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                                                                                                         Department of the Treasury
                                                                                                         Internal Revenue Service
Instructions for 

Schedule M-3 (Form 1120-L)

(Rev. December 2021)
Net Income (Loss) Reconciliation for U.S. Life Insurance Companies With Total 
Assets of $10 Million or More

Section references are to the Internal Revenue tax year that equal or exceed $10 million     assets on its Schedule L, Part II, line 2, 
Code unless otherwise noted.                   must complete and file Schedule M-3.          column (b), of $6 million. Neither C nor D 
                                               • A corporation filing a non-consolidated     is required to file Schedule M-3 for the 
Future Developments                            Form 1120-L that reports on Schedule L,       current tax year.
For the latest information about               Part II, line 2, column (b), of Form 1120-L   3. Foreign corporation A owns 100% 
developments related to Schedule M-3           total assets that equal or exceed $10         of both U.S. life insurance company B and 
(Form 1120-L), and its instructions, such      million must complete and file                U.S. life insurance company C. C owns 
as legislation enacted after they were         Schedule M-3 and must check box (1)           100% of U.S. life insurance company D. 
published, go to IRS.gov/Form1120L.            Non-consolidated return, at the top of        For its current tax year, A prepares a 
                                               page 1 of Schedule M-3.                       consolidated worldwide financial 
                                               • Any U.S. consolidated tax group             statement for the ABCD consolidated 
General Instructions                           consisting of a U.S. parent corporation       group. The ABCD consolidated financial 
                                               and additional includible corporations        statement reports total year-end assets of 
Purpose of Schedule                            listed on Form 851, Affiliations Schedule,    $25 million.  A is not required to file a U.S. 
Schedule M-3, Part I, asks certain             required to file Form 1120-L that reports     income tax return.  B files a separate U.S. 
questions about the corporation's financial    on Schedule L, Part II, line 2, column (b),   income tax return and reports separate 
statements and reconciles financial            of Form 1120-L total consolidated assets      company total year-end assets on 
statement net income (loss) for the            at the end of the tax year that equal or      its Schedule L, Part II, line 2, column (b), 
corporation (or consolidated financial         exceed $10 million must complete and file     of $12 million. C files a consolidated U.S. 
statement group, if applicable), as            Schedule M-3 and must check box (2)           income tax return with D and, after 
reported on Schedule M-3, Part I, line 4a,     Consolidated return (Form 1120-L only) or     eliminating intercompany transactions 
to net income (loss) of the corporation for    (3) Mixed 1120/L/PC group, as applicable,     between C and D, reports consolidated 
U.S. taxable income purposes, as               at the top of page 1 of Schedule M-3.         total year-end assets on Schedule L, Part 
reported on Schedule M-3, Part I, line 11.                                                   II, line 2, column (b), of $8 million. B is 
                                                 A U.S. life insurance company filing 
  Schedule M-3, Parts II and III, reconcile    Form 1120-L that is not required to file      required to file Schedule M-3 because its 
financial statement net income (loss) for      Schedule M-3 may voluntarily file             total year-end assets reported on 
the U.S. corporation (or consolidated tax      Schedule M-3. A life insurance company        Schedule L, Part II, line 2, column (b), 
group, if applicable), as reported on          filing Schedule M-3 must check Item A,        equal at least $10 million. The CD U.S. 
Schedule M-3, Part I, line 11, to the          box 3, on Form 1120-L, page 1, indicating     consolidated tax group is not required to 
subtotal on Form 1120-L, page 1, line 20.      that Schedule M-3 is attached, whether        file Schedule M-3 because its total 
For life insurance companies that prepare      required or voluntary.                        year-end assets reported on Schedule L, 
                                                                                             Part II, line 2, column (b), do not equal at 
an annual statement, financial statement         Example 1.                                  least $10 million.
net income (loss) should be reported on 
the statutory basis on Schedule M-3, Part        1. U.S. life insurance company A 
I, line 11.                                    owns U.S. subsidiary B and foreign            Special Filing Requirements for 
                                               subsidiary F. For its current tax year, A     Mixed Groups
                                               prepares consolidated financial 
Where To File                                                                                If the parent corporation of a U.S. 
                                               statements with B and F that report total     consolidated tax group files Form 1120-L 
If the corporation is required to file (or     assets of $12 million. A files a              and files Schedule M-3, each member of 
voluntarily files) Schedule M-3 (Form          consolidated U.S. income tax return with B    the group must file Schedule M-3. 
1120-L), the corporation must file Form        and reports total consolidated assets on      However, if the parent corporation of a 
1120-L and all attachments and                 Schedule L, Part II, line 2, column (b), of   U.S. consolidated tax group files Form 
schedules, including Schedule M-3 (Form        $8 million. A's U.S. consolidated tax group   1120-L and any member of the group files 
1120-L) at the following address.              is not required to file Schedule M-3 for the  Form 1120-PC, U.S. Property and 
  Department of the Treasury                   current tax year.                             Casualty Insurance Company Income Tax 
  Internal Revenue Service Center                2. U.S. life insurance company C            Return, or Form 1120, that member must 
  Ogden, UT 84201-0012                         owns U.S. life insurance company D. For       file a Form 1120-PC Schedule M-3 or a 
                                               its current tax year, C prepares              Form 1120 Schedule M-3, respectively, 
                                               consolidated financial statements with D      and the group must comply with the mixed 
Who Must File                                  but C and D file separate U.S. income tax     group consolidated Schedule M-3 
Generally, the following apply.                returns. The consolidated accrual basis       reporting described in the section 
• Any domestic corporation or group of         financial statements for C and D report       Schedule M-3 Consolidation for Mixed 
corporations required to file Form 1120-L,     total assets at the end of the tax year of    Groups (1120/L/PC), later, in these 
U.S. Life Insurance Company Income Tax         $12 million after intercompany                instructions. A mixed group must also file 
Return, that reports on Schedule L, Part II,   eliminations. C reports separate company      Form 8916, Reconciliation of 
line 2, column (b), of Form 1120-L             total year-end assets on its Schedule L,      Schedule M-3 Taxable Income With Tax 
total assets at the end of the corporation's   Part II, line 2, column (b), of $7 million. D Return Taxable Income for Mixed Groups, 
                                               reports separate company total year-end 

Jan 05, 2022                                     Cat. No. 39945W

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and, if applicable, Form 8916-A,             corporations listed on Form 851, net of      financial statement total assets for each 
Supplemental Attachment to                   eliminations for intercompany transactions   corporation listed on Form 851 and 
Schedule M-3.                                and balances between the includible          included in the U.S. consolidated tax 
                                             corporations. In addition, for purposes of   return (includible corporation) net of 
If the parent corporation of a U.S.          determining for Schedule M-3 whether the     eliminations for intercompany transactions 
consolidated tax group files Form 1120-L     corporation (or U.S. consolidated tax        between includible corporations. If the life 
and any member of the group files Form       group) has total assets at the end of the    insurance company does not prepare 
1120-PC or Form 1120, and the                current tax year of $10 million or more, the non-tax-basis financial statements, 
consolidated Schedule L, Part II, line 2,    corporation's total consolidated assets      Schedule L, Part II, line 2, column (b), 
column (b), reported in the return includes  must be determined on an overall accrual     must be based on the life insurance 
the assets of all of the corporations (the   method of accounting unless both of the      company's books and records. The 
insurance companies as well as the           following apply: (a) the tax returns of all  Schedule L balance sheet may show 
non-insurance companies), in order to        includible corporations in the U.S.          tax-basis balance sheet amounts if the life 
determine if the group meets the $10         consolidated tax group are prepared using    insurance company is allowed to use 
million threshold test for the requirement   an overall cash method of accounting, and    books and records for Schedule M-3 and 
to file Schedule M-3, use the amount of      (b) no includible corporation in the U.S.    the life insurance company's books and 
total assets reported on Schedule L, Part    consolidated tax group prepares or is        records reflect only tax-basis amounts.
II, line 2, column (b), of the consolidated  included in financial statements prepared    Generally, total assets at the beginning 
return. If the parent company of a U.S.      on an accrual basis.                         of the year (Schedule L, Part II, line 2, 
consolidated tax group files Form 1120-L 
and any member of the group files Form       Note. See the instructions for Part I,       column (a)) must equal total assets at the 
1120-PC or Form 1120 and the                 line 1, for a discussion of non-tax-basis    close of the prior year (Schedule L, Part II, 
consolidated Schedule L, Part II, line 2,    income statements and related                line 2, column (b)). For each Schedule L 
column (b), reported in the return does not  non-tax-basis balance sheets to be used      balance sheet item reported for which 
include the assets of one or more of the     in the preparation of Schedule M-3 and       there is a difference between the current 
corporations in the U.S. consolidated tax    Form 1120-L, Schedule L.                     opening balance sheet amount and the 
group, in order to determine if the group                                                 prior closing balance sheet amount, attach 
                                                                                          a statement that reports the balance sheet 
meets the $10 million threshold test for the Other Form 1120-L                            item, the prior closing amount, the current 
requirement to file Schedule M-3, use the 
sum of the amount of total assets reported   Schedules Affected by                        opening amount, and a short explanation 
on the consolidated Schedule L, Part II,     Schedule M-3                                 of the change. Reasons for those 
line 2, column (b), plus the amounts of all                                               differences include mergers and 
assets reported on Forms 1120-PC and         Requirements                                 acquisitions.
1120 that are included in the consolidated   Report on Schedule L and Form 1120-L, 
return but not included on the               page 1, amounts for the U.S. corporation     For purposes of measuring total assets 
consolidated Schedule L, Part II, line 2,    or, if applicable, the U.S. consolidated tax at the end of the year, the corporation's 
column (b).                                  group.                                       assets may not be netted or reduced by 
                                                                                          the corporation's liabilities. In addition, 
For insurance companies included in          Schedule L                                   total assets may not be reported as a 
the consolidated U.S. income tax return,     If a non-tax-basis income statement and      negative amount. If Schedule L is 
see the instructions for Part I, lines 10a,  related non-tax-basis balance sheet are      prepared on a non-tax-basis method, an 
10b, 10c, and 11, and Part II, line 7, for   prepared for any purpose for a period        investment in a partnership may be shown 
guidance on Schedule M-3 reporting of        ending with or within the tax year,          as appropriate under the corporation's 
intercompany dividends and statutory         Schedule L must be prepared showing          non-tax-basis method of accounting, 
accounting adjustments.                      non-tax-basis amounts. See the               including, if required by the corporation's 
                                             instructions for Schedule M-3, Part I,       reporting methodology, the equity method 
Other Issues Affecting                       line 1, for the discussion of non-tax-basis  of accounting for investments. If 
                                             income statements and related                Schedule L is prepared on a tax basis, an 
Schedule M-3 Filing                          non-tax-basis balance sheets prepared for    investment by the corporation in a 
Requirements                                 any purpose and the impact on the            partnership must be shown as an asset 
If a life insurance company was required     selection of the income statement used for   and measured by the corporation's 
to file Schedule M-3 for the preceding tax   Schedule M-3 and the related                 adjusted basis in its partnership interest. 
year but reports on Schedule L, Part II,     non-tax-basis balance sheet amounts that     Any liabilities contributing to such adjusted 
line 2, column (b), of Form 1120-L total     must be used for Schedule L.                 basis must be shown on Schedule L as 
                                                                                          corporate liabilities.
consolidated assets at the end of the 
current tax year of less than $10 million,   Total assets shown on Schedule L,            Consolidated Return
the life insurance company is not required   Part II, line 2, column (b), must equal the 
to file Schedule M-3 for the current tax     total assets of the life insurance company   (Form 1120-L, Page 1)
year. The life insurance company may         (or, in the case of a U.S. consolidated tax  Report on Form 1120-L, page 1, each item 
voluntarily file Schedule M-3 for the        group, the total assets of all members of    of income, gain, loss, expense, or 
current tax year. If for a subsequent tax    the group listed on Form 851) as of the      deduction net of elimination entries for 
year the life insurance company is           last day of the tax year, and must be the    intercompany transactions between 
required to file Schedule M-3, the life      same total assets reported by the life       includible corporations. The corporation 
insurance company must complete              insurance company (or by each member         must not report as dividends on Form 
Schedule M-3 in its entirety for that        of the U.S. consolidated tax group) in the   1120-L, Schedule A, any amounts 
subsequent tax year.                         non-tax-basis financial statements, if any,  received from an includible corporation 
                                             used for Schedule M-3. If the life           unless the corporation receiving the 
In the case of a U.S. consolidated tax       insurance company prepares                   intercompany dividends is an insurance 
group, total assets at the end of the tax    non-tax-basis financial statements,          company and only to the extent that the 
year must be determined based on the         Schedule L, Part II, line 2, column (b),     insurance company is required to include 
total year-end assets of all includible      must equal the sum of the non-tax-basis      intercompany dividends in taxable 

                                                        -2-           Instructions for Schedule M-3 (Form 1120-L) (12-2021)

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income. (See the instructions for Part I, 4. The owner of 50% or more of 16, 2021, Z was a reportable entity partner
lines 10a, 10b, 10c, and 11, for a partnership income, loss, or capital on any with respect to A and, through A, with
discussion of intercompany dividends and day of the partnership tax year is deemed respect to B, C, D, and E. On November 5,
insurance company statutory accounting.) to own all corporate and partnership 2021, Z reports to A, B, C, D, and E, as it
In general, dividends received from an interests owned or deemed to be owned is required to do within 30 days of October
includible corporation must be eliminated under these instructions by the 16, that Z is a reportable entity partner
in consolidation rather than offset by the partnership during the partnership tax directly owning (with respect to A) or
dividends-received deduction. year. deemed to own indirectly (with respect to
5. The beneficial owner of 50% or B, C, D, and E) a 50% interest. Therefore,
Entity Considerations for more of the beneficial interest of a trust or because Z was a reportable entity partner
Schedule M-3 nominee arrangement on any day of the for 2021, each of A, B, C, D, and E is
For purposes of Schedule M-3, references trust or nominee arrangement tax year is required to file Form 1065, Schedule M-3,
to the classification of an entity (for deemed to own all corporate and for 2021, regardless of whether they would
example, as a corporation, a partnership, partnership interests owned or deemed to otherwise be required to file Schedule M-3
or a trust) are references to the treatment be owned under these instructions by the for that year.
of the entity for U.S. income tax purposes. trust or nominee arrangement. 2. P, a U.S. life insurance company, is
the parent of a financial consolidation
An entity that is generally regarded as A reportable entity partner with respect group with 50 domestic subsidiaries, DS1
separate from its owner for U.S. income to a partnership (as defined above) must through DS50, and 50 foreign
tax purposes (disregarded entity) must not report the following to the partnership subsidiaries, FS1 through FS50, all 100%
be separately reported on Schedule M-3 within 30 days of first becoming a owned on October 16, 2021. On October
except, if required, on Part I, line 7a or 7b. reportable entity partner and, after first 15, 2021, P filed a consolidated tax return
On Parts II and III, any item of income, reporting to the partnership under these on Form 1120-L and was required to file
gain, loss, deduction, or credit of a instructions, thereafter within 30 days of Schedule M-3 for the tax year ending
disregarded entity must be reported as an the date of any change in the interest it December 31, 2020. On October 16,
item of its owner. In particular, the income owns or is deemed to own, directly or 2021, DS1, DS2, DS3, FS1, and FS2 each
or loss of a disregarded entity must not be indirectly, under these instructions, in the acquire a 10% partnership interest in
reported on Part II, line 9, 10, or 11 as a partnership. partnership K, which files Form 1065 for
separate partnership or other 1. Name. the tax year ending December 31, 2021. P
pass-through entity. The financial
statement income or loss of a disregarded 2. Mailing address. is deemed to own, directly or indirectly
entity is included on Part I, line 7a or 7b, 3. Taxpayer identification number (under these instructions), all corporate
only if its financial statement income or (TIN or EIN), if applicable. and partnership interests of DS1, DS2,
and DS3, as the parent of the tax
loss is included on Part I, line 11, but not 4. Entity or organization type. consolidation group and therefore is
on Part I, line 4a.
5. State or country in which it is deemed to own 30% of K on October 16,
Reportable Entity Partner organized. 2021. P is deemed to own, directly or
Reporting Responsibilities 6. Date on which it first became a indirectly (under these instructions), all
A reportable entity partner with respect to reportable entity partner. corporate and partnership interests of FS1
and FS2 as the owner of 50% or more of
a partnership filing Form 1065 is an entity 7. Date with respect to which it is each corporation by vote and therefore is
that: reporting a change in its ownership deemed to own 20% of K on October 16,
• Owns or is deemed to own, directly or interest in the partnership, if applicable. 2021. P is therefore deemed to own 50%
indirectly, under these instructions a 50% 8. The interest in the partnership it of K on October 16, 2021. Since P owns or
or greater interest in the income, loss, or owns or is deemed to own in the is deemed to own, directly or indirectly
capital of the partnership on any day of the partnership, directly or indirectly (as (under these instructions), 50% or more of
tax year; and defined under these instructions), as of K on October 16, 2021, and was required
• Was required to file Schedule M-3 on its the date with respect to which it is to file Schedule M-3 with its most recently
most recently filed U.S. income tax return reporting. filed U.S. income tax return filed prior to
or return of income filed prior to that day. that date, P is a reportable entity partner of
9. Any change in that interest as of the
For the purposes of these instructions, date with respect to which it is reporting. K as of October 16, 2021. On November
the following rules apply. 5, 2021, P reports to K that P is a
1. The parent corporation of a The reportable entity partner must reportable entity partner as of October 16,
consolidated tax group is deemed to own retain copies of required reports it makes 2021, deemed to own (under these
all corporate and partnership interests to the partnerships under these instructions) a 50% interest in K. K is,
owned or deemed to be owned under instructions. Each partnership must retain therefore, required to file Schedule M-3
these instructions by any member of the copies of the required reports it receives when it files its Form 1065 for its tax year
tax consolidated group. under these instructions from reportable ending December 31, 2021.
entity partners.
2. The owner of a disregarded entity
is deemed to own all corporate and Example 2. Consolidated
partnership interests owned or deemed to 1. A, an LLC filing a Form 1065 for Schedule M-3 Versus
be owned under these instructions by the 2021, is owned 50% by U.S. life insurance
Consolidating Schedules
disregarded entity. company Z. A owns 50% of B, C, D, and
3. The owner of 50% or more of a E, which are also LLCs filing a Form 1065 M-3 for Form 1120-L
corporation by vote on any day of the for calendar year 2021. Z was first Groups
corporation’s tax year is deemed to own required to file Form 1120-L, A consolidated tax return group with a
all corporate and partnership interests Schedule M-3, for its corporate tax year parent corporation that files a Form
owned or deemed to be owned under ending December 31, 2020, and filed 1120-L is a mixed group if any member is
these instructions by the corporation Schedule M-3 with its Form 1120-L for a property and casualty insurance
during the corporation’s tax year. 2020 on October 15, 2021. As of October

