(1) In the case of a domestic life insurance company, 13 per centum of its net income;

(2) In the case of a foreign life insurance company, 13 per centum of its net income from sources within the United States.

ART. 951. Life insurance companies.-Life insurance companies, as defined in section 201 (a), are subject to the tax imposed by section 201 (b), in lieu of the tax imposed by section 13. The rate for 1932 and for subsequent years is 1334 per cent, and the net income upon which the tax is imposed differs from the net income of other corporations. For rate of tax on corporations making consolidated returns, see section 141 (c). Insurance companies are entitled to the benefit of section 117 (net losses) but not of section 101 (capital gains and losses). All provisions of the Act and of these regulations not inconsistent with the specific provisions of sections 201-203 are applicable to the assessment and collection of this tax, and life insurance companies are subject to the same penalties as are provided in the case of returns and payment of income tax by other corporations. In determining whether an insurance company is a "life insurance company" as defined in section 201, no reserve shall be regarded as held for the fulfillment of life insurance and annuity contracts unless the company is entitled to a deduction from gross income on account thereof under the provisions of section 203 (a) (2) and article 971. As to foreign companies, see section 203 (c) and article 977.

SEC. 202. GROSS INCOME OF LIFE INSURANCE COMPANIES.

(a) 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 rents.

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(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 maintained 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.

ART. 961. Gross income of life insurance companies.-Gross income in the case of life insurance companies means the gross amount of income received from interest, dividends, and rents, and comprises items 25-34 of the income page of the annual statement for life insurance companies (edition of 1920) adopted by the National Convention of Insurance Commissioners and items 23-30 of the income page of the annual statement for miscellaneous stock companies if any

other branches of the insurance business are conducted by the company. As to "reserve funds required by law," see article 971.

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

(1) TAX-FREE INTEREST.-The amount of interest received during the taxable year which under section 22(b) is exempt from the taxes imposed by this title;

(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;

(3) DIVIDENDS.-The amount received as dividends (A) 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, 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 119;

(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;

(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 inprovements 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;

(7) DEPRECIATION.-A reasonable allowance for the exhaustion, wear and tear of property, including a reasonable allowance for obsolescence; and

(8) INTEREST.-All interest paid or accrued within the taxable year on its indebtedness, except on indebtedness incurred or continued to purchase or carry obligations or securities (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.

(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.

(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. 971. Tax-exempt interest and reserve funds.—Under paragraphs (1) and (2) of section 203 (a), life insurance companies are entitled to deduct from gross income:

(1) Interest which is exempted in the case of other taxpayers by section 22 (b) (4) and articles 84-87; and

(2) Four per cent 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 334 per cent shall be substituted for 4 per cent. The reserve deduction is based upon the reserves required by express statutory provisions or by the rules and regulations of the State insurance departments when promulgated in the exercise of a power conferred by statute; but such reserves do not include assets required to be held for the ordinary running expenses of the business nor do they include the reserve or net value of risks reinsured in other solvent companies to the extent of the reinsurance.

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. Reserves 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 will not be considered. A company is permitted to make use of the highest aggregate reserve called for by any State in which it transacts busiress, but the reserve must have been actually held as shown by the annual statement. Generally speaking, the following will be considered reserves as contemplated by the law: Items 7-11 of the liability page of the annual statement for life insurance companies, and items 16-19 and 26 of the liability page of the annual statement for miscellaneous stock companies, if a life insurance company is aiso transacting other kinds of insurance business. If other 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 State 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.

ART. 972. Reserve for deferred dividends.-The deduction for deferred dividends under section 203 (a) (4) will be based upon item 37 of the liability page of the annual statement for life insurance companies but shall not include any dividend payable during the year immediately following the taxable year.

ART. 973. Investment expenses.-If any general expenses are in part assigned to or included in the investment expenses, the total investment expenses (other than taxes and expenses with respect to real estate) allowable as a deduction shall not exceed one-quarter of 1 per cent of the mean of the book value of the invested assets held at the beginning and end of the taxable year. If there be no allocation of general expenses to 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. The invested assets are items 1-6, item 9, and items 10 and 11 (if interest-bearing assets) of the asset page of the annual statement for life insurance companies, and items 1-4, item 7, and items 27-30 (if interest-bearing assets) of the asset page of the annual statement for miscellaneous stock companies. If the method used by any company in ascertaining the investment expenses where there is any allocation of general expenses shall be changed so that a greater deduction is claimed, the company shall file with its return information sufficient to enable the Commissioner to determine the validity of the claim. The maximum allowance of one-quarter of 1 per cent will not be granted unless it is shown to the satisfaction of the Commissioner that such allowance is justified.

ART. 974. Taxes and expenses with respect to real estate. The deduction for taxes and expenses under section 203 (a) (6) comprises items 31 and 32 of the disbursement page of the annual statement for life insurance companies and items 34 and 35 of the disbursement page of the annual statement for miscellaneous stock companies, except as noted below, and any sum included in any other item 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 and occupied in whole or in part by the company except to the extent provided in article 976. Taxes shall not include assessments against local benefits of a kind tending to increase the value of the property assessed, and expenses shall not include any amount paid out for buildings or for permanent improvements and betterments made to increase the value of any propcrty owned by the company.

ART. 975. Other deductions.—(1) 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).

(2) The deduction allowed by section 203 (a) (7) for depreciation is, except as provided in article 976, identical with that allowed other corporations by section 23 (k). (See articles 201-210.)

(3) The deduction allowed by section 203 (a) (8) for interest on indebtedness is the same as that allowed other corporations by section 23 (b) (see article 141), but this deduction includes item 17 of the disbursement page of the annual statement of life insurance companies to the extent that interest on dividends held on deposit and surrendered during the taxable year is included therein. Dividends