CHAPTER XXXV INSURANCE COMPANIES The problem of taxing insurance companies in an equitable manner under the income and excess profits tax provisions which govern corporations was considered at length when the 1918 law was being formulated. The Senate committee proposed and the Senate adopted an entirely new plan for taxing these companies, but the proposal was lost because the House conferees refused to concur.1 REGULATION. Insurance companies include both stock and mutual companies, as well as mutual benefit insurance companies. A voluntary unincorporated association of employees formed for the purpose of relieving sick and aged members and the dependents of deceased members is an insurance company, whether the fund for such purpose is created wholly by membership dues or partly by contributions from the employer. But a corporation which merely sets aside fund for the insurance of its employees is not required to file a separate return for such fund if the income and disbursements "A new basis is recommended for the taxation of life insurance companies (Part IV, sections 245, 246, 247). The tax is in form an income tax, but is imposed upon a net income defined with special reference to the peculiar conditions of the business of life insurance. Roughly, it consists of the gross income from interest, dividends and rents, less tax-free interest, investment expenses and taxes and other expenses paid exclusively in connection with real estate owned by the company. In the case of a domestic life insurance company there is also a specific deduction of $2,000. Thus the tax falls upon the true income of the company; that is, its income from investments; and the rate is so fixed that this tax takes the place of the income tax, war excess profits tax, capital stock tax and the tax on the issuance of policies. It will yield considerably more revenue than the taxes which it is designed to replace, and has the great merit of simplicity and certainty. Above all, it avoids the almost insuperable difficulty of defining the invested capital of a life insurance company for purposes of the war excess profits tax." (Report to Senate, by Senator Simmons, December 6, 1918, page 9.) "Your conferees did not think that its scheme would be equitable or satisfactory if the deductions were eliminated, and, after much controversy and much discussion, reflection and investigation-for we did investigate a good deal to see if we could not reach a basis of compromise-finding ourselves unable to come to any satisfactory adjustment with reference to the Senate scheme, the Senate receded." (Senator Simmons, February 11, 1919, Congressional Record, page 3777.) therefrom are included in the corporation's own return. 1508.) The 1918 law as enacted imposes income and excess profits taxes upon insurance companies as follows: Gross Income LAW. Section 233. (a) That in the case of a corporation subject to the tax imposed by section 230 the term "gross income" means the gross income as defined in section 213 [income of individuals], except that: (1) In the case of life insurance companies there shall not be included in gross income such portion of any actual premium received from any individual policyholder as is paid back or credited to or treated as an abatement of premium of such policyholder within the taxable year. (2) Mutual marine insurance companies shall include in gross income the gross premiums collected and received by them less amounts paid for reinsurance. REGULATION. The gross income of insurance companies consists of their total revenue from the operation of the business and of their income from all other sources within the taxable year, except as otherwise provided by the statute.2 Gross income includes net premiums (that is, gross premiums less returned premiums on policies cancelled and premiums on policies not taken), investment income, profits from the sale of assets, and all gains, profits and income reported to the State insurance departments, except income specifically exempt from tax. Premiums received by mutual marine insurance companies which are paid out for reinsurance should be eliminated from gross income and the payments for reinsurance from disbursements. Deposit premiums on perpetual risks received and returned. by fire insurance companies should be treated in the same manner, as no reserve will be recognized covering liability for such deposits. The earnings on such deposits must be included in the investment income. A net decrease in reserve funds required by law within the taxable year must be included in the gross income. .. (Art. 548.) .... DECISION. Under the provisions of paragraph G, subdivision (b) of section 2 of the act of October 3, 1913, that "life insurance companies shall not include as income in any year such portion of any. [Former Procedure] In a decision under the 1909 law the court decided that premiums actually received in cash constitute income "received." Premiums accrued or becoming due and not paid do not constitute income "received." (Lumber Mutual Fire Insurance Co. v. Malley, 256 Fed. 380.) actual premium received from any individual policyholder as shall have been paid back or credited to such individual policyholder within such year," a life insurance company is not entitled to exclude from its total income during the taxable year, for the purpose of ascertaining its gross income, any dividends paid or credited to policyholders from whom it did not receive any premium during that year; and as to such policyholders as it did receive premiums from that year it is entitled to exclude only such part of the dividends paid to those policyholders as did not exceed the amount received from them, respectively, by way of premiums during that year. None of the cash dividends paid by a life insurance company to its policyholders which represent redundancies in previous premium. payments are deductible from gross income in annual tax returns as "sums other than dividends paid within the year on policy . . . . contracts." [Lederer, Collector, v. Penn Mutual Life Insurance Co. (247 Fed. 559), United States Circuit Court of Appeals for the Third Circuit. (T. D. 2899, July 24, 1919.)] The effect of this decision is that part of the "dividends" paid by insurance companies, even though mere returns of over-assessments of premiums in the past, are not allowable deductions. The court did not defend the law as being equitable, but held that Congress specified the items which could be deducted and that no provision was made for the deduction of payments to policyholders from whom premiums equal to the return premiums were not received during the taxable year. What need not be included in gross income.