Instructions for Schedule M-3 (Form 1120-L) (12-2021) -3-

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company (files Form 1120-PC) or is not an       both a corporation that is an insurance      and one subgroup for those reporting on 
insurance company. See Schedule M-3             company and a corporation that is not an     Form 1120-L. The parent corporation is 
Consolidation for Mixed Groups (1120/L/         insurance company; or (2) includes both a    included in the subgroup that corresponds 
PC), later.                                     life insurance company and a property        to the form on which it reports and the 
  A U.S. consolidated tax group must file       and casualty insurance company; or (3)       entire consolidated group files. For 
a consolidated Schedule M-3. Parts I, II,       includes a life insurance company, a         example, in the case of a Form 1120-L 
and III of the consolidated Schedule M-3        property and casualty insurance company,     parent and Form 1120-L consolidated 
must reflect the activity of the entire U.S.    and a corporation that is not an insurance   group, the parent is included in the Form 
consolidated tax group. The parent              company.                                     1120-L subgroup sub-consolidation. Each 
                                                                                             subgroup uses its own Schedule M-3 
corporation must also complete Parts II         Mixed group consolidation for                (1120, 1120-PC, or 1120-L), Parts II and 
and III of a separate Schedule M-3 to           Schedule M-3, Parts II and III, requires (1) III, for each corporation within the 
reflect the parent's own activity. In           subgroup sub-consolidation of the 1120       subgroup and for the subgroup 
addition, Parts II and III of a separate        subgroup, the 1120-PC subgroup, and the      sub-consolidation and the subgroup 
Schedule M-3 must be completed by each          1120-L subgroup, each with its own           eliminations.
includible corporation to reflect the activity  sub-consolidated Schedule M-3, Parts II 
of that includible corporation. Lastly, it will and III, and (2) consolidation of the        The three subgroup sub-consolidation 
generally be necessary to complete Parts        subgroup sub-consolidation totals on a       taxable income calculations on 
II and III of a separate Schedule M-3 for       consolidated Schedule M-3, Part II, that     Schedule M-3 must follow the separate 
consolidation eliminations.                     ties to a consolidated Schedule M-3, Part    return requirements of the regulations 
  If a U.S. consolidated tax group that is      I, and a consolidated Form 8916.             under section 1502 and all other 
not a mixed group consists of four                                                           applicable regulations taking into account 
includible corporations (the parent and         In addition to one Schedule M-3, Part II, 
three subsidiaries) all filing Form 1120-L,     and one Schedule M-3, Part III, for each     the amounts separately reported on Form 
the U.S. consolidated tax group must            corporation in the three subgroup            8916. Capital loss limitation and 
complete six Schedules M-3 as follows.          sub-consolidations, there will generally be  carryforward used and charitable 
• One consolidated Schedule M-3 with            a total of six additional Schedule M-3,      deduction limitation and carryforward used 
Parts I, II, and III completed to reflect the   Parts II, and six additional Schedule M-3,   are not taken into account in the 
activity of the entire U.S. consolidated tax    Parts III, for the subgroup                  determination of the three subgroup 
group.                                          sub-consolidations. Specifically, there      sub-consolidated taxable incomes on 
• Parts II and III of a separate                must be one Schedule M-3, Part II, and       Schedule M-3, but are reflected on Form 
Schedule M-3 for each of the four               one Schedule M-3, Part III, for each         8916 and in the calculation of the life/
includible corporations to reflect the          subgroup's sub-consolidated amounts          non-life loss limitation and carryforward 
activity of each includible corporation.        and one Schedule M-3, Part II, and one       used. See Life/Non-Life Loss Limitation 
• Parts II and III of a separate                Schedule M-3, Part III, for each             and Carryforward Used Calculations, later.
Schedule M-3 to eliminate intercompany          subgroup's sub-consolidation eliminations 
transactions between includible                 amounts.                                     The reconciliation totals for book, 
                                                                                             temporary difference, permanent 
corporations and to include limitations on      At the mixed group consolidated level,       difference, and taxable income for each 
deductions (for example, charitable             there must be a consolidated                 subgroup are reported on Form 1120, 
contribution limitations and capital loss       Schedule M-3, Part II, and, if applicable, a 1120-PC, or 1120-L, as applicable, 
limitations) and carryover amounts (for         Schedule M-3, Part II, for consolidation     Schedule M-3, Part II, line 29a, columns 
example, charitable contribution                eliminations not includible in the subgroup  (a), (b), (c), and (d), and equal the sum of 
carryovers and capital loss carryovers).        eliminations. At the consolidated level,     the line amounts on Part II, lines 26 
See Completion of Schedule M-3 and              there must also be a consolidated            through 28. For a mixed group, 
Certain Allocations, Limitations, and           Schedule M-3, Part I, and a consolidated     Schedule M-3, Part II, lines 29b, 29c, and 
Carryovers, later.                              Form 8916. For a mixed group, there is no    30, are blank on the Form 1120, 1120-PC, 
                                                Schedule M-3, Part III, at the consolidated  or 1120-L, as applicable, for the separate 
Note. Complete only one Schedule M-3,           level. At the consolidated level, use the    corporations (parent and subsidiary) and 
Part I, for each consolidated group. A          Schedule M-3 (1120, 1120-PC, or              for the three subgroup sub-consolidations.
subsidiary of a consolidated group does         1120-L), Parts I and II, that match the form 
not complete Schedule M-3, Part I. Enter        on which the parent corporation reports      Note. A sub-consolidation is required for 
on Part I the name and EIN of the common        and the entire consolidated group files.     every subgroup, even if the subgroup 
parent of the consolidated group.
                                                                                             consists of only one corporation. In 
  Indicate on each Schedule M-3, Parts II       The corporation must check the               addition, Form 8916-A, if applicable, is 
and III, on the line after the common           applicable mixed group checkboxes on all     required at the sub-consolidated level and 
parent's name and EIN, whether the              Schedules M-3, Parts I, II, and III, as      the sub-consolidated elimination level.
Schedule M-3, Parts II and III, is for the (1)  discussed below.
consolidated group; (2) parent 
                                                                                             Reconciliation of Mixed Group 
corporation; (3) consolidation eliminations;    Subgroup Sub-Consolidation: 
or (4) subsidiary corporation, by checking                                                   Subgroup Sub-Consolidation 
the appropriate box. If Parts II and III are    1120 Subgroup, 1120-PC 
                                                                                             Amounts to Schedule M-3, Part I, 
for a subsidiary in a consolidated return,      Subgroup, and 1120-L Subgroup
                                                                                             Line 11, and to Tax Return Taxable 
also enter the name and EIN of the              A subgroup Schedule M-3, Parts II and III, 
subsidiary.                                     sub-consolidation must be prepared with      Income
Schedule M-3 Consolidation for                  all necessary eliminations within the        At the consolidated level, use the 
                                                subgroup for each of the three possible      Schedule M-3 (Form 1120, 1120-PC, or 
Mixed Groups (1120/L/PC)                        subgroups that are in fact present: one      1120-L), Parts I and II that matches the 
Special Schedule M-3 consolidation rules        subgroup for those corporations reporting    form on which the parent corporation 
apply to a mixed group, that is, a              on Form 1120, one subgroup for those         reports and the entire consolidated group 
consolidated tax group that (1) includes        corporations reporting on Form 1120-PC,      files. For a mixed group, on the 

                                                                -4-         Instructions for Schedule M-3 (Form 1120-L) (12-2021)

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consolidated Schedule M-3, Part II, lines     group for the sub-consolidation, and by      Schedule M-3, by the parent corporation.  
29a, 29b, and 29c, report the applicable      checking box (5) Mixed 1120/L/PC group,      Parts II and III must be completed by the 
amounts from the three subgroup               and box (7) 1120 eliminations, for the       parent corporation, each includible 
sub-consolidation Part II, line 29a,          eliminations. The 1120-PC subgroup           corporation, and a consolidating 
amounts. (If a consolidated level Part II for sub-consolidation Form 1120-PC,              eliminations entity.
consolidation eliminations not includible in  Schedule M-3, Parts II and III, must be 
the subgroup eliminations is applicable,      indicated by checking box (5) Mixed          Except as otherwise provided in these 
the applicable amounts must be adjusted       1120/L/PC group, and box (6) 1120-PC         instructions, when a Schedule M-3 (Form 
by the applicable elimination amounts.)       group for the sub-consolidation and by       1120-L) is filed, all applicable Part I 
The consolidated Schedule M-3, Part II,       checking box (5) Mixed 1120/L/PC group,      questions must be answered; all 
line 30, amounts are the sum of the           and box (7) 1120-PC eliminations, for the    applicable columns in Parts II and III must 
applicable amounts on the consolidated        eliminations. The 1120-L subgroup            be completed; all numerical data required 
Part II, lines 29a, 29b, and 29c. For a       sub-consolidation Form 1120-L,               in Parts I, II, and III must be provided; and 
mixed group, the consolidated Part II, lines  Schedule M-3, Parts II and III, must be      any statement required to support a line 
1 through 28, are blank and no                indicated by checking box (5) Mixed          item in Part I, II, or III must be attached and 
consolidated Part III is required to be       1120/L/PC group, and box (6) 1120-L          must provide the information required for 
completed.                                    group for the sub-consolidation, and by      that line item.
                                              checking box (5) Mixed 1120/L/PC group,      All detailed statements for Part II and 
For mixed groups, the consolidated            and box (7) 1120-L eliminations, for the     Part III of Schedule M-3 must be attached 
Part II, line 30, column (a), must equal Part eliminations.                                for each separate entity included in the 
I, line 11, with appropriate adjustments for                                               consolidated Part II and Part III, including 
statutory accounting requirements             A mixed group with a Form 1120-L             those for the parent company and the 
reflected on Part I, lines 10a and 10b. The   parent corporation completes a               eliminations entity, if applicable. It is not 
consolidated taxable income indicated on      consolidated level Form 1120-L,              required that the same supporting detailed 
Part II, line 30, column (d), must equal the  Schedule M-3, Parts I and II, and a          information be presented for Part II and 
amount shown on Form 8916, line 1. Form       consolidated Form 8916. The mixed group      Part III of the consolidated Schedule M-3.
8916, line 8, must equal taxable income       consolidated Schedule M-3, Part II, must 
reported on the tax return.                   be indicated by checking box (1)             If an item attributable to an includible 
                                              Consolidated group, and box (5) Mixed        corporation is not shared by or allocated to 
Completion of Mixed Group                     1120/L/PC group. If a consolidated level     the appropriate member of the group but 
                                              Part II for consolidation eliminations not   is retained in the parent corporation's 
Checkboxes for Schedule M-3,                  includible in the subgroup eliminations is   financial statements (or books and 
Part II and Part III                          applicable, that Part II must be indicated   records, if applicable), then the item must 
Note. The following discussion of             by checking box (3) Consolidated             be reported by the parent corporation in its 
checkboxes will assume that the 1120-L        eliminations, and box (5) Mixed              separate Schedule M-3. For example, if 
subgroup includes the corporate parent of     1120/L/PC group.                             the parent of a U.S. consolidated tax 
the mixed group.                                                                           group prepares financial statements that 
                                              Life/Non-Life Loss Limitation and            include all members of the U.S. 
                                                                                           consolidated tax group and the parent 
Forms 1120, 1120-PC, and 1120-L,              Carryforward Used Calculations               does not allocate the group's income tax 
Schedule M-3, Parts II and III, each have a 
checkbox (5) at the top indicating a mixed    The applicable life/non-life loss limitation expense as reflected in the financial 
group. Checkbox (5) and one or more           and all carryforward used calculations are   statements among the members of the 
other applicable checkboxes must be           made using the amounts determined for        group but retains it in the parent 
checked for a mixed group.                    taxable income in the three subgroup         corporation, the parent corporation must 
                                              sub-consolidations and other applicable      report on its separate Schedule M-3 the 
For example, an 1120-L parent                 amounts separately reported on Form          U.S. consolidated tax group's income tax 
corporation included in the 1120-L            8916. The calculated life/non-life loss      expense as reflected in the financial 
subgroup must check Form 1120-L,              limitation or carryforward used amounts, if  statements.
Schedule M-3, Parts II and III, box (2)       any, are not entered on Schedule M-3. 
Parent corporation, and box (5) Mixed         The calculated amounts, if any, are          Any adjustments made at the 
1120/L/PC group. An 1120-L subsidiary         entered on Form 8916.                        consolidated group level that are not 
                                                                                           attributable to any specific member of the 
corporation within the 1120-L subgroup                                                     U.S. consolidated tax group (for example, 
must check Form 1120-L, Schedule M-3,         Completion of                                disallowance of net capital losses, 
Parts II and III, box (4) Subsidiary          Schedule M-3 and Certain                     contribution deduction carryovers, and 
corporation, and box (5) Mixed 1120/L/PC                                                   limitation of contribution deductions) must 
group. An 1120-PC subsidiary corporation      Allocations, Limitations, 
                                                                                           not be reported on the separate 
within the 1120-PC subgroup must check        and Carryovers                               consolidating parent or subsidiary 
Form 1120-PC Schedule M-3, Parts II and       Generally, a corporation (or any member      Schedules M-3 but rather on the 
III, box (4) Subsidiary corporation, and box  of a U.S. consolidated tax group) required   consolidated Schedule M-3 and on the 
(5) Mixed 1120/L/PC group. An 1120            to file Schedule M-3 must complete the       consolidating Schedule M-3 for 
subsidiary corporation within the 1120        form in its entirety. In particular, a       consolidation eliminations (or on Form 
subgroup must check Form 1120,                corporation filing a non-consolidated        8916 in the case of a mixed group).
Schedule M-3, Parts II and III, box (4)       return that meets the filing requirements 
Subsidiary corporation, and box (5) Mixed     for Schedule M-3 must complete Parts I, II,  If an includible corporation has (1) no 
1120/L/PC group.                              and III.  Such a corporation does not        activity for the tax year (for example, 
                                              check any of the checkboxes at the top of    because the corporation is a dormant or 
The 1120 subgroup sub-consolidation           Parts II and III.   In the case of a U.S.    inactive corporation); (2) no amount for the 
Form 1120, Schedule M-3, Parts II and III,    consolidated tax group, Part I must be       corporation was included on Part I, line 11; 
must be indicated by checking box (5)         completed once, on the consolidated          and (3) the corporation has no amounts to 
Mixed 1120/L/PC group, and box (6) 1120                                                    report on Part II and Part III of 

