130 T.C. 93">*98 Section 953 defines the term "insurance income" for purposes of determining a CFC's subpart F income. See sec. 952(a)(1). If it were not for petitioners' 2008 U.S. Tax Ct. LEXIS 8">*16 claim that section 953 applies, their argument that American General properly reduced its earnings and profits on account of annual accruals for additions to a reserve reflecting its obligation to make annuity payments pursuant to the annuity agreements could be disposed of in short order. Generally, annuity payments made for property are considered payments made to purchase the property. E.g., Perkins v. United States, 701 F.2d 771">701 F.2d 771, 701 F.2d 771">775 (9th Cir. 1983). The payments constitute capital expenditures, which are not deductible, sec. 263(a)(1), regardless of the number of payments made or the total amount to be paid, 701 F.2d 771">Perkins v. United States, supra at 775. The payments give the taxpayer a cost basis in the acquired property, sec. 1012, and the taxpayer recovers his investment in the property by way of deductions for depreciation, sec. 167(a), or by way of an offset of any unrecovered basis against the amount realized on a sale or disposition of the property, sec. 1001(a).

"Earnings and profits" is a tax concept that generally relates to the determination of whether a distribution from a corporation to its shareholders is properly treated as a dividend or a return of capital. See secs. 301(c), 2008 U.S. Tax Ct. LEXIS 8">*17 316(a); Henry C. Beck Co. v. Commissioner, 52 T.C. 1">52 T.C. 1, 52 T.C. 1">6 (1969), affd. per curiam 433 F.2d 309">433 F.2d 309 (5th Cir. 1970). Capital expenditures do not reduce earnings and profits. Pa. Forge Corp. v. Commissioner, a Memorandum Opinion of this Court dated Sept. 6, 1943 ("the accrued interest * * * represented capital expenditures and was not a proper charge against petitioner's earnings and profits"); Patty v. Commissioner, a Memorandum Opinion of the Board of Tax Appeals dated May 27, 1936 ("Organization expenses are capital expenditures * * * and, therefore, they are not to be considered in determining the earnings or profits available for distribution." ⁴), revd. on other grounds 98 F.2d 717">98 F.2d 717 (2d Cir. 1938).^{52008 U.S. Tax Ct. LEXIS 8">*18}

130 T.C. 93">*99 Moreover, even if annuity payments do not have to be capitalized, the obligation to commence life annuity payments in the future is contingent and for that reason does not reduce earnings and profits absent a special exception like that applicable to life insurance reserves. See Dean v. Commissioner, 9 T.C. 256">9 T.C. 256, 9 T.C. 256">266 (1947) (reserves for contingent future expenses do not reduce earnings and profits), affd. 187 F.2d 1019">187 F.2d 1019 (3d Cir. 1951). Professors Bittker and Eustice, in their treatise, Federal Income Taxation of Corporations and Shareholders, point out that, in determining whether a distribution to shareholders constitutes a taxable dividend, reference is made to the distributing corporation's earnings and profits rather than to its surplus, in part because surplus, unlike earnings and profits, is reduced by reserves for contingencies. Bittker & Eustice, Federal Income Taxation of Corporations and Shareholders, par. 8.03[2], at 8-20 (7th Ed. 2000). The authors describe the problem thus:

If these reserves were taken into account, the floodgates would be opened to a stream of tax-free cash 2008 U.S. Tax Ct. LEXIS 8">*19 distributions for as long as the corporation's directors could conjure up contingencies that would warrant the creation of reserves. It is not surprising, therefore, that accounting surplus was rejected as a criterion and that the phrase "earnings and profits" acquired a meaning more in keeping with its function. [Id.]

We shall now turn to petitioners' section 953 argument.

Life insurance companies are subject to income taxation pursuant to part I, subchapter L, chapter 1, subtitle A of the Internal Revenue Code (part I and subchapter L, respectively). Part I comprises sections 801 through 818. For a life insurance company to be taxable pursuant to part I, the company must first be an insurance company within the meaning of section 816(a). In pertinent part, section 816(a) provides: "the term 'insurance company' means any company more than half of the business of which during the taxable year is the issuing of insurance or annuity contracts". A life insurance company includes in its gross income premiums and other consideration received on annuity contracts. See sec. 803(a)(1)(A). In determining its taxable income, it deducts additions to reserves set aside to 2008 U.S. Tax Ct. LEXIS 8">*20 pay claims arising under annuity contracts. See secs. 804(a)(1), 805(a)(2), 130 T.C. 93">*100 807(b), (c)(1), 816(b). Therefore, it reduces its earnings and profits on account of those reserve additions. See sec. 1.312-6(a), Income Tax Regs. (providing, in pertinent part, that "the amount of the earnings and profits in any case will be dependent upon the method of accounting properly employed in computing taxable income").

