Regulations 77 Relating to the Income Tax Under the Revenue Act of 1932

left with the company to accumulate at interest are a debt and not a reserve liability.

ART. 976. Home office properties.-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.

ART. 977. 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. 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 (see articles 671-684) is subject to the tax imposed by section 13 upon income derived from sources within the United States. (See sections 231238 and articles 1101-1121.)

SEC. 204. INSURANCE
MUTUAL.

COMPANIES

OTHER THAN LIFE OR

(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 its net income;

(2) In the case of such a foreign insurance company, 13% per centum of its net income from sources within the United States. (b) Definition of income, etc.--In the case of an insurance company subject to the tax imposed by this section

(1) GROSS INCOME." Gross income" means the sum of (A) the combined gross amount earned during the taxable year, from

Investment income and from underwriting income as provided in this subsection, computed on the basis of the underwriting and investment exhibit of the annual statement approved by the Nattional Convention of Insurance Commissioners, and (B) gain during the taxable year from the sale or other disposition of property, and (C) all other items constituting gross income under section 22;

(2) NET INCOME.-" Net income " means the gross income as defined in paragraph (1) of this subsection less the deductions allowed by subsection (c) of this section;

(3) INVESTMENT INCOME." Investment income" means the gross amount of income earned during the taxable year from interest, dividends, and rents, computed as follows:

To all interest, dividends and rents received during the taxable year, add interest, dividends and rents due and accrued at the end of the taxable year, and deduct all interest, dividends and rents due and accrued at the end of the preceding taxable year;

(4) UNDERWRITING INCOME.—“ Underwriting income" means the premiums earned on insurance contracts during the taxable year less losses incurred and expenses incurred;

(5) PREMIUMS EARNED.-" Premiums earned on insurance contracts during the taxable year" means an amount computed as follows:

From the amount of gross premiums written on insurance contracts during the taxable year, deduct return premiums and premiums paid for reinsurance. To the result so obtained add unearned premiums on outstanding business at the end of the preceding taxable year and deduct unearned premiums on outstanding business at the end of the taxable year;

(6) LOSSES INCURRED.-" Losses incurred" means losses incurred during the taxable year on insurance contracts, computed as follows:

To losses paid during the taxable year, add salvage and reinsurance recoverable outstanding at the end of the preceding taxable year, and deduct salvage and reinsurance recoverable outstanding at the end of the taxable year. To the results so obtained add all unpaid losses outstanding at the end of the taxable year and deduct unpaid losses outstanding at the end of the preceding taxable year;

(7) EXPENSES INCURRED.- Expenses incurred" means all exexpenses shown on the annual statement approved by the National Convention of Insurance Commissioners, and shall be computed as follows:

To all expenses paid during the taxable year add expenses unpaid at the end of the taxable year and deduct expenses unpaid at the end of the preceding taxable year. For the purpose of computing the net income subject to the tax imposed by this section there shall be deducted from expenses incurred as defined in this paragraph all expenses incurred which are not allowed as deductions by subsection (c) of this section.

(c) Deductions allowed.-In computing the net income of an insurance company subject to the tax imposed by this section there shall be allowed as deductions:

(1) All ordinary and necessary expenses incurred, as provided in section 23(a);

(2) All interest as provided in section 23(b);

(3) Taxes as provided in section 23(c);

(4) Losses incurred as defined in subsection (b) (6) of this section;

(5) Losses sustained during the taxable year from the sale or other disposition of property;

(6) Bad debts in the nature of agency balances and bills receivable ascertained to be worthless and charged off within the taxable year;

(7) The amount received as dividends from corporations as provided in section 23 (p);

(8) The amount of interest earned during the taxable year which under section 22(b) (4) is exempt from the taxes imposed by this title, and the amount of interest allowed as a credit under section 26;

(9) A reasonable allowance for the exhaustion, wear and tear of property, as provided in section 23 (k).

(d) Deductions of foreign corporations. In the case of a foreign corporation the deductions allowed in this section shall be allowed to the extent provided in Supplement I.

(e) Double deductions.-Nothing in this section shall be construed to permit the same item to be twice deducted.