Instructions for Schedule M-3 (Form 1120-L) (12-2021)          -5-

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Schedule M-3 for the tax year, the parent Non-Tax-Basis Financial If no non-tax-basis income statement is
corporation of the U.S. consolidated tax Statements and Tax-Basis certified and two or more non-tax-basis
group may attach to the consolidated statements are prepared, the income
Schedule M-3 a statement that provides Financial Statements statement prepared according to the first
the name and employer identification A tax-basis income statement is allowed listed of the accounting standards above
number (EIN) of the includible corporation for Schedule M-3 and a tax-basis balance must be used.
instead of filing a blank Part II and Part III sheet for Schedule L only if no
of Schedule M-3 for the entity. On Part I, non-tax-basis income statement and no If no non-tax-basis financial statements
check box (4) Dormant subsidiaries non-tax-basis balance sheet were are prepared for a U.S. life insurance
schedule attached. prepared for any purpose and the books company (or, in the case of a U.S.
and records of the corporation reflect only consolidated tax group, for the U.S. parent
tax-basis amounts. The corporation is corporation's consolidated group) filing
Specific Instructions deemed to have non-tax-basis income Schedule M-3, the U.S. life insurance
for Part I statements and the related non-tax-basis company (or the U.S. parent corporation
balance sheets for the current year for of a U.S. consolidated tax group) must
Part I. Financial purposes of Schedule M-3 and check “No” on questions 1a, 1b, and 1c,
Schedule L if such non-tax-basis financial skip Part I, lines 2a through 3c, and enter
Information and Net statements were prepared for and the net income (loss) per the books and
Income (Loss) presented to management, creditors, records of the U.S. life insurance company
Reconciliation shareholders, government regulators, or (or U.S. consolidated tax group) on Part I,
any other third parties for a period ending line 4a.
When To Complete Part I with or within the tax year.
If no non-tax-basis financial statements
Part I must be completed for any tax year are prepared for a U.S. life insurance
for which the life insurance company files Lines 1a, 1b, and 1c company (or, in the case of a U.S.
Schedule M-3. Check either box (1) If a Form 10-K is filed with the SEC for the consolidated tax group, for the U.S. parent
Non-consolidated return, (2) Consolidated period ending with or within the tax year, corporation's consolidated group) filing
return (Form 1120-L only), or (3) Mixed the corporation must check “Yes,” for Part Schedule M-3, and the U.S. life insurance
1120/L/PC group, as applicable. In I, line 1a, and use that income statement company is owned by a foreign
addition, check box (4) Dormant for Schedule M-3. If Form 10-K is not filed corporation that prepares financial
subsidiaries schedule attached, if and a non-tax-basis income statement is statements that include the U.S. life
applicable. prepared that is a certified non-tax-basis insurance company (or the U.S. parent
Line 1. Questions Regarding income statement for the period ending corporation's consolidated group), the
the Type of Income Statement with or within the tax year, the corporation U.S. life insurance company (or the U.S.
must check “Yes,” for Part I, line 1b, and parent corporation of the U.S.
Prepared use that income statement for consolidated tax group) must check “No”
For Schedule M-3, Part I, lines 1 through Schedule M-3. If Form 10-K is not filed on questions 1a, 1b, and 1c, skip Part I,
12, use only the financial statements of the and no certified non-tax-basis income lines 2a through 3c, and enter the net
U.S. life insurance company filing the U.S. statement is prepared but an unaudited income (loss) per the books and records
income tax return (or the consolidated non-tax-basis income statement is of the U.S. corporation (or U.S.
financial statements for the U.S. parent prepared for the period ending with or consolidated tax group) on Part I, line 4a.
corporation of a U.S. consolidated tax within the tax year, the corporation must
group). If the U.S. life insurance company check “Yes” for Part I, line 1c, and use that Line 2. Questions Regarding
filing a U.S. income tax return (or the U.S. income statement for Schedule M-3. Income Statement Period and
parent corporation of a U.S. consolidated Restatements
Order of priority in accounting stand-
tax group) prepares its own financial Enter the beginning and ending dates on
ards. If no Form 10-K is filed and two or
statements but is controlled by another line 2a for the life insurance company's
more non-tax-basis income statements
corporation (U.S. or foreign) that prepares annual income statement period ending
are both certified non-tax-basis income
financial statements that include the U.S. with or within this tax year.
statements for the period, the income
corporation, the U.S. corporation (or the
statement prepared according to the
U.S. parent corporation of a U.S. The questions on Part I, lines 2b and
following order of priority in accounting
consolidated tax group) must use for its 2c, regarding income statement
standards must be used.
Schedule M-3, Part I, its own financial restatements, refer to the worldwide
statements and not the financial 1. U.S. Generally Accepted consolidated income statement issued by
statements of the controlling corporation. Accounting Principles (GAAP). the corporation filing the U.S. income tax
2. International Financial Reporting
If a non-publicly traded U.S. parent life return (the consolidated financial
Standards (IFRS).
insurance company of a U.S. consolidated statements for the U.S. parent corporation
tax group prepares financial statements 3. Any other International Accounting of a U.S. consolidated tax group) and
and that group includes a publicly traded Standards (IAS). used to prepare Schedule M-3. Answer
subsidiary that files financial statements 4. Statutory accounting for insurance “Yes” on lines 2b and/or 2c if the
with the Securities and Exchange companies. corporation's annual income statement
has been restated for any reason. Attach a
Commission (SEC), the consolidated 5. Other regulatory accrual short explanation of the reasons for the
financial statements of the parent life accounting. restatement in net income for each annual
insurance company are the appropriate
financial statements for purposes of 6. Any other accrual accounting income statement period that is restated,
completing Part I. Do not use any separate standard. including the original amount and restated
company financial statements that might 7. Any fair market value standard. amount of each annual statement period's
net income. The attached statement is not
be prepared for publicly traded 8. Any cash basis standard. required to report restatements on an
subsidiaries.
entity-by-entity basis.

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Line 3. Questions Regarding 4. Other (specify). adjust for consolidation eliminations and
correct for minority interest and
Publicly Traded Voting
Common Stock Lines 5a through 10 intercompany dividends between any
nonincludible foreign entity and any
The primary U.S. publicly traded voting Report on Part I, lines 5a through 10, as includible corporation. Do not remove in
common stock class is the most widely instructed below, all adjustment amounts Part I the financial net income (loss) of any
held or most heavily traded within the U.S. required to adjust worldwide net income nonincludible foreign entity accounted for
as determined by the life insurance (loss) reported on this Part I, line 4a on Part I, line 4a, using the equity method.
company. If the life insurance company (whether from financial statements or
has more than one class of publicly traded books and records), to net income (loss) Attach a supporting statement that
voting common stock, attach a list of the of includible corporations that must be provides the name, EIN (if applicable),
classes of publicly traded voting common reported on Part I, line 11. and net income (loss) included on Part I,
line 4a, that is removed on line 5 for each
stock and the trading symbol and the Report on line 12a the worldwide separate nonincludible foreign entity. Also
nine-digit CUSIP number of each class. consolidated total assets and total state the total assets and total liabilities for
Line 4. Worldwide Consolidated liabilities amounts for the corporation each such separate nonincludible foreign
using the same financial statements (or entity and include those assets and
Net Income (Loss) per Income books and records) used for the liabilities amounts in the total assets and
Statement worldwide consolidated income (loss) total liabilities reported on Part I, line 12b.
Report on Part I, line 4a, the worldwide amount reported on Part I, line 4a. The amounts of income (loss) detailed on
consolidated net income (loss) per the the supporting statement should be
income statement (or books and records, If a U.S. life insurance company (a) has reported for each separate nonincludible
if applicable) of the corporation. A net income (loss) included on Part I, foreign entity without regard to the effect
corporation filing a non-consolidated Form line 4a, and removed on Part I, line 6a or of consolidation or elimination entries. If
1120-L for itself must report its worldwide 6b, on another U.S. corporation's there are consolidation or elimination
income on Part I, line 4a. Schedule M-3; (b) files its own Form entries relating to nonincludible foreign
1120-L (separate or consolidated); (c) entities whose income (loss) is reported
In completing Schedule M-3, the life does not have a separate non-tax-basis on the attached statement that are not
insurance company must use financial financial statement (certified or otherwise) reportable on Part I, line 8, the net
statement amounts from the financial of its own; and (d) reports on Schedule L, amounts of all such consolidation and
statement type checked “Yes” on Part I, Part II, line 2, column (b), of its own Form elimination entries must be reported on a
line 1, or from its books and records if Part 1120-L total consolidated assets that separate line on the attached statement,
I, line 1c, is checked “No.” If Part I, line 1a, equal or exceed $10 million at the end of so that the separate financial accounting
is checked “Yes,” report on Part I, line 4a, the corporation's tax year, the life income (loss) of each nonincludible
the net income amount reported in the insurance company must answer foreign entity remains separately stated.
income statement presented to the SEC questions 1a, 1b, and 1c, of Part I as
on the corporation's Form 10-K (the Form appropriate for its own Form 1120-L and For example, if the net income (after
10-K for the security identified on Part I, must report on Part I, line 4a, the amount consolidation and elimination entries) of a
line 3b, if applicable). for the corporation's net income (loss) that nonincludible foreign sub-consolidated
is removed on Part I, line 6a or 6b, of the group is being reported on line 5a, the
If a life insurance company prepares other corporation's Schedule M-3. attached supporting statement should
non-tax-basis financial statements, the However, if in the circumstances report the income (loss) of each separate
amount on Part I, line 4a, must equal the described immediately above, the life nonincludible foreign legal entity from
financial statement net income (loss) for insurance company does have separate each such entity's own financial
the income statement period ending with non-tax-basis financial statements accounting net income statement or books
or within the tax year as indicated on Part (certified or otherwise) of its own, and records, and any consolidation or
I, line 2a. independent of the amount of the elimination entries (for intercompany
If the life insurance company prepares corporation's net income included on Part dividends, minority interests, etc.) not
non-tax-basis financial statements and the I, line 4a, of the other U.S. corporation, the reportable on Part I, line 8, should be
income statement period differs from the life insurance company must answer reported on the attached supporting
life insurance company's tax year, the questions 1a, 1b, and 1c, of Part I, as statement as a net amount on a line
income statement period indicated on Part appropriate, for its own Form 1120-L, separate and apart from lines that report
I, line 2a, applies for purposes of Part I, based on its own separate income each nonincludible foreign entity's
lines 4a through 8. statement, and must report on Part I, separate net income (loss).
line 4a, the net income amounts shown on
If the life insurance company does not its separate income statement. Line 6. Net Income (Loss) of
prepare non-tax-basis financial Nonincludible U.S. Entities
statements, and has checked “No” on Part Note. See the instructions for Part I, Remove the financial net income (line 6a)
I, line 1c, enter the net income (loss) per line 10, for adjustments that may be or loss (line 6b) included on Part I, line 4a,
the books and records of the U.S. life necessary to reconcile financial statement for each U.S. entity that is not an includible
insurance company or the U.S. income to statutory income for the life corporation in the U.S. consolidated tax
consolidated tax group on Part I, line 4a. insurance company. group (nonincludible U.S. entity). In
Indicate on Part I, line 4b, which of the Line 5. Net Income (Loss) of addition, on Part I, line 8, adjust for
following accounting standards were used consolidation eliminations and correct for
for line 4a. Nonincludible Foreign Entities minority interest and intercompany
1. U.S. Generally Accepted Remove the financial net income (line 5a) dividends between any nonincludible U.S.
Accounting Principles (GAAP). or loss (line 5b) of each foreign entity that entity and any includible corporation. Do
is included on Part I, line 4a, and is not an not remove in Part I the financial net
2. International Financial Reporting includible corporation in the U.S. income (loss) of any nonincludible U.S.
Standards (IFRS). consolidated tax group (nonincludible entity accounted for on Part I, line 4a,
3. Statutory. foreign entity). In addition, on Part I, line 8, using the equity method.

Instructions for Schedule M-3 (Form 1120-L) (12-2021) -7-

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Attach a supporting statement that            on Part I, line 8, adjust for consolidation   entities that are in the consolidated 
provides the name, EIN, and net income        eliminations and correct for minority         financial group and other disregarded 
(loss) included on Part I, line 4a, that is   interest and intercompany dividends for       entities and other includible entities that 
removed on line 6 for each separate           any other includible disregarded entity or    are not in the consolidated financial group 
nonincludible U.S. entity. Also state the     other includible entities.                    but that are reported on Part I, line 7a, 7b, 
total assets and total liabilities for each                                                 or 7c, in order to report the correct total 
such separate nonincludible U.S. entity       Attach a supporting statement that            amount on Part I, line 11.
and include those assets and liabilities      provides the name, EIN, and net income 
amounts in the total assets and total         (loss) per the financial statement or books   Include on Part I, line 8, the total of the 
liabilities reported on Part I, line 12c. The and records for each separate other           following: (a) amounts of any adjustments 
amounts of income (loss) detailed on the      disregarded entity or other includible entity to consolidation entries and elimination 
supporting statement should be reported       reported on line 7. Also state the total      entries that are contained in the amount 
for each separate nonincludible U.S. entity   assets and total liabilities for each such    reported on Part I, line 4a, required as a 
without regard to the effect of               separate included entity and include those    result of removing amounts on Part I, 
consolidation or elimination entries. If      assets and liabilities amounts in the total   line 5 or 6; and (b) amounts of any 
there are consolidation or elimination        assets and total liabilities reported on Part additional consolidation entries and 
entries relating to nonincludible U.S.        I, line 12d. The amounts of income (loss)     elimination entries that are required as a 
entities whose income (loss) is reported      detailed on the supporting statement          result of including amounts on Part I, 
on the attached statement that are not        should be reported for each separate          line 7a, 7b, or 7c. This is necessary in 
reportable on Part I, line 8, the net         other disregarded entity or other includible  order that the consolidation entries and 
amounts of all such consolidation and         entity without regard to the effect of        intercompany elimination entries included 
elimination entries must be reported on a     consolidation or elimination entries solely   in the amount reported on Part I, line 11, 
separate line on the attached statement so    between or among the entities listed. If      are only those applicable to the financial 
that the separate financial accounting        there are consolidation or elimination        net income (loss) of includible entities for 
income (loss) of each nonincludible U.S.      entries relating to such other disregarded    the financial statement period.
entity remains separately stated. For         entity or other includible entities whose 
example, if the net income (after             income (loss) is reported on the attached     For example, adjustments must be 
consolidation and elimination entries) of a   statement that are not reportable on Part I,  reported on line 8 to remove minority 
nonincludible U.S. sub-consolidated group     line 8, the net amounts of all such           interest and to reverse the elimination of 
is being reported on line 6a, the attached    consolidation and elimination entries must    intercompany dividends included on Part I, 
supporting statement should report the        be reported on a separate line on the         line 4a, that relate to the net income of 
income (loss) of each separate                attached statement, so that the separate      entities removed on Part I, line 5 or 6, 
nonincludible U.S. legal entity from each     financial accounting income (loss) of each    because the income to which the 
such entity's own financial accounting net    other disregarded entity or other includible  consolidation or elimination entries relate 
income statement or books and records,        entity remains separately stated.             has been removed. Also, for example, 
                                                                                            consolidation or elimination entries must 
and any consolidation or elimination          For example, if the net income (after         be reported on line 8 to reflect any minority 
entries (for intercompany dividends,          consolidation and elimination entries) of a   interest ownership in the net income of 
minority interests, etc.) not reportable on   sub-consolidated group of other               other disregarded entities or other 
Part I, line 8, should be reported on the     disregarded entities is being reported on     includible entities reported on Part I, 
attached supporting statement as a net        line 7a or 7b, the attached supporting        line 7a, 7b, or 7c. Consolidation and 
amount on a line separate and apart from      statement should report the income (loss)     elimination entries must also be reported 
lines that report each nonincludible U.S.     of each separate other disregarded entity     on line 8 to eliminate any intercompany 
entity's separate net income (loss).          from each entity's own financial              dividends between entities whose income 
Lines 7a, 7b, and 7c. Net                     accounting net income statement or books      is included on Part I, line 7a, 7b, or 7c, and 
                                              and records, and any consolidation or         other entities included in the consolidated 
Income (Loss) of Other Foreign                elimination entries (for intercompany         U.S. income tax return. See line 11, 
Disregarded Entities, Net                     dividends, minority interests, etc.) not      examples 3, 4, and 5.
Income (Loss) of Other U.S.                   reportable on Part I, line 8, should be 
Disregarded Entities, and Net                 reported on the attached supporting           If a corporate owner of an interest in 
                                              statement as a net amount on a line           another entity (a) accounts for the interest 
Income (Loss) of Other                        separate and apart from lines that report     in the entity in the owner corporation's 
Includible Entities                           each other disregarded entity's separate      separate general ledger on the equity 
Include on Part I, line 7a, 7b, or 7c, the    net income (loss).                            method, and (b) fully consolidates the 
                                                                                            entity in the owner corporation's 
financial net income or (loss) of each        Line 8. Adjustment to                         consolidated financial statements, but the 
foreign or U.S. disregarded entity or other 
includible corporation that is not included   Eliminations of Transactions                  entity is not includible in the owner 
in the consolidated financial group and       Between Includible Entities and               corporation's consolidated U.S. income 
                                                                                            tax return, then, as part of reversing all 
therefore not included in the income          Nonincludible Entities                        consolidation and elimination entries for 
reported on Part I, line 4a. Include on 
line 7a or 7b the financial net income or     Adjustments on Part I, line 8, to reverse     the nonincludible entity, the corporate 
(loss) of any disregarded entity that is not  certain financial accounting consolidation    owner must reverse on Schedule M-3, 
included in the income reported on Part I,    or elimination entries are necessary to       Part I, line 8, the elimination of the equity 
line 4a, but is included on Part I, line 11   ensure that transactions between              income inclusion from the entity. If the 
(other disregarded entities). Include on      includible entities and nonincludible U.S.    owner corporation does not account for 
line 7c the financial net income or (loss) of or foreign entities are not eliminated, in    the entity on the equity method on its own 
any entity not a disregarded entity that is   order to report the correct total amount on   general ledger, it will not have eliminated 
not included in the income reported on        Part I, line 11. Also, additional             the equity income for consolidated 
Part I, line 4a, but is included on line 11   consolidation entries and elimination         financial statement purposes, and 
(other includible corporation). In addition,  entries may be necessary on Part I, line 8,   therefore will have no elimination of equity 
                                              related to transactions between includible    income to reverse.

