net income (after consolidation and

elimination entries) of a nonincludible foreign

sub-consolidated group is being reported on line 5a, the

attached supporting statement should report the income

(loss) of each separate nonincludible foreign legal entity

from each such entity’s own financial accounting net

income statement or books and records, and any

consolidation or elimination entries (for intercompany

dividends, minority interests, etc.) not reportable on Part I,

line 8, should be reported on the attached supporting

statement as a net amount on a line separate and apart

from lines that report each nonincludible foreign entity’s

separate net income (loss).

Line 6. Net Income (Loss) of Nonincludible U.S.

Entities

Remove the financial net income (line 6a) or loss (line 6b)

included on Part I, line 4a, for each U.S. entity that is not

an includible corporation in the U.S. consolidated tax

group (nonincludible U.S. entity). In addition, on Part I,

9

line 8, adjust for consolidation eliminations and correct for

minority interest and intercompany dividends between any

nonincludible U.S. entity and any includible corporation.

Do not remove in Part I the financial net income (loss) of

any nonincludible U.S. entity accounted for on Part I,

line 4a, using the equity method.

Attach a supporting statement that provides the name,

EIN, and net income (loss) included on Part I, line 4a, that

is removed on line 6 for each separate nonincludible U.S.

entity. Also state the total assets and total liabilities for

each such separate nonincludible U.S. entity and include

those assets and liabilities amounts in the total assets and

total liabilities reported on Part I, line 12c. The amounts of

income (loss) detailed on the supporting statement should

be reported for each separate nonincludible U.S. entity

without regard to the effect of consolidation or elimination

entries. If there are consolidation or elimination entries

relating to nonincludible U.S. entities whose income (loss)

is reported on the attached statement that are not

reportable on Part I, line 8, the net amounts of all such

consolidation and elimination entries must be reported on

a separate line on the attached statement, so that the

separate financial accounting income (loss) of each

nonincludible U.S. entity remains separately stated.

For example, if the net income (after consolidation and

elimination entries) of a nonincludible U.S.

sub-consolidated group is being reported on line 6a, the

attached supporting statement should report the income

(loss) of each separate nonincludible U.S. legal entity from

each such entity’s own financial accounting net income

statement or books and records, and any consolidation or

elimination entries (for intercompany dividends, minority

interests, etc.) not reportable on Part I, line 8, should be

reported on the attached supporting statement as a net

amount on a line separate and apart from lines that report

each nonincludible U.S. entity’s separate net income

(loss).

Lines 7a, 7b, and 7c. Net Income (Loss) of Other

Foreign Disregarded Entities, Net Income (Loss)

of Other U.S. Disregarded Entities, and Net

Income (Loss) of Other Includible Entities

Include on Part I, line 7a, 7b, or 7c, the financial net

income or (loss) of each foreign or U.S. disregarded entity

or other includible corporation that is not included in the

consolidated financial group and therefore not included in

the income reported on Part I, line 4a. Include on line 7a or

7b the financial net income or (loss) of any disregarded

entity that is not included in the income reported on Part I,

line 4a, but is included on Part I, line 11 (other disregarded

entities). Include on line 7c the financial net income or

(loss) of any entity not a disregarded entity that is not

included in the income reported on Part I, line 4a, but is

included on line 11 (other includible corporations). In

addition, on Part I, line 8, adjust for consolidation

eliminations and correct for minority interest and

intercompany dividends for any other disregarded entity or

other includible entities.

Attach a supporting statement that provides the name,

EIN, and net income (loss) per the financial statement or

books and records for each separate other disregarded

entity or other includible entity reported on line 7. Also

10

state the total assets and total liabilities for each such

separate included entity and include those assets and

liabilities amounts in the total assets and total liabilities

reported on Part I, line 12d. The amounts of income (loss)

detailed on the supporting statement should be reported

for each separate other disregarded entity or other

includible entity without regard to the effect of

consolidation or elimination entries solely between or

among the entities listed. If there are consolidation or

elimination entries relating to such other disregarded

entity or other includible entities whose income (loss) is

reported on the attached statement that are not reportable

on Part I, line 8, the net amounts of all such consolidation

and elimination entries must be reported on a separate

line on the attached statement, so that the separate

financial accounting income (loss) of each other

disregarded entity or other includible entity remains

separately stated.

For example, if the net income (after consolidation and

elimination entries) of a sub-consolidated group of other

disregarded entities is being reported on line 7a or 7b, the

attached supporting statement should report the income

(loss) of each separate other disregarded entity from each

entity’s own financial accounting net income statement or

books and records, and any consolidation or elimination

entries (for intercompany dividends, minority interests,

etc.) not reportable on Part I, line 8, should be reported on

the attached supporting statement as a net amount on a

line separate and apart from lines that report each other

disregarded entity’s separate net income (loss).

Line 8. Adjustment to Eliminations of

Transactions Between Includible Entities and

Nonincludible Entities

Adjustments on Part I, line 8, to reverse certain financial

accounting consolidation or elimination entries are

necessary to ensure that transactions between includible

entities and nonincludible U.S. or foreign entities are not

eliminated, in order to report the correct total amount on

Part I, line 11. Also, additional consolidation entries and

elimination entries may be necessary on Part I, line 8,

related to transactions between includible entities that are

in the consolidated financial statement group and other

disregarded entities and other includible entities that are

not in the consolidated financial statement group but that

are reported on Part I, line 7a, 7b, or 7c, in order to report

the correct total amount on Part I, line 11.

Include on Part I, line 8, the total of the following: (a)

amounts of any adjustments to consolidation entries and

elimination entries that are contained in the amount

reported on Part I, line 4a, required as a result of removing

amounts on Part I, line 5 or 6, and (b) amounts of any

additional consolidation entries and elimination entries

that are required as a result of including amounts on Part I,

line 7a, 7b, or 7c. This is necessary in order that the

consolidation entries and intercompany eliminations

entries included in the amount reported on Part I, line 11,

are only those applicable to the financial net income (loss)

of includible entities for the financial statement period.

For example, adjustments must be reported on line 8 to

remove minority interest and to reverse the elimination of

intercompany dividends included on Part I, line 4a, that

Instructions for Schedule M-3 (Form 1120-PC)

relate to the net income of entities removed on Part I,

line 5 or 6, because the income to which the consolidation

or elimination entries related have been removed. Also, for

example, consolidation or elimination entries must be

reported on line 8 to reflect any minority interest

ownership in the net income of other disregarded entities

or other includible entities reported on Part I, line 7a, 7b,

or 7c. Consolidation and elimination entries must also be

reported on line 8 to eliminate any intercompany

dividends between corporations or entities whose income

is included on Part I, line 7a, 7b, or 7c, and other entities

included in the consolidated U.S. income tax return. See

line 11, examples 3, 4, and 5.

If a corporate owner of an interest in another entity (a)

accounts for the interest in the entity in the owner

corporation’s separate general ledger on the equity

method, and (b) fully consolidates the entity in the owner

corporation’s consolidated financial statements, but the

entity is not includible in the owner corporation’s

consolidated U.S. income tax return, then, as part of

reversing all consolidation and elimination entries for the

nonincludible entity, the corporate owner must reverse on

Schedule M-3, Part I, line 8, the elimination of the equity

income inclusion from the entity. If the owner corporation

does not account for the entity on the equity method on its

own general ledger, it will not have eliminated the equity

income for consolidated financial statement purposes,

and therefore will have no elimination of equity income to

reverse.

The attached supporting statement for Part I, line 8,

must identify the type (for example, minority interest,

intercompany dividends, etc.) and amount of

consolidation or elimination entries reported, as well as

the names of the entities to which they pertain. It is not

necessary, but it is permitted, to report intercompany

eliminations that net to zero on Part I, line 8, such as

intercompany interest income and expense.

Line 9. Adjustment To Reconcile Income

Statement Period to Tax Year

Include on line 9 any adjustments necessary to the

income (loss) of includible corporations to reconcile

differences between the corporation’s income statement

period reported on line 2a and the corporation’s tax year.

Attach a statement describing the adjustment.

Statutory accounting for an insurance company

subsidiary acquired or merged may require the use of a

financial statement period for income reported on Part I,

line 11, that differs from the period reported on Part I,

line 4a, or line 7. Report on Part I, line 10b, adjustments to

income because of the differences in accounting period.

Line 10a. Intercompany Dividend Adjustments

To Reconcile to Line 11,

Line 10b. Other Statutory Accounting

Adjustments To Reconcile to Line 11, and

Line 10c. Other Adjustments To Reconcile to

Amount on Line 11

Include on lines 10a, 10b, and 10c any other adjustments

to reconcile net income (loss) on Part I, line 4a, through

Part I, line 9, with net income (loss) on Part I, line 11.

Instructions for Schedule M-3 (Form 1120-PC)

Include on line 10a the amount of any intercompany

dividend adjustment required by statutory accounting.

Include on line 10b the amount of any other required

statutory accounting adjustment. Include on line 10c the

amount of any other adjustment not required by statutory

accounting.

Normally, all intercompany dividends will have been

eliminated or excluded from the financial accounting

consolidated net income (loss) reported on Part I, line 4a.

However, an insurance company may be required to

include certain intercompany dividends on Part I, line 11,

so that the amount reported on Part I, line 11, agrees with

statutory accounting net income (Annual Statement). If the

net income (loss) of a corporation that files Form 1120-PC

or Form 1120-L is included on Part I, line 4a, or line 7, and

is computed on a basis other than statutory accounting,

include on line 10a the adjustments necessary such that

Part I, line 11, includes intercompany dividends in the net

income (loss) for the corporation to the extent required by

statutory accounting principles. For insurance companies

included in the consolidated U.S. income tax return, see

the instructions for Part I, line 11, and Part II, line 7.

Statutory accounting for an insurance company

subsidiary acquired or merged may require the use of a

financial statement period for income reported on Part I,

line 11, that differs from the period reported on Part I,

line 4a, or line 7. Report on Part I, line 10b, adjustments to

income because of such differences in accounting period.

For any adjustments reported on Part I, lines 10a, 10b,

and 10c, attach a supporting statement that provides, for

each corporation to which an adjustment relates, the

name and EIN of the corporation; the amount of net

income included in Part I before any adjustments on

line 10; the amount of net income included on Part I,

line 11; the amount of the net adjustment that is

attributable to intercompany dividend adjustments

required to be reported by statutory accounting and

included on Part I, line 10a; the amount of the net

adjustment attributable to other statutory accounting

requirements and included on Part I, line 10b; and the

amount of the remainder of the net adjustment not

required because of statutory accounting and included on

Part I, line 10c. If any net adjustment is included for the

corporation on Part I, line 10b or 10c, attach a

supplemental supporting statement identifying the line

(10b or 10c), and the type and amount of each adjustment

included in the net adjustment.

Line 11. Net Income (Loss) per Income

Statement of Includible Corporations

Report on line 11 the net income (loss) per the income

statement (or books and records, if applicable) of the

property and casualty insurance company. In the case of a

U.S. consolidated tax group, report the consolidated

income statement net income (loss) of all corporations

listed on Form 851 and included in the consolidated U.S.

income tax return for the tax year. Amounts reported in

Parts II and III, column (a) (see instructions, later), must be

reported on the same accounting method used to report

the amount of net income (loss) per income statement of

includible corporations on Part I, line 11, which for

insurance companies is usually statutory accounting. For

11

insurance companies included in the consolidated U.S.

income tax return, see the instructions for Part I, line 10,

and Part II, line 7.