— REGULATION. A life insurance company shall not include in gross income such portion of any actual premium received from any individual policyholder as is paid back or credited to or treated as an abatement of premium of such policyholder within the taxable year. (a) "Paid back" means paid in cash. (b) "Credited to" means held to the credit of, including dividends applied to pay renewal premiums, to purchase additional paid-up insurance or annuities, or to shorten the endowment or premium-paying period. It does not include dividends provisionally ascertained and apportioned upon deferred dividend policies. (c) "Treated as an abatement of premium" means of the premium for the taxable year. Where the dividend paid back is in excess of the premium received from the policyholder within the taxable year there may be excluded from gross income only the amount of such premium received, and where no premium is received from the policyholder within the taxable year the company is not entitled to exclude from its premiums received from other policyholders any amount in respect of such dividend payment. (Art. 549.) Gross income of foreign corporations. REGULATION. The gross income of a foreign corporation or insurance company means its gross income from sources within the United States, as defined and described in articles 91-93 relating to nonresident alien individuals. The income from business relating to a foreign country which is transacted by a United States branch or agency of a foreign insurance company must be returned as gross income. (Art. 550.) [See page 831.] Deductions LAW. Section 234. (a) ... (10) In the case of insurance companies, in addition to the above:3 (a) The net addition required by law to be made within the taxable year to reserve funds (including in the case of assessment insurance companies the actual deposit of sums with State or Territorial officers pursuant to law as additions to guarantee or reserve funds); and (b) the sums other than dividends paid within the taxable year on policy and annuity contracts; (11) In the case of corporations 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, in addition to the above, such portion of the net addition (not required by law) made within the taxable year to reserve funds as the Commissioner finds to be required for the protection of the holders of such policies only; (12) In the case of mutual marine insurance companies, there shall be allowed, in addition to the deductions allowed in paragraphs (1) to (10), inclusive, amounts repaid to policyholders on account of premiums previously paid by them, and interest paid upon such amounts between the ascertainment and the payment thereof; (13) In the case of mutual insurance companies (other than mutual life or mutual marine insurance companies) requiring their members to make premium deposits to provide for losses and expenses, there shall be allowed, in addition to the deductions allowed in paragraphs (1) to (10), inclusive (unless otherwise allowed under such paragraphs) the amount of premium deposits returned to Paragraphs 1 to 9 cover deductions for expenses, interest, taxes, losses, depreciation, etc. (See Chapters XXIII to XXXI.) their policyholders and the amount of premium deposits retained for the payment of losses, expenses, and reinsurance reserves; REGULATION. Insurance companies are entitled to the same deductions from gross income as other corporations, and also to the deduction of the net addition required by law to be made within the taxable year to reserve funds and of the sums other than dividends paid within the taxable year on policy and annuity contracts. "Paid" includes "accrued" or "incurred" (construed according to the method of accounting upon the basis of which the net income is computed) during the taxable year, but does not include any estimate for losses incurred but not reported during the taxable year. As payments on policies there should be reported all death, disability and other policy claims (other than dividends as above specified) paid within the year, including fire, accident and liability losses, matured endowments, annuities, payments on installment policies and surrender values actually paid. See also article 566. (Art. 568.) Deductions for reserves. REGULATION. Insurance companies may deduct from gross income the net addition required by law to be made within the taxable year to reserve funds, including in the case of assessment insurance companies the actual deposit of sums with State or Territorial officers pursuant to law as additions to guarantee or reserve funds. This is considered to mean the net addition required by the specific statutes of the States within which the taxpayer transacts business. A requirement by a State insurance commissioner that a net addition shall be made to certain amounts retained to meet specified liabilities is not a net addition required by law to be made to reserve funds within the meaning of the statute. Only reserves commonly recognized as reserve funds in insurance accounting are to be taken into consideration in computing the net addition to reserve funds required by law. In the case of a fire insurance company the only reserve fund commonly recognized is the "unearned-premium" fund. Casualty companies may deduct losses incurred within the taxable year; but unless the net addition to the unpaid loss reserve required by law exceeds such losses incurred, no deduction for the net addition to the unpaid loss reserve may be taken. In any event only the excess of such net addition over such losses may be deducted. In the case of life insurance companies the net addition to the "reinsurance reserve" and the "reserve for supplementary contracts not involving life contingencies," and the net addition to any other reserve funds necessarily maintained for the purpose of liquidating policies at maturity, are legally deductible. An increase in the reserve maintained by a life insurance company to pay dividends on deferred dividend policies may not be deducted from gross income. Mutual hail and |