                                                                 -8-     Instructions for Schedule M-3 (Form 1120-L) (12-2021)

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The attached supporting statement for include on line 10a the adjustments Do not, in any event, report on line 11
Part I, line 8, must identify the type (for necessary such that Part I, line 11, the net income of entities not listed on
example, minority interest, intercompany includes intercompany dividends in the Form 851 and not included in the
dividends, etc.) and amount of net income (loss) for the corporation to the consolidated U.S. income tax return for
consolidation or elimination entries extent required by statutory accounting the tax year. For example, it is not
reported, as well as the names of the principles. (For insurance companies permissible to remove the income of
entities to which they pertain. It is not included in the consolidated U.S. income nonincludible entities on lines 5 and/or 6,
necessary, but it is permitted, to report tax return, see instructions for Part I, discussed earlier, then to add back such
intercompany eliminations that net to zero line 11, and Part II, line 7.) income on lines 7 through 10, such that
on Part I, line 8, such as intercompany the amount reported on line 11 includes
interest income and expense. Statutory accounting for an insurance the net income of entities not includible in
company subsidiary acquired or merged the consolidated U.S. income tax return. A
Line 9. Adjustment To may require the use of a financial principal purpose of Schedule M-3 is to
Reconcile Income Statement statement period for income reported on report on this Part I, line 11, only the
Period to Tax Year Part I, line 11, that differs from the period financial accounting net income of only the
reported on Part I, line 4 or line 7. Report corporations included in the consolidated
Include on line 9 any adjustments on Part I, line 10b, adjustments to income U.S. income tax return.
necessary to the income (loss) of because of such differences in accounting
includible corporations to reconcile period. Whether or not the corporation
differences between the corporation's prepares financial statements, Part I,
income statement period reported on For any adjustments reported on Part I, line 11, must include all items that impact
line 2a and the corporation's tax year. lines 10a, 10b, and 10c, attach a the net income (loss) of the corporation
Attach a statement describing the supporting statement that provides, for even if they are not recorded in the profit
adjustment. each corporation to which an adjustment and loss accounts in the corporation's
Statutory accounting for an insurance relates, the name and EIN of the general ledger, including, for example, all
company subsidiary acquired or merged corporation; the amount of net income post-closing adjusting entries (including
may require the use of a financial included in Part I before any adjustments workpaper adjustments) and dividend
statement period for income reported on on line 10; the amount of net income income or other income received from
Part I, line 11, that differs from the period included on Part I, line 11; the amount of non-includible corporations.
reported on Part I, line 4a or line 7. Report the net adjustment that is attributable to Example 3.
on Part I, line 10b, adjustments to income intercompany dividend adjustments
because of the differences in accounting required to be reported by statutory 1. U.S. life insurance company P is
period. accounting and included on Part I, publicly traded and files Form 10-K with
line 10a; the amount of the net adjustment the SEC. P owns 80% or more of the stock
Line 10a. Intercompany attributable to other statutory accounting of 75 U.S. corporations, DS1 through
Dividend Adjustments To requirements and included on Part I, DS75; between 51% and 79% of the stock
Reconcile to Line 11 and line 10b; and the amount of the remainder of 25 U.S. corporations, DS76 through
of the net adjustment not required DS100; and 100% of the stock of 50
Line 10b. Other Statutory because of statutory accounting and foreign subsidiaries, FS1 through FS50. P
Accounting Adjustments To included on Part I, line 10c. If any net eliminates all dividend income from DS1
Reconcile to Line 11 and adjustment is included for the corporation through DS100 and FS1 through FS50 in
on Part I, line 10b or 10c, attach a financial statement consolidation entries.
Line 10c. Other Adjustments To supplemental supporting statement Furthermore, P eliminates the minority
Reconcile to Amount on Line 11 identifying the line (10b or 10c), and the interest ownership, if any, of DS1 through
Include on lines 10a, 10b, and 10c any type and amount of each adjustment DS100 in financial statement
other adjustments to reconcile net income included in the net adjustment. consolidation entries. P's SEC Form 10-K
(loss) on Part I, line 4a, through Part I, includes P, DS1 through DS100, and FS1
line 9, with net income (loss) on Part I, Line 11. Net Income (Loss) per through FS50, on a fully consolidated
line 11. Include on line 10a the amount of Income Statement of Includible basis. P files a consolidated U.S. income
tax return with DS1 through DS75.
any intercompany dividend adjustment Corporations
P must check “Yes” on Part I, line 1a.
required by statutory accounting. Include Report on line 11 the net income (loss) per On Part I, line 4a, P must report the
on line 10b the amount of any other the income statement (or books and consolidated net income from the SEC
required statutory accounting adjustment. records, if applicable) of the life insurance Form 10-K for the consolidated financial
Include on line 10c the amount of any company. In the case of a U.S. statement group of P, DS1 through
other adjustment not required by statutory consolidated tax group, report the DS100, and FS1 through FS50. P must
accounting. consolidated income statement net remove the net income (loss) of FS1
Normally, all intercompany dividends income (loss) of all corporations listed on through FS50 on Part I, line 5a or 5b, as
will have been eliminated or excluded Form 851 and included in the consolidated applicable. P must remove the net income
from the financial accounting consolidated U.S. income tax return for the tax year. (loss) before minority interests of DS76
net income (loss) reported on Part I, Amounts reported in column (a) of Parts II through DS100 on Part I, line 6a or 6b, as
line 4a. However, an insurance company and III (see instructions, later) must be applicable. P must reverse on Part I,
may be required to include certain reported on the same accounting method line 8:
intercompany dividends on Part I, line 11, used to report the amount of net income
so that the amount reported on Part I, (loss) per income statement of includible a. The elimination of dividends
line 11, agrees with statutory accounting corporations on Part I, line 11, which for received by P and DS1 through DS75
net income (Annual Statement). If the net insurance companies is usually statutory from DS76 through DS100 and FS1
income (loss) of a corporation that files accounting. (For insurance companies through FS50; and
Form 1120-PC or Form 1120-L is included included in the consolidated U.S. income b. The recognition of minority
on Part I, line 4a or line 7, and is computed tax return, see instructions for Part I, interests' share of the net income (loss) of
on a basis other than statutory accounting, line 10, and Part II, line 7.) DS76 through DS100. Note. The minority

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interests' share, if any, of the income of addition, P reverses its elimination of the income tax purposes. For equity method
DS1 through DS75 must be reported on $30 intercompany dividend in its financial reporting on C's separate general ledger,
Part II, line 8. statements on Part I, line 8. The net result C includes its 60% equity share of N
is that P includes the $30 dividend from income, which is $60. In its financial
P reports on Part I, line 11, the DS1 on Part I, line 11, and on Part II, statements, C eliminates the $60 of N
consolidated financial statement net line 7, column (a). P's dividend income equity method income and consolidates
income (loss) attributable to the includible included on the tax return from DS1 must N, including $60 of net income ($100 less
corporations. Intercompany transactions be reported on Part II, line 7, column (d). the minority interest of $40) on Part I,
between the includible corporations that line 4a.
had been eliminated in the net income 2. U.S. life insurance company C
amount on Part I, line 4a, remain owns 60% of the capital and profits C must remove the $100 net income of
eliminated in the net income amount on interests in U.S. LLC N. C does not N on Part I, line 6a. C must reverse on Part
line 11. Transactions between the account for N in C's separate general I, line 8, the elimination of the $40 minority
includible corporations and the ledger on the equity method. N has net interest net income of N and the
nonincludible entities that are eliminated in income of $100 (before minority interests) elimination of the $60 of N equity method
the net income amount on Part I, line 4a, and makes no distributions during the tax income. The result is that C includes the
are included in the net income amount on year. C treats N as a corporation for $60 of equity method income for N on Part
line 11 since the elimination of those financial statement purposes and as a I, line 11, and on Part II, line 9, column (a).
transactions was reversed on line 8. partnership for U.S. income tax purposes. C's taxable income from N must be
In its financial statements, C consolidates reported by C on Part II, line 9, column (d).
2. Foreign corporation F owns 100% N and includes $60 of net income ($100 5. U.S. life insurance company C
of the stock of U.S. life insurance less the minority interest of $40) on Part I, owns 60% of the capital and profits
company P. P owns 100% of the stock of line 4a. interests in U.S. LLC N. C accounts for N
DS1, 60% of the stock of DS2, and 100%
of the stock of FS1. F prepares certified C must remove the $100 net income of in C's separate general ledger on the
audited financial statements. P does not N on Part I, line 6a. C must reverse on Part equity method. N has net income of $100
prepare any financial statements. P files a I, line 8, the elimination of the $40 minority (before minority interests) and pays a $50
consolidated U.S. income tax return with interest net income of N. The result is that cash distribution, of which C receives $30.
DS1. C includes no income for N either on Part The distribution reduces C's investment in
I, line 11, or on Part II, line 9, column (a). N for equity method reporting on C's
P must not complete Schedule M-3, C's taxable income from N must be separate general ledger. C treats N as a
Part I, with reference to the financial reported by C on Part II, line 9, column (d). corporation for financial statement
statements of its foreign parent F. P must purposes and as a partnership for U.S.
check “No” on Part I, lines 1a, 1b, and 1c, 3. U.S. life insurance company P
skip lines 2a through 3c of Part I, and owns 60% of corporation DS1, which is income tax purposes. For equity method
enter worldwide net income (loss) per the fully consolidated in P's financial reporting on C's separate general ledger,
books and records of the includible statements. P accounts for DS1 in P's C includes its 60% equity share of N
corporations (P and DS1) on Part I, separate general ledger on the equity income, which is $60. In its financial
line 4a. If the amount on Part I, line 4a, method. DS1 has net income of $100 statements, C eliminates the $60 of N
includes the income (loss) of DS2 and (before minority interests) and pays equity method income and consolidates N
FS1 or is not on the statutory basis, P dividends of $50, of which P receives $30. and includes $60 of net income ($100 less
must enter any necessary adjustments on The dividend reduces P's investment in the minority interest of $40) on Part I,
lines 5a through 10 in order for Part I, DS1 for equity method reporting on P's line 4a.
line 11, to report the net income (loss) of separate general ledger where P includes C must remove the $100 net income of
includible corporations P and DS1, net of its 60% equity share of DS1 income, N on Part I, line 6a. C must reverse on Part
eliminations for transactions between P which is $60. In its financial statements, P I, line 8, the elimination of the $40 minority
and DS1. In particular, P must make any eliminates the DS1 equity method income interest net income of N and the
required adjustments on Part I, line 10, in of $60 and consolidates DS1, including elimination of the $60 of N equity method
order for the net income on line 11 for life $60 of net income ($100 less the minority income. The result is that C includes the
insurance companies to be on the interest of $40) on Part I, line 4a. $60 of equity method income for N on Part
statutory basis. P must remove the $100 net income of I, line 11, and on Part II, line 9, column (a).
DS1 on Part I, line 6a. P must reverse on C's taxable income from N must be
Example 4. Part I, line 8, the elimination of the $40 reported by C on Part II, line 9, column (d).
1. U.S. life insurance company P minority interest net income of DS1 and Example 5. U.S. life insurance
owns 60% of corporation DS1, which is the elimination of the $60 of DS1 equity company P owns 80% of the stock of
fully consolidated in P's financial income. The net result is that P includes corporation DS1. DS1 is included in P's
statements. P does not account for DS1 in the $60 of equity method income from consolidated U.S. income tax return, even
P's separate general ledger on the equity DS1 on Part I, line 11, and on Part II, though DS1 is not included in P's
method. DS1 has net income of $100 line 6, column (a). P's dividend income consolidated financial statements on
(before minority interests) and pays included on the tax return from its either a consolidated basis or on the
dividends of $50, of which P receives $30. investment in DS1 must be reported on equity method. DS1 has current year net
The dividend is eliminated in the Part II, line 7, column (d). income of $100 after taking into account
consolidated financial statements. In its 4. U.S. life insurance company C its $40 interest payment to P. P has net
financial statements, P consolidates DS1 owns 60% of the capital and profits income of $1,040 after recognition of the
and includes $60 of net income ($100 less interests in U.S. LLC N. C accounts for N interest income from DS1. Because DS1
the minority interest of $40) on Part I, in C's separate general ledger on the is an includible corporation, 100% of the
line 4a. equity method. N has net income of $100 net income of both P and DS1 must be
P must remove the $100 net income of (before minority interests) and makes no reported on Form 1120-L, page 1, of the
DS1 on Part I, line 6a. P must reverse on distributions during the tax year. C treats N PDS consolidated U.S. income tax return,
Part I, line 8, the elimination of the $40 as a corporation for financial statement and the intercompany interest income and
minority interest net income of DS1. In purposes and as a partnership for U.S.

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expense must be removed by reversal of such a difference that arose in
consolidation elimination entries. Specific Instructions for a prior tax year. Report in column (c) any
P must report its financial statement net Parts II and III difference that the life insurance company
believes will not reverse in a future tax
income of $1,040 on Part I, line 4a, and For consolidated U.S. income tax returns, year (and is not the reversal of such a
reports DS1's net income of $100 on Part file supporting statements for each difference that arose in a prior tax year).
I, line 7c. Then, in order to reflect the full includible corporation. See Consolidated
consolidation of the financial accounting Return in the Instructions for Form 1120-L. If the life insurance company is unable
net income of P and DS1 at Part I, line 11, to determine whether a difference
Net income (loss) per income statement of General Format of Parts II and between column (a) and column (d) for an
includible corporations, the following III item will reverse in a future tax year or is
consolidation and elimination entries are Check the applicable box(es) at the top of the reversal of a difference that arose in a
reported on Part I, line 8: (a) offsetting pages 2 and 3 of Schedule M-3 to indicate prior tax year, report the difference for that
entries to remove the $40 of interest whether the Schedule M-3 is for the: item in column (c).
income received from DS1 included by P
on line 4a, and to remove the $40 of 1. Consolidated group, Example 6. In its first year of
operation, life insurance company A is not
interest expense of DS1 included in line 7c 2. Parent corporation,
required to file a Schedule M-3. If A
for a net change of zero; and (b) an entry 3. Consolidated eliminations, voluntarily files Schedule M-3, all
to reflect the $20 minority interest in the
net income of DS1 (DS1 net income of 4. Subsidiary corporation, or applicable Part I questions must be
$100 times 20% minority interest). The 5. Mixed 1120/L/PC group. answered and all applicable columns in
Parts II and III must be completed.
result is that Part I, line 11, reports $1,120: Also check the applicable box to Example 7. Life insurance company B
$1,040 from line 4a, $100 from line 7c, indicate whether the Schedule M-3 is for a is a U.S. publicly traded corporation that
and ($20) from line 8. Stated another way, sub-consolidated (6) 1120-L group; or (7) files a consolidated U.S. income tax return
Part I, line 11, includes the entire $1,000 1120-L eliminations. See Consolidated and prepares consolidated SAP/GAAP
net income of P, measured before Schedule M-3 Versus Consolidating financial statements. In prior years, B
recognition of the intercompany interest Schedules M-3 for Form 1120-L Groups acquired intellectual property (IP) and
income from DS1 and the consolidation of and Schedule M-3 Consolidation for goodwill through several corporate
DS1 operations, plus the entire $140 net Mixed Groups (1120/L/PC), earlier. acquisitions. The IP is amortizable for both
income of DS1, measured before interest
expense to P, less the minority interest For each line item in Parts II and III, U.S. income tax and financial statement
ownership of $20 in DS1's separate net report in column (a) the amount of net purposes. In the current year, B's annual
income ($100). The consolidated U.S. income (loss) included on Part I, line 11, amortization expense for IP is $9,000 for
income tax group is required to include on and report in column (d) the amount U.S. income tax purposes and $6,000 for
the attached supporting statement for Part included in the subtotal on Form 1120-L, financial statement purposes. In its
I, line 8, the details of the adjustment to page 1, line 20. financial statements, B treats the
the minority interest in the net income of difference in IP amortization as a
DS1, but is not required to report the Note. A statement or explanation may be temporary difference. The goodwill is not
offsetting adjustment to the intercompany attached to any line even if none is amortizable for U.S. income tax purposes
elimination of interest income and interest required. and is subject to impairment for financial
expense (though it is permitted to do so). statement purposes. In the current year, B
For any item of income, gain, loss, records an impairment charge on the
Line 12. Total Assets and expense, or deduction for which there is a goodwill of $5,000. In its financial
Liabilities of Entities Included difference between columns (a) and (d), statements, B treats the goodwill
the portion of the difference that is impairment as a permanent difference. B
or Removed on Part I, Lines 4, temporary must be entered in column (b) must report the amortization attributable to
5, 6, and 7 and the portion of the difference that is the IP on Part III, line 30, and report
Line 12 must be completed by all permanent must be entered in column (c). $6,000 in column (a), a temporary
corporations that file Schedule M-3. If financial statements are prepared by difference of $3,000 in column (b), and
Report on lines 12a, 12b, 12c, and 12d the the life insurance company in accordance $9,000 in column (d). B must report the
total amount (not just the corporation's with statutory accounting principles (SAP), goodwill impairment on Part III, line 29,
share) of assets and liabilities of entities differences that are treated as temporary and report $5,000 in column (a), a
included or removed on Part I, lines 4, 5, for SAP must be reported in column (b) permanent difference of ($5,000) in
6, and 7. All assets and liabilities reported and differences that are permanent (that column (c), and $0 in column (d).
on Part I, lines 12a through 12d, must be is, not temporary for SAP) must be
reported as positive amounts. reported in column (c). Generally, Reporting Requirements
On line 12a, enter the worldwide pursuant to SAP, a temporary difference for Parts II and III
consolidated total assets and total affects (creates, increases, or decreases) Except for mixed group consolidation, the
liabilities of all of the entities included in a deferred tax asset or liability. number of Parts II must equal the number
completing Part I, line 4a. On line 12b, If the life insurance company does not of Parts III filed by the corporation. Mixed
enter the total assets and total liabilities of prepare financial statements, or the groups should see Schedule M-3
the entities removed in completing Part I, financial statements are not prepared in Consolidation for Mixed Groups (1120/L/
line 5. On line 12c, enter the total assets accordance with SAP, report in column (b) PC), earlier.
and total liabilities removed in completing any difference that the life insurance General Reporting
Part I, line 6. On line 12d, enter total company believes will reverse in a future
assets and total liabilities included in tax year (that is, have an opposite effect Requirements
completing Part I, line 7. on taxable income in a future tax year (or If an amount is attributable to a reportable
years) due to the difference in timing of transaction described in Regulations
recognition for financial accounting and section 1.6011-4(b), the amount must be
U.S. income tax purposes) or is the reported in columns (a), (b), (c), and (d),

