$500 to the beneficiary in case of accidental death. The no age limit policy carries no provision for burial or death benefits. Two other policies, designated regular and special, provided indemnity for discharge, permanent disability, or retirement, dependent upon the length of time the policy had been in force, with no provision for funeral or death benefits. The last policy, designated funeral benefit policy, provided solely for the payment of $500 upon the death of the insured.

All of the policies, except the regular, provided that the premium is based on an annual payment of a stated amount payable in advance. The regular policy provides for the premium to be paid monthly. The record discloses the following additional facts:

All the policies are noncancelable by the petitioner and the insured can keep the policy in force simply by paying the premiums fixed in the policies.

All the policies issued by the petitioner are issued upon the "level premium plan," that is, the premium is in a constant and fixed amount which can not be increased by the petitioner during the life of the policy.

Before and during the taxable years here in controversy the petitioner maintained reserves set aside from the premiums collected, which were held exclusively against its unaccrued and contingent liability for either the death benefit or retirement benefit payable under the policies in force during such years. The retirement reserves and the death benefit reserves were separately maintained. The petitioner maintains no reserve for discharge benefits payable under the various policies.

The types of policies, the number of each type outstanding, and the death and retirement reserves established for each as of December 31 for each of the years 1937, 1938, and 1939, were as follows:

206,371 2,243, 883

Reserve for accidental death under those of above policies which provide for additional benefits in event of accidental death.

3,500

Total reserves....

2, 453,754

Reserve for accidental death under those of above policies which provide for additional benefits in event of accidental death.

Total reserves....

225, 592.00 2,204, 195. 49

4, 158.75

2,433, 946. 24

257,393 2,273, 167

4,406

Reserve for accidental death under those of above policies which provide for additional benefits in event of accidental death..

Total reserves...

2,534,966

Prior to 1937 the petitioner computed the reserves set up and maintained by it against the liability for retirement and death benefits under the issued and outstanding policies on the basis of the American Experience Table of Mortality, with an assumed rate of interest of 4 per cent. The reserve used on the retirement feature of the policies was computed in the same manner as a pure endowment reserve maturing at the age of 70 for the amount of the retirement benefit payable under each individual contract at that age. The death benefit (life) reserve was considered a yearly renewable term insurance and was computed and established on that basis.

In 1937 the Railroad Retirement Act (Title 45, U. S. C. A., ch. 9) was amended so as to allow railroad employees to retire on full benefits

at the age of 65 instead of at age 70, as had been the previous retirement age. The petitioner then caused a detailed study to be made of its experience and that of its predecessor which covered the years 1907 to 1937. This 30 years' experience covered approximately 52,000 years of exposure (i. e., the operations for one year of 52,000 policies). From this investigation a table of mortality was compiled setting forth the probability of any railroad man at any given age being discharged, retired, dying, or permitting his policy to lapse in a given year at that age. In compiling this table, the reserves used on the retirement and life insurance features of the policies were computed in the same manner as pure endowment reserves maturing at the age of 65 for the amount of the retirement or life insurance benefits payable under each individual contract at that age. This table also assumed an interest rate of 4 per cent.

The table of mortality used by the petitioner was compiled in accordance with proper actuarial practice. The data upon which it was based were sufficiently comprehensive to permit substantially correct conclusions to be reached.

It was proper for the petitioner to use its own table of mortality, since, owing to the unique character of its business, there was no standard table which would meet the petitioner's needs.

On March 4, 1938, the petitioner addressed a letter to the Department of Insurance of the State of Michigan, requesting an opinion as to the necessity of maintaining the reserves heretofore mentioned. On March 7, 1938, the Department of Insurance of the State of Michigan replied by letter reading, in part, as follows:

Altho no specific provision is made in this section [the section of the Michigan statutes under which the petitioner was organized] for the maintenance of reserves on business of the type you write, this department would not allow your company to operate unless provision was made for adequate reserves.

It can be stated in no uncertain terms that reserves must be built up and maintained if your company is to remain solvent.

On its returns for 1938 and 1939 the petitioner claimed as deductions 4 per cent of the mean amounts in the reserves. These deductions were disallowed by the respondent.

OPINION.

VAN FOSSAN, Judge: The only question for our determination is whether or not the amounts placed by the petitioner in its reserves during the taxable years here in controversy constitute "unearned premiums" within the meaning of section 204 (b) (5) of the Revenue Act

of 1938 and the Internal Revenue Code. The pertinent provisions of the statutes are set forth in the margin.1

As a prefatory note, it may be stated that there is no contention that the petitioner is a life insurance company, taxable as such under section 201 of the applicable act and the code. That question was decided adversely to the petitioner in proceedings before the Board of Tax Appeals, reported at 45 B. T. A. 365, and the petitioner does not now question the soundness of that decision.

