the latter cannot deduct reserves against losses, although the Insurance Commissioner of Pennsylvania may require such reserves under a practice of his office established for many years and relied upon as an administrative interpretation of the law of that state. Corporations 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. may deduct such portion of the net addition (not required by law) made within the taxable year to reserve funds as the Commissioner of Internal Revenue finds to be required for the protection of the holders of such policies only.9

RELEASED Reserves. Where there has been a decrease in reserve funds the amount of the decrease is commonly called released reserve, and is to be treated as income for the year in which the reserve is released.10 Released reserves though not mentioned in express terms in the law have been held to be income and taxable for the year in which released.11

Assessment Insurance Companies. In the case of assessment insurance companies the actual deposit of sums with state or territorial officers pursuant to law as additions to guarantee or reserve funds are included in the term "the net addition required by law to be made within the taxable year to reserve funds.'' 12

Payments on Policy and Annuity Contracts. All insurance companies may deduct the sums, other than dividends, paid within the taxable year on policy and annuity contracts.1 13 Under this item on the return of income may be included all death, disability or other policy claims, including fire, accident and liability losses, matured endow

8 Insurance Company of North America v. McCoach, 218 Fed. 905, reversed 224 Fed. 657, 661, writ of certiorari granted, 241 U. S. 694, reversed 244 U. S. 585; see T. D. 2501.

9 Revenue Act of 1918, § 234 (a) 11.

10 Reg. 33 Rev., Art. 240.

11 Maryland Casualty Co. v. U. S., 52 Ct. Cls. 201; T. D. 2451. 12 Revenue Act of 1918, § 234 (a) 10.

13 Revenue Act of 1918, § 234 (a) 10.

ments, payments on installment policies, surrender values and all claims actually paid under the terms of policy con tracts. There may also be deducted as losses agency balances or other amounts charged off, losses from defalcation, and premium notes voided by lapse provided such notes have at some time been included in returns of income. 14

Mutual Insurance Companies. Under the 1916 Law it was provided that "mutual fire and mutual employers' liability and mutual workmen's compensation and mutual casualty insurance companies requiring their members to make premium deposits to provide for losses and expenses shall not return as income any portion of the premium deposits returned to their policyholders, but shall return as taxable income all income received by them from all other sources plus portions of their premium deposits as are retained by the companies for purposes other than the payment of losses and expenses and reinsurance reserves.' The Revenue Act of 1918 provides 16 that in the case of mutual insurance companies (other than mutual life or mutual marine insurance companies) there shall be allowed in addition to other deductions "the amount of premium deposits returned to their policyholders and the amount of the premium deposits retained for the payment of losses, expenses, and reinsurance reserves. It will thus

15

be noted that in the case of such companies the amount of premium deposits returned to policyholders will not be excluded from gross income, as heretofore, but will be included therein, and taken as a deduction; and this will also be true of such portions of their premium deposits as are retained for the payment of losses, expenses and reinsurance reserves. Under the above quoted provision of the 1916 Law, the Treasury Department prescribed a special form for such companies.17 It was ruled under

14 Reg. 45, Art. 569.

15 Revenue Act of 1916, §.12 (a).

16 Revenue Act of 1918, § 234 (a) 13. 17 This form was known as No. 1030A.

F. T.-16

the 1916 Law as to such insurance companies as stated in the following paragraph.

PROFIT ON SALE OR MATURITY OF LEDGER ASSETS. Under the 1916 Law, the profit or income to be returned in the event of the sale or maturity of capital assets acquired prior to March 1, 1913, was required to be determined upon the basis of the difference between the fair market value of such assets as of that date and the selling price thereof. If the assets were acquired subsequent to March 1, 1913, the loss would be the amount by which the selling price was less than the cost. This profit or income might, for the purpose of the tax, be reduced by the amount of any loss resulting from the same source and ascertained in the same manner. In no event could a loss resulting from the sale or maturity of capital assets exceed the gain within the year from like transactions.18

Mutual Marine Insurance Companies. Mutual marine insurance companies are required to include in gross income the gross premiums collected and received by them less amounts paid for reinsurance, 19 but are entitled to deduct from gross income amounts repaid to policyholders on account of premiums previously paid by them, and interest upon such amounts between the ascertainment and the payment thereof.20 In other respects the companies of this class proceed in the same manner as insurance companies generally.