ART. 991. Tax on insurance companies other than life or mutual.—For the calendar year 1932 and subsequent years all insurance companies (other than life or mutual companies) are subject to the tax imposed by section 204. Mutual insurance companies (other than life) remain subject to the tax imposed by section 13. The term "insurance companies" as used in this article and in articles 992 and 993 means only those companies subject to the tax imposed by section 204. The rate of the tax imposed by section 204 is 1334 per cent, and the net income upon which the tax is imposed, as defined in section 204, 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 net gains and losses). All provisions of the Act and of these regulations not inconsistent with the specific provisions of section 204 are applicable to the assessment and collection of this tax, and insurance companies are subject to the same penalties as provided in the case of returns and payment of income tax by other corporations. Since section 204 provides that the underwriting and investment exhibit of the annual statement approved by the National Convention of Insurance Commissioners shall be the basis

for computing gross income and since the annual statement is rendered on the calendar year basis, the first returns under section 204 will be for the taxable year ending December 31, 1932.

ART. 992. Gross income of insurance companies other than life or mutual.-Gross income as defined in section 204 (b) means the gross amount of income earned during the taxable year from interest, dividends, rents, and premium income, computed on the basis of the underwriting and investment exhibit of the annual statement approved by the National Convention of Insurance Commissioners, as well as the gain derived from sale or other disposition of property, and all other items constituting gross income under section 22. See articles 51-71, 81-90, and 101-108. It does not include increase in liabilities during the year on account of reinsurance treaties, remittances from the home office of a foreign insurance company to the United States branch, borrowed money, gross increase due to adjustments in book value of capital assets, and premium on capital stock sold. The underwriting and investment exhibit is presumed clearly to reflect the true net income of the company, and in so far as it is not inconsistent with the provisions of the Act will be recognized and used as a basis for that purpose. All items of the exhibit, however, do not reflect an insurance company's income as defined in the Act. By reason of the definition of investment income, miscellaneous items which are intended to reflect surplus but do not properly enter into the computation of income, such as dividends declared, home office remittances and receipts, and special deposits, are ignored. Gain or loss from agency balances and bills receivable not admitted as assets on the underwriting and investment exhibit will be ignored, excepting only such agency balances and bills receivable as have been charged off the books of the company as bad debts or, having been previously charged off, are recovered during the taxable year.

ART. 993. Deductions allowed insurance companies other than life or mutual. The deductions allowable are specified in section 204, and include losses sustained from the sale or other disposition of property. A domestic insurance company is also entitled to the credit for income, war-profits, and excess-profits taxes paid or accrued during the taxable year to any foreign country or to any possession of the United States which is allowed other domestic corporations by section 131. (See section 206.) Among the items which may not be deducted are income taxes, paid or accrued, imposed by the United States, income and profits taxes imposed by any foreign country or possession of the United States (in cases where the company signifies in its return its desire to claim to any extent a credit for such taxes),

taxes assessed against local benefits, donations, decrease during the year due to adjustments in the book value of capital assets, decrease in liabilities during the year on account of reinsurance treaties, dividends paid to shareholders, remittances to the home office of a foreign insurance company by the United States branch, and borrowed money repaid.

SEC. 205. NET LOSSES.

The benefit of the special deduction for net losses allowed by section 117 shall be allowed to insurance, companies subject to the tax imposed by section 201 or 204, under regulations prescribed by the Commissioner with the approval of the Secretary.

ART. 996. Net losses; insurance companies.-In the case of an insurance company subject to the tax imposed by section 201, the "net loss" is the amount by which gross income as defined in section 202 (a) is exceeded by the deductions allowed by section 203 excluding:

(a) The amount of interest received during the taxable year allowed as a deduction under section 203 (a) (1), in excess of the amount of interest paid within the taxable year which is not deductible under section 203 (a) (8);

(b) The amount received as dividends and allowed as a deduction under section 203 (a) (3); and

In the case of an insurance company subject to the tax imposed by section 204, the "net loss " is the amount by which gross income as defined in section 204 (b) (1) is exceeded by the deductions allowed by section 204 (c) excluding:

(a) The amount of interest earned during the taxable year allowed as a deduction under that part of section 204 (c) (8) which refers to interest exempt from taxation under section 22 (b) (4), in excess of the amount of interest accrued within the taxable year which is not deductible under section 204 (c) (2) in view of the provisions of section 23 (b);

(b) The amount of interest allowed as a deduction under that part of section 204 (c) (8) which refers to interest allowed as a credit under section 26; and

SEC. 206. TAXES OF FOREIGN COUNTRIES AND POSSESSIONS OF UNITED STATES.

The amount of income, war-profits, and excess-profits taxes imposed by foreign countries or possessions of the United States shall be

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