Do not, in any event, report on line 11 the net income of

entities not listed on Form 851 other than disregarded

entities and not included in the consolidated U.S. income

tax return for the tax year. For example, it is not

permissible to remove the income of nonincludible entities

on lines 5 and/or 6, discussed earlier, then to add back

such income on lines 7 through 10, such that the amount

reported on line 11 includes the net income of entities not

includible in the consolidated U.S. income tax return. A

principal purpose of Schedule M-3 is to report on this Part

I, line 11, only the financial accounting net income of only

the corporations included in the consolidated U.S. income

tax return.

Whether or not the corporation prepares financial

statements, Part I, line 11, must include all items that

impact the net income (loss) of the corporation even if

they are not recorded in the profit and loss accounts in the

corporation’s general ledger, including, for example, all

post-closing adjusting entries (including workpaper

adjustments) and dividend income or other income

received from nonincludible corporations.

Example 3.

1. U.S. property and casualty insurance company P is

publicly traded and files Form 10-K with the SEC. P owns

80% or more of the stock of 75 U.S. corporations, DS1

through DS75; between 51% and 79% of the stock of 25

U.S. corporations, DS76 through DS100; and 100% of the

stock of 50 foreign subsidiaries, FS1 through FS50. P

eliminates all dividend income from DS1 through DS100

and FS1 through FS50 in financial statement

consolidation entries. Furthermore, P eliminates the

minority interest ownership, if any, of DS1 through DS100

in financial statement consolidation entries. P’s SEC Form

10-K includes P, DS1 through DS100, and FS1 through

FS50 on a fully consolidated basis. P files a consolidated

U.S. income tax return with DS1 through DS75.

P must check “Yes” on Part I, line 1a. On Part I, line 4a,

P must report the consolidated net income from the SEC

Form 10-K for the consolidated financial statement group

of P, DS1 through DS100, and FS1 through FS50. P must

remove the net income (loss) of FS1 through FS50 on Part

I, line 5a or 5b, as applicable. P must remove the net

income (loss) before minority interests of DS76 through

DS100 on Part I, line 6a or 6b, as applicable. P must

reverse on Part I, line 8:

a. The elimination of dividends received by P and DS1

through DS75 from DS76 through DS100 and FS1

through FS50; and

b. The recognition of minority interests’ share of the

net income (loss) of DS76 through DS100. (The minority

interests’ share, if any, of the income of DS1 through DS75

must be reported on Part II, line 8.)

P reports on Part I, line 11, the consolidated financial

statement net income (loss) attributable to the includible

corporations. Intercompany transactions between the

includible corporations that had been eliminated in the net

income amount on Part I, line 4a, remain eliminated in the

net income amount on line 11. Transactions between the

12

includible corporations and the nonincludible entities that

are eliminated in the net income amount on Part I, line 4a,

are included in the net income amount on line 11 since the

elimination of those transactions was reversed on line 8.

2. Foreign corporation F owns 100% of the stock of

U.S. property and casualty insurance company P. P owns

100% of the stock of DS1, 60% of the stock of DS2, and

100% of the stock of FS1. F prepares certified audited

financial statements. P does not prepare any financial

statements. P files a consolidated U.S. income tax return

with DS1.

P must not complete Schedule M-3, Part I, with

reference to the financial statements of its foreign parent F.

P must check “No” on Part I, lines 1a, 1b, and 1c, skip

lines 2a through 3c of Part I, and enter worldwide net

income (loss) per the books and records of the includible

corporations (P and DS1) on Part I, line 4a. If the amount

on Part I, line 4a, includes the income (loss) of DS2 and

FS1 or is not on the statutory basis, P must enter any

necessary adjustments on lines 5a through 10 in order for

Part I, line 11, to report the net income (loss) of includible

corporations P and DS1, net of eliminations for

transactions between P and DS1.

Example 4.

1. U.S. property and casualty insurance company P

owns 60% of corporation DS1 which is fully consolidated

in P’s financial statements. P does not account for DS1 in

P’s separate general ledger on the equity method. DS1

has net income of $100 (before minority interests) and

pays dividends of $50, of which P receives $30. The

dividend is eliminated in the consolidated financial

statements. In its financial statements, P consolidates

DS1 and includes $60 of net income ($100 less the

minority interest of $40) on Part I, line 4a.

P must remove the $100 net income of DS1 on Part I,

line 6a. P must reverse on Part I, line 8, the elimination of

the $40 minority interest net income of DS1. In addition, P

reverses its elimination of the $30 intercompany dividend

in its financial statements on Part I, line 8. The net result is

that P includes the $30 dividend from DS1 on Part I,

line 11, and on Part II, line 7, column (a). P’s dividend

income included on the tax return from DS1 must be

reported on Part II, line 7, column (d).

2. U.S. property and casualty insurance company C

owns 60% of the capital and profits interests in U.S. LLC

N. C does not account for N in C’s separate general ledger

on the equity method. N has net income of $100 (before

minority interests) and makes no distributions during the

tax year. C treats N as a corporation for financial

statement purposes and as a partnership for U.S. income

tax purposes. In its financial statements, C consolidates N

and includes $60 of net income ($100 less the minority

interest of $40) on Part I, line 4a.

C must remove the $100 net income of N on Part I,

line 6a. C must reverse on Part I, line 8, the elimination of

the $40 minority interest net income of N. The result is that

C includes no income for N either on Part I, line 11, or on

Part II, line 9, column (a). C’s taxable income from N must

be reported by C on Part II, line 9, column (d).

3. U.S. property and casualty insurance company P

owns 60% of corporation DS1, which is fully consolidated

Instructions for Schedule M-3 (Form 1120-PC)

in P’s financial statements. P accounts for DS1 in P’s

separate general ledger on the equity method. DS1 has

net income of $100 (before minority interests) and pays

dividends of $50, of which P receives $30. The dividend

reduces P’s investment in DS1 for equity method reporting

on P’s separate general ledger where P includes its 60%

equity share of DS1 income, which is $60. In its financial

statements, P eliminates the DS1 equity method income

of $60 and consolidates DS1, including $60 of net income

($100 less the minority interest of $40) on Part I, line 4a.

P must remove the $100 net income of DS1 on Part I,

line 6a. P must reverse on Part I, line 8, the elimination of

the $40 minority interest net income of DS1 and the

elimination of the $60 of DS1 equity income. The net

result is that P includes the $60 of equity method income

from DS1 at Part I, line 11, and on Part II, line 6, column

(a). P’s dividend income included on the tax return from its

investment in DS1 must be reported on Part II, line 7,

column (d).

4. U.S. property and casualty insurance company C

owns 60% of the capital and profits interests in U.S. LLC

N. C accounts for N in C’s separate general ledger on the

equity method. N has net income of $100 (before minority

interests) and makes no distributions during the tax year.

C treats N as a corporation for financial statement

purposes and as a partnership for U.S. income tax

purposes. For equity method reporting on C’s separate

general ledger, C includes its 60% equity share of N

income, which is $60. In its financial statements, C

eliminates the $60 of N equity method income and

consolidates N including $60 of net income ($100 less the

minority interest of $40) on Part I, line 4a.

C must remove the $100 net income of N on Part I,

line 6a. C must reverse on Part I, line 8, the elimination of

the $40 minority interest net income of N and the

elimination of the $60 of N equity method income. The

result is that C includes the $60 of equity method income

for N on Part I, line 11, and on Part II, line 9, column (a).

C’s taxable income from N must be reported by C on Part

II, line 9, column (d).

5. U.S. property and casualty insurance company C

owns 60% of the capital and profits interests in U.S. LLC

N. C accounts for N in C’s separate general ledger on the

equity method. N has net income of $100 (before minority

interests) and pays a $50 cash distribution, of which C

receives $30. The distribution reduces C’s investment in N

for equity method reporting on C’s separate general

ledger. C treats N as a corporation for financial statement

purposes and as a partnership for U.S. income tax

purposes. For equity method reporting on C’s separate

general ledger, C includes its 60% equity share of N

income, which is $60. In its financial statements, C

eliminates the $60 of N equity method income and

consolidates N and includes $60 of net income ($100 less

the minority interest of $40) on Part I, line 4a.

C must remove the $100 net income of N on Part I,

line 6a. C must reverse on Part I, line 8, the elimination of

the $40 minority interest net income of N and the

elimination of the $60 of N equity method income. The

result is that C includes the $60 of equity method income

for N on Part I, line 11, and on Part II, line 9, column (a).

Instructions for Schedule M-3 (Form 1120-PC)

C’s taxable income from N must be reported by C on Part

II, line 9, column (d).

Example 5. U.S. property and casualty insurance

company P owns 80% of the stock of corporation DS1.

DS1 is included in P’s consolidated U.S. income tax

return, even though DS1 is not included in P’s

consolidated financial statements on either a consolidated

basis or on the equity method. DS1 has current-year net

income of $100 after taking into account its $40 interest

payment to P. P has net income of $1,040 after recognition

of the interest income from DS1. Because DS1 is an

includible corporation, 100% of the net income of both P

and DS1 must be reported on Form 1120-PC,

Schedule A, of the PDS consolidated U.S. income tax

return, and the intercompany interest income and expense

must be removed by consolidation elimination entries.

P must report its financial statement net income of

$1,040 on Part I, line 4a, and reports DS1’s net income of

$100 on Part I, line 7c. Then, in order to reflect the full

consolidation of the financial accounting net income of P

and DS1 at Part I, line 11, Net income (loss) per income

statement of includible corporations, the following

consolidation and elimination entries are reported on Part

I, line 8: (a) offsetting entries to remove the $40 of interest

income received from DS1 included by P on Part I, line 4a,

and to remove the $40 of interest expense of DS1

included in line 7c for a net change of zero; and (b) an

entry to reflect the $20 minority interest in the net income

of DS1 (DS1 net income of $100 times 20% minority

interest). The result is that Part I, line 11, reports $1,120:

$1,040 from Part I, line 4a, $100 from line 7, and ($20)

from line 8. Stated another way, Part I, line 11, includes

the entire $1,000 net income of P, measured before

recognition of the intercompany interest income from DS1

and the consolidation of DS1 operations, plus the entire

$140 net income of DS1, measured before interest

expense to P, less the minority interest ownership of $20 in

DS1’s separate net income ($100). The consolidated U.S.

income tax group is required to include on the attached

supporting statement for Part I, line 8, the details of the

adjustment to the minority interest in the net income of

DS1, but is not required to report the offsetting adjustment

to the intercompany elimination of interest income and

interest expense (though it is permitted to do so).

Line 12. Total Assets and Liabilities of Entities

Included or Removed on Part I, Lines 4, 5, 6, and

7

Line 12 must be completed by all corporations that file

Schedule M-3. Report on lines 12a, 12b, 12c, and 12d the

total amount (not just the corporation’s share) of assets

and liabilities of entities included or removed on Part I,

lines 4, 5, 6, and 7. Assets and liabilities reported on Part

I, lines 12a through 12d, must be reported as positive

amounts.

On line 12a, enter the worldwide consolidated total

assets and total liabilities of all of the entities included in

completing Part I, line 4a. On line 12b, enter the total

assets and total liabilities of the entities removed in

completing Part I, line 5. On line 12c, enter the total assets

and total liabilities removed in completing Part I, line 6. On

13

line 12d, enter total assets and total liabilities included in

completing Part I, line 7.

