an Ohio partnership, on behalf of the partnership has been held to be invalid. (C. B. III-2, 302; S. M. 2531.)

Since the Solicitor's reason for directing the refusal of waivers is apparently that such waivers would not be binding on the heirs, the difficulty would probably be removed if all persons interested in the estate (provided each is competent) join in the execution of the waiver.

For a discussion of the giving of waivers in general, see Volume II, page 74 et seq.

The problem of taxing insurance companies in an equitable manner has given the Treasury and Congress much concern.1 The law places such companies in a special class. Sections 243-245 define the taxable income of life insurance companies, and sections 246-247 2 define the taxable income of insurance companies other than life or mutual insurance companies. With the exception of those companies which are entirely exempt under section 231 (10), mutual insurance companies are taxable under sections 232-236 which define the taxable income of ordinary corporations. The last named sections, however, contain certain provisions applicable specifically to mutual insurance companies.

Insurance companies defined.

REGULATION. Insurance companies include both stock and mutual companies, as well as mutual benefit insurance companies. A voluntary

1 For a brief account of the attempt made in 1918 to establish a new method of taxing insurance companies, see Income Tax Procedure, 1922, page 1377:

2 [Former Procedure] See Income Tax Procedure, 1926, page 1758.

unincorporated association of employees formed for the purpose of relieving sick and aged members and the dependents of deceased members is an insurance company, whether the fund for such purpose is created wholly by membership dues or partly by contributions from the employer. A corporation which merely sets aside a fund for the insurance of its employees is not required to file a separate return for such fund, but the income therefrom shall be included in the return of the corporation. (Art. 1508.)

To facilitate consideration of the law and regulations pertaining to the different classes of insurance companies, this chapter is divided into the following sections:

1. Life insurance companies.

2. Insurance companies other than life and mutual companies. 3. Mutual insurance companies.

4. Exempt insurance companies.

Life Insurance Companies

Definition of life insurance company.—

LAW. Section 242. When used in this title the term "life insurance company" means an insurance company engaged in the business of issuing life insurance and annuity contracts (including contracts of combined life, health, and accident insurance), the reserve funds of which held for the fulfillment of such contracts comprise more than 50 per centum of its total reserve funds.

Rates of tax.3

LAW. Section 243. In lieu of the tax imposed by section 230, there shall be levied, collected, and paid for each taxable year upon the net income of every life insurance company a tax as follows:

(1) In the case of a domestic life insurance company, 121⁄2 per centum of its net income;

(2) In the case of a foreign life insurance company, 121⁄2 per centum of its net income from sources within the United States.

REGULATION. Life insurance companies, as defined in section 242, are subject to the tax imposed by section 243, in lieu of the taxes imposed by section 230. The rate for 1925 and for subsequent years is 121⁄2 per cent, and the net income upon which the tax is imposed differs from the net income of other corporations. Insurance companies are entitled to the benefit of section 206 (net losses) but not of section 208 (capital gains and losses). All provisions of the statute and of these regulations not inconsistent with the specific provisions of sections 242 to 245, inclusive, are applicable to the assessment and collection of this tax, and life insurance companies are subject to the same penalties as are provided

[Former Procedure] See Income Tax Procedure, 1926, page 1759.

in the case of returns and payment of income tax by other corporations. In determining whether an insurance company is a "life insurance company" as defined in section 242, no reserve shall be regarded as held for the fulfillment of life insurance and annuity contracts unless the company is entitled to a deduction from gross income on account thereof under the provisions of section 245 (a) (2) and article 681. As to foreign companies, see section 245 (c) and article 687. (Art. 661.)

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Gross income defined. No part of premiums received from the assured is to be included in gross income.

LAW. Section 244. (a) In the case of a life insurance company the term "gross income" means the gross amount of income received during the taxable year from interest, dividends, and rents. . . .

Net income defined.

REGULATION. Net income in the case of life insurance companies is gross income from interest, dividends, and rents less the deductions allowed by section 245. Gross income comprises items 25-34, inclusive, of the income page of the annual statement for life companies (edition of 1920) adopted by the National Convention of Insurance Commissioners and items 23-30, inclusive, of the income page of the annual statement for miscellaneous stock companies if any other branches of the insurance business are conducted by the company; except that the rental value of the space occupied by the company in its own building or buildings if included in gross income shall be determined according to the provisions of section 245 (b) and article 686. As to "reserve funds required by law," see article 681. (Art. 671.)

Deductions.-The deductions allowed take into consideration conditions peculiar to insurance companies, particularly conditions imposed by state laws. It will be noted among other things that no deduction is provided by the law for losses on investments, though on the other hand gains realized from sale of securities are not required to be reported as gross income.

EXEMPT INTEREST.

LAW. Section 245. (a) .... (1) The amount of interest received during the taxable year which under paragraph (4) of subdivision (b) of section 213 is exempt from taxation under this title; ...

The interest referred to includes that on United States obligations and those of states, municipalities, etc. (See Chapters 12 and 24.) RESERVE FUND EARNING ALLOWANCE.

LAW. Section 245. (a) ... (2) An amount equal to the excess, if any, over the deduction specified in paragraph (1) of this subdivision,

of 4 per centum of the mean of the reserve funds required by law and held at the beginning and end of the taxable year, plus (in case of life insurance companies issuing policies covering life, health, and accident insurance combined in one policy issued on the weekly premium payment plan, continuing for life and not subject to cancellation) 4 per centum of the mean of such reserve funds (not required by law) held at the beginning and end of the taxable year, as the Commissioner finds to be necessary for the protection of the holders of such policies only; . . . .

The definition of "reserve funds required by law" is given below:

LAW. Section 244. (b) The term "reserve funds required by law" includes, in the case of assessment insurance, sums actually deposited by any company or association with State or Territorial officers pursuant to law as guaranty or reserve funds, and any funds maintained under the charter of articles of incorporation of the company or association exclusively for the payment of claims arising under certificates of membership or policies issued upon the assessment plan and not subject to any other use.

The effect of the deductions referred to in subdivisions (1) and (2) of section 245 (a), is to permit all life insurance companies to deduct 4 per cent of the year's average reserves required by law, and to permit certain companies in addition to deduct 4 per cent of the mean of certain other reserves not required by law, at the discretion of the Commissioner.

REGULATIONS. Under paragraphs (1) and (2) of section 245 (a), life insurance companies are entitled to deduct from gross income:

(1) Interest which is exempted in the case of other taxpayers by section 213 (b) (4) and articles 74-82; and

(2) The excess, if any, of the reserve deduction specified in section 245 (a) (2) over the amount of such interest. The reserve deduction is based upon the reserves required by express statutory provisions or by the rules and regulations of the State insurance departments when promulgated in the exercise of a power conferred by statute; but such reserves do not include assets required to be held for the ordinary running expenses of the business nor do they include the reserve or net value of risks reinsured in other solvent companies to the extent of the reinsurance.

In the case of life insurance companies issuing policies covering life, health, and accident insurance combined in one policy issued on the weekly premium payment plan, continuing for life and not subject to cancellation, it is required that reserves thereon be based upon recognized tables of experience covering disability benefits of the kind contained in policies issued by this particular class of companies. Reserves maintained to provide for the ordinary running expense of a business, definite in amount, and which must be currently paid by every company from its income if its business is to continue, such as taxes, salaries, reinsurance, and unpaid brokerage will not be considered. A company is permitted to make use of the highest aggregate reserve called for by