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as applicable, of Part II, line 12, regardless proper tax treatment of the item in            If there is no difference between the 
of whether the amount would otherwise be       columns (b), (c), and (d), as applicable.      annual statement amount and the taxable 
reported on Part II or Part III of                                                            amount of an entire item of income, loss, 
Schedule M-3. Thus, if a taxpayer files        Furthermore, in applying the two               expense, or deduction and the item is not 
Form 8886, Reportable Transaction              preceding paragraphs, a life insurance         described or included in Part II, lines 1 
Disclosure Statement, the amounts              company is required to report in Parts II      through 24, or Part III, lines 1 through 38, 
attributable to that reportable transaction    and III, column (a), the amount of any item    report the entire amount of the item in 
must be reported on Part II, line 12.          specifically listed on Schedule M-3 that is    columns (a) and (d) of Part II, line 28.
                                               included in the life insurance company's 
A life insurance company is required to        annual statement or exists in the life         Special instructions for Part II, lines 25 
report in column (a) of Parts II and III the   insurance company's books and records,         and 28, and Part III, line 39.  Whether an 
amount of any item specifically listed on      regardless of the nomenclature                 income (loss) item is reported on Part II, 
Schedule M-3 that is in any manner             associated with that item in the annual        line 25, or on Part II, line 28, or a given 
included in the life insurance company's       statement or books and records. Accurate       expense/deduction item on Part III, line 39, 
current year annual statement net income       completion of Schedule M-3 requires            or on Part II, line 28, is determined 
(loss) or in an income or expense account      reporting amounts according to the             separately by each member of the U.S. 
maintained in the life insurance company's     substantive nature of the specific line        consolidated tax group and not at the U.S. 
books and records, even if there is no         items included in Schedule M-3 and             consolidated tax group level. For example, 
difference between that amount and the         consistent reporting of all transactions of    U.S. corporation P has two subsidiaries, A 
amount included in taxable income unless       like substantive nature that occurred          and B, that are included in P's 
(a) otherwise provided in these                during the tax year. For example, all          consolidated financial statements and in 
instructions, or (b) the amount is             expense amounts that are included in the       P's consolidated U.S. income tax return. 
attributable to a reportable transaction       annual statement or exist in the books and     For financial statement purposes, P, A, 
described in Regulations section               records that represent some form of “Bad       and B recognize real estate tax expense 
1.6011-4(b) and is therefore reported on       debt expense” must be reported on Part         when accrued. For U.S. income tax 
Part II, line 12. For example, with the        III, line 33, column (a), regardless of        purposes, P and A recognize such 
exception of interest income reflected on a    whether the amounts are recorded or            expense consistent with the method used 
Schedule K-1 received by a life insurance      stated under different nomenclature in the     for financial statement purposes, whereas 
company as a result of the life insurance      annual statement or the books and              B recognizes such deduction based on a 
company's investment in a partnership or       records, such as: “Provision for doubtful      method different from that used for 
other pass-through entity, all interest        accounts”; “Expense for uncollectible          financial statement purposes. P and A 
income, whether from unconsolidated            notes receivable”; or “Impairment of trade     must report this expense/deduction in 
affiliated companies, third parties, banks,    accounts receivable.” Likewise, as stated      columns (a) and (d) on Part II, line 28. B 
or other entities; whether from foreign or     in the preceding paragraph, all fines and      must report the following on Part III, 
domestic sources; whether taxable or           penalties must be included on Part III,        line 39, in column (a), B's expense 
exempt from tax; and regardless of how or      line 12, column (a), regardless of the         recognized in the financial statements 
where the income is classified in the life     terminology or nomenclature attached to        when accrued; in column (d), B's real 
insurance company's annual statement,          them by the life insurance company in its      estate tax expense recognized for U.S. 
must be included on Part II, line 13,          books and records or annual statement.         income tax purposes; and in column (b) or 
column (a). Likewise, all fines and                                                           (c), as applicable, the difference between 
penalties paid to a government or other        With limited exceptions, Part II includes      B's real estate tax expense in its financial 
authority for the violation of any law for     lines for specific items of income, gain, or   statements and its real estate tax 
which fines or penalties are assessed          loss (income items). (See Part II, lines 1     deduction recognized for U.S. taxable 
must be included on Part III, line 12,         through 24.) If an income item is described    income purposes.
column (a), regardless of the government       in Part II, lines 1 through 24, report the 
authority that imposed the fines or            amount of the item on the applicable line,     Separately stated and adequately dis-
penalties; regardless of whether the fines     regardless of whether there is a difference    closed. Each difference reported in Parts 
or penalties are civil or criminal;            for the item. If there is a difference for the II and III must be separately stated and 
regardless of the classification,              income item, or only a portion of the          adequately disclosed. In general, a 
nomenclature, or terminology attached to       income item has a difference and a portion     difference is adequately disclosed if the 
the fines or penalties by the imposing         of the item does not have a difference,        difference is labeled in a manner that 
authority in its actions or documents; and     and the item is not described in Part II,      clearly identifies the item or transaction 
regardless of how or where the fines or        lines 1 through 24, report and describe the    from which the difference arises. For 
penalties are classified in the life           entire amount of the item on Part II,          further guidance about adequate 
insurance company's summary of                 line 25.                                       disclosure, see Regulations section 
                                                                                              1.6662-4(f). If a specific item of income, 
operations or the income and expense           With limited exceptions, Part III              gain, loss, expense, or deduction is 
accounts maintained in the life insurance      includes lines for specific items of           described on Part II, lines 9 through 24, or 
company's books and records.                   expense or deduction (expense items).          Part III, lines 1 through 38, and the line 
                                               (See Part III, lines 1 through 38.) If an      does not indicate to “attach statement” 
If a life insurance company would be           expense item is described on Part III, lines   and the specific instructions for the line do 
required to report in Parts II and III, column 1 through 38, report the amount of the         not call for an attachment of a statement, 
(a), the amount of any item specifically       item on the applicable line, regardless of     then the item is considered separately 
listed on Schedule M-3 in accordance with      whether there is a difference for the item. If stated and adequately disclosed if the 
the preceding paragraph, except that the       there is a difference for the expense item,    item is reported on the applicable line and 
life insurance company has capitalized the     or only a portion of the expense item has a    the amount(s) of the item(s) are reported 
item of income or expense and reports the      difference and a portion of the item does      in the applicable columns of the applicable 
amount in its annual statement or in asset     not have a difference and the item is not      line. See the instructions for Part II, lines 1 
and liability accounts maintained in the life  described in Part III, lines 1 through 38,     through 8, later, for specific additional 
insurance company's books and records,         report and describe the entire amount of       information to be provided for these 
the life insurance company must report the     the item on Part III, line 39.                 particular lines.

                                                        -12-                  Instructions for Schedule M-3 (Form 1120-L) (12-2021)

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Note. A statement or explanation may be income statement depreciation expense of
attached to any line even if none is $90,000 in column (a), a temporary Part II. Reconciliation of
required. difference of $10,000 in column (b), and Net Income (Loss) per
Except as otherwise provided, U.S. income tax depreciation expense of
differences for the same item must be $100,000 in column (d). Income Statement of Life
combined or netted together and reported Example 9. Life insurance company D Insurance Companies
as one amount on the applicable line of is a calendar year taxpayer that is required With Taxable Income per
Schedule M-3. However, differences for to file Schedule M-3 for its current tax
separate items must not be combined or year. On December 31 of the current year, Return
netted together. Each item (and D establishes two reserve accounts in the Lines 1 Through 8. Additional
corresponding amount attributable to that amount of $100,000 for each account. Information for Each Life
item) must be separately stated and One reserve account is an allowance for
adequately disclosed on the applicable agency balances that are estimated to be Insurance Company
line of Schedule M-3, or any statement uncollectible. The second reserve is an For any item reported on Part II, lines 1, 3
required to be attached, even if the estimate of future office closure expenses. through 6, or 8, attach a supporting
amounts are below a certain dollar In its annual statement, D treats the two statement that provides the name of the
amount. reserve accounts as giving rise to entity for which the item is reported, the
Required statements for Part II, temporary differences that will reverse in type of entity (corporation, partnership,
line 25, and Part III, line 39. A separate future years. The two reserves are etc.), the entity's EIN (if applicable), and
statement must be attached to expenses in D's current annual statement the item amounts for columns (a) through
Schedule M-3 (Form 1120-L) that includes but are not deductions for U.S. income tax (d). See the instructions for Part II, lines 2
a detailed description of each item and purposes in the current year. D must not and 7, for the specific information required
adjustment entered on Part II, line 25, and combine the Schedule M-3 differences for for those particular lines.
Part III, line 39. the two reserve accounts. D must report
the amounts attributable to the allowance Line 1. Income (Loss) From
The description for each amount for bad debts on Part III, line 33, Bad debt Equity Method Foreign
entered in column (a) must be readily expense/agency balances written off, and Corporations
identifiable to the name of the account in must separately state and adequately Report on line 1, column (a), the financial
the financial statements or books and disclose the amount attributable to the income (loss) included on Part I, line 11,
records of the taxpayer, under which the other reserve, office closure costs, on a for any foreign corporation accounted for
amount in column (a) was recorded in the required, attached statement that supports on the equity method and remove such
accounting records. Also, the description the amounts on Part III, line 39. amount in column (b) or (c), as applicable.
for each amount entered in column (a)
must include detailed information D must also provide a description for Report the amount of dividends received
supporting each adjustment reported in each reserve that meets the requirements and other taxable amounts received or
columns (b) and (c), including how the for Part III, line 39, discussed earlier under includible from foreign corporations on
adjustment is identified in the accounting Required statements for Part II, line 25, Part II, lines 2 through 5, as applicable.
records. The entire description is and Part III, line 39. In this example, an
considered the tax description for the acceptable description would be “Future Line 2. Gross Foreign
amount reported in column (d) for each Office Closure Expense Reserve.” Dividends Not Previously
item reported on Part II, line 25, or Part III, Taxed
Note. There is no need to add the title of
line 39. Except as otherwise provided in this
the reserve account to the description if
Each description should adequately the account name for the amount in paragraph, report on line 2, column (d),
describe all four columns of Part II, line 25, column (a) is already part of the the amount (before any withholding tax) of
or Part III, line 39. If additional information adjustment description. any foreign dividends included in the
is required to provide an acceptable subtotal on Form 1120-L, page 1, line 20,
description, attach a supporting Example 10. Life insurance company and report on line 2, column (a), the
statement. F had $100 of meal expenses and $100 of amount of dividends from any foreign
entertainment expenses. Therefore, F corporation included on Part I, line 11. Do
Example 8. Life insurance company C deducted $200 on its income statement. not report on Part II, line 2, any amounts
is a calendar year taxpayer that is required For federal income tax purposes, the that must be reported on Part II, line 3 or 4,
to file Schedule M-3 for its current tax entire $100 of meal expenses are subject or dividends that were previously taxed
year. C placed in service 10 depreciable to the 50% limitation under section 274(n). and must be reported on Part II, line 5.
fixed assets in previous years. C's total The $100 of entertainment expenses are See the instructions below for Part II, lines
depreciation expense for its current tax nondeductible under section 274(a). F 3, 4, and 5. Report amounts in columns (b)
year for five of the assets is $50,000 for must report on Part III, line 11, $200 in and (c), as applicable.
summary of operations purposes and column (a), $150 in column (c), and $50 in
$70,000 for U.S. income tax purposes. C's column (d). F must report all its meal and For any dividends reported on Part II,
total annual depreciation expense for its entertainment expenses only on this line line 2, that are received on a class of
current tax year for the other five assets is whether there is a difference or not voting stock of which the life insurance
$40,000 for summary of operations because meal and entertainment company directly or indirectly owned 10%
purposes and $30,000 for U.S. income tax expenses are specifically described. or more of the outstanding shares of that
purposes. In its annual statement, C treats class at any time during the tax year,
the differences between annual statement report on an attached supporting
and U.S. income tax depreciation expense statement for Part II, line 2 (1) the name of
as giving rise to temporary differences that the dividend payer, (2) the payer's EIN (if
will reverse in future years. C must applicable), (3) the class of voting stock
combine all of its depreciation on which the dividend was paid, (4) the
adjustments. Accordingly, C must report percentage of the class directly or
on Part III, line 32, for its current tax year

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indirectly owned, and (5) the amounts for     Line 6. Income (Loss) From                    on which the dividend was paid, (4) the 
columns (a) through (d).                                                                    percentage of the class directly or 
                                              Equity Method U.S. 
                                                                                            indirectly owned, and (5) the amounts for 
Line 3. Subpart F, QEF, and                   Corporations                                  columns (a) through (d).
Similar Income Inclusions                     Report on line 6, column (a), the financial 
Report on line 3, column (d), the amount      income (loss) included on Part I, line 11,    Line 8. Minority Interest for 
included in taxable income under section      for any U.S. corporation accounted for on     Includible Corporations
951 (relating to Subpart F), the amount       the equity method and remove such             Report on line 8, column (a), the minority 
included in income under section 951A         amount in column (b) or (c), as applicable.   interest included in the financial income 
(relating to global intangible low-taxed      Report on Part II, line 7, dividends          (loss) on Part I, line 11, for any member of 
income, or GILTI), gains or other income      received from any U.S. corporation            the U.S. consolidated tax group that is 
inclusions resulting from elections under     accounted for on the equity method.           less than 100% owned.
sections 1291(d)(2) and 1298(b)(1), and                                                     Example 11.        Life insurance company 
                                              Line 7. U.S. Dividends Not 
any amount included in taxable income                                                       G is a calendar year taxpayer that is 
pursuant to section 1293 (relating to         Eliminated in Tax Consolidation
                                                                                            required to file Schedule M-3 for its current 
qualified electing funds). The amount of      Report on line 7, column (a), the amount      tax year. G owns 90% of the stock of U.S. 
Subpart F income corresponds to the total     of dividends included on Part I, line 11,     corporation DS1. G files a consolidated 
of the amounts reported by the life           that were received from any U.S.              U.S. income tax return with DS1 as the 
insurance company on line 6, Schedule I,      corporation. Report on line 7, column (d),    GDS1 U.S. consolidated group. G 
of all Forms 5471, Information Return of      the amount of any U.S. dividends included     prepares certified SAP/GAAP financial 
U.S. Persons With Respect to Certain          in the subtotal on Form 1120-L, page 1,       statements for the consolidated financial 
Foreign Corporations. The amount of           line 20.                                      statement group consisting of G and DS1. 
qualified electing fund (QEF) income                                                        G has no net income of its own, and G 
corresponds to the total of the amounts       Usually, the amounts included on 
reported by the life insurance company on     line 7, columns (a) and (d), include only     does not report its equity interest in the 
all Forms 8621, Information Return by a       dividends received from U.S. corporations     income of DS1 on its separate financial 
Shareholder of a Passive Foreign              that are not included in the U.S.             statements. DS1 has financial statement 
Investment Company or Qualified Electing      consolidated tax group because                net income (before minority interests) and 
Fund.                                         intercompany dividends (dividends             taxable income of $1,000 ($2,500 of 
                                              received from includible corporations         revenue less $1,500 cost of goods sold).
Also include on line 3 passive foreign        listed on Form 851) are eliminated or         On the consolidated Schedule M-3, 
investment company mark-to-market             excluded for financial accounting             Part I, line 4a, Worldwide consolidated net 
gains and losses under section 1296. Do       purposes and eliminated for the               income (loss) per income statement, and 
not report such gains and losses on           calculation of U.S. taxable income. In the    on line 11, Net income (loss) per income 
Schedule M-3, Part II, line 16.               case of an insurance company included in      statement of includible corporations, the 
                                              the consolidated U.S. income tax return       U.S. consolidated tax group GDS1 must 
Line 4. Gross-Up for Foreign                  required to report intercompany dividends     report $900 of financial statement net 
Taxes Deemed Paid                             as part of statutory accounting net income,   income ($1,000 net income less $100 
Report on line 4, column (d), the amount      include such intercompany dividends on        minority interest).
of any gross-up for foreign taxes deemed      Part II, line 7, column (a), and the taxable  The GDS1 group must prepare one 
paid not included on Part II, column (d), of  amount of those dividends on Part II,         consolidated Schedule M-3, Parts II and 
lines 9, 10, and 11, Income (loss) from       line 7, column (d). (For insurance            III, and three additional Schedules M-3, 
U.S. partnerships, foreign partnerships,      companies included in the consolidated        Parts II and III: one for G, one for DS1, and 
and other pass-through entities. The          U.S. income tax return, see instructions for  one for consolidation eliminations.
gross-up amount on line 4 must                Part I, lines 10a, 10b, 10c, and 11.)
                                                                                            On the Schedule M-3, Parts II and III, 
correspond to the total gross-up amounts 
                                              For any intercompany dividends                for DS1, $1,000 is reported on Part II, 
for foreign taxes deemed paid reported by 
                                              (dividends received from includible           line 28 and line 30, in both columns (a) 
the corporation on all Forms 1118, Foreign 
                                              corporations listed on Form 851) included     and (d). On G's Schedule M-3, Parts II and 
Tax Credit—Corporations, excluding the 
                                              on Part II, line 7, report on an attached     III, zero is reported on Part II, line 30, in 
amounts reported on Schedule M-3, Part 
                                              supporting statement for Part II, line 7 (1)  both columns (a) and (d). On the 
II, column (d), of lines 9, 10, and 11.
                                              the name of the dividend payer, (2) the       consolidation eliminations Schedule M-3, 
Line 5. Gross Foreign                         payer's EIN, (3) the class of stock or        Parts II and III, on Part II, line 8 and line 30, 
Distributions Previously Taxed                security on which the dividends were paid,    the minority interest elimination for the 
                                              (4) the amount of any net adjustment          U.S. consolidated tax group is reported as 
Report on line 5, column (a), any             included on Part I, line 10a, for such        ($100) in column (a), $100 in column (c), 
distributions received from foreign           dividends, and (5) the amounts for            and $0 in column (d).
corporations that were included on Part I,    columns (a) through (d).                      On the Schedule M-3, Parts II and III, 
line 11, and that were previously taxed for 
U.S. income tax purposes. For example,        For any dividends included on Part II,        for the U.S. consolidated tax group, on 
include in column (a) amounts that are        line 7, that are not intercompany dividends   Part II, line 8, Minority interest for 
excluded from taxable income under            (dividends received from includible           includible corporations, ($100) is reported 
sections 959 and 1293(c). Remove such         corporations listed on Form 851) that are     in column (a), $100 in column (c), and $0 
amount in column (b) or (c), as applicable.   received on classes of voting stock in        in column (d). On Part II, line 28, the U.S. 
Report the full amount of the distribution    which the corporation directly or indirectly  consolidated tax group reports $1,000 in 
before any withholding tax. Since             owned 10% or more of the outstanding          both columns (a) and (d). As a result, 
previously taxed foreign distributions are    shares of that class at any time during the   financial statement net income on Part II, 
not currently taxable, line 5, column (d), is tax year, report on an attached supporting    line 30, column (a), will total $900; net 
shaded. (Also see the instructions for Part   statement for Part II, line 7 (1) the name of permanent differences on Part II, line 30, 
II, line 2, earlier.)                         the dividend payer, (2) the payer's EIN (if   column (c), will total $100; and taxable 
                                              applicable), (3) the class of voting stock 