Specific Instructions for Parts II and

III

For U.S. consolidated tax returns, file supporting

statements for each includible corporation. See

Consolidated Return in the Instructions for Form 1120-PC.

General Format for Parts II and III

Check the applicable box(es) at the top of pages 2 and 3

of Schedule M-3 to indicate whether the Schedule M-3 is

for the:

1. Consolidated group,

2. Parent corporation,

3. Consolidated eliminations,

4. Subsidiary corporation, or

5. Mixed 1120/L/PC group.

Also, check the applicable box to indicate whether the

Schedule M-3 is for a sub-consolidated (6) 1120-PC

group; or (7) 1120-PC eliminations. See Consolidated

Schedule M-3 Versus Consolidating Schedules M-3 for

Form 1120-PC Groups, and Schedule M-3 Consolidation

for Mixed Groups (1120/L/PC), earlier.

For each line item in Parts II and III, report in column (a)

the amount of net income (loss) included on Part I, line 11,

and report in column (d) the amount included in the

subtotal on Form 1120-PC, Schedule A, line 35 (or

Schedule B, line 19, if applicable).

Note: A statement or explanation may be attached to any

line even if none is required.

For any item of income, gain, loss, expense, or

deduction for which there is a difference between columns

(a) and (d), the portion of the difference that is temporary

must be entered in column (b) and the portion of the

difference that is permanent must be entered in column

(c).

If financial statements are prepared by the property and

casualty insurance company in accordance with statutory

accounting principles (SAP), differences that are treated

as temporary for SAP must be reported in column (b) and

differences that are permanent (that is, not temporary for

SAP) must be reported in column (c). Generally, pursuant

to SAP, a temporary difference affects (creates, increases,

or decreases) a deferred tax asset or liability.

If the property and casualty insurance company does

not prepare financial statements, or the financial

statements are not prepared in accordance with SAP,

report in column (b) any difference that the property and

casualty insurance company believes will reverse in a

future tax year (that is, have an opposite effect on taxable

income in a future tax year (or years) due to the difference

in timing of recognition for financial accounting and U.S.

income tax purposes) or is the reversal of such a

difference that arose in a prior tax year. Report in column

(c) any difference that the property and casualty insurance

company believes will not reverse in a future tax year (and

14

is not the reversal of such a difference that arose in a prior

tax year).

If the property and casualty insurance company is

unable to determine whether a difference between column

(a) and column (d) for an item will reverse in a future tax

year or is the reversal of a difference that arose in a prior

tax year, report the difference for that item in column (c).

Example 6. In its first year of operation, property and

casualty insurance company A is not required to file a

Schedule M-3. If A voluntarily files Schedule M-3, all

applicable Part I questions must be answered and all

applicable columns in Parts II and III must be completed.

Example 7. Property and casualty insurance company

B is a U.S. publicly traded corporation that files a U.S.

consolidated tax return and prepares consolidated SAP/

GAAP financial statements. In prior years, B acquired

intellectual property (IP) and goodwill through several

corporate acquisitions. The IP is amortizable for both U.S.

income tax and financial statement purposes. In the

current year, B’s annual amortization expense for IP is

$9,000 for U.S. income tax purposes and $6,000 for

financial statement purposes. In its financial statements, B

treats the difference in IP amortization as a temporary

difference. The goodwill is not amortizable for U.S. income

tax purposes and is subject to impairment for financial

statement purposes. In the current year, B records an

impairment charge on the goodwill of $5,000. In its

financial statements, B treats the goodwill impairment as a

permanent difference. B must report the amortization

attributable to the IP on Part III, line 28, and report $6,000

in column (a), a temporary difference of $3,000 in column

(b), and $9,000 in column (d). B must report the goodwill

impairment on Part III, line 27, and report $5,000 in

column (a), a permanent difference of ($5,000) in column

(c), and $0 in column (d).

Reporting Requirements for Parts II

and III

Except for mixed group consolidation, the number of Parts

II must equal the number of Parts III filed by the

corporation. Mixed groups should see Schedule M-3

Consolidation for Mixed Groups (1120/L/PC), earlier.

General Reporting Requirements

If an amount is attributable to a reportable transaction

described in Regulations section 1.6011-4(b), the amount

must be reported in Part II, line 12 columns (a), (b), (c),

and (d), as applicable, regardless of whether the amount

would otherwise be reported on Schedule M-3, Part II or

Part III. Thus, if a taxpayer files Form 8886, Reportable

Transaction Disclosure Statement, the amounts

attributable to that reportable transaction must be

reported on Part II, line 12.

A property and casualty insurance company is required

to report in Parts II and III, column (a) the amount of any

item specifically listed on Schedule M-3 that is in any

manner included in the property and casualty insurance

company’s current-year annual statement net income

(loss) or in an income or expense account maintained in

the property and casualty insurance company’s books and

records. The amount should be reported even if there is

no difference between that amount and the amount

Instructions for Schedule M-3 (Form 1120-PC)

included in taxable income unless (a) otherwise provided

in these instructions or (b) the amount is attributable to a

reportable transaction described in Regulations section

1.6011-4(b) and is therefore reported in Part II, line 12. For

example, with the exception of interest income reflected

on a Schedule K-1 received by a property and casualty

insurance company as a result of the property and

casualty insurance company’s investment in a partnership

or other pass-through entity, all interest income, whether

from unconsolidated affiliated companies, third parties,

banks, or other entities; whether imputed interest or not;

whether from foreign or domestic sources; whether

taxable or exempt from tax; and regardless of how or

where the income is classified in the property and

casualty insurance company’s annual statement, must be

included on Part II, line 13, column (a). Likewise, all fines

and penalties paid to a government or other authority for

the violation of any law for which fines or penalties are

assessed must be included on Part III, line 11, column (a),

regardless of the government authority that imposed the

fines or penalties; regardless of whether the fines or

penalties are civil or criminal; regardless of the

classification, nomenclature, or terminology attached to

the fines or penalties by the imposing authority in its

actions or documents; and regardless of how or where the

fines or penalties are classified in the property and

casualty insurance company’s summary of operations or

the income and expense accounts maintained in the

property and casualty insurance company’s books and

records.

If a property and casualty insurance company would be

required to report in Parts II and III, column (a), the amount

of any item specifically listed on Schedule M-3 in

accordance with the preceding paragraph, except that the

property and casualty insurance company has capitalized

the item of income or expense and reports the amount in

its annual statement or in asset and liability accounts

maintained in the property and casualty insurance

company’s books and records, the property and casualty

insurance company must report the proper tax treatment

of the item in columns (b), (c), and (d), as applicable.

Furthermore, in applying the two preceding paragraphs,

a property and casualty insurance company is required to

report in Parts II and III, column (a), the amount of any

item specifically listed on Schedule M-3 that is included in

the property and casualty insurance company’s annual

statement or exists in the property and casualty insurance

company’s books and records, regardless of the

nomenclature associated with that item in the annual

statement or books and records. Accurate completion of

Schedule M-3 requires reporting amounts according to

the substantive nature of the specific line items included

on Schedule M-3 and consistent reporting of all

transactions of like substantive nature that occurred

during the tax year. For example, all expense amounts that

are included in the annual statement or exist in the books

and records that represent some form of “Bad debt

expense,” except write-offs of premium receivables, must

be reported on Part III, line 32, in column (a), regardless of

whether the amounts are recorded or stated under

different nomenclature in the annual statement or the

books and records, such as “Provision for doubtful

accounts” or “Expense for uncollectible notes receivable.”

Instructions for Schedule M-3 (Form 1120-PC)

Likewise, as stated in the preceding paragraph, all fines

and penalties must be included in Part III, line 11, column

(a), regardless of the terminology or nomenclature

attached to them by the property and casualty insurance

company in its books and records or annual statement.

With limited exceptions, Part II includes lines for

specific items of income, gain, or loss (income items). See

Part II, lines 1 through 24. If an income item is described

on Part II, lines 1 through 24, report the amount of the item

on the applicable line, regardless of whether there is a

difference for the item. If there is a difference for the

income item, or only a portion of the income item has a

difference and a portion of the item does not have a

difference, and the item is not described on Part II, lines 1

through 24, report and describe the entire amount of the

item on Part II, line 25.

With limited exceptions, Part III includes lines for

specific items of expense or deduction (expense items).

See Part III, lines 1 through 38. If an expense item is

described on Part III, lines 1 through 38, report the amount

of the item on the applicable line, regardless of whether

there is a difference for the item. If there is a difference for

the expense item, or only a portion of the expense item

has a difference and a portion of the item does not have a

difference and the item is not described in Part III, lines 1

through 38, report and describe the entire amount of the

item in Part III, line 39.

If there is no difference between the annual statement

amount and the taxable amount of an entire item of

income, loss, expense, or deduction and the item is not

described or included on Part II, lines 1 through 25, or Part

III, lines 1 through 39, report the entire amount of the item

in Part II, line 28, columns (a) and (d).

Special instructions for Part II, lines 25 and 28, and

Part III, line 39. Whether an income (loss) item is

reported on Part II, line 25, or on Part II, line 28, or an

expense/deduction item on Part III, line 39, or on Part II,

line 28, is determined separately by each member of the

U.S. consolidated tax group and not at the U.S.

consolidated tax group level. For example, U.S.

corporation P has two subsidiaries, A and B, that are

included in P’s consolidated financial statements and in

P’s consolidated U.S. income tax return. For financial

statement purposes, P, A, and B recognize real estate tax

expense when accrued. For U.S. income tax purposes, P

and A recognize such expense consistent with the method

used for financial statement purposes, whereas B

recognizes such deduction based on a method different

from that used for financial statement purposes. P and A

must report this expense/deduction in Part II, line 28,

columns (a) and (d). B must report the following on Part III,

line 39, in column (a), B’s expense recognized in the

financial statements when accrued; in column (d), B’s real

estate tax expense recognized for U.S. income tax

purposes; and in column (b) or (c), as applicable, the

difference between B’s real estate tax expense in its

financial statements and its real estate tax deduction

recognized for U.S. taxable income purposes.

Separately stated and adequately disclosed. Each

difference reported in Parts II and III must be separately

stated and adequately disclosed. In general, a difference

15

is adequately disclosed if the difference is labeled in a

manner that clearly identifies the item or transaction from

which the difference arises. For further guidance about

adequate disclosure, see Regulations section 1.6662-4(f).

If a specific item of income, gain, loss, expense, or

deduction is described on Part II, lines 9 through 24, or

Part III, lines 1 through 38, and the line does not indicate

to “attach statement” and the specific instructions for the

line do not call for an attachment of a statement, then the

item is considered separately stated and adequately

disclosed if the item is reported on the applicable line and

the amount(s) of the item(s) are reported in the applicable

columns of the applicable line. See the instructions for

Part II, lines 1 through 8, later, for specific additional

information required to be provided for these particular

lines.

Note: A statement or explanation may be attached to any

line even if none is required.

Except as otherwise provided, differences for the same

item must be combined or netted together and reported as

one amount on the applicable line of Schedule M-3.

However, differences for separate items must not be

combined or netted together. Each item (and

corresponding amount attributable to that item) must be

separately stated and adequately disclosed on the

applicable line of Schedule M-3, or any statement

required to be attached, even if the amounts are below a

certain dollar amount.

Required statements for Part II, line 25, and Part III,

line 39. A separate statement must be attached to

Schedule M-3 (Form 1120-PC) that includes a detailed

description of each item and adjustment entered on Part

II, line 25, and Part III, line 39.

