ANSWER: The Commissioner of Internal Revenue would probably request a full disclosure of the relationship between the two corporations, and he would no doubt direct that the accounts of the foreign and domestic companies be consolidated to the end that the income and capital be equitably distributed as between the foreign corporation and the domestic corporation for the purpose of assessing against the latter its proper income and excessprofits tax. REFERENCE: Sec. 240 (d): "For the purposes of this section a corporation entitled to the benefits of section 262 shall be treated as a foreign corporation: Provided, That in any case of two or more related trades or businesses (whether unincorporated or incorporated and whether organized in the United States or not) owned or controlled directly or indirectly by the same interests, the Commissioner may consolidate the accounts of such related trades and businesses, in any proper case, for the purpose of making an accurate distribution or apportionment of gains, profits, income, deductions, or capital between or among such related trades or businesses." PROBLEM 233 Illustrating Rates of Tax on Domestic Life Insurance Companies FACTS: The New York American Life Insurance Company, organized under the laws of the State of New York, in making up its income-tax return for the calendar year 1921 is in doubt as to what Federal taxes it is subject to. QUESTION: Are life insurance companies subject to (1) income tax, (2) war-profits and excess-profits tax and (3) capital-stock tax? ANSWER: In the calendar year 1921 and all subsequent taxable years, the only Federal tax imposed on life insurance companies is the income tax at the same rate as applies to other corporations subject to that tax. In accordance with section 230 the rate for 1921 is 10%; for 1922 and each subsequent year the rate is 122%. Life insurance companies are exempt from the capitalstock tax and the war-profits and excess-profits taxes. REFERENCE: Sec. 243: "That in lieu of the taxes imposed by sections 230 and 1000 and by Title III, there shall be levied, collected, and paid for the calendar year 1921 and for each taxable year thereafter upon the net income of every life insurance company a tax as follows: (1) In the case of a domestic life insurance company, the same percentage of its net income as is imposed upon other corporations by section 230;. . ." See note under Problem 234. PROBLEM 234 Illustrating Rates of Taxes on Foreign Life Insurance Companies FACTS: The Dublin Life Insurance Company, incorporated under the laws of Great Britain and Ireland, requests its general agent in New York to report as soon as possible what United States taxes it is subject to for the calendar year 1921. The reserve funds of the company, held for the fulfillment of its life insurance and annuity contracts, comprise more than 50% of its total reserve funds. QUESTION: What should the agent report to the company? ANSWER: For the calendar year 1921 the company is subject to an income tax of 10% on its net income from sources within the United States. For the calendar year 1922, and all subsequent years, the rate is 1212%. It is not subject to the capital-stock tax nor excess-profits or war-profits taxes. REFERENCES: Sec. 242. That 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. Sec. 243. "That in lieu of the taxes imposed by sections 230 and 1000 and by Title III, there shall be levied, collected, and paid for the calendar year 1921 and for each taxable year thereafter upon the net income of every life insurance company a tax as follows: . . . (2) In the case of a foreign life insurance company, the same percentage of its net income from sources within the United States as is imposed upon the net income of other corporations by section 230." NOTE: Sec. 1000 relates to the Capital-Stock Tax. Title III imposes the war-profits and excess-profits taxes. This title is in effect only for the calendar year 1921. Sec. 230 imposes a rate of tax of 10% for the calendar year 1921 and 122% for all subsequent years. FACTS: PROBLEM 235 Illustrating Deductions Allowed Life Insurance The Jamaica Life Insurance Company of New York in preparing its income tax return for the calendar year 1921 finds that it has among its assets quite a number of municipal bonds. QUESTION: Is the interest on these bonds taxable? ANSWER: No. The interest received on these bonds must be included in the gross income of life insurance companies, differing in this respect from corporations subject to the tax imposed by section 230, but such interest is deductible in computing net income. REFERENCES: Sec. 244 (a): "That 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 rent." Sec. 245 (a): "That in the case of a life insurance company the term 'net income' means the gross income less-(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; . Sec. 213 (b) (4) (c): (Quoted under Problem 72.) PROBLEM 236 Illustrating Deductions Allowed Life Insurance Companies -Deduction on Account of Reserves FACTS: The Ideal Insurance Company of Hartford, Conn., issuing policies covering life, health and accident insurance combined in the one policy issued for life on the weekly payment plan not subject to cancellation, has drawn up a trial balance as of December 31, 1921, for the purpose of preparing its income-tax return and the question of the deductions allowable on account of the Reserves has come up. The following items appear on the trial balance as of December 31, 1921: $ 150,000 Its balance sheet as of December 31, 1920 shows: Reserve funds required by law Reserve funds not required by law (as above) 100,000 The company has stated the facts to the Commissioner with respect to the reserve fund not required by law, and he has notified them that he is satisfied such reserve is necessary for the protection of the holders of the combined policy described above. QUESTION: What deduction, if any, is allowable on account of the reserves above mentioned? ANSWER: In the case of life insurance companies issuing the combined policy referred to in "Facts" above, only such part of the reserve funds not required by law, as the Commissioner finds to be necessary for the protection of such policy-holders forms the basis for the deduction, in addition to the reserve required by law, which is the only basis for the deduction in the case of life insurance companies not issuing such policy. The excess, if any, of 4% of the mean of the reserves at the beginning and end of the year over the amount of tax free interest received is the deduction allowed on account of such reserves. In this case, the allowable deduction is computed as follows: 4% of $160,000, which is the mean of the reserve account 4% of $112,500, which is the mean of the reserve not $6,400 Amount allowed as a deduction from gross income. ... $ 2,900 REFERENCES: Sec. 245 (a): "That in the case of a life insurance company the term 'net income' means the gross income less. . . . (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;" See Problem 235 for quotation paragraph 1 of subdivision (a) of section 245. Sec. 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 main |