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income on line 30, column (d), will total company H's charitable contribution Each difference attributable to a
$1,000. deduction is wholly attributable to its reportable transaction must be separately
partnership interest in USP and is limited stated and adequately disclosed. A life
Line 9. Income (Loss) From to $90 pursuant to section 170(b)(2) due insurance company will be considered to
U.S. Partnerships and Line 10. to other investment losses incurred by H. have separately stated and adequately
Income (Loss) From Foreign In its financial statements, H treated this disclosed a reportable transaction on
limitation as a temporary difference. H line 12 if the life insurance company
Partnerships
must not report the charitable contribution sequentially numbers each Form 8886
For any interest owned by the corporation limitation of $3,910 ($4,000 − $90) on Part and lists by identifying number on the
or a member of the U.S. consolidated tax II, line 9. H must report the limitation on supporting statement for Part II, line 12,
group that is treated as an investment in a Part III, line 21, and report the disallowed each sequentially numbered reportable
partnership for U.S. income tax purposes charitable contributions of ($3,910) in transaction and the amounts required for
(other than an interest in a disregarded columns (b) and (d). Part II, line 12, columns (a) through (d).
entity), report amounts on Part II, line 9 or
10, as described below: Line 11. Income (Loss) From Instead of the requirements of the
1. In column (a), the sum of the Other Pass-Through Entities preceding paragraph, a life insurance
company will be considered to have
corporation's distributive share of income For any interest in a pass-through entity separately stated and adequately
or loss from a U.S. or foreign partnership (other than an interest in a partnership disclosed a reportable transaction if the
that is included on Part I, line 11; reportable on Part II, line 9 or 10, as life insurance company attaches a
2. In column (b) or (c), as applicable, applicable) owned by a member of the supporting statement that provides the
the sum of all differences, if any, U.S. consolidated tax group (other than an following for each reportable transaction:
attributable to the corporation's distributive interest in a disregarded entity), report the
share of income or loss from a U.S. or following on line 11: 1. A description of the reportable
transaction disclosed on Form 8886 for
foreign partnership; and 1. In column (a) the sum of the which amounts are reported on Part II,
3. In column (d) the sum of all corporation's distributive share of income line 12;
amounts of income, gain, loss, or or loss from the pass-through entity that is
deduction attributable to the corporation's included on Part I, line 11; 2. The name and reportable
transaction or tax shelter registration
distributive share of income or loss from a 2. In column (b) or (c), as applicable, number, if applicable, as reported on Form
U.S. or foreign partnership (that is, the the sum of all differences, if any, 8886; and
sum of all amounts reportable on the attributable to the pass-through entity; and
3. The type of reportable transaction
corporation's Schedule(s) K-1 received 3. In column (d) the sum of all taxable (for example, listed transaction,
from the partnership (if applicable)), amounts of income, gain, loss, or confidential transaction, transaction with
without regard to any limitations computed deduction reportable on the corporation's contractual protection, etc.) as reported on
at the partner level (for example, Schedules K-1 received from the Form 8886.
limitations on utilization of charitable pass-through entity (if applicable).
contributions, capital losses, and interest If a transaction is a listed transaction
expense). For each pass-through entity reported described in Regulations section
on line 11, attach a supporting statement 1.6011-4(b)(2), the description must also
For each partnership reported on line 9 that provides that entity's name, EIN (if include the description provided on Form
or 10, attach a supporting statement that applicable), the life insurance company's 8886. In addition, if the reportable
provides the name, EIN (if applicable), end of year profit-sharing percentage (if transaction involves an investment in the
end of year profit-sharing percentage (if applicable), the life insurance company's transaction through another entity such as
applicable), end of year loss-sharing end of year loss-sharing percentage (if a partnership, the description must include
percentage (if applicable), and the amount applicable), and the amounts reported by the name and EIN (if applicable) of that
reported in column (a), (b), (c), or (d) of the life insurance company in column (a), entity as reported on Form 8886.
line 9 or 10, as applicable. (b), (c), or (d) of line 11, as applicable.
Example 12. U.S. life insurance Example 14. Life insurance company
company H is a calendar year taxpayer Line 12. Items Relating to J is a calendar year taxpayer that is
that is required to file Schedule M-3 for its Reportable Transactions required to file Schedule M-3 for its current
current tax year. H has an investment in a Any amounts attributable to any reportable tax year. J incurred seven different
U.S. partnership, USP. H prepares annual transactions (as described in Regulations abandonment losses during its current tax
statements in accordance with SAP. In its section 1.6011-4) must be included on year. One loss of $12 million results from a
annual statement, H treats the difference Part II, line 12, regardless of whether the reportable transaction described in
between annual statement net income and difference, or differences, would otherwise Regulations section 1.6011-4(b)(5),
taxable income from its investment in USP be reported elsewhere in Part II or Part III. another loss of $5 million results from a
as a permanent difference. For its current Thus, if a taxpayer files Form 8886 for any reportable transaction described in
tax year, H's annual statement net income reportable transaction described in Regulations section 1.6011-4(b)(4), and
includes $10,000 of income attributable to Regulations section 1.6011-4, the the remaining five abandonment losses
its share of USP's net income. H's amounts attributable to that reportable are not reportable transactions. J
Schedule K-1 from USP reports $5,000 of transaction must be reported on Part II, discloses the reportable transactions
ordinary income, $7,000 of long-term line 12. In addition, all income and giving rise to the $12 million and $5 million
capital gains, $4,000 of charitable expense amounts attributable to a losses on separate Forms 8886 and
contributions, and $200 of section 179 reportable transaction must be reported sequentially numbers them X1 and X2,
expense. H must report on Part II, line 9, on Part II, line 12, columns (a) and (d) respectively. J must separately state and
$10,000 in column (a), a permanent even if there is no difference between the adequately disclose the $12 million and $5
difference of ($2,200) in column (c), and annual statement amounts and the taxable million losses on Part II, line 12. The $12
$7,800 in column (d). amounts. million loss and the $5 million loss will be
adequately disclosed if J attaches a
Example 13. Assume the same facts supporting statement for line 12 that lists
as Example 12, except that life insurance

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each of the sequentially numbered forms, Part II, line 18, should be made in columns method of accounting on Part II, line 15,
Form 8886-X1 and Form 8886-X2, and (b) and (c) of line 13. and not on line 16.
with respect to each reportable transaction Complete Part II of Form 8916-A. Enter Traders in securities or commodities.
reports the appropriate amounts required the amounts from Form 8916-A, Part II, For a trader in securities or commodities
for Part II, line 12, columns (a) through (d). line 6, columns (a) through (d), on that made a valid election under section
Alternatively, J's disclosures will be Schedule M-3, Part II, line 13, columns (a) 475(f) to use the mark-to-market method
adequate if the description provided for through (d), as applicable. Attach Form to account for securities or commodities
each loss on the supporting statement 8916-A. held in connection with a trading business
includes the names and reportable
transaction or tax shelter registration Do not report on line 13 or include on that files Form 4797, any Schedule M-3
numbers, if any, disclosed on the Form 8916-A the amounts reported in entries required as a result of marking to
applicable Form 8886, identifies the type accordance with the instructions for Part II, market these securities or commodities
of reportable transaction for the loss, and lines 9, 10, 11, 12, and 21. are reported as follows: (a) mark-to-
market gains and losses from Form 4797,
reports the appropriate amounts required
for Part II, line 12, columns (a) through (d). Line 14. Accrual of Bond line 10, are included on Part II, line 16, of
J must report the losses attributable to the Discount Schedule M-3 (Form 1120-L); and (b) any
other Schedule M-3 entries required
other five abandonment losses on Part II, Report on line 14, column (a), the amount based on other results
line 23e, regardless of whether a of accrued bond discount included on Part (non-mark-to-market gains and losses)
difference exists for any or all of those I, line 11. Report on line 14, column (d), included in the total reported on Form
abandonment losses. the amount of accrued bond discount 4797, line 17, should be reported on Part
Example 15. Life insurance company included in the subtotal on Form 1120-L, II, line 23d, of Schedule M-3 (Form
K is a calendar year taxpayer that is page 1, line 20. Report amounts in 1120-L), unless the instructions for
required to file Schedule M-3 for its current columns (b) and (c), as applicable. Schedule M-3 require the amounts to be
tax year. K enters into a transaction with Line 15. Hedging Transactions reported on another line.
contractual protection that is a reportable
transaction described in Regulations Report on line 15, column (a), the net gain Line 17. Deferred and
section 1.6011-4(b)(4). This reportable or loss from hedging transactions included Uncollected Premiums
transaction is the only reportable on Part I, line 11. Report in column (d) the
transaction for K's current tax year and amount of taxable income from hedging Report on line 17, column (a), the amount
results in a $7 million capital loss for both transactions as defined in section 1221(b) of deferred and uncollected premiums
statutory accounting purposes and U.S. (2). Use columns (b) and (c) to report all included on Part I, line 11. Report on
income tax purposes. Although the differences caused by treating hedging line 17, column (d), the amount of deferred
transaction does not result in a difference, transactions differently for statutory and uncollected premiums included in the
K is required to report on Part II, line 12, accounting purposes and for U.S. income subtotal on Form 1120-L, page 1, line 20.
the following amounts: ($7 million) in tax purposes. For example, if a portion of Report amounts in columns (b) and (c), as
column (a), zero in columns (b) and (c), a hedge is considered ineffective under applicable.
and ($7 million) in column (d). The SAP but still is a valid hedge under section Line 18. Sale Versus Lease (for
transaction will be adequately disclosed if 1221(b)(2), the difference must be
K attaches a supporting statement for reported on line 15. The hedge of a capital Sellers and/or Lessors)
line 12 that (a) sequentially numbers the asset, which is not a valid hedge for U.S. Note. Also see the instructions for Part III,
Form 8886 and refers to the sequentially income tax purposes but may be line 35, Purchase Versus Lease (for
numbered Form 8886-X1, and (b) reports considered a hedge for SAP purposes, Purchasers and/or Lessees), later.
the applicable amounts required for must also be reported here. Asset transfer transactions with periodic
payments characterized for statutory
line 12, columns (a) through (d). Report hedging gains and losses accounting purposes as either a sale or a
Alternatively, the transaction will be computed under the mark-to-market lease may, under some circumstances, be
adequately disclosed if the supporting method of accounting on line 15 and not characterized as the opposite for tax
statement for line 12 includes a on Part II, line 16, Mark-to-market income purposes. If the transaction is treated as a
description of the transaction, the name (loss). lease, the seller/lessor reports the periodic
and tax shelter registration number, if any, payments as gross rental income and also
and the type of reportable transaction Line 16. Mark-to-Market Income
reports depreciation expense or
disclosed on Form 8886. (Loss) deduction. If the transaction is treated as a
Line 13. Interest Income Report on line 16 any amount sale, the seller/lessor reports gross profit
representing the mark-to-market income (sale price less cost of goods sold) from
Report on Part II, line 13, column (a), the or loss for any securities held by a dealer the sale of assets and reports the periodic
total amount of interest income included in securities, a dealer in commodities payments as payments of principal and
on Part I, line 11. Report on Part II, line 13, having made a valid election under interest income.
column (d), the total amount of interest section 475(e), or a trader in securities or
income included on Form 1120-L, page 1, commodities having made a valid election On Part II, line 18, column (a), report
line 20, that is not required to be reported under section 475(f). “Securities” for these the gross profit or gross rental income for
elsewhere on Schedule M-3. In column (b) purposes are securities described in statutory accounting purposes for all sale
or (c), as applicable, adjust for any section 475(c)(2) and commodities or lease transactions that must be given
amounts treated for U.S. income tax described in section 475(e)(2). the opposite characterization for U.S.
purposes as interest income that are “Securities” do not include any items income tax purposes. On Part II, line 18,
treated as some other form of income for specifically excluded from sections 475(c) column (d), report the gross profit or gross
statutory accounting purposes, or vice (2) and 475(e)(2), such as certain rental income for U.S. income tax
versa. For example, adjustments to contracts to which section 1256(a) purposes. Interest income amounts for
interest income resulting from adjustments applies. such transactions must be reported on
made in accordance with instructions for Part II, line 13, in column (a) or (d), as
Report hedging gains and losses applicable. Depreciation expense for such
computed under the mark-to-market

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transactions must be reported on Part III, Example 17. Life insurance company Line 23a. Income Statement
line 32, in column (a) or (d), as applicable. N is a calendar year taxpayer that is
Gain/Loss on Sale, Exchange,
Use columns (b) and (c) of Part II, lines 13 required to file Schedule M-3 for its current
and 18, and Part III, line 32, as applicable, tax year. N was depreciating certain fixed Abandonment, Worthlessness,
to report the differences between columns assets over an erroneous recovery period or Other Disposition of Assets
(a) and (d). and, effective for its current tax year, N Other Than Pass-Through
Example 16. Life insurance company receives IRS consent to change its
M sells and leases property to customers. method of accounting for the depreciable Entities
M is a calendar year taxpayer that is fixed assets and begins using the proper Report on line 23a, column (a), all gains
required to file Schedule M-3 for its current recovery period. The change in method of and losses on the disposition of assets
tax year. For statutory accounting accounting results in a positive section except for gains and losses allocated to
purposes, M accounts for each 481(a) adjustment of $100,000 that is the life insurance company from a
transaction as a sale. For U.S. income tax required to be spread over 4 tax years, pass-through entity (for example, on
purposes, each of M's transactions must beginning with the current tax year. In its Schedule K-1) that are included in the net
be treated as a lease. In its annual annual statement, N treats the section income (loss) of includible corporations
statement, M treats the difference in the 481(a) adjustment as a temporary reported on Part I, line 11. Reverse the
statutory accounting and the U.S. income difference. N must report on Part II, amount reported in column (a) in column
tax treatment of these transactions as line 19, $25,000 in columns (b) and (d) for (b) or (c), as applicable. The
temporary. During its current tax year, M its current tax year and each of the corresponding gains and losses for U.S.
reports in its annual statement $1,000 of subsequent 3 tax years (unless N is income tax purposes are reported on Part
sales and $700 of cost of goods sold with otherwise required to recognize the II, lines 23b through 23g, as applicable.
respect to current year lease transactions. remainder of the 481(a) adjustment
M receives periodic payments of $500 in earlier). N must not report the section Line 23b. Gross Capital Gains
its current year with respect to these 481(a) adjustment on Part III, line 32. From Schedule D, Excluding
Amounts From Pass-Through
current year transactions and similar Line 20. Amortization of
transactions from prior years and treats Entities
$400 as principal and $100 as interest Interest Maintenance Reserve
Report on line 23b gross capital gains
income. For statutory accounting Report on line 20, column (a), the amount reported on Schedule D, excluding capital
purposes, M reports gross profit of $300 of interest maintenance reserve gains from pass-through entities, which
($1,000 − $700) and interest income of amortization included on Part I, line 11. must be reported on Part II, line 9, 10, or
$100 from these transactions. For U.S. Report amounts in columns (b) and (c), as 11, as applicable.
income tax purposes, M reports $500 of applicable.
Line 23c. Gross Capital Losses
gross rental income (the periodic Line 21. Original Issue Discount
payments) and (based on other facts) From Schedule D, Excluding
$200 of depreciation deduction on the and Other Imputed Interest
Amounts From Pass-Through
property. On Schedule M-3, M must report Report on line 21 any amounts of original
on Part II, line 13, $100 in column (a), issue discount (OID) and imputed interest. Entities, Abandonment Losses,
($100) in column (b), and zero in column The term “original issue discount and and Worthless Stock Losses
(d). In addition, M must report on Part II, other imputed interest” includes, but is not Report on line 23c gross capital losses
line 18, $300 of gross profit in column (a), limited to: reported on Schedule D, excluding capital
$200 in column (b), and $500 of gross 1. The excess of a debt instrument's losses from (a) pass-through entities,
rental income in column (d). Lastly, M stated redemption price at maturity over its which must be reported on Part II, line 9,
must report on Part III, line 32, $200 in issue price, as determined under section 10, or 11, as applicable; (b) abandonment
column (b) and (d). 1273; losses, which must be reported on Part II,
Line 19. Section 481(a) 2. Amounts that are imputed interest line 23e; and (c) worthless stock losses,
Adjustments on a deferred sales contract under section which must be reported on Part II, line 23f.
483; Do not report on line 23c capital losses
Any difference between an income or carried over from a prior tax year and
expense item attributable to an authorized 3. Amounts treated as interest or OID utilized in the current tax year. See the
(or unauthorized) change in method of under the stripped bond rules under instructions for Part II, line 24, regarding
accounting made for U.S. income tax section 1286; and the reporting requirements for capital loss
purposes that results in a section 481(a) 4. Amounts treated as OID under the carryovers utilized in the current tax year.
adjustment must be reported on Part II, below-market interest rate rules under
line 19, regardless of whether a separate section 7872. Line 23d. Net Gain/Loss
line for that income or expense item exists Reported on Form 4797,
in Part II or Part III. The following section Line 22. Market Discount Line 17, Excluding Amounts
481(a) adjustments, however, should not Reclassification From Pass-Through Entities,
be reported on Part II, line 19. Report on line 22 the amount of market Abandonment Losses, and
1. Adjustments for reportable discount reclassification included on Part
transactions that are required to be I, line 11. Report on line 22 the amount of Worthless Stock Losses
reported on Part II, line 12. market discount reclassification included Report on line 23d the net gain or loss
2. Section 807(f) adjustments for in the subtotal on Form 1120-L, page 1, reported on line 17 of Form 4797, Sales of
changes in computing reserves that are line 20. Report amounts in columns (b) Business Property, excluding amounts
required to be reported on Part III, line 25. and (c), as applicable. from (a) pass-through entities, which must
be reported on Part II, line 9, 10, or 11, as
3. Reserve Transition Relief applicable; (b) abandonment losses,
adjustments that are required to be which must be reported on Part II,
reported on Part III, line 25. line 23e; and (c) worthless stock losses,
which must be reported on Part II, line 23f.