A brief review of the salient facts may be of aid in presenting the issue raised. The petitioner was organized to provide job insurance for railway employees. The principal features of the polices were their retirement and discharge provisions, although some of them also contained provisions for death and disability benefits. The policies were all noncancelable and were issued upon the level premium basis; that is, the insured could keep the polices in force simply by paying the premiums and the amount of the premiums could not be changed by the petitioner during the life of the policy. Both before and during the years here in question the petitioner maintained reserves set aside from the premiums collected which were held exclusively against its unsecured and contingent liabilities for either the death benefits or retirement benefits, payable under the policies in force during such years. On its returns for 1938 and 1939 the petitioner claimed 4 per cent of the mean of these reserves as deductions from gross income. These deductions were disallowed by the respondent.

The respondent contends that as used in the statute the term "unearned premiums" means premiums collected for insurance in advance for periods which fall in the succeeding year; that such amounts have already been allowed the petitioner as deductions; and that it is not entitled to the further deductions it now seeks.

The petitioner contends that, in addition to the amounts allowed by the respondent, there must also be included in unearned premiums that portion of the premiums over and above the actual costs of the insurance for the period for which the premiums are paid which represents the amount which must be set aside in order to meet the excess of claims in later years over the level premium then collected.

SEC. 204. INSURANCE COMPANIES OTHER THAN LIFE OR MUTUAL.

(b) DEFINITION OF INCOME, ETC.-In case of an insurance company subject to the tax imposed by this section

(4) UNDERWRITING INCOME." Underwriting income" means the premiums earned on insurance contracts during the taxable year less losses incurred and expenses incurred; (5) PREMIUMS EARNED." Premiums earned on insurance contracts during the taxable year means an amount computed as follows:

From the amount of gross premiums written on insurance contracts during the taxable year, deduct return premiums and premiums paid for reinsurance. To the result so obtained add unearned premiums on outstanding business at the end of the preceding taxable year and deduct unearned premiums on outstanding business at the end of the taxable year.

The petitioner relies upon Massachusetts Protective Association, Inc. v. United States, 114 Fed. (2d) 304. In that case the petitioner engaged in the business of writing level premium noncancelable health and accident polices. The taxpayer maintained a reserve “to meet the additional hazards on noncancellable health and accident policies due to the fact that the premiums must remain constant while the risk and cost inevitably increase." In its returns the taxpayer sought to adjust its gross income by the net change during the year in its reserve under section 246 (b) (5) of the Revenue Act of 1926, which, for present purposes, is identical with the section with which we are here concerned. The court held the taxpayer entitled to the deduction it sought, saying that the addition to the reserve fund constituted a part of the "unearned premiums" within the meaning of the statute. In its opinion, the court said:

In a non-cancellable health and accident policy the premium remains level throughout the life of the policy even though the risk insured against increases with the age of the insured and even though the claim costs in the later years of the policy are, therefore, correspondingly greater than those of the earlier years. It follows, therefore, that in each of the earlier years of a non-cancellable policy the net annual premium collected exceeds the cost of the insurance for those years, while in each of the later years, the cost exceeds the net annual premium. Therefore, the additional reserve for non-cancellable health and accident policies is set up and used to supplement the net annual premiums of such policies in the later years to the extent that the prospective cost in those years exceeds the net annual premiums. Equitable Life Assurance Society v. Commissioner, 1935, 33 B. T. A. 708.

As long as these reserve funds must be held to provide for expected insurance liabilities in the future on these non-cancellable health and accident polices and are not to be used for the general purposes of the company, they are not "earned premiums" within the meaning of Congress and not includible in gross income.

The respondent seeks to distinguish the Massachusetts Protective Association, Inc. case, and other cases cited by the petitioner, from the case at bar on the ground that in those cases the company involved wrote contracts containing almost exclusively life or health and accident features, whereas the policies here were predominantly retirement policies. If we accept this as a correct statement, however, we do not think that such a distinction has substance. Whether or not the amounts in the reserve constitute unearned premiums is not to be determined solely by reference to the type of policies issued, but primarily by the nature of the reserve and the purpose for which it is maintained.

We perceive no essential difference between the reserves maintained in the instant case and that maintained in the case cited above. The reserves maintained for the death benefits under the petitioner's policies are clearly of the same type as those used in the Massachusetts