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[SEC. 203. NET INCOME OF LIFE INSURANCE COMPANIES.]

[(a) General rule.-In the case of a life insurance company the term "net income means the gross income less-]

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(1) TAX-FREE INTEREST.—The amount of interest received during the taxable year which under section 22 (b)(4) is excluded from gross income;

ART. 203(a) (1)-1. Tax-free interest.—Interest which in the case of other taxpayers is excluded from gross income by section 22 (b) (4) but included in the gross income of a life insurance company by section 202 (a) is allowed as a deduction from gross income by section 203 (a) (1).

[SEC. 203. NET INCOME OF LIFE INSURANCE COMPANIES.]

[(a) General rule. In the case of a life insurance company the term "net income means the gross income less-]

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(2) RESERVE FUNDS.-An amount equal to 4 per centum of the mean of the reserve funds required by law and held at the beginning and end of the taxable year, except that in the case of any such reserve fund which is computed at a lower interest assumption rate, the rate of 34 per centum shall be substituted for 4 per centum. 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, shall be allowed, in addition to the above, a deduction of 34 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;

ART. 203(a) (2)-1. Reserve funds.—In general, the reserve contemplated is a sum of money, variously computed or estimated, which, with accretions from interest, is set aside (reserved) as a fund with which to mature or liquidate, either by payment or reinsurance with other companies, future unaccrued and contingent claims. It must be required either by express statutory provisions or by rules and regulations of the insurance department of a State, Territory, or the District of Columbia when promulgated in the exercise of a power conferred by statute, but such requirement, without more, is not conclusive; for example, it does not include reserves required to be maintained to provide for the ordinary running expenses of a business definite in amount, and which must be currently paid by every company from its income if its business is to continue, such as taxes, salaries, reinsurance and unpaid brokerage; the reserve or net value of risks reinsured in other solvent companies to the extent of the reinsurance; reserve for premiums paid in advance; annual and deferred dividends; accrued but unsettled policy claims; losses incurred but unreported; liability on supplementary contracts not involving life contingencies; estimated value of future premiums which have been waived on policies after proof of total and permanent disability.

In any case where reserves are claimed, sufficient information must be filed with the return to enable the Commissioner to determine the validity of the claim. Reference should be made to the item in which the reserve appears in the annual statement and to the statute or insurance department ruling requiring that such reserves be held. Only reserves which are so required, which are peculiar to insurance companies, and which are dependent upon interest earnings for their maintenance will be considered. A company is permitted to make use of the highest aggregate reserve called for by any State or Territory or the District of Columbia in which it transacts business, but the reserve must have been actually held.

In the 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, it is required that reserve funds thereon be based upon recognized tables of experience covering disability benefits of the kind contained in policies issued by this particular class of companies. The deduction in respect of such reserve funds (not required by law) is 334 per cent of the mean of such reserve funds held at the beginning and end of the taxable year.

[SEC. 203. NET INCOME OF LIFE INSURANCE COMPANIES.]

[(a) General rule.-In the case of a life insurance company the term "net income means the gross income less-]

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(3) DIVIDENDS.-The amount received as dividends from a domestic corporation which is subject to taxation under this title, other than a corporation entitled to the benefits of section 251, and other than a corporation organized under the China Trade Act, 1922;

ART. 203 (a) (3)-1. Dividends.-The deduction allowed by section 203 (a) (3) for dividends received from other corporations is identical with the deduction allowed other corporations by section 23 (p).

[SEC. 203. NET INCOME OF LIFE INSURANCE COMPANIES.]

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[(a) General rule.-In the case of a life insurance company the term net income means the gross income less-]

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(4) RESERVE FOR DIVIDENDS.-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;

(5) INVESTMENT EXPENSES.-Investment 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;

ART. 203 (a) (5)-1. Investment expenses.-The term "general expenses as used in the Act means any expense incurred for the benefit of more than one department of the company rather than for the benefit of a particular department thereof. Any assignment of such expense to the investment department of the company for which a deduction is claimed under section 203 (a) (5) shall operate to subject the total investment expenses to the limitation provided in that section.

If no general expenses are assigned to or included in investment expenses the deduction may consist of investment expenses actually paid during the taxable year in which case an itemized schedule of such expenses must be appended to the return.

Invested assets for the purpose of section 203 (a) (5) and this article are those which are owned and used, and to the extent used, for the purpose of producing the income specified in section 202 (a).

The maximum allowance of one-fourth of 1 per cent will not be granted unless it is shown to the satisfaction of the Commissioner that such allowance is justified.

[SEC. 203. NET INCOME OF LIFE INSURANCE COMPANIES.]