Instructions for Schedule M-3 (Form 1120-L) (12-2021) -17-

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Note. Traders in securities or Line 25. Other Income (Loss) purposes, whereas B recognizes such
commodities that have made a valid revenue based upon customer
Items With Differences
election under section 475(f) to use the acceptance. P and A must report this
mark-to-market method to account for Separately state and adequately disclose revenue in columns (a) and (d) on Part II,
securities or commodities, see the on Part II, line 25, all items of income line 28. B must report the following on Part
instructions for Part II, line 16, earlier. (loss) with differences that are not II, line 25: in column (a), B's revenue
otherwise listed on Part II, lines 1 through recognized in the financial statements
Line 23e. Abandonment Losses 24. Attach a statement that describes and based upon delivery to the customer; in
Report on line 23e any abandonment itemizes the type of income (loss) and the column (d), B's revenue recognized for
losses, regardless of whether the loss is amount of each item and provides a U.S. income tax purposes based upon
characterized as an ordinary loss or a description that states the income (loss) customer acceptance; and in column (b)
capital loss. name for book purposes for the amount or (c), as applicable, the difference
recorded in column (a) and describes the between B's revenue recognized in its
Line 23f. Worthless Stock adjustment being recorded in column (b) financial statements and in its U.S. taxable
Losses or (c). The entire description completes income.
Report on line 23f any worthless stock the tax description for the amount included
loss, regardless of whether the loss is in column (d) for each item separately Note. In this example, the first column of
characterized as an ordinary loss or a stated on this line. the attached statement for Part II, line 25,
discussed earlier, must include an
capital loss. Attach a statement that The attached statement should have adequate description, such as “Inventory
separately states and adequately five columns. The first column has the Sales Revenue recognized upon
discloses each transaction that gives rise description for the next four columns. The acceptance, not delivery.”
to a worthless stock loss and the amount second column is column (a) income
of each loss. (loss) per income statement; the third Line 27. Total Expense/
Line 23g. Other Gain/Loss on column is column (b) temporary Deduction Items
difference; the fourth column is column (c)
Disposition of Assets permanent difference; and the fifth column Report on Part II, line 27, columns (a)
Report on line 23g any gains or losses is column (d) income (loss) per tax return. through (d), as applicable, the negative of
from the sale or exchange of property that Every item listed on the attached the amounts reported on Part III, line 40,
are not reported on lines 23b through 23f. statement for line 25 always must have columns (a) through (d). For example, if
columns (a) + (b) + (c) = (d). Each item Part III, line 40, column (a), reflects an
Line 24. Capital Loss Limitation with amounts in columns (a), (b), (c), and amount of $1 million, then report on Part II,
and Carryforward Used (d) will be totaled and included as one line line 27, column (a), ($1 million). Similarly,
Report as a positive amount on line 24, on Part II, line 25. if Part III, line 40, column (b), reflects an
column (b) or (c), as applicable, and (d) amount of ($50,000), then report on Part II,
the excess of the net capital losses over For insurance companies included in line 27, column (b), $50,000.
the net capital gains reported on the consolidated U.S. income tax return,
Schedule D, Capital Gains and Losses, by see instructions for Part I, lines 10a, 10b, Line 28. Other Items With No
the corporation. For a U.S. consolidated 10c, and 11, and Part II, line 7, for Differences
tax group, the Schedule M-3 adjustment guidance on the treatment of If there is no difference between the
for the amount of the consolidated net intercompany dividends and statutory statutory accounting amount and the
capital loss that is disallowed should not accounting. taxable amount of an entire item of
income, gain, loss, expense, or deduction
be made on the separate consolidating If any “comprehensive income” as and the item is not described or included
Schedules M-3 of the includible defined by Statement of Financial on Part II, lines 1 through 25, or Part III,
corporations, but on the separate Accounting Standards (SFAS) No. 130 is lines 1 through 39, report the entire
Schedule M-3 for consolidated reported on this line, describe the item(s) amount of the item in columns (a) and (d)
eliminations (or on Form 8916 in the case in detail. Examples of sufficiently detailed of line 28. If a portion of an item of income,
of a mixed group) as described under descriptions include “foreign currency loss, expense, or deduction has a
Completion of Schedule M-3 and Certain translation adjustments—comprehensive difference and a portion of the item does
Allocations, Limitations, and Carryovers, income” and “gains and losses on not have a difference, do not report any
earlier. available-for-sale portion of the item on line 28. Instead,
If the corporation utilizes a capital loss securities—comprehensive income.” report the entire amount of the item (for
carryforward on Schedule D in the current Whether an item of income (loss) is example, both the portion with a difference
tax year, report the carryforward utilized reported on line 25, or is reported on Part and the portion without a difference) on
as a negative amount on Part II, line 24, II, line 28, is determined separately by the applicable line of Part II, lines 1
column (b) or (c), as applicable, and each member of the U.S. consolidated tax through 25, or Part III, lines 1 through 39.
column (d). For a U.S. consolidated tax group and not at the U.S. consolidated tax See Example 10, earlier.
group, the Schedule M-3 adjustment for group level. Line 29a. Life Insurance
the amount of the consolidated capital
loss carryforward should not be made on Example 18. U.S. corporation P has Subgroup Reconciliation Totals
the separate consolidating Schedules M-3 two subsidiaries, corporations A and B, For filers other than a mixed group,
of the includible corporations, but on the that are included in P's consolidated combine lines 26 through 28 and skip lines
separate Schedule M-3 for consolidation financial statements and in P's 29b and 29c. On the sub-consolidated
eliminations (or on Form 8916 in the case consolidated U.S. income tax return. For Schedule M-3 for a mixed group, combine
of a mixed group) as described under financial statement purposes, P, A, and B lines 26 through 28 and skip lines 29b and
Completion of Schedule M-3 and Certain recognize revenue from the sale of 29c. For the consolidated Schedule M-3 of
Allocations, Limitations, and Carryovers, inventory upon delivery to the customer. a mixed group, complete only lines 29a
earlier. For U.S. income tax purposes, P and A through 29c and line 30 of Part II. Part III is
recognize such revenue consistent with not required to be completed for the
the method used for financial statement

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consolidated Schedule M-3 of a mixed Line 7. Foreign Withholding are accounted for in statutory accounting
group. income, regardless of the classification,
Taxes
nomenclature, or terminology used for
Line 29b. 1120 Subgroup Report on line 7, column (a), the amount such amounts, and regardless of how or
Reconciliation Totals of foreign withholding taxes included in where such amounts are classified in the
Line 29b is used only by mixed groups. statutory accounting net income on Part I, life insurance company's statutory income
See Schedule M-3 Consolidation for line 11. If the life insurance company is statement or the income and expense
Mixed Groups (1120/L/PC), earlier. deducting foreign tax, use column (b) or accounts maintained in the life insurance
(c), as applicable, to correct for any company's books and records. Report
Line 29c. PC Insurance difference between foreign withholding tax only amounts not otherwise reportable
Subgroup Reconciliation Totals included in statutory accounting net elsewhere on Schedule M-3, Parts II and
income and the amount of foreign III.
Line 29c is used only by mixed groups. withholding taxes being deducted in the
See Schedule M-3 Consolidation for return. If the life insurance company is Line 12. Fines and Penalties
Mixed Groups (1120/L/PC), earlier. crediting foreign withholding taxes against Report on line 12 any fines or similar
the U.S. income tax liability, use column penalties paid to a government or other
(b) or (c), as applicable, to negate the authority for the violation of any law for
Part III. Reconciliation of amount reported in column (a). which fines or penalties are assessed. All
Net Income (Loss) per fines and penalties expensed in financial
Line 8. Equity-Based
Income Statement of accounting income (paid or accrued) must
Compensation be included on line 12, column (a),
Includible Corporations regardless of the government or other
Report on line 8 any amounts for
With Taxable Income per equity-based compensation or authority that imposed the fines or
Return—Expense/ consideration that are reflected as penalties; regardless of whether the fines
expense for statutory accounting and penalties are civil or criminal;
Deduction Items purposes (column (a)) or deducted in the regardless of the classification,
Note. Expense amounts that reduce U.S. income tax return (column (d)) other nomenclature, or terminology used for the
financial accounting income must be than amounts reportable elsewhere on fines or penalties by the imposing
reported on Part III, column (a), as positive Schedule M-3, Parts II and III. Examples of authority in its actions or documents; and
amounts. Deduction amounts that reduce amounts reportable on line 8 include regardless of how or where the fines or
taxable income must be reported on Part incentive stock options, nonqualified stock penalties are classified in the corporation's
III, column (d), as positive amounts. options, payments attributable to financial income statement or the income
Amounts reported on Part II, line 27, must employee stock purchase plans (ESPPs), and expense accounts maintained in the
be the negative of the amounts reported phantom stock options, phantom stock corporation's books and records. Also
on Part III, line 40. units, stock warrants, stock appreciation report on line 12, column (a), the reversal
Lines 1 Through 6. Income Tax rights, and restricted stock, regardless of of any overaccrual of any amount
whether such payments are made to described in this paragraph. See section
Expense employees or non-employees, or as 162(f) for additional guidance.
If the life insurance company does not payment for property or compensation for
distinguish between current and deferred services. Report on line 12, column (d), any such
income tax expense in its annual amounts as described in the preceding
statement (or its books and records, if If the amounts include incentive stock paragraph that are includible in taxable
applicable), report income tax expense as options or nonqualified stock options, income, regardless of the financial
current income tax expense using lines 1, attach a detailed statement separately accounting period in which such amounts
3, and 5, as applicable. stating each. were or are included in financial
accounting net income. Complete
A U.S. consolidated tax group must Line 9. Capitalization of columns (b) and (c) as appropriate.
complete lines 1 through 6 in accordance Deferred Acquisition Costs
with the allocation of tax expense among Report on line 9, column (d), the amount Do not report on Part III, line 12,
the members of the U.S. consolidated tax of deferred acquisition costs capitalized amounts required to be reported in
group in the financial statements (or its and taken into account in the subtotal on accordance with instructions for Part III,
books and records, if applicable). If the Form 1120-L, page 1, line 20. Report line 13.
current and deferred U.S., state, and amounts in columns (b) and (c), as Do not report on Part III, line 12,
foreign income tax expense for the U.S. applicable. amounts recovered from insurers or any
consolidated tax group (income tax
expense) is allocated among the members Line 10. Amortization of other indemnitors for any fines and
penalties described above.
of the U.S. consolidated tax group in the Deferred Acquisition Costs
group's financial statements (or its books Line 13. Judgments, Damages,
and records, if applicable), then each Report on line 10, column (d), the amount
member must report its allocated income of deferred acquisition costs amortized Awards, and Similar Costs
tax expense on Part III, lines 1 through 6, and taken into account in the subtotal on Report on line 13, column (a), the amount
of that member's separate Schedule M-3. Form 1120-L, page 1, line 20. Report of any estimated or actual judgments,
However, if the income tax expense is not amounts in columns (b) and (c), as damages, awards, settlements, and
shared or allocated among members of applicable. similar costs, however named or
the U.S. consolidated tax group but is Line 11. Meals and classified, included in financial accounting
retained in the parent corporation's income, regardless of whether the amount
financial statements (or books and Entertainment deducted was attributable to an estimate
records, if applicable), then amounts are Report on line 11, column (a), any of future anticipated payments or actual
reported only on Part III, lines 1 through 6, amounts paid or accrued by the life payments. Also report on line 13, column
of the parent's separate Schedule M-3. insurance company during the tax year for (a), the reversal of any overaccrual of any
meals, beverages, and entertainment that amount described in this paragraph.

Instructions for Schedule M-3 (Form 1120-L) (12-2021) -19-

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Report on line 13, column (d), any such        Line 18. Deferred                              Line 22. Change in Section 
amounts as are described in the 
                                               Compensation                                   807(c)(1) Tax Reserves
preceding paragraph that are includible in 
taxable income, regardless of the financial    Report on line 18, column (a), any             Report on line 22, column (a), the change 
accounting period in which such amounts        compensation expense included in the net       in section 807(c)(1) life insurance reserves 
were or are included in financial              income (loss) amount reported on Part I,       included on Part I, line 11. Report on 
accounting net income. Complete                line 11, that is not deductible for U.S.       line 22, column (d), the change in section 
columns (b) and (c) as appropriate.            income tax purposes in the current tax         807(c)(1) life insurance reserves included 
                                               year and that was not reported elsewhere       in the subtotal on Form 1120-L, page 1, 
Do not report on Part III, line 13,            on Schedule M-3. Report on line 18,            line 20. Report amounts in columns (b) 
amounts required to be reported in             column (d), any compensation deductible        and (c), as applicable.
accordance with instructions for Part III,     in the current tax year that was not 
line 12.                                       included in the net income (loss) amount       Line 23. Change in Section 
                                               reported on Part I, line 11, for the current   807(c)(2) Tax Reserves
Do not report on Part III, line 13,            tax year and that is not reportable            Report on line 23, column (a), the change 
amounts recovered from insurers or any         elsewhere on Schedule M-3. For example,        in section 807(c)(2) unearned premiums 
other indemnitors for any judgments,           report originations and reversals of           and unpaid losses included on Part I, 
damages, awards, or similar costs              deferred compensation subject to section       line 11. Report on line 23, column (d), the 
described above.                               409A on line 18.                               change in section 807(c)(2) unearned 
Line 14. Parachute Payments                    Line 20. Charitable                            premiums and unpaid losses included in 
                                                                                              the subtotal on Form 1120-L, page 1, 
Report on line 14, column (a), the total       Contribution of Intangible                     line 20. Report amounts in columns (b) 
expense included in statutory accounting       Property                                       and (c), as applicable.
net income on Part I, line 11, that is 
subject to section 280G. Report in column      Report on line 20 any charitable               Line 24. Change in All Other 
(b) or (c), as applicable, the amount of       contribution of intangible property, for 
nondeductible parachute payments               example, contributions of:                     Section 807(c) Tax Reserves
pursuant to section 280G, and report in        • Intellectual property, patents (including    Report on line 24, column (a), the change 
column (d) the deductible amount of            any amounts of additional contributions        in all other section 807(c) reserves 
compensation after any excess parachute        allowable by virtue of income earned by        included on Part I, line 11. Report on 
payment limitations under section 280G. If     donees subsequent to the year of               line 24, column (d), the change in all other 
a payment is subject to limitation under       donation), copyrights, and trademarks;         section 807(c) reserves included in the 
both sections 162(m) and 280G, report the      • Securities (including stocks and their       subtotal on Form 1120-L, page 1, line 20. 
total payment on line 14.                      derivatives, stock options, and bonds);        Report amounts in columns (b) and (c), as 
                                               • Conservation easements (including            applicable.
Line 15. Compensation With                     scenic easements or air rights);
Section 162(m) Limitation                      • Railroad rights of way;                      Line 25. Section 807(f) and 
Report on line 15, column (a), the total       • Mineral rights; and                          Reserve Transition Relief 
amount of non-performance-based current        • Other intangible property.                   Adjustments for Change in 
compensation expense for the corporate         Line 21. Charitable                            Computing Reserves
officers to whom section 162(m) applies.       Contribution Limitation/                       Report on line 25, column (d), the section 
Report in column (b) or (c), as applicable,                                                   807(f) and Reserve Transition Relief 
the nondeductible amount of current            Carryforward                                   adjustments included in the subtotal on 
compensation in excess of $1 million           Report as a negative amount on line 21,        Form 1120-L, page 1, line 20. Report 
($500,000 if the corporation receives or       columns (b), (c), and (d), as applicable,      amounts in columns (b) and (c), as 
has received financial assistance under        the excess of charitable contributions         applicable.
the Treasury Troubled Asset Relief             made during the tax year over the amount 
Program (TARP)). Report the deductible         of the charitable contribution limitation      Line 26. Section 807(a)(2)(B) 
compensation in column (d). If a payment       amount.                                        Tax Reserve Amount With 
is subject to limitation under both sections                                                  Respect to Policyholder Share 
162(m) and 280G, report the total                If the corporation utilizes a contribution 
payment on Part III, line 14, Parachute        carryforward in the current tax year, report   of Tax Exempt Interest
payments. See Regulations section              the carryforward utilized as a positive        Report on line 26, column (d), the change 
1.162-27(g) for the interaction between        amount on columns (b), (c), and (d), as        in section 807(a)(2)(B) tax reserve amount 
sections 162(m) and 280G.                      applicable.                                    with respect to policyholder share of tax 
                                                 When a consolidated income tax return        exempt interest included in the subtotal on 
Line 16. Pension and                           is being filed, Schedule M-3 adjustments       Form 1120-L, page 1, line 20. Report 
Profit-Sharing                                 for the amount of charitable contributions     amounts in columns (b) and (c), as 
Report on line 16 any amounts attributable     in excess of the limitation, or for charitable applicable.
to the life insurance company's pension        contribution carryforward utilized, should     Line 27. Current Year 
plans, profit-sharing plans, and any other     not be made on the separate 
retirement plans.                              consolidating Schedules M-3 of the             Acquisition/Reorganization 
                                               includible corporations, but on the            Costs
Line 17. Other Post-Retirement                 separate consolidating Schedule M-3 for        Report on line 27 any investment banking 
Benefits                                       consolidation eliminations (or on Form         fees, legal and accounting fees, and any 
Report on line 17 any amounts attributable     8916 in the case of a mixed group). See        other fees paid or incurred in connection 
to other post-retirement benefits not          Completion of Schedule M-3 and Certain         with a taxable or tax-free acquisition of 
otherwise includible on Part III, line 16 (for Allocations, Limitations, and Carryovers,      property (for example, stock or assets) or 
example, retiree health and life insurance     earlier.                                       a tax-free reorganization. Report on this 
coverage, dental coverage, etc.).                                                             line any investment banking fees, legal 

