and incurred basis. It is clear, therefore, that under the law they are entitled to deduct the several items included in unpaid losses as "losses" and to allow them also to include these items in reserves the net additions to which may be deducted from gross income in determining the taxable income of such companies, would be in effect to permit them a double deduction, a result which can not be presumed to have been intended by Congress, and which could only be reached under the compulsion of an express provision of the statute.

It is hardly conceivable that insurance companies would intentionally claim a double deduction for losses. It would appear from the Solicitor's Opinion that, while he holds that unpaid losses are not deductible as "reserves," they are deductible as "losses" if a company's books are kept on an accrual basis.

PREMIUM REPAYMENTS BY MUTUAL MARINE INSURANCE COM

PANIES.

LAW. Section 234. (a) (10) In the case of mutual marine Insurance companies, there shall be allowed, in addition to the deductions allowed in paragraphs (1) to (9), inclusive, unless otherwise allowed, amounts repaid to policyholders on account of premiums previously paid by them, and interest paid upon such amounts between the ascertainment and the payment thereof;

REGULATION. Mutual marine insurance companies should include in gross income the gross premiums collected and received by them less amounts paid for reinsurance. (See section 233 and article 549.) They may deduct from gross income amounts repaid to policyholders on account of premiums previously paid by them, together with the interest actually paid upon such amounts between the date of ascertainment and the date of payment thereof. The remainder of the premiums accordingly forms part of the net income of the company, except to the extent that it is subject to the deductions allowed such insurance companies and other corporations. (Art. 570.)

LAW. Section 234. (a) . . . . (11) In the case of mutual insurance companies (including interinsurers and reciprocal underwriters, but not including mutual life or mutual marine insurance companies) requiring their members to make premium deposits to provide for losses and expenses, there shall be allowed, in addition to the deductions allowed in paragraphs (1) to (9), inclusive, unless otherwise allowed, the amount of premium deposits returned to their policyholders and the amount of premium deposits retained for the payment of losses, expenses, and reinsurance reserves.

REGULATION. Mutual insurance companies (including interinsurers and reciprocal underwriters, but not including mutual life and mutual marine insurance companies), which require their members to make premium deposits to provide for losses and expenses, are allowed to deduct from gross income the aggregate amount of premium deposits returned to their policyholders or retained for the payment of losses, expenses, and reinsurance reserves. In determining the amount of

premium deposits retained by a mutual fire or mutual casualty insurance company for the payment of losses, expenses, and reinsurance reserves, it will be presumed that losses and expenses have been paid out of earnings and profits other than premiums to the extent of such earnings and profits. If, however, any portion of such amount is applied during the taxable year to the payment of losses, expenses, or reinsurance reserves, for which a separate allowance is taken, then such portion is not deductible; and if any portion of such amount for which an allowance is taken is subsequently applied to the payment of expenses, losses, or reinsurance reserves, then such payment can not be separately deducted. The amount of premium deposits retained for the payment of expenses and losses, and the amount of such expenses and losses, may not both be deducted. A company which invests part of the premium deposits so retained by it in interest-bearing securities may nevertheless deduct such part but not the interest received on such securities. A mutual fire insurance company which has a guaranty capital is taxed like other mutual fire insurance companies. A stock fire insurance company, operated on the mutual plan to the extent of paying dividends to certain classes of policyholders, may make a return on the same basis as a mutual fire insurance company with respect to its business conducted on the mutual plan. (Art. 571.)

RULINGS. In determining the amount of premium deposits retained by a mutual fire or mutual casualty insurance company for the payment of losses, expenses and reinsurance reserves, it is to be presumed that losses and expenses have been paid out of earnings and profits, other than premiums to the extent of such earnings and profits. Office Decision 403 (Bulletin 7-20) overruled. . . . . (C. B. 3, 279; L. O. 1050.)

The M Company is held to be a mutual insurance company requiring its members to make premium deposits to provide for losses and expenses, and the amount of such premium deposits retained for the payment of losses, expenses, and reinsurance reserves is deductible from gross income, under the provisions of section 214 (a-13) of the Revenue Act of 1918. The small amount of income received from policies written to nonmembers is not considered material in this case, as it is clear that the gain derived from policies written to nonmembers plus income from interest and gains on investments did not exceed the expenses during the taxable years involved. (C. B. III-1, 294; A. R. R. 7939.)

The term "premium deposit" as used in section 12 (a) of the Revenue Act of 1916 and section 234 (a) 13 of the Revenue Act of 1918 does not necessarily involve in all cases a return to the policyholder of a portion of the unexpended premium. The necessity of such a return depends upon whether a balance remains from the unexpended premium after the retention by the insurance company of an amount reasonably necessary for the payment of losses, expenses, and reinsurance reserves. (C.B. I-1, 287; Sol, Op. 141.)