The description for each amount entered in column (a)

must be readily identifiable to the name of the account in

the financial statements or books and records of the

taxpayer, under which the amount in column (a) was

recorded in the accounting records. Also, the description

for each amount entered in column (a) must include

detailed information supporting each adjustment reported

in columns (b) and (c), including how the adjustment is

identified in the accounting records. The entire description

is considered the tax description for the amount reported

in column (d) for each item reported on Part II, line 25, or

Part III, line 39.

Each description should adequately describe all four

columns of Part II, line 25, or Part III, line 39. If additional

information is required to provide an acceptable

description, attach a supporting statement.

giving rise to temporary differences that will reverse in

future years. C must combine all of its depreciation

adjustments. Accordingly, C must report on Part III,

line 31, for its current tax year income statement

depreciation expense of $90,000 in column (a), a

temporary difference of $10,000 in column (b), and U.S.

income tax depreciation expense of $100,000 in column

(d).

Example 9. Property and casualty insurance company

D is a calendar year taxpayer that is required to file

Schedule M-3 for its current tax year. On December 31, of

the current year, D establishes two reserve accounts in

the amount of $100,000 for each account. One reserve

account is an allowance for agency balances that are

estimated to be uncollectible. The second reserve is an

estimate of future office closure expenses. In its annual

statement, D treats the two reserve accounts as giving

rise to temporary differences that will reverse in future

years. The two reserves are expenses in D’s current

annual statement but are not deductions for U.S. income

tax purposes in the current year. D must not combine the

Schedule M-3 differences for the two reserve accounts. D

must report the amounts attributable to the allowance for

bad debts on Part III, line 32, and must separately state

and adequately disclose the amount attributable to the

other reserve, future office closure expenses, on a

required, attached statement that supports the amounts

on Part III, line 39.

D must also provide a description for each reserve that

meets the requirements for Part III, line 39, discussed

earlier under Required statements for Part II, line 25, and

Part III, line 39. In this example, an acceptable description

would be “Future Office Closure Expense Reserve.”

Note: There is no need to add the title of the reserve

account to the description if the account name for the

amount in column (a) is already part of the adjustment

description.

Example 10. Insurance company F had $100 of meal

expenses, $100 of entertainment expenses, and therefore

deducted $200 on its income statement. For federal

income tax purposes, the entire $100 of meal expenses

are subject to the 50% limitation under section 274(n).

The $100 of entertainment expenses are nondeductible

under section 274(a). F must report on Part III, line 10,

$200 in column (a), $150 in column (c), and $50 in column

(d). F must report all its meals and entertainment

expenses only on this line whether there is a difference or

not because meals and entertainment expenses are

specifically described.

Example 8. Property and casualty insurance company

C is a calendar year taxpayer that is required to file

Schedule M-3 for its current tax year. C placed in service

ten depreciable assets in prior years. C’s total

depreciation expense for its current tax year for five of the

assets is $50,000 for income statement purposes and

$70,000 for U.S. income tax purposes. C’s total annual

depreciation expense for its current tax year for the other

five assets is $40,000 for income statement purposes and

$30,000 for U.S. income tax purposes. In its annual

statement, C treats the differences between annual

statement and U.S. income tax depreciation expense as

16

Instructions for Schedule M-3 (Form 1120-PC)

Part II. Reconciliation of Net Income

(Loss) per Income Statement of

Includible Corporations With Taxable

Income per Return

Lines 1 Through 8. Additional Information for

Each Property and Casualty Insurance

Company

For any item reported on Part II, lines 1, 3 through 6, or 8,

attach a supporting statement that provides the name of

the entity for which the item is reported, the type of entity

(corporation, partnership, etc.), the entity’s EIN (if

applicable), and the item amounts for columns (a) through

(d). See the instructions for Part II, lines 2 and 7, for the

specific information required for those particular lines.

Line 1. Income (Loss) From Equity Method

Foreign Corporations

Report on line 1, column (a), the financial income (loss)

included on Part I, line 11, for any foreign corporation

accounted for on the equity method and remove such

amount in column (b) or (c), as applicable. Report the

amount of dividends received and other taxable amounts

received or includible from or includible with respect to

foreign corporations on Part II, lines 2 through 5, as

applicable.

Line 2. Gross Foreign Dividends Not Previously

Taxed

Except as otherwise provided in this paragraph, report on

line 2, column (d), the amount (before any withholding tax)

of any foreign dividends included in the subtotal on Form

1120-PC, Schedule A, line 35 (or Schedule B, line 19, if

applicable), and report on line 2, column (a), the amount

of dividends from any foreign corporation included on Part

I, line 11. Do not report on Part II, line 2, any amounts that

must be reported on Part II, line 3 or 4, or dividends that

were previously taxed and must be reported on Part II,

line 5. See the instructions for Part II, lines 3, 4, and 5,

later. Report amounts in columns (b) and (c), as

applicable.

For any dividends reported on Part II, line 2, that are

received on a class of voting stock of which the property

and casualty insurance company directly or indirectly

owned 10% or more of the outstanding shares of that

class at any time during the tax year, report on an

attached supporting statement for Part II, line 2:

1. The name of the dividend payer,

2. The payer’s EIN (if applicable),

3. The class of voting stock on which the dividend was

paid,

4. The percentage of the class directly or indirectly

owned, and

5. The item amounts for columns (a) through (d).

Instructions for Schedule M-3 (Form 1120-PC)

Line 3. Subpart F, QEF, and Similar Income

Inclusions

Report on line 3, column (d), the amount included in

taxable income under section 951, relating to Subpart F;

the amount included in income under section 951A,

relating to global intangible low-taxed income (GILTI);

gains or other income inclusions resulting from elections

under sections 1291(d)(2) and 1298(b)(1); and any

amount included in taxable income pursuant to section

1293 (relating to qualified electing funds). The amount

included under section 951 corresponds to the total of the

amounts reported by the property and casualty insurance

company on line 6, Schedule I, of all Forms 5471,

Information Return of U.S. Persons With Respect To

Certain Foreign Corporations. The amount of qualified

electing fund (QEF) income corresponds to the total of the

amounts reported by the property and casualty insurance

company on all Forms 8621, Information Return by a

Shareholder of a Passive Foreign Investment Company or

Qualified Electing Fund.

Also, include on line 3 passive foreign investment

company mark-to-market gains and losses under section

1296. Do not report such gains and losses on

Schedule M-3, Part II, line 15.

Line 4. Gross-Up for Foreign Taxes Deemed Paid

Report on line 4, column (d), the amount of any gross-up

for foreign taxes deemed paid not included on Part II,

column (d) of lines 9, 10, and 11, Income (loss) from U.S.

partnerships, foreign partnerships, and other

pass-through entities. The gross-up amount on line 4 must

correspond to the total gross-up amounts for foreign taxes

deemed paid reported by the property and casualty

insurance company on all Forms 1118, Foreign Tax

Credit—Corporations, excluding the amounts reported on

Schedule M-3, Part II, lines 9, 10, and 11, column (d).

Line 5. Gross Foreign Distributions Previously

Taxed

Report on line 5, column (a), any distributions received

from foreign corporations that correspond to amounts

included on Part I, line 11, and that were previously taxed

for U.S. income tax purposes. For example, include in

column (a) amounts that are excluded from taxable

income under sections 959 and 1293(c). Remove such

amount in column (b) or (c), as applicable. Report the full

amount of the distribution before any withholding tax.

Since previously taxed foreign distributions are not

currently taxable, line 5, column (d), is shaded. Also, see

the instructions for Part II, line 2, earlier.

Line 6. Income (Loss) From Equity Method U.S.

Corporations

Report on line 6, column (a), the financial income (loss)

included on Part I, line 11, for any U.S. corporation

accounted for on the equity method and remove such

amount in column (b) or (c), as applicable. Report on Part

II, line 7, dividends received from any U.S. corporation

accounted for on the equity method.

17

Line 7. U.S. Dividends Not Eliminated in Tax

Consolidation

Report on line 7, column (a), the amount of dividends

included on Part I, line 11 that were received from any U.S.

corporation. Report on line 7, column (d), the amount of

any U.S. dividends included in the subtotal on Form

1120-PC, Schedule A, line 35 (or Schedule B, line 19, if

applicable).

Usually, the amounts included on line 7, columns (a)

and (d), include only dividends received from U.S.

corporations that are not included in the U.S. consolidated

tax group because intercompany dividends (dividends

received from includible corporations listed on Form 851)

are eliminated or excluded for financial accounting

purposes and eliminated for the calculation of U.S. taxable

income. In the case of an insurance company included in

the consolidated U.S. income tax return required to report

intercompany dividends as part of statutory accounting

net income, include such intercompany dividends on Part

II, line 7, column (a), and the taxable amount of those

dividends on Part II, line 7, column (d). For insurance

companies included in the consolidated U.S. income tax

return, see the instructions for Part I, lines 10a, 10b, 10c,

and 11.

For any intercompany dividends (dividends received

from includible corporations listed on Form 851) included

on Part II, line 7, report on an attached supporting

statement for Part II, line 7:

1. The name of the dividend payer,

2. The payer’s EIN,

3. The class of stock or security on which the

dividends were paid,

4. The amount of any net adjustment included on Part

I, line 10a, for such dividends, and

5. The amounts for columns (a) through (d).

For any dividends included on Part II, line 7, that are not

intercompany dividends (dividends received from

includible corporations listed on Form 851) that are

received on classes of voting stock in which the

corporation directly or indirectly owned 10% or more of the

outstanding shares of that class at any time during the tax

year, report on an attached supporting statement for Part

II, line 7:

1. The name of the dividend payer,

2. The payer’s EIN (if applicable),

3. The class of voting stock on which the dividend was

paid,

4. The percentage of the class directly or indirectly

owned, and

5. The amounts for columns (a) through (d).

Line 8. Minority Interest for Includible

Corporations

Report on line 8, column (a), the minority interest included

in the income statement income (loss) on Part I, line 11,

for any member of the U.S. consolidated tax group that is

less than 100% owned.

Example 11. Property and casualty insurance

company G is a calendar year taxpayer that is required to

18

file Schedule M-3 for its current tax year. G owns 90% of

the stock of U.S. corporation DS1. G files a consolidated

U.S. income tax return with DS1 as the GDS1 U.S.

consolidated group. G prepares certified SAP/GAAP

financial statements for the consolidated financial

statement group consisting of G and DS1. G has no net

income of its own, and G does not report its equity interest

in the income of DS1 on its separate financial statements.

DS1 has financial statement net income (before minority

interests) and taxable income of $1,000 ($2,500 of

revenue less $1,500 cost of goods sold).

On the consolidated Schedule M-3, Part I, line 4a,

Worldwide consolidated net income (loss) per income

statement, and on line 11, Net income (loss) per income

statement of includible corporations, the U.S.

consolidated tax group GDS1 must report $900 of

financial statement net income ($1,000 net income less

$100 minority interest).

The GDS1 group must prepare one consolidated

Schedule M-3, Parts II and III, and three additional

Schedules M-3, Parts II and III: one for G, one for DS1,

and one for consolidation eliminations.

On the Schedule M-3, Parts II and III, for DS1, $1,000 is

reported on Part II, line 28 and line 30, in both columns (a)

and (d). On G’s Schedule M-3, Parts II and III, zero is

reported on Part II, line 30, in both columns (a) and (d). On

the consolidation eliminations Schedule M-3, Parts II and

III, on Part II, line 8 and line 30, the minority interest

elimination for the U.S. consolidated tax group is reported

as ($100) in column (a), $100 in column (c), and $0 in

column (d).

