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return showing the names of customers with such details as to profits, losses or other information which the Commissioner may require, as to each of such customers, as will enable the Commissioner of Internal Revenue to determine whether all income tax due on profits or gains of such customers has been paid. This report is for the purpose of information at the source and is more fully covered in the chapter on that subject. 90

SPECIAL REPORT OF UNDISTRIBUTED PROFITS AND NAMES OF SHAREHOLDERS. When a corporation has permitted its gains and profits to accumulate and become surplus to such an extent that the Secretary of the Treasury certifies that in his opinion such accumulation is unreasonable for the purpose of the business it may be required by the Commissioner of Internal Revenue or any collector to file a correct statement of such gains and profits and the names and addresses of the individuals or shareholders who would be entitled to the same if divided or distributed.91 This return is required under that provision of the 1916 Law which is intended to prevent the creation or use of corporations for the purpose of fraudulently preventing the imposition of the supertaxes, through the medium of permitting the gains and profits to accumulate instead of being divided or distributed. The fact that a corporation is a mere holding company or that the gains and profits are permitted to accumulate beyond the reasonable needs of the business are prima facie evidence of a fraudulent purpose to escape such tax, but the Secretary of the Treasury must first certify that in his opinion such accumulation is unreasonable for the purposes of the business. When the accumulation has been so certified to be unreasonable the respective stockholders will be required to include in their personal returns the share of such profits to which they would be entitled if they were divided and distributed.

90 See Chapter 40. 91 Act of September 8, 1916, § 3.

Withholding the Tax at the Source. No withholding takes place on payment of income to domestic corporations. Such corporations are required to withhold the tax on payments of fixed or determinable annual or periodical income to non-resident aliens, and on payments of bond interest and dividends to non-resident foreign corporations as indicated in the chapter on collection at the source.

92

92 See Chapter 41.

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In the case of insurance companies, both domestic and foreign, certain special provisions govern the reporting of income and the making of deductions. In general domestic insurance companies are subject to the same provisions as other domestic corporations and foreign insurance companies are subject to the same provisions as other foreign corporations. The foregoing chapter should be consulted as to the general provisions relating to corporations and the following chapter should be consulted as to the special provisions applicable to foreign corporations. Two special forms for making the return of annual net income are provided for insurance companies, one to be used by mutual insurance companies other than mutual life and mutual marine, and the other to be used by all other insurance companies including mutual life and mutual marine.

Gross Income. The gross income of insurance companies consists of the total revenue derived from the operation of the business including income, gains and profits from all other sources, except as modified by the express exemptions in the statute. The statements on the return of annual net income should conform with the reports of the same years made to the state insurance

1 Act of September 8, 1916, § 12.

departments. Reinsurance and return premiums should not be included in the gross income or deductions of an insurance company.

Expenses. The same allowance for expenses is permitted as in the case of other corporations. Insurance companies will be permitted to add to expenses, in lieu of depreciation of furniture and fixtures, the actual cost of repairs, replacements and renewals on such furniture, as is reported to the state insurance department, provided that in the case of an original investment, the cost thereof shall be charged to the capital account.

Deduction of Net Addition to Reserve Funds. In the case of all insurance companies, the net addition, if any, required by law to be made within the year to reserve funds may be deducted. The net addition may be based upon the highest authorized reserve required by the statutes of any state in which the company does business, but having adopted the requirements of one state the company cannot base its reserve upon the requirements of another state for subsequent years.2 Legal reserve funds are those sums required by state laws to be maintained by an insurance company to secure its liabilities upon policies written. They are accumulated out of the income of the company and are in reality simply its invested assets, approved securities sufficient in amount to meet its liabilities. This reserve is not intended to cover the company's liability with respect to the insurance written, but is a fund providing against loss in case the company should go out of business. It does not secure all the creditors or claimants of the company. The computation of the amount is ascertained upon a hypothetical basis, and the rules governing it are arbitrary. The laws of the states, probably without exception, require the maintenance of this reserve and the insurance companies for years have recognized the wisdom of its existence.

2 T. D. 1727.

Loss and unpaid liability claims afford an exact basis for computation, and the reserves maintained cover the liability therefor. The state statutes most generally require the maintenance of a reserve to cover each class of this particular kind of insurance, but an insurance company cannot expand this privileged deduction to include all liabilities. Unpaid taxes, unpaid salaries, brokerage, and agents' commissions are current expenses; they are essential items of expense in the daily, monthly, and yearly conduct of the company's business; the amount and date of payment is fixed and determined; they depend for liquidation solely upon the company's earning capacity as the business progresses. Apparently no state law requires the maintenance of a reserve to secure these payments. A permanent reserve for taxes is not necessary or required by law, and they are not properly included in the net additions required by law to reserve funds. The income tax law specifically limits the deductions to sums required by law, not such reservations as business prudence may suggest, and the express provisions of the law fix the determining basis.

RESERVES REQUIRED BY LAW. Only those reserves which are “required by law” may be deducted. Under the laws of Pennsylvania reserves against unpaid losses are required by law of casualty companies, but not of fire and marine insurance companies. Hence, the latter cannot deduct reserves against losses, although the In

8 Maryland Casualty Co. v. U. S., Court of Claims, T. D. 2451.

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