tained under the charter or 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." FACTS: PROBLEM 237 Illustrating Deductions Allowed Life Insurance The Star Life Insurance Company of Newark, New Jersey, holds in its investment account: 200 Shares of the Porto Rico Sugar Company. 100 Shares of the British American Trading Company of London, England. Neither of these companies has ever derived any income from sources within the United States. During its taxable year 1921, the insurance company received dividends on the stock held in both companies. QUESTION: Are the dividends above mentioned a proper deduction from gross income? ANSWER: No, for they are received from foreign corporations which have derived no income from sources within the United States. REFERENCE: the Sec. 245 (a): "That in the case of a life insurance company, term 'net income' means the gross income less. . . . (3) The amount received as dividends (a) from a domestic corporation other than a corporation entitled to the benefits of section 262, or (b) from any foreign corporation when it is shown to the satisfaction of the Commissioner that more than 50 per centum of the gross income of such foreign corporation for the three-year period ending with the close of its taxable year preceding the declaration of such dividends (or for such part of such period as the foreign corporation has been in existence) was derived from sources within the United States as determined under section 217;" PROBLEM 238 Illustrating Deductions Allowed Life Insurance Companies -Reserve for Dividends FACTS: The All American Life Insurance Company of Brooklyn, N. Y. up to the year 1906 issued life insurance policies the dividends upon which were deferred for from 5 to 20 years. After 1906, no other policies of this nature were written by the company. On Dec. 31, 1921, the close of its taxable year, there was carried on its books a "Reserve for Dividend Payments" in the amount of $105,000 of which $25,000 was payable during the calendar year 1922. QUESTION: May any part of this reserve be deducted from the company's gross income? ANSWER: Yes, 2% of the reserve after deducting the payments due for the following year; i. e., 2% of, ($105,000-$25,000), or $1,600 is deductible from gross income. REFERENCE: Sec. 245 (a): "That in the case of a life insurance company, the term 'net income' means the gross income less. . . . (4) An amount equal to 2 per centum of any sums held at the end of the taxable year as a reserve for dividends (other than dividends payable during the year following the taxable year) the payment of which is deferred for a period of not less than five years from the date of the policy contract;" PROBLEM 239 Illustrating Deductions Allowed Life Insurance Companies -Investment Expenses FACTS: The Hartford Life Insurance Company of Connecticut main tains an office in Kansas City, Missouri, for the express purpose of investing part of its funds in loans on farms located in the surrounding country. The expenses of this office for the taxable year 1921, including rent, salaries, legal fees, etc., were $25,000. A similar office is maintained in New York City for investment in bonds, etc., in charge of a vice president of the company. The expenses of this office for salaries, rent, brokers' commissions, etc., were $37,000. Balance sheets of the company as at the beginning and end of the year 1921, showed book values of its invested assets of $4,700,000 and $5,200,000 respectively. QUESTION: What part, if any, of the expense of maintaining these offices is deductible? ANSWER: Such investment expenses are deductible but to an amount not in excess of 4 of 1% of the average at the beginning and end of the taxable year of the invested assets of the company. In this case the allowable deduction is computed as follows: Book value of invested assets at beginning of year ... $4,700,000 Book value of invested assets at end of year Total ..... 14 of 1% of average $12,375 allowable deduction. REFERENCE: 5,200,000 $9,900,000 4,950,000 Sec. 245 (a): "That in the case of a life insurance company the term 'net income' means the gross income less ... (5) Învestment expenses paid during the taxable year: Provided, That if any general expenses are in part assigned to or included in the investment expenses, the total deduction under this paragraph shall not exceed one-fourth of 1 per centum of the book value of the mean of the invested assets held at the beginning and end of the taxable year;" PROBLEM 240 Illustrating Deductions Allowed Life Insurance CompaniesTaxes FACTS: During the year 1920, the Puritan Life Insurance Company of Rhode Island had to take over several parcels of real estate on account of bad loans. During 1921 it paid city and county taxes on this real estate amounting to $1,200. No part of these taxes was for local benefits and no part of the real estate was occupied by the company. QUESTION: Are these taxes allowable deductions? ANSWER: Yes, as they were for taxes not assessed against local benefits and the real estate on account of which the taxes were paid was not occupied in whole or in part by the company. REFERENCE: Sec. 245 (a): "That in the case of a life insurance company the term 'net income' means the gross income less ... (6) taxes and other expenses paid during the taxable year exclusively upon or with respect to the real estate owned by the company, not including taxes assessed against local benefits of a kind tending to increase the value of the property assessed, and not including any amount paid out for new buildings, or for permanent improvements or betterments made to increase the value of any property. The deduction allowed by this paragraph shall be allowed in the case of taxes imposed upon a shareholder or member of a company upon his interest as shareholder or member, which are paid by the company without reimbursement from the shareholder or member, but in such cases no deduction shall be allowed the shareholder or member for the amount of such taxes:" See Problem 242 for illustration of limitation of deduction for taxes paid on real estate owned and occupied in whole or in part by the company. PROBLEM 241 Illustrating Deductions Allowed Life Insurance Companies -Depreciation, Specific Exemption FACTS: The Royal Life Insurance Company of Delaware, Maryland, in preparing its Federal income tax return for the calendar year 1921, requested information as to whether life insurance companies were to treat the following deductions the same as domestic corporations subject to tax: (1) Depreciation. (2) Specific exemption allowed. QUESTION: Are depreciation, and the specific exemption of $2,000 for domestic corporations having a net income of less than $25,000 to be treated in a different manner by life insurance companies than by corporations subject to the tax imposed by section 230? ANSWER: The method of computing depreciation is the same, except that on real estate owned by a life insurance company that is occupied in whole or in part by such company, no deduction for depreciation of such property is allowed unless the rental value of the space so occupied is included in gross income. (See Problem 242 for illustration of such inclusion). In the case of life insurance companies having a net income of less than $25,000, the specific exemption of $2,000 is to be taken as a deduction from gross income, instead of a credit against net income subject to the income tax. REFERENCE: Sec. 245 (a): "That in the case of a life insurance company the term 'net income' means the gross income less. . . . (7) A reasonable allowance for the exhaustion, wear and tear of property, including a reasonable allowance for obsolescence. In the case of property acquired before March 1, 1913, this deduction shall be computed upon the basis of its fair market price or value as of March |