On the Schedule M-3, Parts II and III for the U.S.

consolidated tax group, on Part II, line 8, Minority interest

for includible corporations, ($100) is reported in column

(a), $100 in column (c), and $0 in column (d). On Part II,

line 28, the U.S. consolidated tax group reports $1,000 in

both columns (a) and (d). As a result, financial statement

net income on Part II, line 30, column (a), will total $900;

net permanent differences on Part II, line 30, column (c),

will total $100; and taxable income on line 30, column (d),

will total $1,000.

Line 9. Income (Loss) From U.S. Partnerships

and Line 10. Income (Loss) From Foreign

Partnerships

For any interest owned by the corporation or a member of

the U.S. consolidated tax group that is treated as an

investment in a partnership for U.S. income tax purposes

(other than an interest in a disregarded entity), report

amounts on Part II, line 9 or 10, as described below.

1. In column (a) the sum of the corporation’s

distributive share of income or loss from a U.S. or foreign

partnership that is included on Part I, line 11;

2. In column (b) or (c), as applicable, the sum of all

differences, if any, attributable to the corporation’s

distributive share of income or loss from a U.S. or foreign

partnership; and

3. In column (d), the sum of all amounts of income,

gain, loss, or deduction attributable to the corporation’s

distributive share of income or loss from a U.S. or foreign

partnership (that is, the sum of all amounts reportable on

Instructions for Schedule M-3 (Form 1120-PC)

the corporation’s Schedule(s) K-1 received from the

partnership (if applicable)), without regard to any

limitations computed at the partner level (for example,

limitations on utilization of charitable contributions, capital

losses, and interest expense).

For each partnership reported on line 9 or 10, attach a

supporting statement that provides the name, EIN (if

applicable), end of year profit-sharing percentage (if

applicable), end of year loss-sharing percentage (if

applicable), and the amount reported in column (a), (b),

(c), or (d) of line 9 or 10, as applicable.

Example 12. U.S. property and casualty insurance

company H is a calendar year taxpayer that is required to

file Schedule M-3. H has an investment in a U.S.

partnership, USP. H prepares annual statements in

accordance with SAP. In its annual statement, H treats the

difference between annual statement net income and

taxable income from its investment in USP as a

permanent difference. For its current tax year, H’s annual

statement net income includes $10,000 of income

attributable to its share of USP’s net income. H’s

Schedule K-1 from USP reports $5,000 of ordinary

income, $7,000 of long-term capital gains, $4,000 of

charitable contributions, and $200 of section 179

expense. H must report on Part II, line 9, $10,000 in

column (a), a permanent difference of ($2,200) in column

(c), and $7,800 in column (d).

Example 13. Assume the same facts as Example 12,

except that corporation H’s charitable contribution

deduction is wholly attributable to its partnership interest

in USP and is limited to $90 pursuant to section 170(b)(2)

due to other investment losses incurred by H. In its

financial statements, H treated this limitation as a

temporary difference. H must not report the charitable

contribution limitation of $3,910 ($4,000 - $90) on Part II,

line 9. H must report the limitation on Part III, line 20, and

report the disallowed charitable contributions of ($3,910)

in columns (b) and (d).

Line 11. Income (Loss) From Other

Pass-Through Entities

company’s end of year profit-sharing percentage (if

applicable), the property and casualty insurance

company’s end of year loss-sharing percentage (if

applicable), and the amounts reported by the property and

casualty insurance company on line 11, column (a), (b),

(c), or (d), as applicable.

Line 12. Items Relating to Reportable

Transactions

Any amounts attributable to any reportable transactions

(as described in Regulations section 1.6011-4) must be

included on Part II, line 12, regardless of whether the

difference, or differences, would otherwise be reported

elsewhere in Part II or Part III. Thus, if a taxpayer files

Form 8886 for any reportable transaction described in

Regulations section 1.6011-4, the amounts attributable to

that reportable transaction must be reported on Part II,

line 12. In addition, all income and expense amounts

attributable to a reportable transaction must be reported

on Part II, line 12, columns (a) and (d) even if there is no

difference between the annual statement amounts and the

taxable amounts.

Each difference attributable to a reportable transaction

must be separately stated and adequately disclosed. A

property and casualty insurance company will be

considered to have separately stated and adequately

disclosed a reportable transaction on line 12 if the

property and casualty insurance company sequentially

numbers each Form 8886 and lists by identifying number

on the supporting statement for Part II, line 12, each

sequentially numbered reportable transaction and the

amounts required for Part II, line 12, columns (a) through

(d).

Instead of the requirements of the preceding

paragraph, a property and casualty insurance company

will be considered to have separately stated and

adequately disclosed a reportable transaction if the

property and casualty insurance company attaches a

supporting statement that provides the following for each

reportable transaction.

1. A description of the reportable transaction disclosed

on Form 8886 for which amounts are reported on Part II,

line 12;

2. The name and reportable transaction or tax shelter

registration number, if applicable, as reported on Form

8886; and

3. The type of reportable transaction (for example,

listed transaction, confidential transaction, transaction

with contractual protection, etc.) as reported on Form

8886.

For any interest in a pass-through entity (other than an

interest in a partnership reportable on Part II, line 9 or 10,

as applicable) owned by a member of the U.S.

consolidated tax group (other than an interest in a

disregarded entity), report the following on line 11.

1. In column (a) the sum of the corporation’s

distributive share of income or loss from the pass-through

entity that is included on Part I, line 11;

2. In column (b) or (c), as applicable, except for

amounts described in item 4 below, the sum of all

differences, if any, attributable to the pass-through entity;

and

3. In column (d), except for amounts described in item

4 below, the sum of all taxable amounts of income, gain,

loss, or deduction reportable on the corporation’s

Schedules K-1 received from the pass-through entity (if

applicable).

If a transaction is a listed transaction described in

Regulations section 1.6011-4(b)(2), the description must

also include the published guidance number provided on

Form 8886. In addition, if the reportable transaction

involves an investment in the transaction through another

entity such as a partnership, the description must include

the name and EIN (if applicable) of that entity as reported

on Form 8886.

For each pass-through entity reported on line 11, attach

a supporting statement that provides that entity’s name,

EIN (if applicable), the property and casualty insurance

Example 14. Property and casualty insurance

company J is a calendar year taxpayer that is required to

file Schedule M-3 for its current tax year. J incurred seven

Instructions for Schedule M-3 (Form 1120-PC)

19

different abandonment losses during its current tax year.

One loss of $12 million results from a reportable

transaction described in Regulations section 1.6011-4(b)

(5), another loss of $5 million results from a reportable

transaction described in Regulations section 1.6011-4(b)

(4), and the remaining five abandonment losses are not

reportable transactions. J discloses the reportable

transactions giving rise to the $12 million and $5 million

losses on separate Forms 8886 and sequentially numbers

them X1 and X2, respectively. J must separately state and

adequately disclose the $12 million and $5 million losses

on Part II, line 12. The $12 million loss and the $5 million

loss will be adequately disclosed if J attaches a

supporting statement for line 12 that lists each of the

sequentially numbered forms, Form 8886-X1 and Form

8886-X2, and with respect to each reportable transaction

reports the appropriate amounts required for Part II,

line 12, columns (a) through (d). Alternatively, J’s

disclosures will be adequate if the description provided for

each loss on the supporting statement includes the names

and reportable transaction or tax shelter registration

numbers, if any, disclosed on the applicable Form 8886,

identifies the type of reportable transaction for the loss,

and reports the appropriate amounts required for Part II,

line 12, columns (a) through (d). J must report the losses

attributable to the other five abandonment losses on Part

II, line 23e, regardless of whether a difference exists for

any or all of those abandonment losses.

Example 15. Property and casualty insurance

company K is a calendar year taxpayer that is required to

file Schedule M-3 for its current tax year. K enters into a

transaction with contractual protection that is a reportable

transaction described in Regulations section 1.6011-4(b)

(4). This reportable transaction is the only reportable

transaction for K’s current tax year and results in a $7

million capital loss for both statutory accounting purposes

and U.S. income tax purposes. Although the transaction

does not result in a difference, K is required to report on

Part II, line 12, the following amounts: ($7 million) in

column (a), zero in columns (b) and (c), and ($7 million) in

column (d). The transaction will be adequately disclosed if

K attaches a supporting statement for line 12 that (a)

sequentially numbers the Form 8886 and refers to the

sequentially numbered Form 8886-X1, and (b) reports the

applicable amounts required for line 12, columns (a)

through (d). Alternatively, the transaction will be

adequately disclosed if the supporting statement for

line 12 includes a description of the transaction, the name

and tax shelter registration number, if any, and the type of

reportable transaction disclosed on Form 8886.

Line 13. Interest Income

Report in Part II, line 13, column (a), the total amount of

interest income included in Part I, line 11. Report on Part

II, line 13, column (d), the total amount of interest income

included on Form 1120-PC, Schedule A, line 35 (or

Schedule B, line 19, if applicable), that is not required to

be reported elsewhere on Schedule M-3. In column (b) or

(c), as applicable, adjust for any amounts treated for U.S.

income tax purposes as interest income that are treated

as some other form of income for statutory accounting

purposes, or vice versa. For example, adjustments to

interest income resulting from adjustments made in

20

accordance with instructions for Part II, line 17, should be

made in columns (b) and (c) of this line 13.

Complete Part II of Form 8916-A. Enter the amounts

from Form 8916-A, Part II, line 6, columns (a) through (d),

in Schedule M-3, Part II, line 13, columns (a) through (d),

as applicable. Attach Form 8916-A.

Do not report on line 13 or include on Form 8916-A

amounts reported in accordance with the instructions for

Part II, lines 9, 10, 11, 12, and 21.

Line 14. Hedging Transactions

Report in line 14, column (a), the net gain or loss from

hedging transactions included on Part I, line 11. Report in

column (d) the amount of taxable income from hedging

transactions, as defined in section 1221(b)(2). Use

columns (b) and (c) to report all differences caused by

treating hedging transactions differently for statutory

accounting purposes and for U.S. income tax purposes.

For example, if a portion of a hedge is considered

ineffective under SAP but still is a valid hedge under

section 1221(b)(2), the difference must be reported on

line 14. The hedge of a capital asset, which is not a valid

hedge for U.S. income tax purposes but may be

considered a hedge for SAP purposes, must also be

reported here.

Report hedging gains and losses computed under the

mark-to-market method of accounting on line 14 and not

on Part II, line 15.

Line 15. Mark-to-Market Income (Loss)

Report on line 15 any amount representing the

mark-to-market income or loss for any securities held by a

dealer in securities, a dealer in commodities having made

a valid election under section 475(e), or a trader in

securities or commodities having made a valid election

under section 475(f). “Securities” for these purposes are

securities described in section 475(c)(2) and commodities

described in section 475(e)(2). “Securities” do not include

any items specifically excluded from sections 475(c)(2)

and 475(e)(2), such as certain contracts to which section

1256(a) applies.

Report hedging gains and losses computed under the

mark-to-market method of accounting on Part II, line 14,

and not on line 15.