On brief, petitioners concede that American General is not an insurance company: "Respondent is correct in pointing out that[,] as a real estate company, American General is not an Insurance Company." They argue, however, that that does not matter: "American General * * * [does not need to be an insurance company in the business of selling insurance] in order to reduce * * * [earnings and profits] by the future annuity obligations." They rely on section 953, which, in pertinent part, provides:

SEC. 953. INSURANCE INCOME.

(a) Insurance Income. --

(1) In general. -- For purposes of section 952(a)(1), [which provides that "subpart F income" includes "insurance income"] the term "insurance income" means any income which --

As we understand it, the essence of petitioners' argument is that, on account of entering into the annuity agreements, American General had insurance income within the meaning of section 953(a)(1), which allows it to accrue additions to reserves, and reduce its earnings and profits, in anticipation of making the annuity payments called for by those agreements, notwithstanding that it is not an insurance company. ⁶

To support their argument, petitioners rely on regulations proposed under section 953. Proposed regulations are accorded little, if any, deference. Estate of Ratliff v. Commissioner, 101 T.C. 276">101 T.C. 276, 101 T.C. 276">278 (1993). In any event, those proposed regulations weaken, rather than support, petitioners' argument. Section 1.953-6(a), Proposed Income Tax Regs., 56 Fed. Reg. 15560 (April 17, 1991), 2008 U.S. Tax Ct. LEXIS 8">*22 deals with the applicability of subchapter L to CFCs. In pertinent part, subparagraph (1) 130 T.C. 93">*101 of that section provides the following general rule: "A controlled foreign corporation which has insurance income under section 953 * * * shall compute its insurance income * * * under part I of subchapter L". (Emphasis added.) Section 1.953-6(f), Proposed Income Tax Regs., 56 Fed. Reg. 15561 (April 17, 1991), deals with CFCs that, if they were domestic corporations, would not qualify to be taxed under subchapter L as insurance companies. In pertinent part, subparagraph (1) of that proposed regulation provides:

A controlled foreign corporation will compute its insurance income as if it were a domestic insurance company subject to part I of subchapter L (relating to life insurance companies) only if it can meet the requirements of section 816(a) of the Code taking into account only that portion of its business which involves the issuing or reinsuring of insurance or annuity contracts. [Emphasis added.]

Petitioners' first difficulty in finding support in the proposed regulations is that they have failed to prove that American General's business was to any extent the business of issuing insurance or 2008 U.S. Tax Ct. LEXIS 8">*23 annuity contracts. The issuance of insurance, to include annuities, requires risk shifting and risk distribution. See Helvering v. Le Gierse, 312 U.S. 531">312 U.S. 531, 312 U.S. 531">539, 61 S. Ct. 646">61 S. Ct. 646, 85 L. Ed. 996">85 L. Ed. 996 (1941); Wright v. Commissioner, T.C. Memo. 1993-328 ("The amounts in the annuities did not constitute insurance because no risk shifting or risk distribution occurred."), modified per order (Oct. 29, 1993), affd. without published opinion 73 F.3d 372">73 F.3d 372 (9th Cir. 1995). In the case of the annuity agreements, there was no risk distribution (i.e., the pooling of possible annuity termination dates) among a broad number of individuals. American General's mortality risk was spread between the lives of only two individuals; viz, petitioners. We said in Amerco & Subs. v. Commissioner, 96 T.C. 18">96 T.C. 18, 96 T.C. 18">41 (1991), affd. 979 F.2d 162">979 F.2d 162 (9th Cir. 1992): "The concept of risk-distributing emphasizes the pooling aspect of insurance: that it is the nature of an insurance contract to be part of a larger collection of coverages, combined to distribute risk between insureds." Moreover, respondent argues that there was no risk shifting (one party shifting the risk of a loss to another party), since petitioners are the owners, at least for tax purposes, 2008 U.S. Tax Ct. LEXIS 8">*24 of American General. To find that there was no insurance, it is sufficient that we find that there was no risk 130 T.C. 93">*102 distribution, which we do find. It is not necessary that we consider whether there was risk shifting.

Even were we to put aside petitioners' failure to prove that American General was in the insurance business, they have failed to prove that American General realized any income in connection with the annuity agreements. American General received the property in exchange for those agreements. On its books and records, it accounted for the obligations imposed on it by the annuity agreements as liabilities. Petitioners do not claim that they reported premium income, or, indeed, any income, as a result of incurring those obligations. ⁷

Petitioners have failed to prove that American General received insurance income within the meaning of section 952(a)(1). American General does not fall within the ambit of the rules of part I, allowing life insurance companies to deduct additions to reserves set aside 2008 U.S. Tax Ct. LEXIS 8">*25 to pay claims arising under annuity contracts, nor can it reduce its earnings and profits as a life insurance company could on account of those contingent claims.

Because American General's accruals for the future payment of annuities to petitioners did not reduce its earnings and profits, respondent's adjustments increasing petitioners' 2001 income under section 951(a)(1) are sustained.

Decision will be entered under Rule 155.