[(a) General rule.—In the case of a life insurance company the term "net income means the gross income less-]

(6) REAL ESTATE EXPENSES.-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 of a company upon his interest as shareholder, which are paid by the company without reimbursement from the shareholder, but in such cases no deduction shall be allowed the shareholder for the amount of such taxes;

ART. 203 (a) (6)-1. Taxes and expenses with respect to real estate.— The deduction for taxes and expenses under section 203 (a) (6) includes taxes and expenses paid during the taxable year exclusively upon or with respect to real estate owned by the company and any sum representing taxes imposed upon a shareholder of the company upon his interest as shareholder which is paid by the company without reimbursement from the shareholder. No deduction shall be allowed, however, for taxes, expenses, and depreciation upon or with respect to any real estate owned by the company except to the extent used for the purpose of producing investment income. (See article 203 (a) (5)-1.) As to real estate owned and occupied by the company see article 203 (b)−1.

[SEC. 203. NET INCOME OF LIFE INSURANCE COMPANIES.]
[(a) General rule. In the case of a life insurance company the term
"net income means the gross income less-]

(7) DEPRECIATION. A reasonable allowance, as provided in section 23 (1), for the exhaustion, wear and tear of property, including a reasonable allowance for obsolescence; and

ART. 203(a)(7)—1. Depreciation. The deduction allowed by section 203 (a) (7) for depreciation is, except as provided in article 203(b)-1, identical with that allowed other corporations by section 23 (1). The amount allowed by section 23 (1) in the case of life insurance companies is limited to depreciation sustained on the property used, and to the extent used, for the purpose of producing the income specified in section 202 (a).

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[SEC. 203. NET INCOME OF LIFE INSURANCE COMPANIES.]

[(a) General rule.—In the case of a life insurance company the term net income means the gross income less-]

(8) INTEREST.-All interest paid within the taxable year on its indebtedness, except on indebtedness incurred or continued to purchase or carry obligations (other than obligations of the United States issued after September 24, 1917, and originally subscribed for by the taxpayer) the interest upon which is wholly exempt from taxation under this title.

ART. 203 (a) (8)-1. Interest.-The deduction allowed by section 203 (a) (8) for interest on indebtedness is the same as that allowed other corporations by section 23 (b) but this deduction includes interest on dividends held on deposit and surrendered during the taxable year. Reserve funds as defined in article 203 (a) (2)-1 are not indebtedness. Dividends left with the company to accumulate at interest are a debt and not a reserve liability.

[SEC. 203. NET INCOME OF LIFE INSURANCE COMPANIES.]

(b) Rental value of real estate. The deduction under subsection (a) (6) or (7) of this section on account of any real estate owned and occupied in whole or in part by a life insurance company, shall be limited to an amount which bears the same ratio to such deduction (computed without regard to this subsection) as the rental value of the space not so occupied bears to the rental value of the entire property. ART. 203 (b)-1. Real estate owned and occupied.-The amount allowable as a deduction for taxes, expenses, and depreciation upon or with respect to any real estate owned and occupied in whole or in part by a life insurance company is limited to an amount which bears the same ratio to such deduction (computed without regard to this limitation) as the rental value of the space not so occupied bears to the rental value of the entire property. For example, if the rental value of the space not occupied by the company is equal to one-half of the rental value of the entire property, the deduction for taxes, expenses,

and depreciation is one-half of the taxes, expenses, and depreciation on account of the entire property. Where a deduction is claimed as provided in this article, the parts of the property occupied and the parts not occupied by the company, together with the respective rental values thereof, must be shown in a statement accompanying the return.

[SEC. 203. NET INCOME OF LIFE INSURANCE COMPANIES.]

(c) Foreign life insurance companies.-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.

ART. 203 (c)-1. Foreign life insurance companies.-Foreign life insurance companies holding reserve funds upon business transacted within the United States are taxed under section 201 (b) (2) upon their net income from sources within the United States in excess of the credit provided in section 201 (c). All business transacted by a United States branch or agency of a foreign life insurance company, for which a reserve fund is required by the laws of any State or Territory of the United States or of the District of Columbia, will be regarded as business transacted within the United States. A foreign life insurance company not doing an insurance business within the United States and holding no reserve funds upon business transacted within the United States, but which derives income from sources within the United States as defined in section 119, is subject to the tax imposed by section 13 upon income derived from sources within the United States. (See sections 231-238.)

SEC. 204. INSURANCE COMPANIES OTHER THAN LIFE OR
MUTUAL.

(a) Imposition of tax.-In lieu of the tax imposed by section 13 of this title, there shall be levied, collected, and paid for each taxable year upon the net income of every insurance company (other than a life or mutual insurance company) a tax as follows:

(1) In the case of such a domestic insurance company, 13 per centum of the amount of its net income in excess of the credit provided in subsection (f) of this section;

(2) In the case of such a foreign insurance company, 13 per centum of the amount of its net income from sources within the United States in excess of the credit provided in subsection (f) of this section.

ART. 204(a)-1. Tax on insurance companies other than life or mutual. For the calendar year 1934 and subsequent years all insurance companies (other than life or mutual companies) are subject to the

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