Traders in securities or commodities. For a trader in

securities or commodities that made a valid election under

section 475(f) to use the mark-to-market method to

account for securities or commodities held in connection

with a trading business that files Form 4797, Sales of

Business Property, any Schedule M-3 entries required as

a result of marking to market these securities or

commodities are reported as follows: (a) mark-to-market

gains and losses from Form 4797, line 10, are included on

Part II, line 15, of Schedule M-3 (Form 1120-PC), and (b)

any other Schedule M-3 entries required based on other

results (non-mark-to-market gains and losses) included in

the total reported on Form 4797, line 17, should be

reported on Part II, line 23d, of Schedule M-3 (Form

1120-PC), unless the instructions for Schedule M-3

require the amounts to be reported on another line.

Instructions for Schedule M-3 (Form 1120-PC)

Line 16. Premium Income

Report on line 16, column (a), the amount of earned

premiums included in Part I, line 11. Include on line 16,

column (d), the amount of earned premiums included on

Form 1120-PC, Schedule A, line 35 (or Schedule B,

line 19, if applicable). Complete columns (b) and (c), as

appropriate. Attach a detailed statement separately

stating amounts included on line 16 attributable to the

change in:

1. Advanced premiums,

2. Earned but unbilled premiums,

3. Retrospective premium accruals,

4. Unearned premiums, and

5. Other premium accounts.

Line 17. Sale Versus Lease (for Sellers and/or

Lessors)

Note: Also, see the instructions in Part III, line 35,

Purchase Versus Lease (for Purchasers and/or Lessees),

later.

Asset transfer transactions with periodic payments

characterized for statutory accounting purposes as either

a sale or a lease may, under some circumstances, be

characterized as the opposite for tax purposes. If the

transaction is treated as a lease, the seller/lessor reports

the periodic payments as gross rental income and also

reports depreciation expense or deduction. If the

transaction is treated as a sale, the seller/lessor reports

gross profit (sale price less cost of goods sold) from the

sale of assets and reports the periodic payments as

payments of principal and interest income.

In Part II, line 17, in column (a), report the gross profit or

gross rental income for statutory accounting purposes for

all sale or lease transactions that must be given the

opposite characterization for U.S. income tax purposes. In

column (d), report the gross profit or gross rental income

for U.S. income tax purposes. Interest income amounts for

such transactions must be reported on Part II, line 13, in

column (a) or (d), as applicable. Depreciation expense for

such transactions must be reported on Part III, line 31, in

column (a) or (d), as applicable. Use columns (b) and (c)

of Part II, lines 13 and 17, and Part III, line 31, as

applicable, to report the differences between columns (a)

and (d).

Example 16. Property and casualty insurance

company M sells and leases property to customers. M is a

calendar year taxpayer that is required to file

Schedule M-3 for its current tax year. For statutory

accounting purposes, M accounts for each transaction as

a sale. For U.S. income tax purposes, each of M’s

transactions must be treated as a lease. In its annual

statement, M treats the difference in the statutory

accounting and the U.S. income tax treatment of these

transactions as temporary. During its current year, M

reports in its annual statement $1,000 of sales and $700

of cost of goods sold with respect to current-year lease

transactions. M receives periodic payments of $500 in its

current year with respect to these current year

transactions and similar transactions from prior years and

treats $400 as principal and $100 as interest income. For

statutory accounting purposes, M reports gross profit of

Instructions for Schedule M-3 (Form 1120-PC)

$300 ($1,000 - $700) and interest income of $100 from

these transactions. For U.S. income tax purposes, M

reports $500 of gross rental income (the periodic

payments) and (based on other facts) $200 of

depreciation deduction on the property. On Schedule M-3,

M must report on Part II, line 13, $100 in column (a),

($100) in column (b), and zero in column (d). In addition,

M must report on Part II, line 17, $300 of gross profit in

column (a), $200 in column (b), and $500 of gross rental

income in column (d). Lastly, M must report on Part III,

line 31, $200 in columns (b) and (d).

Line 18. Section 481(a) Adjustments

With the exception of a section 481(a) adjustment that is

required to be reported on Part II, line 12, for reportable

transactions, any difference between an income or

expense item attributable to an authorized (or

unauthorized) change in method of accounting made for

U.S. income tax purposes that results in a section 481(a)

adjustment must be reported on Part II, line 18, regardless

of whether a separate line for that income or expense item

exists in Part II or Part III.

Example 17. Property and casualty insurance

company N is a calendar year taxpayer that is required to

file Schedule M-3 for its current tax year. N was

depreciating certain fixed assets over an erroneous

recovery period and, effective for its current tax year, N

receives IRS consent to change its method of accounting

for the depreciable fixed assets and begins using the

proper recovery period. The change in method of

accounting results in a positive section 481(a) adjustment

of $100,000 that is required to be spread over 4 tax years,

beginning with the current tax year. In its annual

statement, N treats the section 481(a) adjustment as a

temporary difference. N must report on Part II, line 18,

$25,000 in columns (b) and (d) for its current tax year and

each of the subsequent 3 tax years (unless N is otherwise

required to recognize the remainder of the section 481(a)

adjustment earlier). N must not report the section 481(a)

adjustment on Part III, line 31.

Line 19. Reserved for Future Use

This line is reserved for future use. Do not include any

amounts on this line.

Line 20. Income Recognition From Long-Term

Contracts

Report on line 20 the amount of net income or loss for

financial statement purposes (or books and records, if

applicable) or U.S. income tax purposes for any contract

accounted for under a long-term contract method of

accounting.

Line 21. Original Issue Discount and Other

Imputed Interest

Report on line 21 any amounts of original issue discount

(OID) and other imputed interest. The term “original issue

discount and other imputed interest” includes, but is not

limited to:

1. The excess of a debt instrument’s stated

redemption price at maturity over its issue price, as

determined under section 1273;

21

2. Amounts that are imputed interest on a deferred

sales contract under section 483;

3. Amounts treated as interest or OID under the

stripped bond rules under section 1286; and

4. Amounts treated as OID under the below-market

interest rate rules under section 7872.

Note: Traders in securities or commodities that have

made a valid election under section 475(f) to use the

mark-to-market method to account for securities or

commodities, see the instructions for Part II, line 15,

earlier.

Line 22. Reserved for Future Use

Report on line 23e any abandonment losses, regardless

of whether the loss is characterized as an ordinary loss or

a capital loss.

This line is reserved for future use. Do not include any

amounts on this line.

Line 23a. Income Statement Gain/Loss on Sale,

Exchange, Abandonment, Worthlessness, or

Other Disposition of Assets Other Than

Pass-Through Entities

Report on line 23a, column (a), all gains and losses on the

disposition of assets. An exception to this reporting is for

gains and losses allocated to the corporation from a

pass-through entity (for example, on Schedule K-1) that

are included in the net income (loss) per income

statement of includible corporations reported on Part I,

line 11. Reverse the amount reported in column (a) in

column (b) or (c), as applicable. The corresponding gains

and losses for U.S. income tax purposes are reported on

Part II, lines 23b through 23g, as applicable.

Line 23b. Gross Capital Gains From Schedule D,

Excluding Amounts From Pass-Through Entities

Report on line 23b gross capital gains reported on

Schedule D, Capital Gains and Losses, excluding capital

gains from pass-through entities, which must be reported

on Part II, line 9, 10, or 11, as applicable.

Line 23c. Gross Capital Losses From

Schedule D, Excluding Amounts From

Pass-Through Entities, Abandonment Losses,

and Worthless Stock Losses

Report on line 23c gross capital losses reported on

Schedule D, excluding capital losses from (a)

pass-through entities, which must be reported on Part II,

line 9, 10, or 11, as applicable; (b) abandonment losses,

which must be reported on Part II, line 23e; and (c)

worthless stock losses, which must be reported on Part II,

line 23f. Do not report on line 23c capital losses carried

over from a prior tax year and utilized in the current tax

year. See the instructions for Part II, line 24, regarding the

reporting requirements for capital loss carryovers utilized

in the current tax year.

Line 23d. Net Gain/Loss Reported on Form

4797, Line 17, Excluding Amounts From

Pass-Through Entities, Abandonment Losses,

and Worthless Stock Losses

Report on line 23d the net gain or loss reported on line 17

of Form 4797, excluding amounts from (a) pass-through

entities, which must be reported on Part II, line 9, 10, or

11, as applicable; (b) abandonment losses, which must be

reported on Part II, line 23e; and (c) worthless stock

losses, which must be reported on Part II, line 23f.

22

Line 23e. Abandonment Losses

Line 23f. Worthless Stock Losses

Report on line 23f any worthless stock loss, regardless of

whether the loss is characterized as an ordinary loss or a

capital loss. Attach a statement that separately states and

adequately discloses each transaction that gives rise to a

worthless stock loss and the amount of each loss.

Line 23g. Other Gain/Loss on Disposition of

Assets

Report on line 23g any gains or losses from the sale or

exchange of property that are not reported on lines 23b

through 23f.

Line 24. Capital Loss Limitation and

Carryforward Used

Report as a positive amount on line 24, column (b) or (c),

as applicable, and column (d) the excess of the net capital

losses over the net capital gains reported on Schedule D,

by the corporation. For a U.S. consolidated tax group, the

Schedule M-3 adjustment for the amount of the

consolidated net capital loss that is disallowed should not

be made on the separate consolidating Schedules M-3 of

the includible corporations, but on the separate

Schedule M-3 for consolidated eliminations (or on Form

8916 in the case of a mixed group) as described under

Completion of Schedule M-3 and Certain Allocations,

Limitations, and Carryovers, earlier.

If the corporation utilizes a capital loss carryforward on

Schedule D in the current tax year, report the carryforward

utilized as a negative amount in Part II, line 24, column (b)

or (c), as applicable, and column (d). For a U.S.

consolidated tax group, the Schedule M-3 adjustment for

the amount of the consolidated capital loss carryforward

should not be made on the separate consolidating

Schedules M-3 of the includible corporations, but on the

separate Schedule M-3 for consolidation eliminations (or

on Form 8916 in the case of a mixed group) as described

under Completion of Schedule M-3 and Certain

Allocations, Limitations, and Carryovers, earlier.

Line 25. Other Income (Loss) Items With

Differences

Separately state and adequately disclose on Part II,

line 25, all items of income (loss) with differences that are

not otherwise listed on Part II, lines 1 through 24. Attach a

statement that describes and itemizes the type of income

(loss) and the amount of each item and provides a

description that states the income (loss) name for book

purposes for the amount recorded in column (a) and

describes the adjustment being recorded in column (b) or

(c). The entire description completes the tax description

Instructions for Schedule M-3 (Form 1120-PC)

for the amount included in column (d) for each item

separately stated on this line.

The attached statement should have five columns. The

first column has the description for the next four columns.

The second column is column (a), income (loss) per

income statement; the third column is column (b),

temporary difference; the fourth column is column (c),

permanent difference; and the fifth column is column (d),

income (loss) per tax return. Every item listed on the

attached statement for line 25 always must have columns

(a) + (b) + (c) = (d). Each item with amounts in columns

(a), (b), (c), and (d) will be totaled and included as one line

on Part II, line 25.

For insurance companies included in the consolidated

U.S. income tax return, see instructions for Part I, lines

10a, 10b, 10c, and 11, and Part II, line 7, for guidance on

the treatment of intercompany dividends and statutory

accounting.

If any “comprehensive income” as defined by

Statement of Financial Accounting Standards (SFAS) No.

130 is reported on this line, describe the item(s) in detail.

Examples of sufficiently detailed descriptions include

“foreign currency translation adjustments —

comprehensive income” and “gains and losses on

available-for-sale securities — comprehensive income.”

