and in the case of insurance companies the sums other than dividends,537 paid within the year on policy and annuity contracts and the net addition, if any, required by law to be made within the year to reserve funds;538 (third) interest539 actually paid within the year on its bonded or other indebtedness to an amount of such bonded

beginning and end of the year; and the enhanced value of parts through repairs and replacements should be set off against depreciation of other parts not repaired or replaced. Nashville, C. & St. L. Ry. Co. v. U. S., (C. C. A., Sixth Cir. 1920) 269 Fed. 351. Certiorari denied, (1921) 255 U. S. 569.

#

537 So-called "dividends," paid annually to policyholders by a mutual life insurance company doing business on the level premium plan, which represent the excess of premiums collected in previous years, over actual cost of insurance, when applied by them respectively in the reduction or abatement of renewal premiums, were not taxable as part of the company's "net income received by it # * during such year, "" under Sec. 38, Act of 1909. They were taxed previously in the years when received. Neither were they "dividends" paid to policyholders, the word "dividends" being used in said Act in its ordinary sense as representing profits. Herold (Col.) v. Mutual Benefit Life Ins. Co., (C. C. A., Third Cir. 1913) 201 Fed. 918, affirming Id., (D. C., D. N. J. 1912) 198 Fed. 199, Certiorari denied, (1913) 231 U. S. 755; Eaton (Col.) v. Conn. Gen. Life Ins. Co. and Eaton (Col.) v. Conn. Mutual Life Ins. Co., (C. C. A., Second Cir. 1915) 223 Fed. 1022, affirming Id., (D. C., D. Conn. 1914) 218 Fed. 188 and 206, respectively. In 218 Fed. 188, the company was a stock company maintaining a mutual department. Prudential Ins. Co. v. Herold (Col.), (D. C., D. N. J. 1918) 247 Fed. 681, in which case the so-called "dividends" were paid voluntarily by the company on non-participating policies. Lumber Mutual Fire Ins. Co. v. Malley (Col.), (D. C., D. Mass. 1916) 256 Fed. 380; New York Life Ins. Co. v. Anderson (Col.), (C. C. A., Second Cir. 1920) 263 Fed. 527, affirming Id., (D. C., S. D. N. Y. 1919) 262 Fed. 215; Fink (Col.) v. Northwestern Mutual Life Ins. Co., (C. C. A., Seventh Cir. 1920) 267 Fed. 968, affirming Id., (D. C., E. D. Wisc. 1917) 248 Fed. 568.

538 (a) Sums set aside and credited to a reserve fund in compliance with law to meet obligations on policies on which premiums were not received, were deductible from gross income under Sec. 38, Act of 1909. Mutual Benefit Life Ins. Co. v. Herold (Col.), (D. C., D. N. J. 1912) 198 Fed. 199; Prudential Ins. Co. v. Herold (Col.), (D. C., D. N. J. 1918) 247 Fed. 681.

538 (b) Under Sec. 38, Act of 1909, insurance companies were not permitted to deduct from gross income sums set aside as reserves to meet obligations created by policies, when such reserves were not required by State law. McCoach v. Ins. Co. of N. A., (1917) 244 U. S. 585, reversing Id., (C. C. A., Third Cir. 1915) 224 Fed. 657, and affirming Id., (D. C., E. D. Penn. 1914) 218 Fed. 905; National Life & Accident Ins. Co. v. Craig (Col.), (C. C. A., Sixth Cir. 1918) 251 Fed. 524; Maryland Casualty Co. v. U. S., (1920) 251 U. S. 342, affirming Id., (1917) 52 Ct. Cl. 201; Fink (Col.) v. N. W. Mutual Life Ins. Co., (C. C. A., Seventh Cir. 1920) 267 Fed. 968, reversing Id., (D. C., E. D. Wisc. 1917) 248 Fed. 568.

538 (c) Reserves required by regulations of the Insurance Department of a State, when reasonably adapted to the enforcement of the law, which the Insurance Department has statutory authority to enforce, are re

and other indebtedness not exceeding the paidup capital stock of such corporation, joint-stock company or association, or insurance company, outstanding at the close of the year, and in the case of a bank, banking association or trust company, all interest actually paid by it within the year on deposits;540 (fourth) all sums paid by

quired by the "law" of a State, within the meaning of Sec. 38, Act of 1909. Maryland Casualty Co. v. U. S., (1920) 251 U. S. 342, 1eversing Id., (1917) 52 Ct. CI. 201.

539 (a) The limitation placed upon the amount of interest deductible under Sec. 38, Act of 1909, was not repugnant to the Constitution. Anderson (Col.) v. Forty-two Broadway, (1915) 239 U. S. 69.

