1, 1913; . . . (9) In the case of a domestic life insurance company, the net income of which (computed without the benefit of this paragraph) is $25,000 or less, the sum of $2,000; but if the net income is more than $25,000 the tax imposed by section 243 shall not exceed the tax which would be payable if the $2,000 credit were allowed, plus the amount of the net income in excess of $25,000. (b) No deduction shall be made under1 paragraphs (6) and (7) of subdivision (a) on account of any real estate owned and occupied in whole or in part by a life insurance company unless there is included in the return of gross income the rental value of the space so occupied. Such rental value shall be not less than a sum which in addition to any rents received from other tenants shall provide a net income (after deducting taxes, depreciation, and all other expenses) at the rate of 4 per centum per annum of the book value at the end of the taxable year of the real estate so owned or occupied." PROBLEM 242 Illustrating Deductions Allowed Life Insurance Companies -Taxes and Depreciation on Property Owned and Occupied in Part FACTS: The Fidelity Life Insurance Company of Newark, N. J. purchased an eight-story office building in December, 1914, for $2,000,000; the company located its main offices in this building. During the calendar year 1921 the company occupied only three floors and rented the remaining five floors of the building at an annual rental of $120,000. In 1921 the taxes on this building were $20,000, and operating expenses were $75,000. The building was estimated to have a life of fifty years from date of purchase; accordingly depreciation at the rate of 2% per annum on cost was written off each year on account of this building. No improvements have been made since that date. QUESTION: Is the company allowed a deduction from its gross income for such taxes and for depreciation on the building? 1 Paragraphs 6 and 7 refer to the deduction of taxes and depreciation, ANSWER: The company is allowed deduction from gross income on account of the taxes paid and on account of the depreciation of the building only if there is included in gross income the rental value of the space so occupied, which rental values, however, shall not be less than a sum which in addition to any rents received from other tenants shall provide a net income (after deducting taxes, depreciation, and all other expenses) at the rate of 4% per annum of the book value at the end of the taxable year in question. On the basis of the rents received from the five floors not occupied by the company, the rental value of the three floors occupied by the company amounts to $72,000. However, this value is less than the minimum rental value prescribed by the statute. The following shows the computation of this minimum rental value. Cost of building Depreciation (7 years at $40,000 per year). $2,000,000 Book value of building, December 31, 1921. $1,720,000 REFERENCE: Sec. 245 (b): (Quoted under Problem 242.) $ 68,800 75,000 20,000 40,000 $203,800 120,000 $ 83,800 PROBLEM 243 Illustrating Taxable Net Income of Foreign Life Insurance Companies FACTS: At the request of its general agent in New York, the London and Globe Life Insurance Company, Ltd., of London, England, has forwarded the following information to him for the United States income tax purposes: Total net income for the calendar year 1921 from all sources ... Total reserve funds as at December 31, 1921 $ 840,000 ... 3,500,000 Reserve funds at December 31, 1921 required by law upon business transacted within the United States. 1,000,000 Sec. 245 (c): "In the case of a foreign life insurance company the amount of its net income for any taxable year from sources within the United States shall be the same proportion of its net income for the taxable year from sources within and without the United States, which the reserve funds required by law and held by it at the end of the taxable year upon business transacted within the United States is of the reserve funds held by it at the end of the taxable year upon all business transacted." PROBLEM 244 Illustrating Rate of Tax on Foreign Insurance Companies Other Than Life or Mutual Insurance Companies, for the Taxable Year 1922 FACTS: The Scotland Fire Insurance Co., Ltd., of London, England, writes policies of fire insurance in the United States. It has inquired of its agent in the United States what tax it is subject to for the year 1922. QUESTION: How should this question be answered by the agent? ANSWER: The corporation is subject to the income tax of 122% on its net income from sources within the United States, but is exempt from the capital-stock tax. REFERENCE: Sec. 246 (a): "That, in lieu of the taxes imposed by sections 230 and 1000, there shall be levied, collected and paid for the calendar year 1922, and for each taxable year thereafter, upon the net income of every insurance company (other than a life or mutual insurance company) a tax as follows: . . . (2) In the case of such a foreign 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. 230 provides a tax of 122% for the calendar year 1922, and thereafter. Section 1000 imposes the capital stock tax. PROBLEM 245 Illustrating Manner of Paying Tax in Case an Extension of Time for Filing a Return is Granted a Taxpayer FACTS: Arthur C. Sylvester, a traveling salesman, always filed his tax return on a calendar year basis. He was granted an extension of 60 days for filing his income tax return for the calendar year 1921, by the Commissioner of Internal Revenue due to the fact that he was on a business trip to the Pacific Coast and his records were in New York thus making it impossible for him to prepare his return on time. QUESTION: When will Mr. Sylvester be required to pay his Federal income tax? In the case of deferred payments, must interest also be paid? ANSWER: Mr. Sylvester has the option of (a) paying the entire tax due on or before May 24, 1922, (the date the sixty-day extension expires) plus interest on 1/4 of the total tax due (the first installment, the payment of which was extended with the extension of date for filing return) at the rate of 1/2 per centum per month from March 15 to the date of filing the return, or (b) paying the tax due in four equal installments payable one fourth on or before May 24, 1922, plus interest on such installment at the rate of 12 per centum per month from March 15, 1922, to May 24, 1922, one fourth on the fifteenth day of June, one fourth on the fifteenth day of September and one fourth on the fifteenth day of December, 1922. REFERENCE: Sec. 250 (a): "That except as otherwise provided in this section and sections 221 and 237 the tax shall be paid in four installments, each consisting of one fourth of the total amount of the tax. The first installment shall be paid at the time fixed by law for filing the return, and the second installment shall be paid on the fifteenth day of the third month, the third installment on the fifteenth day of the sixth month, and the fourth installment on the fifteenth day of the ninth month, after the time fixed by law for filing the return. Where an extension of time for filing a return is granted the time for payment of the first installment shall be postponed until the date of the expiration of the period of the extension, but the time for payment of the other installments shall not be postponed unless the Commissioner so provides in granting the extension. In any case in which the time for the payment of any installment is at the request of the taxpayer thus postponed, there shall be added as part of such installment interest thereon at the rate of one-half of 1 per centum per month from the time it would have been due if no extension had been granted, until paid. If any installment is not paid when due, the whole amount of the tax unpaid shall become due and payable upon notice and demand by the collector. The tax may at the option of the taxpayer be paid in a single payment instead of in installments, in which case the total amount |