Life Insurance Companies. Life insurance companies, including stock and mutual companies, do not include in gross income such portion of any actual premium received from any individual policyholder as is paid back or credited to or treated as an abatement of premium of such policyholder within the taxable year.21 In so far as "deferred

18 Reg. 33 Rev., Art. 242.

19 Revenue Act of 1918, § 233 (a) 2.

20 Revenue Act of 1918, § 234 (a) 12; Reg. 45, Art. 569.

21 Revenue Act of 1918, § 233 (a) 1; Reg. 33 Rev., Art. 241. Under the 1909 Law there was much litigation as to whether socalled dividends paid by insurance companies to policyholders as

dividends" payable at a stated period represent "a portion of any actual premium received," they may be omitted from gross income for the year in which they were actually paid back, except that so much of any deferred dividends paid during the tax year to the individual policyholder as exceeds the amount of premiums paid during the same year may not be omitted. Only the actual amount of dividends actually credited or apportioned to a policyholder during the premium-paying period, and not any accretions thereto, can be excluded from gross income. In the case of whole life or five-year distribution policies, deferred dividends may be excluded from gross income to the extent that they are paid back or credited to the insured or used as an abatement of annual premiums.22 Dividends provisionally ascertained, apportioned, or credited on deferred dividend policies cannot be excluded from gross income for the reason that the assured has no vested or enforceable right in them and cannot, at the time of the ascertainment, apportionment, or credit, nor until the maturity of the policy, avail himself of such dividends; and in the event of the death of the assured prior to the expiration of the deferred dividend period, the amount so ascertained, apportioned, or credited lapses.23 Book income of life insurance companies which consists of "dividends applied to purchase paid-up additions and annuities," "dividends applied to pay renewal premiums," and "dividends applied to shorten the endowment or premiumpaying period," shall not be included in gross income except when the dividends applied are declared on paid-up participating policies.23a

a return of a part of the premium were properly deductible. The courts held that the so-called dividends awarded annually to policyholders did not constitute income (Herold v. Mutual Benefit Insurance Co., 201 Fed. 918, affirming 198 Fed. 199) and at the time of the enactment of the 1913 and 1916 Laws the point was expressly covered by substantially the same language as in the present law. 22 Reg. 33, Art. 100.

23 Reg. 33 Rev., Art. 241. 23a Reg. 45, Art. 547.

Supplementary Policy Contracts. Where a life insurance company's policies contain an option to have proceeds paid in annual installments for a given term of years, or during the lifetime of the beneficiary, instead of in one sum, such policies, if the option is exercised, are styled "supplementary policy contracts." These obligations are protected by reserves, the net additions to which are deductible if such reserves are "required by law." The Commissioners of Insurance of all the states require the establishment of a reserve to cover the obligations of the company on such supplementary policy contracts. This fact of itself tends strongly to show that they are required by law,24 but if the action of a commissioner of insurance is based in such cases upon the practice of his office and not upon an express requirement of law, deduction may not be made.25

Payments on Policies. Surrender values applied in any manner, consideration for supplementary contracts, involving and not involving life contingencies, should be included in the gross income of life insurance companies. Applied surrender values and consideration for supplementary contracts not involving life contingencies included in income are deductible as payments under policy contracts, but for convenience in verifying the returns these items should appear in the return in gross income and deductions.26

Mutual Life Insurance Companies. Mutual life insurance companies file the same return as stock companies and are governed by the same rules with respect to computing net income. It has been held that portions of premiums and accretions received by mutual life insurance companies and returned to policyholders may be excluded from gross income for the year in which they are returned, the fact being that in the case of such companies the actual cost

24 Mutual Benefit Ins. Co. v. Herold, 198 Fed. 199, affirmed 201 Fed. 918.

25 See Maryland Casualty Co. v. U. S., 52 Ct. Cls. 201; T. D. 2451. See Note 7.

26 Reg. 33 Rev., Art. 241.