539 (b) Where the indebtedness of a corporation was in excess of the paid-up capital stock, interest paid on such excess was not deductible as an "ordinary and necessary' expense under Sec. 38, Act of 1909. Änderson (Col.) v. Forty-two Broadway, (1915) 239 U. S. 69, reversing Id., (C. C. A., Second Cir. 1914) 213 Fed. 777, and Id., (D. C., S. D. N. Y. 1913) 209 Fed. 991; Altheimer & Rawlins Inv. Co. v. Allen (Col.), (C. C. A., Eighth Cir. 1918) 248 Fed. 688, affirming Id., (D. C., E. D. Mo., E. D. 1917) 246 Fed. 270, Certiorari denied, (1918) 248 U. S. 578; Associated Pipe Line Co. v. U. S., (C. C. A., Ninth Cir. 1919) 258 Fed. 800.

539 (c) A corporation sold bonds at a discount which matured in thirty-one years. It was not permitted to prorate the discount over two years, and then deduct the prorated amounts from the gross income of said respective years under Sec. 38, Act of 1909. It did not represent "expenses actually paid" within the taxable year. Baldwin Locomotive Works v. McCoach (Col.), (C. C. A., Third Cir. 1915) 221 Fed. 59, affirming Id., (D. C., E. D. Penn. 1914) 215 Fed. 967.

539 (d) Amortization of bond discount was not deductible under Sec. 38, Act of 1909. It did not represent a "loss sustained" or "interest paid" within the taxable year. Southern Pacific R. R. Co. v. Muenter, (C. C. A., Ninth Cir. 1919) 260 Fed. 837.

539 (e) The interest deductible under Sec. 38, Act of 1909, is the interest on an amount of indebtedness equivalent to the paid-up capital stock, par value, al though the stock was sold at a premium. Boston & M. R. R. v. U. S., (C. C. A., First Cir. 1920) 265 Fed. 578; N. Y., N. H. & H. R. R. Co. v. U. S., (C. C. A., Second Cir. 1920) 269 Fed. 907, affirming Id., (D. C., D. Conn. 1919) 265 Fed. 331.

539 (f) Where a corporation purchased bonds at a premium and under an amortization plan set up on its books the ratable decrease in value each year so that they stood at par on maturity, such ratable decrease was not deductible in the year entered on the books as expenses paid or losses sustained under the Act of 1909. Lumber Mutual Fire Ins. Co. v. Malley (Col.), (D. C., D. Mass. 1916) 256 Fed. 383.

539 (g) A corporation was engaged in the business of purchasing mortgage notes and selling them to the public. Later, in order to offer denominations of more desirable amounts, it placed the mortgage notes as it purchased them, with a trustee and issued its own debentures, which it sold in lieu of the mortgage notes. It was permitted to deduct interest only on an amount of such debentures equal to its paid-up capital stock under the Act of 1909. U. S. v. Waddell Inv. Co., (D. C., W. D. Mo. 1921) 275 Fed. 935.

540 Interest paid by a banking corporation on debenture bonds issued by it was not deductible as inter

it within the year for taxes541 imposed under the authority of the United States or of any State or Territory thereof, or imposed by the government of any foreign country as a condition to carry on business therein; (fifth) all amounts received by it within the year as dividends upon stock of other corporations, jointstock companies or associations, or insurance companies, subject to the tax hereby imposed: Provided, That in the case of a corporation, joint-stock company or association, or insurance company, organized under the laws of a foreign country, such net income shall be ascertained by deducting from the gross amount of its income received within the year from business transacted and capital invested within the United States and any of its Territories, Alaska, and the District of Columbia, (first) all the ordinary and necessary expenses actually paid within the year out of earnings in the maintenance and operation of its business and property within the United States and its Territories, Alaska, and the District of Columbia, including all charges such as rentals or franchise payments required to be made as a condition to the continued use or possession of property; (second) all losses actually sustained within the year in business conducted by it within the United States or its Territories, Alaska, or the District of Columbia not compensated by insurance or otherwise, including a reasonable allowance for depreciation of property, if any, and in the case of insurance companies the sums other than dividends, paid within the year on policy and annuity contracts and the net addition, if any, required by law to be made within the year to reserve funds; (third) interest actually paid within the year on its bonded or other indebtedness to an amount of such bonded and other indebtedness, not exceeding the proportion of its paid-up capital stock outstanding at the close of the year which the gross amount of its income for the year from business transacted and capital invested within the United States and any of its Territories, Alaska, and the District of Columbia bears to the gross amount of its income derived from all sources within and without the United States; (fourth) the sums paid by it within the year for taxes imposed under the authority of the United States or of any

est paid on "deposits" under Sec. 38 of the Act of 1909. Middlesex Banking Co. v. Eaton (Col.), (C. C. A., Second Cir. 1916) 233 Fed. 87, affirming Id., (D. C., D. Conn. 1915) 221 Fed. 86.