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and accounting fees, and any other fees statement. Report in column (d) the accounting and U.S. income tax treatment
paid or incurred at any stage of the amount of bad debt expense deductible of this transaction as a temporary
acquisition or reorganization process for federal income tax purposes in difference. During its current tax year, X
including, for example, fees paid or accordance with section 166. reports in its annual statement $1,000 of
incurred to evaluate whether to investigate gross rental expense that, for U.S. income
an acquisition, fees to conduct an actual Line 34. Corporate-Owned Life tax purposes, is recharacterized as a $700
investigation, and fees to complete the Insurance Premiums payment of principal and a $300 payment
acquisition. Also include on this line any Report on line 34 all amounts of insurance of interest, accompanied by a depreciation
investment banking fees, legal and premiums attributable to any life insurance deduction of $1,200 (based on other
accounting fees, and any other fees paid policy if the life insurance company is facts). On Schedule M-3, X must report
or incurred in connection with the directly or indirectly a beneficiary under the following on Part III, line 35: column
liquidation of a subsidiary, a spin-off of a the policy or if the policy has a cash value. (a), $1,000, its statutory accounting gross
subsidiary, or an initial public stock Report in column (d) the amount of the rental expense; column (b), ($1,000); and
offering. Attach a statement separately premiums that are deductible for federal column (d), zero. On Part III, line 36, X
stating acquisition/reorganization income tax purposes. reports $300 in columns (b) and (d) for the
investment banking fees, legal and interest deduction. On Part III, line 32, X
accounting fees, and other costs. Report Line 35. Purchase Versus reports $1,200 in columns (b) and (d) for
amounts in columns (b) and (c), as Lease (for Purchasers and/or the depreciation deduction.
applicable. Lessees) Line 36. Interest Expense
Line 28. Amortization of Note. Also see the instructions for sellers Report on Part III, line 36, column (a), the
and/or lessors in the instructions for Part II,
Acquisition, Reorganization, total amount of interest expense included
line 18. on Part I, line 11, and report on Part III,
and Start-Up Costs Asset transfer transactions with periodic line 36, column (d), the total amount of
Report on line 28 amortization of payments characterized for statutory interest deduction included on Form
acquisition, reorganization, and start-up accounting purposes as either a purchase 1120-L, page 1, line 20, that is not
costs. For purposes of columns (b), (c), or a lease may, under some required to be reported elsewhere on
and (d), include amounts amortizable circumstances, be characterized as the Schedule M-3. In column (b) or (c), as
under section 167, 195, or 248. opposite for tax purposes. applicable, include any adjustments for
Line 29. Amortization/ If a transaction is treated as a lease, any amounts treated for U.S. income tax
Impairment of Goodwill, the purchaser/lessee reports the periodic purposes as interest deduction that are
payments as gross rental expense. If the treated as some other form of expense for
Insurance in Force, and Ceding statutory accounting purposes, or vice
transaction is treated as a purchase, the
Commissions purchaser/lessee reports the periodic versa. For example, adjustments to
Report on line 29 amortization of goodwill, payments as payments of principal and interest expense/deduction resulting from
insurance in force and ceding interest and also reports depreciation adjustments made in accordance with the
commissions or amounts attributable to expense or deduction with respect to the instructions for Part III, line 35, Purchase
the impairment of goodwill, and insurance purchased asset. versus lease (for purchasers and/or
in force and ceding commissions. Attach a lessees), should be made in column (b) or
statement separately stating the amounts Report in column (a) gross rent (c), as applicable, on line 36.
for each item. expense for a transaction treated as a
lease for statutory accounting purposes Complete Part III of Form 8916-A. Enter
Line 30. Other Amortization or but as a sale for U.S. income tax the amounts from Form 8916-A, line 5,
Impairment Write-Offs purposes. Report in column (d) gross columns (a) through (d), on Schedule M-3,
rental deductions for a transaction treated Part III, line 36, columns (a) through (d), as
Report on line 30 any amortization or as a lease for U.S. income tax purposes applicable. Attach Form 8916-A.
impairment write-offs not otherwise but as a purchase for statutory accounting Do not report on Form 8916-A and
includible on Schedule M-3. purposes. Report interest expense for line 36 the amounts reported in
Line 31. Section 846 Amount such transactions on Part III, line 36, in accordance with the instructions for Part II,
column (a) or (d), as applicable. Report lines 9, 10, 11, and 12.
Report on line 31, column (d), the section depreciation expense or deductions for
846 amount included in the subtotal on such transactions on Part III, line 32, in Line 37. Research and
Form 1120-L, page 1, line 20. Report column (a) or (d), as applicable. Use Development Costs
amounts in columns (b) and (c), as columns (b) and (c) of Part III, lines 32, 35, Report in column (a) the amount of
applicable. and 36, as applicable, to report the expenses included in net income reported
Line 32. Depreciation differences between columns (a) and (d) on Part I, line 11, that are related to
for such recharacterized transactions.
Report on line 32 any depreciation research and development expense.
expense that is not required to be reported Example 19. U.S. life insurance Report in column (d) the amount of
elsewhere on Schedule M-3 (for example, company X acquired property in a deductions included on Form 1120-L,
on Part II, line 9, 10, or 11). transaction that, for statutory accounting page 1, line 19, that are recognized and
purposes, X treats as a lease. X is a reported as section 174 research and
Line 33. Bad Debt Expense and calendar year taxpayer that is required to experimental expenditures consistent with
Agency Balances Written Off file Schedule M-3 for its current tax year. the corporation’s adopted method of
Report on line 33, column (a), any Because of its terms, the transaction is accounting for such expenditures. In
amounts attributable to an allowance for treated for U.S. income tax purposes as a column (c), as applicable, include any
uncollectible accounts receivable or actual purchase and X must treat the periodic adjustments for any amounts treated for
write-offs of accounts receivable included payments it makes partially as payment of U.S. income tax purposes as research or
on Part I, line 11. Also report on this line principal and partially as payment of experimental expenditures that are treated
agency balances written off per the annual interest. In its annual statement, X treats as some other form of expense for
the difference between the statutory financial accounting purposes, or vice

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versa. Report any difference in timing purposes. Accordingly, X must report $10,000 of research and development
recognition in column (b). For example, if $100,000 in column (a), $20,000 in costs related to social sciences that it
the taxpayer's financial accounting column (b), and $120,000 in column (d). X recognized as an expense in its financial
method does not specify otherwise, must also report $2,000 in column (a), statements. X adopted the current
column (b) adjustments include ($2,000) in column (b), and $0 in column expense method for research and
adjustments for timing differences (d) on Part III, line 30, Other amortization experimental expenditures for U.S.
between financial and tax accounting for or impairment write-offs. income tax purposes. Because such costs
(1) deferral and amortization of research Example 21. Assume the same facts are not allowable costs under section 174,
expenditures, (2) a section 59(e) election, as Example 20 except Corporation X X must report $10,000 in column (a),
(3) reduction of section 174 expenditures makes an annual election under section permanent difference ($10,000) in column
under section 280C or section 482, (4) 59(e) to deduct $80,000 of its $120,000 of (c), and $0 in column (d). If such costs are
costs attributable to obtaining a patent, (5) research and experimental expenditures otherwise deductible for U.S. income tax
research in social sciences, and (6) cost over a 10-year period. Accordingly, X purposes, X must report this item of
elements for property of a character must report $100,000 in column (a), a expense on Part III, line 39, Other
subject to depreciation. temporary difference of ($52,000) expense/deduction items with differences.
Section 174 provides two methods for ($20,000 less ($80,000/10 years x 9 Example 25. Corporation X is a
the treatment of research and years)) in column (b), and $48,000 in calendar year taxpayer that is required to
experimental expenditures paid or column (d). X must also report $2,000 in file Schedule M-3 for its current tax year.
incurred by a taxpayer in connection with column (a), ($2,000) in column (b), and $0 During its current tax year, X paid $75,000
the taxpayer’s trade or business. These in column (d) on Part III, line 30, Other to acquire or in-license intangible assets
expenditures may be treated as expenses amortization or impairment write-offs. under a collaborative arrangement with
not chargeable to a capital account and Example 22. Assume the same facts another company that X recognized as a
deducted in the year in which they are as Example 21 except Corporation X research and development expense in its
paid or incurred, or they may be deferred elected to capitalize and amortize its financial statements. X adopted the
and amortized. Since the method for research and expenditures over 60 current expense method for research and
treatment of research and experimental months with respect to all its research experimental expenditures for U.S.
expenditures is adopted at the subsidiary programs for U.S. tax purposes. X first income tax purposes. Because payments
level, the expense/deduction item is realized benefits from such expenditures made to acquire rights to a product or
determined separately by each member of on August 1. Accordingly, X must report technology are excluded costs from the
a U.S. consolidated tax group and not at $100,000 in column (a), a temporary definition of research and experimental
the U.S. consolidated tax group level. For difference of ($90,000) ($20,000 less expenditures, X must report $75,000 in
example, U.S. Corporation P has two ($120,000/60 months x 55 months)) in column (a), ($75,000) in column (c), and
subsidiaries, A and B, which are included column (b), and $10,000 in column (d). $0 in column (d). X must report any
amortization otherwise allowable related
in P’s consolidated financial statements Example 23. Corporation X is a to the payments on Part III, line 30, Other
and in P’s consolidated U.S. income tax calendar year taxpayer that is required to amortization or impairment write-offs.
return. For financial purposes, P, A, and B file Schedule M-3 for its current tax year. X
recognize research and development cost adopted the current expense method for Line 38. Section 118 Exclusion
as an expense when accrued. For U.S. research and experimental expenditures Report on line 38 any inducements
income tax purposes, P and A recognize for U.S. income tax purposes. During its received in the current year and treated as
such costs consistent with the method current tax year, X incurred $50,000 of contributions to the capital of a corporation
used for financial purposes, whereas B research and development costs that X by a non-shareholder. Report in column
capitalizes and amortizes such costs. P recognized as an expense in its financial (a) any income amount as a negative
and A must report these expenses in statements. Also, X undertook to develop number and any expense amount as a
columns (a) and (d). B must report its a new machine for its business. X positive number.
expense recognized in the financial expended $30,000 on the project of which
statements when accrued in column (a); in $10,000 represents actual costs of Corporations must identify on an
column (d), B’s research and development material, labor, and component cost to accompanying statement referencing
expenditures recognized for U.S. income construct the machine, and $20,000 line 38 the fair market value of land or
tax purposes; and in columns (b) and (c), represents research costs not attributable other property (including cash) provided to
as applicable, the difference between B’s to the machine itself. X capitalized the corporation by any non-shareholder,
research and development costs in its $30,000 of costs related to the machine including a governmental unit or civic
financial statements and its research and and recognized $6,000 of depreciation group, as an inducement, or for any other
experimental expenditures for U.S. expense in its financial statements. X’s purpose. Include inducements for the
taxable income purposes. depreciation expense on the $10,000 of corporation to locate its business in a
Example 20. Corporation X is a costs related to the machine itself was particular state, municipality, community,
calendar year taxpayer that is required to $2,000 for U.S. income tax purposes. or locality for the purpose of enabling the
file Schedule M-3 for its current tax year. Accordingly, X must report $50,000 in corporation to expand its existing
During its current tax year, X incurred column (a), $20,000 (research costs that operating facilities, including corporate
$100,000 of research and development are not attributable to the machine itself) in headquarters, distribution center(s), or
costs that X recognized as an expense in column (b), and $70,000 in column (d). X factory(ies) (“inducements”).
its financial statements. Also, X incurred must also report $6,000 in column (a), On the accompanying statement, also
$20,000 in attorney fees in obtaining a ($4,000) in column (b), and $2,000 in identify any inducements that include
patent application that X capitalized and column (d) on Part III, line 32, refundable or transferable tax credits,
amortized in its financial statements. X Depreciation. including transferable credits that were
recognized a $2,000 amortization Example 24. Corporation X is a sold.
deduction. In compliance with its adopted calendar year taxpayer that is required to
method of accounting under section 174, file Schedule M-3 for its current tax year. The statement must separately state,
X deducts research and experimental During its current tax year, X incurred adequately disclose, and identify all of the
expenditures for U.S. income tax dollar amounts summarized by this line.

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An accompanying statement is required          employee termination costs, it is not                 Report on line 39, column (a), 
even if there are no dollar amounts            required that an anticipated termination              expenses included in net income reported 
reported on line 38.                           cost amount be listed for each employee,              on Part I, line 11, that are related to 
                                               or that each asset (or category of asset)             reserves and contingent liabilities. Report 
Line 39. Other Expense/                        be listed along with the anticipated loss on          on line 39, column (d), amounts related to 
Deduction Items With                           disposition.                                          liabilities for reserves and contingent 
                                                                                                     liabilities that are deductible in the current 
Differences                                          The attached statement should have              tax year for U.S. income tax purposes. 
Separately state and adequately disclose       five columns. The first column has the                Examples of reserves that are allowed for 
on Part III, line 39, all items of expense/    description for the next four columns. The            book purposes, but not for tax purposes, 
deduction that are not otherwise listed on     second column is column (a) expense per               include restructuring reserves, reserves 
Part III, lines 1 through 38.                  income statement, the third column is                 for discontinued operations, and reserves 
Attach a statement that describes and          column (b) temporary difference, the                  for acquisitions and dispositions. Only 
itemizes the type of expense/deduction         fourth column is column (c) permanent                 report on line 39 items that are not 
and the amount of each item, and that          difference, and the fifth column is column            required to be reported elsewhere on 
provides a description that states the         (d) deduction per tax return. Every item              Schedule M-3, Parts II and III.
expense/deduction name for book                listed on the attached statement for line 39 
purposes for the amount recorded in            must always have columns (a) + (b) + (c) =            Example 26.                     Life insurance company 
column (a) and describes the adjustment        (d). Each item with amounts in columns                Q is a calendar year taxpayer that is 
being recorded in column (b) or (c). The       (a), (b), (c), and (d) will be totaled and            required to file Schedule M-3 for its current 
entire description completes the tax           included as one line on Part III, line 39.            tax year. On July 1 of each year, Q has a 
                                                                                                     fixed liability for its annual insurance 
description for the amount included in         Comprehensive income.          If any                 premiums on its home office building that 
column (d) for each item separately stated     “comprehensive income” as defined by                  provides a 12-month coverage period 
on this line.                                  SFAS No. 130 is reported on this line,                beginning July 1 through June 30. In 
                                               describe the item(s) in detail as, for                addition, Q historically prepays 12 months 
The statement of details attached to           example, “foreign currency translation                of advertising expense on July 1. On July 
the Schedule M-3 for line 39 must              adjustments—comprehensive income”                     1, Q prepays its insurance premium of 
separately state and adequately disclose       and “gains and losses on                              $500,000 and advertising expenses of 
the nature and amount of the expense           available-for-sale                                    $800,000. For statutory accounting 
related to each reserve and/or contingent      securities—comprehensive income.”                     purposes, Q capitalizes and amortizes the 
liability. The appropriate level of disclosure 
depends upon each taxpayer’s                   Reserves and contingent liabilities.                  prepaid insurance and advertising over 12 
operational activity and the nature of its     Report on line 39 amounts related to the              months. For U.S. income tax purposes, Q 
accounting records. For example, if a          change in each reserve or contingent                  deducts the insurance premium when paid 
corporation’s net income amount reported       liability that is not required to be reported         and amortizes the advertising over the 
in the income statement includes               elsewhere on Schedule M-3. For example:               12-month period. In its annual statement, 
anticipated expenses for a discontinued        (1) amounts relating to changes in                    Q treats the differences attributable to the 
operation as a single amount, and its          reserves for litigation must be reported on           annual statement treatment and U.S. 
general ledger or other books, records,        Part III, line 13, Judgments, damages,                income tax treatment of the prepaid 
and workpapers provide details for the         awards, and similar costs; and (2)                    insurance and advertising as temporary 
anticipated expenses under more                amounts relating to changes in reserves               differences.
explanatory and defined categories such        for uncollectible accounts receivable must            Q also has a legal reserve where 
as employee termination costs, lease           be reported on Part III, line 33, Bad debt            $300,000 was expensed for financial 
cancellation costs, loss on sale of            expense/agency balances written off. See              accounting purposes and a ($100,000) 
equipment, etc., a supporting statement        Example 9 and Example 26.                             temporary difference was calculated to 
that lists those categories of expenses              Report on Part III, line 39, the                arrive at the income tax deduction of 
and their details will satisfy the             amortization of various items of prepaid              $200,000. The statement attached to Q's 
requirement to separately state and            expense, such as prepaid subscriptions                return for Part III, line 39, must be 
adequately disclose. In order to separately    and license fees, prepaid insurance, etc.             separately stated and adequately 
state and adequately disclose the                                                                    disclosed as follows:
                                       Column (a) Expense per Income                                                                 Column (d) Deduction per Tax 
Description                             Statement                    Column (b) Temporary Difference Column (c) Permanent Difference Return
Prepaid insurance premium expensed not 
capitalized                                 $250,000                 $250,000                        -0-                             $500,000
Legal expense reserve                       $300,000                 ($100,000)                      -0-                             $200,000
Total Line 39                               $550,000                 $150,000                        -0-                             $700,000

Line 40. Total Expense/                        columns (a) through (d), as applicable.               report on Part II, line 27, column (a), ($1 
                                               Report positive amounts as negative and               million). Similarly, if Part III, line 40, 
Deduction Items
                                               negative amounts as positive. For                     column (b), reflects an amount of 
Report on Part II, line 27, columns (a)        example, if Part III, line 40, column (a),            ($50,000), then report on Part II, line 27, 
through (d), as applicable, the negative of    reflects an amount of $1 million, then                column (b), $50,000.
the amounts reported on Part III, line 40, 

Instructions for Schedule M-3 (Form 1120-L) (12-2021)                -23-

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