Whether an item of income (loss) is reported on line 25,

or is reported on Part II, line 28, is determined separately

by each member of the U.S. consolidated tax group and

not at the U.S. consolidated tax group level.

Example 18. U.S. corporation P has two subsidiaries,

corporations A and B, that are included in P’s

consolidated financial statements and in P’s consolidated

U.S. income tax return. For financial statement purposes,

P, A, and B recognize revenue from the sale of inventory

upon delivery to the customer. For U.S. income tax

purposes, P and A recognize such revenue consistent

with the method used for financial statement purposes,

whereas B recognizes such revenue based upon

customer acceptance. P and A must report this revenue in

columns (a) and (d) on Part II, line 28. B must report the

following on Part II, line 25: in column (a), B’s revenue

recognized in the financial statements based upon

delivery to the customer; in column (d), B’s revenue

recognized for U.S. income tax purposes based upon

customer acceptance; and in column (b) or (c), as

applicable, the difference between B’s revenue

recognized in its financial statements and in its U.S.

taxable income.

Note: In this example, the first column of the attached

statement for Part II, line 25, discussed earlier, must

include an adequate description, such as, “Inventory

Sales Revenue recognized upon acceptance, not

delivery.”

Line 27. Total Expense/Deduction Items

Report on Part II, line 27, columns (a) through (d), as

applicable, the negative of the amounts reported on Part

III, line 40, columns (a) through (d). For example, if Part III,

line 40, column (a), reflects an amount of $1 million, then

report on Part II, line 27, column (a), ($1 million). Similarly,

Instructions for Schedule M-3 (Form 1120-PC)

if Part III, line 40, column (b), reflects an amount of

($50,000), then report on Part II, line 27, column (b),

$50,000.

Line 28. Other Items With No Differences

If there is no difference between the statutory accounting

amount and the taxable amount of an entire item of

income, gain, loss, expense, or deduction and the item is

not described or included in Part II, lines 1 through 25, or

Part III, lines 1 through 39, report the entire amount of the

item in columns (a) and (d) of line 28. If a portion of an

item of income, loss, expense, or deduction has a

difference and a portion of the item does not have a

difference, do not report any portion of the item on line 28.

Instead, report the entire amount of the item (for example,

both the portion with a difference and the portion without a

difference) on the applicable line of Part II, lines 1 through

25, or Part III, lines 1 through 39. See Example 10, earlier.

Line 29a. PC Insurance Subgroup Reconciliation

Totals

For filers other than a mixed group, combine lines 26

through 28 and skip lines 29b and 29c. On the

sub-consolidated Schedule M-3 for a mixed group,

combine lines 26 through 28 and skip lines 29b and 29c.

For the consolidated Schedule M-3 of a mixed group,

complete only lines 29a through 29c and line 30 of Part II.

Part III is not required for the consolidated Schedule M-3

of a mixed group.

Line 29b. 1120 Subgroup Reconciliation Totals

Line 29b is used only by mixed groups. See Schedule M-3

Consolidation for Mixed Groups (1120/L/PC), earlier.

Line 29c. Life Insurance Subgroup

Reconciliation Totals

Line 29c is used only by mixed groups. See Schedule M-3

Consolidation for Mixed Groups (1120/L/PC), earlier.

Part III. Reconciliation of Net Income

(Loss) per Income Statement of

Includible Corporations With Taxable

Income per Return—Expense/

Deduction Items

Note: Expense amounts that reduce financial accounting

income must be reported on Part III, column (a), as

positive amounts. Deduction amounts that reduce taxable

income must be reported on Part III, column (d), as

positive amounts. Amounts reported on Part II, line 27,

must be the negative of the amounts reported on Part III,

line 40.

Lines 1 Through 6. Income Tax Expense

If the property and casualty insurance company does not

distinguish between current and deferred income tax

expense in its annual statement (or its books and records,

if applicable), report income tax expense as current

income tax expense using lines 1, 3, and 5, as applicable.

A U.S. consolidated tax group must complete lines 1

through 6 in accordance with the allocation of tax expense

23

among the members of the U.S. consolidated tax group in

the financial statements (or its books and records, if

applicable). If the current and deferred U.S., state, and

foreign income tax expense for the U.S. consolidated tax

group (income tax expense) is allocated among the

members of the U.S. consolidated tax group in the group’s

financial statements (or its books and records, if

applicable), then each member must report its allocated

income tax expense on Part III, lines 1 through 6, of that

member’s separate Schedule M-3. However, if the income

tax expense is not shared or allocated among members of

the U.S. consolidated tax group but is retained in the

parent corporation’s financial statements (or books and

records, if applicable), then amounts are reported only on

Part III, lines 1 through 6, of the parent’s separate

Schedule M-3.

Line 7. Foreign Withholding Taxes

Report in line 7, column (a), the amount of foreign

withholding taxes included in financial accounting income

on Part I, line 11. If the property and casualty insurance

company is deducting foreign tax, use column (b) or (c),

as applicable, to correct for any difference between

foreign withholding tax included in statutory accounting

net income and the amount of foreign withholding taxes

being deducted in the return. If the property and casualty

insurance company is crediting foreign withholding taxes

against the U.S. income tax liability, use column (b) or (c),

as applicable, to negate the amount reported in column

(a).

Line 8. Stock Option Expense

Report in line 8, column (a), amounts expensed on Part I,

line 11, that are attributable to all stock options. Report on

line 8, column (d), deduction amounts attributable to all

stock options.

Line 9. Other Equity-Based Compensation

Report on line 9 any amounts for equity-based

compensation or consideration that are reflected as

expenses for statutory accounting purposes (column (a))

or deducted in the U.S. income tax return (column (d))

other than amounts reportable elsewhere on

Schedule M-3, Parts II and III (for example, on Part III,

line 8, for stock options expense). Examples of amounts

reportable on line 9 include payments attributable to

employee stock purchase plans (ESPPs), phantom stock

options, phantom stock units, stock warrants, stock

appreciation rights, and restricted stock, regardless of

whether such payments are made to employees or

non-employees, or as payment for property or

compensation for services.

Line 10. Meals and Entertainment

Report on line 10, column (a), any amounts paid or

accrued by the property and casualty insurance company

during the tax year for meals, beverages, and

entertainment that are accounted for in the company’s

statutory income statement or the income and expense

accounts maintained in the property and casualty

insurance company’s books and records. Report only

amounts not otherwise reportable elsewhere on

Schedule M-3, Parts II and III.

24

Line 11. Fines and Penalties

Report on line 11 any fines or similar penalties paid to a

government or other authority for the violation of any law

for which fines or penalties are assessed. All fines and

penalties expensed in statutory accounting income (paid

or accrued) must be included on line 11, column (a),

regardless of the government or other authority that

imposed the fines or penalties; regardless of whether the

fines and penalties are civil or criminal; regardless of the

classification, nomenclature, or terminology used for the

fines or penalties by the imposing authority in its actions or

documents; and regardless of how or where the fines or

penalties are classified in the property and casualty

insurance company’s statutory income statement or the

income and expense accounts maintained in the property

and casualty insurance company’s books and records.

Also report on line 11, column (a), the reversal of any

overaccrual of any amount described in this paragraph.

See section 162(f) for additional guidance.

Report on line 11, column (d), any such amounts as

described in the preceding paragraph that are includible in

taxable income, regardless of the financial accounting

period in which such amounts were or are included in

financial accounting net income. Complete columns (b)

and (c) as appropriate.

Do not report on Part III, line 11, amounts required to be

reported in accordance with instructions for Part III,

line 12.

Do not report on Part III, line 11, amounts recovered

from insurers or any other indemnitors for any fines and

penalties described above.

Line 12. Judgments, Damages, Awards, and

Similar Costs

Report on line 12, column (a), the amount of any

estimated or actual judgments, damages, awards,

settlements, and similar costs, however named or

classified, included in financial accounting income,

regardless of whether the amount deducted was

attributable to an estimate of future anticipated payments

or actual payments. Also report on line 12, column (a), the

reversal of any overaccrual of any amount described in

this paragraph.

Report on line 12, column (d), any such amounts as are

described in the preceding paragraph that are includible in

taxable income, regardless of the statutory accounting

period in which such amounts were or are included in

statutory accounting net income. Complete columns (b)

and (c), as appropriate.

Do not report on Part III, line 12, amounts required to be

reported in accordance with instructions for Part III,

line 11.

Do not report on Part III, line 12, amounts recovered

from insurers or any other indemnitors for any judgments,

damages, awards, or similar costs described above.

Line 13. Parachute Payments

Report on line 13, column (a), the total expense included

in statutory accounting net income on Part I, line 11, that is

subject to section 280G. Report in column (b) or (c), as

Instructions for Schedule M-3 (Form 1120-PC)

applicable, the amount of nondeductible parachute

payments pursuant to section 280G, and report in column

(d) the deductible amount of compensation after any

excess parachute payment limitations under section

280G. If a payment is subject to limitation under both

sections 162(m) and 280G, report the total payment on

line 13.

Line 14. Compensation With Section 162(m)

Limitation

Report on line 14, column (a), the total amount of

non-performance-based current compensation expense

for the corporate officers to whom section 162 (m) applies.

Report in column (b) or (c), as applicable, the

nondeductible amount of current compensation in excess

of $1 million ($500,000 if the corporation receives or has

received financial assistance under the Treasury Asset

Relief Program (TARP)). Report the deductible

compensation in column (d). If a payment is subject to

limitation under both sections 162(m) and 280G, report

the total payment on Part III, line 13, Parachute payments.

See Regulations section 1.162-27(g) for the interaction

between sections 162(m) and 280G.

Line 15. Pension and Profit-Sharing

Report on line 15 any amounts attributable to the property

and casualty insurance company’s pension plans,

profit-sharing plans, and any other retirement plans.

Line 16. Other Post-Retirement Benefits

Report on line 16 any amounts attributable to other

post-retirement benefits not otherwise includible on Part

III, line 15 (for example, retiree health and life insurance

coverage, dental coverage, etc.).

Line 17. Deferred Compensation

Report on line 17, column (a), any compensation expense

included in the net income (loss) amount reported on Part

I, line 11, that is not deductible for U.S. income tax

purposes in the current tax year and that was not reported

elsewhere on Schedule M-3. Report on line 17, column

(d), any compensation deductible in the current tax year

that was not included in the net income (loss) amount

reported on Part I, line 11, for the current tax year and that

is not reportable elsewhere on Schedule M-3. For

example, report originations and reversals of deferred

compensation subject to section 409A on line 17.

Line 19. Charitable Contribution of Intangible

Property

Report on line 19 any charitable contribution of intangible

property, for example, contributions of:

• Intellectual property, patents (including any amounts of

additional contributions allowable by virtue of income

earned by donees subsequent to the year of donation),

copyrights, and trademarks;

• Securities (including stocks and their derivatives, stock

options, and bonds);

• Conservation easements (including scenic easements

or air rights);

• Railroad rights of way;

• Mineral rights; and

• Other intangible property.

Instructions for Schedule M-3 (Form 1120-PC)

Line 20. Charitable Contribution Limitation/

Carryforward

Report the excess of contributions paid during the tax year

(reported in column (a)) over amounts deducted as

charitable contributions as negative amounts on line 20,

columns (b) and (c), as applicable, and the excess of

amounts deducted as charitable contributions under tax

rules over such amounts expensed under financial

accounting rules as positive amounts on line 20, columns

(b) and (c), as applicable.

If the corporation utilizes a contribution carryforward in

the current tax year, report the carryforward utilized as a

positive amount in columns (b), (c), and (d), as applicable.