541 (a) State taxes assessed against shareholders but paid directly by the corporation in their behalf were not taxes imposed under the authority of a State against the corporation under Sec. 38, Act of 1909. Northern

State or Territory thereof; (fifth) all amounts received by it within the year as dividends upon stock of other corporations, joint-stock companies or associations, and insurance companies, subject to the tax hereby imposed. In the case of assessment insurance companies the actual deposit of sums with State or Territorial officers, pursuant to law, as additions to guaranty or reserve funds shall be treated as being payments required by law to reserve funds.

Third. There shall be deducted from the amount of the net income of each of such corporations, joint-stock companies or associations, or insurance companies, ascertained as provided in the foregoing paragraphs of this section, the sum of five thousand dollars, and said tax shall be computed upon the remainder of said net income of such corporation, joint-stock company or association, or insurance company, for the year ending December thirty-first, nineteen hundred and nine, and for each calendar year thereafter; and on or before the first day of March, nineteen hundred and ten, and the first day of March in each year thereafter, a true and accurate return542 under oath or affirmation of its president, vice-president, or other principal officer, and its treasurer or assistant treasurer, shall be made by each of the corporations, joint-stock companies or associations, and insurance companies, subject to the tax imposed by this section, to the collector of internal revenue for the district in which such corporation, joint-stock company or association, or insurance company has its principal place of business, or, in the case of a corporation, joint-stock company or association, or insurance company, organized under the laws of a foreign country, in the place where its principal business is carried on within the United States, in such form as the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury, shall prescribe, setting forth (first) the total amount of the paidup capital stock of such corporation, joint-stock company or association, or insurance company, outstanding at the close of the year; (second) the total amount of the bonded and other indebtedness of such corporation, joint-stock company or association, or insurance company at the close of the year; (third) the gross amount of the income of such corporation, joint-stock

Trust Co. v. McCoach, (D. C., E. D. Penn. 1914) 215 Fed. 991; Eliot Nat'l Bank v. Gill (Col.), (C. C. A., First Cir. 1914) 218 Fed. 600, affirming Id., (D. C., D. Mass. 1913) 210 Fed. 933; National Bank of Commerce v. Allen (Col.), (C. C. A., Eighth Cir. 1915) 223 Fed. 472, affirming Id., (D. C., E. D. Mo., E. D. 1914) 211 Fed. 743; First National Bank v. McNeil (Col.), (C. C. A., Fifth Cir. 1917) 238 Fed. 559.

company or association, or insurance company received during such year from all sources, and if organized under the laws of a foreign country the gross amount of its income received within the year from business transacted and capital invested within the United States and any of its Territories, Alaska, and the District of Columbia; also the amount received by such corporation, joint-stock company or association, or insurance company within the year by way of dividends upon stock of other corporations, jointstock companies or associations, or insurance companies, subject to the tax imposed by this section; (fourth) the total amount of all the ordinary and necessary expenses actually paid out of earnings in the maintenance and operation of the business and properties of such corporation, joint-stock company or association, or insurance company within the year, stating separately all charges such as rentals or franchise payments required to be made as a condition to the continued use or possession of property, and if organized under the laws of a foreign country the amount so paid in the maintenance and operation of its business within the United States and its Territories, Alaska, and the District of Columbia; (fifth) the total amount of all losses actually sustained during the year and not compensated by insurance or otherwise, stating separately any amounts allowed for depreciation of property, and in the case of insurance companies the sums other than dividends, paid within the year on policy and annuity contracts and the net addition, if any, required by law to be made within the year to reserve funds; and in the case of a corporation, joint-stock company or association, or insurance company, organized under the laws of a foreign country, all losses actually sustained by it during the year in business conducted by it within the United States or its Territories, Alaska, and the District of Columbia, not compensated by insurance or otherwise, stating separately any amounts allowed for depreciation of property, and in the case of insurance companies the sums other than dividends, paid within the year on policy and annuity contracts and the net addition, if any, required by law to be made within the year to reserve fund; (sixth) the amount of interest actually paid within the year on its bonded or other indebtedness to an amount of such bonded and other indebtedness not exceed

ing the paid-up capital stock of such corporation, joint-stock company or association, or insurance company, outstanding at the close of the year, and in the case of a bank, banking association, or trust company, stating separately all interest paid by it within the year on deposits; or in case of a corporation, joint-stock company or association, or insurance company, organized under the laws of a foreign country, interest so paid on its bonded or other indebtedness to an amount of such bonded and other indebtedness not exceeding the proportion of its paid-up capital stock outstanding at the close of the year, which the gross amount of its income for the year from business transacted and capital invested within the United States and any of its Territories, Alaska, and the District of Columbia, bears to the gross amount of its income derived from all sources within and without the United States; (seventh) the amount paid by it within the year for taxes imposed under the authority of the United States or any State or Territory thereof, and separately the amount so paid by it for taxes imposed by the government of any foreign country as a condition to carrying on business therein; (eighth) the net income of such corporation, joint-stock company or association, or insurance company, after making the deductions in this section authorized. All such returns shall as received be transmitted forthwith by the collector to the Commissioner of Internal Revenue.

