mutual cyclone insurance companies are entitled to deduct from gross income the net addition which they are required to make to the "guaranty surplus" fund or similar fund. (Art. 569.)

Special deductions in the case of combined life, health and accident policies.

REGULATION. Corporations which issue combination policies of life, health and accident insurance on the weekly premium payment plan, continuing for life and not subject to cancellation, may deduct from gross income only such portion of the net addition not required by law made within the taxable year to reserve funds as is needed for the protection of the holders of such combination policies. In general the net addition to any fund especially maintained for the protection of such policyholders may be deducted. The determination by the company of the need for such addition is subject to review by the Commissioner, and the return of income should be accompanied by a full explanation of the basis upon which such fund and the additions to it are determined. (Art. 570.)

Special deductions allowed mutual marine insurance companies.

REGULATION. Mutual marine insurance companies should include in gross income the gross premiums collected and received by them less amounts paid for reinsurance. . . . . They may deduct from gross income amounts repaid to policyholders on account of premiums previously paid by them, together with the interest actually paid upon such amounts between the date of ascertainment and the date of payment thereof. The remainder of the premiums accordingly form part of the net income of the company, except to the extent that they are subject to the deductions allowed insurance companies in general and other corporations. (Art. 571.)

Special deductions allowed mutual insurance companies.— REGULATION. Mutual insurance companies (other than mutual life and mutual marine insurance companies), which require their members to make premium deposits to provide for losses and expenses, are allowed to deduct from gross income the aggregate amount of premium deposits returned to their policyholders or retained for the payment of losses, expenses and reinsurance reserves. If, however, any portion of such amount is applied during the taxable year to the payment of losses, expenses or reinsurance reserves, for which a separate allowance is taken, then such portion is not deductible; and if any portion of such amount for which an allowance is taken is subsequently applied to the payment of expenses, losses or

reinsurance reserves, then such payment cannot be separately deducted. An amount of premium deposits retained for the payment of expenses and losses, and the amount of such expenses and losses, may not both be deducted. A company which invests part of the premium deposits so retained by it in interest-bearing securities may nevertheless deduct such part, but not the interest received on such securities. A mutual fire insurance company which has a guaranty capital is taxed like other mutual fire insurance companies. A stock fire insurance company, operated on the mutual plan to the extent of paying dividends to certain classes of policyholders, may make a return on the same basis as a mutual fire insurance company with respect to its business conducted on the mutual plan. (Art. 572.)

Insurance Companies which Are Exempt

LAW. Section 231. . . . (3) Fraternal beneficiary societies, orders, or associations, (a) operating under the lodge system or for the exclusive benefit of the members of a fraternity itself operating under the lodge system, and (b) providing for the payment of life, sick, accident, or other benefits to the members of such society, order, or association or their dependents; . .

(10) Farmers' or other mutual hail, cyclone, or fire insurance companies, . . . . of a purely local character, the income of which consists solely of assessments, dues, and fees collected from members for the sole purpose of meeting expenses;

Fraternal beneficiary societies.—

REGULATION. A fraternal beneficiary society is exempt from tax only if operated under the "lodge system," or for the exclusive benefit of the members of a society so operating. "Operating under the lodge system" means carrying on its activities under a form of organization that comprises local branches chartered by a parent organization and largely self-governing, called lodges, chapters, or the like. In order to be exempt it is also necessary that the society have an established system for the payment to its members or their dependents of life, sick, accident or other benefits. (Art. 514.)

Mutual insurance companies and like organizations.REGULATION. It is necessary to exemption that the income of the company be derived solely from assessments, dues and fees collected from members. If income is received from other sources, the corporation is not exempt, even though its additional income is tax exempt. Income, however, from sources other than those specified does not prevent exemption where its receipt is a mere incident of

the business of the company. Thus the receipt of interest upon a working bank balance, or of the proceeds of the sale of badges, office supplies or equipment, will not defeat the exemption. The same is true of the receipt of interest upon liberty bonds, where they were purchased as a patriotic duty and were afterwards sold. Where, however, such bonds are bought as a permanent investment, the receipt of the interest destroys the exemption. The receipt of what is in substance an entrance fee, charged by a mutual fire insurance company as a condition of membership, does not render the company taxable, although this fee is called a premium. But the issuance of policies for stipulated cash premiums prevents exemption. . . . (Art. 521.)

Returns of Insurance Companies

REGULATION. Insurance companies transacting business in the United States or deriving an income from sources therein are required to file returns of income. The return shall be on form 1120. As an aid in auditing the returns, wherever possible a copy of the report to the State insurance department should be submitted with the return. Otherwise a copy of schedule D, parts 1, 3 and 4, of the report should be attached to the return, showing the federal, State and municipal obligations from which the interest omitted from gross income was derived, and a copy of the complete report should be furnished as soon as ready for filing. (Art. 623.)

CHAPTER XXXVI

FARMERS

The lowering of the specific exemption to $1,000 and $2,000 has had the effect of bringing many thousands of farmers within the class of income tax payers. There are many difficulties involved in the assessment of tax upon the true net income of a farmer, the accounting difficulty being very serious. It is now generally recognized, however, that accurate accounting of the income and expenses incident to the business of farming is practicable and is very beneficial to the farmer. The attempt by the Commissioner of Internal Revenue to secure returns which reflect actual operating results should have unanimous support.

It has been charged in the past that lawmakers legislate in favor of the farmer whenever possible. It is questionable whether the farmer ever demanded special favors. It may rather be assumed that all he asked was a square deal, that is, the right to insist that no undue burden be placed upon him. It has not been shown that farmers as a class have knowingly evaded income tax requirements. Inability to understand the laws and difficulty in determining actual net income have probably deterred many from making returns. Under saner laws and intelligent administration it may be expected that many returns and substantial taxes will be received.

To the extent that a farmer is not required to return as income that part of his crops which is consumed as food by himself and his family he receives an allowance for living expenses. This is an allowance which is not permitted to any other class of taxpayers. As soon as possible the allowance should be withdrawn.

In Great Britain a method was devised under which a farmer's taxable income was assumed to have a definite relation to the rental value of the farm. Such a method would

hardly meet with favor in the United States, but if a farmer is not willing to keep books and ascertain, even roughly, his net income some plan should be devised whereby to impose a reasonable tax in all cases in which a tax obviously is due.

Enormous prices for farm products and extensive purchases of automobiles and farm equipment of every sort indicate surplus funds among the farmers. It has been stated that farmers as a rule do not mortgage their farms to buy luxuries and that the expenditures mentioned must be out of the proceeds of taxable income rather than from borrowed money.

The introduction of the inventory system will do more than anything else to prove to the farmer that there may be an increase in net worth even though his bank balance has not increased.

Furthermore, it may be assumed that most sales of farm properties result in a taxable profit to the seller.

Gross income.-
REGULATION.

All gains, profits and income derived from the sale or exchange of farm products, whether produced on the farm or purchased and resold, shall be included in the return of income for the year in which the products were actually marketed and sold, unless an inventory is used.

SALE OF MACHINERY AND WORK ANIMALS.

In case of the sale of machinery, and of animals purchased as draft or work animals or solely for breeding purposes and not for resale, any excess over the cost thereof reduced by all sums theretofore deducted for depreciation shall be included as gross income in preparing the taxpayer's return.

EXCHANGE OF PRODUCE FOR MERCHANDISE.—

Where farm produce is exchanged for merchandise, groceries or mill products, the market value of the article or product received in exchange is to be returned as income.

RENTS.

Rents received in crop shares shall be returned as of the year in which the crop shares are reduced to money or a money equivalent.