When a consolidated income tax return is being filed,

Schedule M-3 adjustments for the amount of charitable

contributions in excess of the limitation, or for charitable

contribution carryforward utilized, should not be made on

the separate consolidating Schedules M-3 of the

includible corporations, but on the separate consolidating

Schedule M-3 for consolidation eliminations (or on Form

8916 in the case of a mixed group). See Completion of

Schedule M-3 and Certain Allocations, Limitations, and

Carryovers, earlier.

Line 21. Write-Off of Premium Receivables

Report on line 21 the amount of premium receivables

written off rather than on line 32.

Line 22. Guarantee Fund Assessments

Report on line 22 all special purpose and guaranty fund

assessments accrued or deducted for the tax year.

Line 23. Current-Year Acquisition or

Reorganization Investment Banking Fees

Report on line 23 any investment banking fees paid or

incurred in connection with a taxable or tax-free

acquisition of property (for example, stock or assets) or a

tax-free reorganization. Report on this line any investment

banking fees incurred at any stage of the acquisition or

reorganization process including, for example, fees paid or

incurred to evaluate whether to investigate an acquisition,

fees to conduct an actual investigation, and fees to

consummate the acquisition. Also, include on line 23

investment banking fees incurred in connection with the

liquidation of a subsidiary, a spin-off of a subsidiary, or an

initial public stock offering.

Line 24. Current-Year Acquisition or

Reorganization Legal and Accounting Fees

Report on line 24 any legal and accounting fees paid or

incurred in connection with a taxable or tax-free

acquisition of property (for example, stock or assets) or

tax-free reorganization. Report on this line any legal and

accounting fees incurred at any stage of the acquisition or

reorganization process including, for example, fees paid or

incurred to evaluate whether to investigate an acquisition,

fees to conduct an actual investigation, and fees to

consummate the acquisition. Also, include on this line

legal and accounting fees incurred in connection with the

liquidation of a subsidiary, a spin-off of a subsidiary, or an

initial public stock offering.

25

Line 25. Current-Year Acquisition/

Reorganization Other Costs

Report on line 25 any other fees paid or incurred in

connection with a taxable or tax-free acquisition of

property (for example, stock or assets) or a tax-free

reorganization not otherwise reportable on Schedule M-3

(for example, Part III, line 23 or 24). Report on this line any

fees paid or incurred at any stage of the acquisition or

reorganization process including, for example, fees paid or

incurred to evaluate whether to investigate an acquisition,

fees to conduct an actual investigation, and fees to

consummate the acquisition. Also, include on this line 25

other acquisition/reorganization costs incurred in

connection with the liquidation of a subsidiary, a spin-off of

a subsidiary, or an initial public stock offering.

Line 26. Amortization of Acquisition,

Reorganization, and Start-Up Costs

Report on line 26 amortization of acquisition,

reorganization, and start-up costs. For purposes of

columns (b), (c), and (d), include amounts amortizable

under section 167, 195, or 248.

Line 27. Amortization/ Impairment of Goodwill,

Insurance in Force, and Ceding Commissions

Report on line 27 amortization of goodwill, insurance in

force, and ceding commissions or amounts attributable to

the impairment of goodwill, insurance in force, and ceding

commissions. Attach a statement separately stating the

amounts for each item.

Line 28. Other Amortization or Impairment

Write-Offs

Report on line 28 any amortization or impairment

write-offs not otherwise includible on Schedule M-3.

Line 29. Discounting of Unpaid Losses (Section

846)

Report on line 29, column (a), the change in liability for

unpaid losses and loss adjustment expense net of

reinsurance as included in Part I, line 11. Report in column

(d) the amount of change in the same liability valued for

tax purposes included in the subtotal on Form 1120-PC,

Schedule A, line 35 (or Schedule B, line 19, if applicable).

Do not include paid losses on line 29. Indicate amounts in

columns (b) and (c), as appropriate. Attach a statement

supporting columns (b) and (c) that identifies the

beginning and end of the taxable year amounts of

discounting, as required by section 846. Include any other

differences between columns (a) and (d) by separate title

as well as beginning and end of tax year amounts.

Line 30. Reduction of Loss Deduction (Section

832(b)(5)(B))

Report the proration adjustment required by section

832(b)(5)(B) as a negative amount on line 30, column (d).

Report amounts in columns (b) and (c), as appropriate. Do

not enter an amount on line 30, column (a).

26

Line 31. Depreciation

Report on line 31 any depreciation expense that is not

required to be reported elsewhere on Schedule M-3 (for

example, on Part II, line 9, 10, or 11).

Line 32. Bad Debt Expense and Agency

Balances Written Off

Report on line 32, column (a), any amounts attributable to

an allowance for uncollectible accounts receivable or

actual write-offs of accounts receivable included in Part I,

line 11. Also report on this line agency balances written off

per the annual statement. Report in column (d) the

amount of bad debt expense deductible for federal income

tax purposes in accordance with section 166.

Line 33. Reserved for Future Use

No entry is made on line 33.

Line 34. Corporate Owned Life Insurance

Premiums

Report on line 34 all amounts of insurance premiums

attributable to any life insurance policy if the insurance

company is, directly or indirectly, a beneficiary under the

policy or if the policy has a cash value. Report in column

(d) the amount of the premiums that are deductible for

federal income tax purposes.

Line 35. Purchase Versus Lease (for Purchasers

and/or Lessees)

Note: Also, see the instructions for sellers and/or lessors

in the instructions for Part II, line 17.

Asset transfer transactions with periodic payments

characterized for statutory accounting purposes as either

a purchase or a lease may, under some circumstances, be

characterized as the opposite for tax purposes.

If a transaction is treated as a lease, the purchaser/

lessee reports the periodic payments as gross rental

expense. If the transaction is treated as a purchase, the

purchaser/lessee reports the periodic payments as

payments of principal and interest and also reports

depreciation expense or deduction with respect to the

purchased asset.

Report in column (a) gross rent expense for a

transaction treated as a lease for statutory accounting

purposes but as a sale for U.S. income tax purposes.

Report in column (d) gross rental deductions for a

transaction treated as a lease for U.S. income tax

purposes but as a purchase for statutory accounting

purposes. Report interest expense for such transactions

on Part III, line 36, in column (a) or (d), as applicable.

Report depreciation expense or deductions for such

transactions on Part III, line 31, in column (a) or (d), as

applicable. Use columns (b) and (c) of Part III, lines 31,

35, and 36, as applicable, to report the differences

between columns (a) and (d) for such recharacterized

transactions.

Example 19. U.S. property and casualty insurance

company X acquired property in a transaction that, for

statutory accounting purposes, X treats as a lease. X is a

calendar year taxpayer that is required to file

Schedule M-3 for its current tax year. Because of its

Instructions for Schedule M-3 (Form 1120-PC)

terms, the transaction is treated for U.S. income tax

purposes as a purchase and X must treat the periodic

payments it makes partially as payment of principal and

partially as payment of interest. In its annual statement, X

treats the difference between the statutory accounting and

U.S. income tax treatment of this transaction as a

temporary difference. During its current tax year, X reports

in its annual statement $1,000 of gross rental expense

that, for U.S. income tax purposes, is recharacterized as a

$700 payment of principal and a $300 payment of interest,

accompanied by a depreciation deduction of $1,200

(based on other facts). On Schedule M-3, X must report

the following on Part III, line 35: column (a), $1,000, its

statutory accounting gross rental expense; column (b),

($1,000); and column (d), zero. On Part III, line 36, X

reports zero in column (a) and $300 in columns (b) and (d)

for the interest deduction. On Part III, line 31, X reports

zero in column (a) and $1,200 in columns (b) and (d) for

the depreciation deduction.

Line 36. Interest Expense

Report on Part III, line 36, column (a), the total amount of

interest expense included on Part I, line 11, and report on

Part III, line 36, column (d), the total amount of interest

expense included on Form 1120-PC, Schedule A, line 35

(or Schedule B, line 19, if applicable), that is not reported

elsewhere on Schedule M-3. In column (b) or (c), as

applicable, adjust for any amounts treated for U.S. income

tax purposes as interest expense that are treated as some

other form of expense for statutory accounting purposes,

or vice versa. For example, adjustments to interest

expense resulting from adjustments made in accordance

with the instructions for Part III, line 35, Purchase versus

lease (for purchasers and/or lessees), should be made on

line 36, columns (b) and (c), as applicable.

Complete Part III of Form 8916-A. Enter the amounts

from Form 8916-A, Part III, line 5, columns (a) through (d),

on Schedule M-3, Part III, line 36, columns (a) through (d),

as applicable. Attach Form 8916-A.

Do not report on Form 8916-A and line 36 amounts

reported in accordance with the instructions for Part II,

lines 9, 10, 11, and 12.

Line 37. Research and Experimental

Expenditures

P.L. 119-21 adds new section 174A to the Internal

Revenue Code. Section 174A(a) allows taxpayers to

deduct amounts paid or incurred for domestic research

and experimental expenditures in tax years beginning

after December 31, 2024.

For U.S. income tax purposes, you can deduct your

domestic research or experimental expenditures as

current business expenses when incurred, elect to

capitalize and amortize your domestic research or

experimental expenditures in equal amounts over a period

of 60 months or more (beginning with the month in which

you first realize benefits from the expenditures), or elect to

amortize your research or experimental expenditures

ratably over a 10-year period (beginning with the taxable

year in which the expenditure was made). This includes

any domestic amounts paid or incurred in connection with

the development of software.

Instructions for Schedule M-3 (Form 1120-PC)

You must capitalize and amortize research or

experimental expenditures attributable to foreign research

conducted outside the United States, Puerto Rico, or any

territory of the United States ratably over a 15-year period

beginning with the midpoint of the tax year in which the

expenditures were paid or incurred. This includes any

foreign amounts paid or incurred in connection with the

development of software.

For more information, see section 174 and section

174A. For rules prior to P.L. 119-21, see Notice 2023-63,

as modified by Notice 2024-12. See Rev. Proc. 2025-28

for procedures to begin applying section 174A to domestic

research or experimental expenditures, as well as

transition rules provided in P.L. 119-21 that allow

taxpayers to recover remaining unamortized amounts

attributable to domestic research or experimental

expenditures paid or incurred in tax years beginning after

December 31, 2021, and before January 1, 2025, that

were capitalized under section 174 for such years.

Report in column (a) the amount of research and

development expenditures reported as an expense on the

corporation's financial statements (or books and records,

if applicable). Report in column (d) the amount of

amortization deductions of specified research or

experimental expenditures (as defined prior to

amendment by P.L. 119-21), foreign research or

experimental expenditures, and domestic research or

experimental expenditures included on Form 4562, Part

VI, line 44, or domestic research or experimental

expenditures included in total deductions on Form

1120-PC, Schedule A, line 32. Any deductions taken

under section 174A(a) and any amortization deductions

allowable under sections 174(b), 174A(c), or 59(e) related

to such costs are reported in column (b) to the extent they

differ from related amounts taken as expenses on the

corporation's financial statements (or books and records,

if applicable). Report any difference in timing between

financial statement research or development costs and

tax deductions for research and experimental

expenditures in column (b).

In column (c), as applicable, include any adjustments

for any amounts treated for U.S. income tax purposes as

research or experimental expenditures that are treated as

some other form of expense for financial accounting

purposes, or vice versa. Report any difference in timing

recognition in column (b). For example, if the t

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