Where the members of a mutual fire insurance company are required to deposit with the company promissory notes, guaranteed by a mortgage on the property insured, and assessments based upon the amount of such notes are levied after losses have been sustained, the assessments so made to meet the losses are held not to be premium deposits, (C. B. I-1, 286; A. R. R. 882.)

Insurance Companies Which Are Exempt

Mutual insurance companies which conform to certain specified requirements are exempt from taxation. (See Chapter 2.)

Returns of Insurance Companies

REGULATION. Insurance companies transacting business in the United States or deriving any income from sources therein are required to file returns of income. The return shall be on Form 1120, except that life insurance companies shall make return on Form 1120 L. As an aid in auditing the returns, wherever possible a copy of the report to the State insurance department shall be submitted with the return. Otherwise a copy of Schedule D, parts 1, 3, and 4, of the report should be attached to the return, showing the Federal, State, and municipal obligations from which the interest omitted from gross income was derived, and a copy of the complete report should be furnished as soon as ready for filing. (Art. 623.)

Net Losses

The provision of the law (section 206; see page 893 et seq.) whereby taxpayers may deduct net losses (as defined in the statute), resulting from the operation of their regular trade or business from the net income of the succeeding taxable year, and from the second succeeding taxable year, if necessary, is applicable to all insurance companies.

It is now generally recognized that accurate accounting for the income and expenses incident to the business of farming is practicable. It has its peculiar difficulties, admittedly and if experience should show that our farmers are unable or unwilling to keep the books essential to a precise determination of net income, it may become necessary to adopt some rough approximation such as that used in Great Britain where taxable income is assumed to have a definite relation to the rental value of the farm.

In at least one respect the farmer stands in a relatively favorable position with respect to the income tax. To the extent that he is not required to return as income that part of his crops which is consumed as food by himself and his family, he receives an allowance for living expenses not allowed other classes of taxpayers.

The gain arising from the sale of farms is taxable. If title has not changed within two years, immediately prior to the sale, the gain will be subject to the maximum rate of 122 per cent imposed upon capital gains. Such crops as form part of the sale should not be included among capital assets.

1 For details of a system see the Magazine of Wall Street for January 24, 1920, pages 392-393. A bibliography on farm accounting will be found in Accountant's Index, 1921, pages 46-53, 787, 788.

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Definition of "farm."

REGULATION. . . . . As herein used the term "farm" embraces the farm in the ordinarily accepted sense, and includes stock, dairy, poultry, fruit, and truck farms, also plantations, ranches, and all land used for farming operations. All individuals, partnerships, or corporations that cultivate, operate, or manage farms for gain or profit, either as owners or tenants, are designated farmers. . . . . (Art. 38.)

"Gentlemen" farmers.

REGULATIONS. .... A person cultivating or operating a farm for recreation or pleasure, the result of which is a continual loss from year to year, is not regarded as a farmer. . . . . (Art. 38.)

If an individual owns and operates a farm, in addition to being engaged in another trade, business, or calling, and sustains a loss from such operation of the farm, then the amount of loss sustained may be deducted from gross income received from all sources, provided the farm is not operated for recreation or pleasure. . . . . (Art. 145.)

If a farm is operated for recreation or pleasure and not on a commercial basis, and if the expenses incurred in connection with the farm are in excess of the receipts therefrom, the entire receipts from the sale of products may be ignored in rendering a return of income, and the expenses incurred, being regarded as personal expenses, will not constitute allowable deductions. (Art. 111.)

It may be inferred from the foregoing that if a person makes a profit out of operating a farm he is a farmer.

The Treasury's position is as follows:

RULING. It is held that where a farm is operated on a basis other than the recognized principles of commercial farming, such a farm is not to be classed as a commercial enterprise, inasmuch as it does not form a part of the owner's business or trade, and until it is placed upon a profit-paying basis the gross receipts are not to be reported under "gross income" and the expenses are not to be claimed as a deduction. (Extract from letter to a taxpayer, February 9, 1920.)

The regulations are quite right in refusing to allow losses unless it can be shown that a farm is operated as if it were a transaction undertaken for profit. If a taxpayer conducts the farm or estate chiefly for recreation or pleasure, and not as he would conduct a business for profit, the loss, if any, is apparent only. The deficit. is a family, personal or living expense. But if a taxpayer in good faith embarks in the farming business and loses money during one or

Cotton planters are considered as farmers even though they own cotton gins. (Letter to Hon. B. G. Humphreys, dated August 30, 1923.)