Fourth. Whenever evidence shall be produced before the Commissioner of Internal Revenue which in the opinion of the commissioner justifies the belief that the return made by any corporation, joint-stock company or association, or insurance company is incorrect, or whenever any collector shall report to the Commissioner of Internal Revenue that any corporation, jointstock company or association, or insurance company has failed to make a return as required by law, the Commissioner of Internal Revenue may require from the corporation, joint-stock company or association, or insurance company making such return, such further information with reference to its capital, income, losses, and expenditures as he may deem expedient; and the Commissioner of Internal Revenue, for the purpose of ascertaining the correctness of such return or for the purpose of making a return where none has been made, is hereby

unreasonable search and seizure provision of the Fourth Amendment to The Federal Constitution. Flint v. StoneTracy Co., (1911) 220 U. S. 107.

542 (b) Corporations specified in Sec. 38, Act of 1909, were required to file returns regardless of whether they had sufficient net income to render them subject to the tax. U. S. v. Military Const. Co., (D. C., W. D. Mo. 1913) 204 Fed. 153; U. S. v. Acorn Roofing Co. et al., (D. C., E. D. N. Y. 1912) 204 Fed. 157.

with any corrections thereof which may have been made by the commissioner, shall be filed in the office of the Commissioner of Internal Revenue and shall constitute public records and be open to inspection as such.547

Seventh. It shall be unlawful for any collector, deputy collector, agent, clerk, or other officer or employee of the United States to divulge or make known in any manner whatever not provided by law to any person any information obtained by him in the discharge of his official duty, or to divulge or make known in any manner not provided by law any document received, evidence taken, or report made under this section except upon the special direction of the President; and any offense against the foregoing provision shall be a misdemeanor and be punished by a fine not exceeding one thousand dollars, or by imprisonment not exceeding one year or both, at the discretion of the court.

Eighth. If any of the corporations, joint-stock companies or associations, or insurance companies aforesaid, shall refuse or neglect to make a return at the time or times herein before specified in each year, or shall render a false or fraudulent return, such corporation, joint-stock

company or association, or insurance company shall be liable to a penalty of not less than one thousand dollars and not exceeding ten thousand dollars.

Any person authorized by law to make, render, sign, or verify any return, who makes any false or fraudulent return, or statement, with intent to defeat or evade the assessment required by this section to be made, shall be guilty of a misdemeanor, and shall be fined not exceeding one thousand dollars or be imprisoned not exceeding one year, or both, at the discretion of the court, with the costs of prosecution.

All laws relating to the collection, remission, and refund548 of internal-revenue taxes, so far as applicable to and not inconsistent with the provisions of this section, are hereby extended and made applicable to the tax imposed by this section.

Jurisdiction is hereby conferred upon the circuit and district courts of the United States for the district within which any person summoned under this section to appear to testify or to produce books as aforesaid, shall reside, to compel such attendance, production of books, and testimony by appropriate process.

548 An act to provide for refund or abatement, under certain conditions, of penalty taxes imposed by Section 38 of the Act of August 5, 1909, known as the Special Excise Corporation Tax Law, approved March 3, 1913 (37 Stat., 734).

Be it enacted, etc., That any corporation, joint-stock company, association, or any insurance company subject to the special excise tax provided by section thirty-eight of the act of August fifth, nineteen hundred and nine, known as the special excise corporation-tax law, which has been or may be compelled to pay or become liable for any additional tax within the provisions of subsection five of said section thirty-eight, which additional tax has been or may hereafter be imposed for neglect to file a return as provided in said corporation-tax law on or before the first of March of any year, may, within one year after the passage of this act or within

one year after the date of notice of assessment where such notice is given after the passage of this act, make application to the Commissioner of Internal Revenue for a refund of such additional tax. And the Commissioner of Internal Revenue, with the advice and consent of the Solicitor of Internal Revenue, is hereby directed to remit, abate, or pay back all such additional taxes in excess of $100 for any single year whenever in any case it appears to his satisfaction that the additional tax was assessed or imposed solely because of a neglect to make a return at the time or times specified in said act, and without any intention or design on the part of any officer of such corporation, joint-stock company, association, or insurance company to hinder or delay the United States in the collection of the tax originally assessed.