Moneys paid a pipe-line corporation by its stockholders. Held not payment for capital stock, but advances to corporation, and corporation, having no paid up stock, could not deduct interest on such advances in calculating net income. (Associated Pipe Line Co. v. United States, 258 Fed. 800, 1919.)

Money reserved and set aside by book entries each year for the purpose of meeting a loss occasioned by selling bonds below par was not a payment of interest nor did it represent a loss actually sustained within the year-the money not being, in fact, paid out— and hence could not be deducted either as an interest payment on outstanding indebtedness or as a loss of the current year under subdivision 2, section 38, act of August 5, 1909. Bookkeeping entries are not a basis for taxation. (So. Pac. Ry. Co. v. Muenter & Wardell (unreported), (C. C. A., 9th Cir., 1919.) See also Chicago & Alton R. R. Co. v. U. S. (53 Ct. Cls. 41.)

LOSSES.

In the absence of evidence to the contrary, the profits and losses on sales of real estate, acquired by mutual insurance companies through foreclosure of mortgages securing loans made by them, and carried by said companies as assets at a valuation equal to the original cost to the company, should be treated as having been made. or sustained during the year, and the company was chargeable in its gross income with the profits made and entitled to a deduction of the full amount of the losses. (Connecticut Mutual Life Ins. Co. v. Eaton, 218 Fed., 206, 207, 1914.) Affirmed in 223 Federal 1022 on another point.

See Southern Pacific Railway Co. v. Muenter & Wardell, last case under "Interest deductions" above.

NET ADDITIONS TO RESERVE FUNDS.

Where a mutual insurance company issued supplementary policy contracts, by which the amount due on policies that had matured was paid in annual installments for a given term of years, or during the lifetime of the beneficiary, instead of in one sum, and, to secure such payments, was required by State law to maintain a reserve, it was entitled to deduct such reserve from its income received in determining the amount on which it was liable for excise taxation under corporation tax act, section 38. (Mutual Benefit Life Ins. Co. v.

Herold, 198 Fed. 199, 1912.)

In case of McCoach v. Insurance Co. of North America the Supreme Court (244 U. S. 585, 1917) reversed the decision of the C. C. A. (Insurance Co. of North America v. McCoach, 224 Fed. 657, 1915), and affirmed the decision of the district court (218 Fed. 905) holding that a fire and marine insurance company in Pennsylvania is not required by State laws to maintain a reserve against unpaid losses and, therefore, amounts added by it to such reserve may not be de

ducted in determining the company's net income for purposes of the corporation tax.

Where a mutual life insurance company had obligations on policies termed supplementary contracts, presenting the feature that, when a policyholder died, the beneficiary exercised an option to take the avails of the policy in installments, the general reserve fund was charged with a fixed liability according to the deferred term covered by the option, the inclusion of such contracts, as exhibiting a reserve liability, in the calculation of the annual "net addition to reserve" which might be deducted from the gross income, was warranted under corporation tax act, section 38. (Northwestern Mut. Life Ins. Co. v. Fink, 248 Fed. 569, 1917.)

Where a New Jersey corporation engaged in insurance business was required by New Jersey commissioner of banking and insurance to provide reserve for all policies written though premiums were not fully paid, all sums paid into reserve are to be excluded in computing gross income for purpose of taxation under corporation excise tax act. (Prudential Insurance Co. v. Herold, 247 Fed. 681.)

Under acts Tennessee 1895, chapter 160, sections 1, 8, 16, relating to insurance companies, reserve funds are not required by law to be so maintained as to include additional sums reserved to satisfy unpaid losses, accrued or prospective, and no deductions for amounts so reserved, though required by the insurance commission, can be allowed under excise tax law August 5, 1909, section 38, in computing a Tennessee company's net income for taxation, though the act provided for deduction of any additions to reserve funds required by law.

When a word which has a known legal meaning is used in a statute, it must be assumed that it is used in its legal sense in the absence of an indication to the contrary; therefore the term "reserve funds," used in excise tax law August 5, 1909, section 38, must be given the signification known in the general law of insurance. (National Life & Accident Insurance Company v. Craig, 251 Fed. 524.)

Mutual life insurance company's return under above act should not include premiums and interest due, but not received. Inclusion of supplementary contracts, as exhibiting reserve liability, in calculation of annual net addition to reserve, to be deducted from income of such company, held warranted under corporation tax act. Interest accrued on policy loans need not be returned as part of gross income. (Northwestern Mutual Life Insurance Co. v. Fink, 248 Fed. 568.)

The exemptions stated of "net additions" to reserve funds was only intended to cover such additions as were required by law and not such as business prudence suggested.

149707-19-PT II- -3

The sums released from reserve funds are not exempt from taxation as reserve funds, for when they cease to be reserve funds they are then income. (Maryland Casualty Co. v. U. S., 52 Ct. Cls., 201, 1917, pending in U. S. Supreme Court.)

TAXES IMPOSED BY STATES, ETC.

1. Act Pennsylvania June 13, 1907 (P. L. 640), entitled "An act to provide revenue by levying a tax upon the shares of stock of certain classes of corporations," requires such corporations to report to the auditor general the number of shares into which their stock is divided and the actual value thereof, ascertained in the manner prescribed by the act, and provides that on such report or return the auditor general shall assess the shares for taxation at a specified rate based on the actual value, to be determined by ascertaining the aggregate sum of payments on the stock, the surplus, and undivided profits and dividing such sum by a figure representing the total number of shares. It is thereupon made the duty of the executive officers of the corporations to post the tax settlement in the corporation's place of business; and within a specified time, at its option, either to pay the total amount of the tax out of its general funds or collect the same from its stockholders and pay the amount into the State treasury. The act further declares that if the corporation's officers fail to comply with the act, they shall be adjudged in default, and as a penalty the corporation shall be responsible to the State for the tax assessed against the stockholders. Held that the tax so assessed was a tax against the property of the individual stockholders and not against either the corporation or its property, and hence was not such a tax as to be deducted from the corporation's return to the United States under corporation tax act (act Aug. 5, 1909) providing for a tax on the net income of corporations, and authorizing the deduction of all sums paid by a corporation within the year for taxes imposed under the authority of the United States or any State. (Northern Trust Co. v. McCoach, 215 Fed. 991, 1914; same point similarly decided in Eliot National Bank v. Gill, 218 Fed. 601.)

2. A tax levied by a State on the shares of a national bank, and paid by the bank as required by the State statutes, but which under the statute it has the right to recover back from the stockholder, is not a "tax imposed under the authority of the State" on the corporation or its property, within the meaning of corporation tax law August 5, 1909, * * such as the bank is thereby authorized to deduct from its gross income to ascertain its taxable net income; nor can it be deducted as an expense of the business. (National Bank of Commerce in St. Louis v. Allen, 211 Fed. 743, 1914, and affirmed by 223 Fed. 472, 1915.)

*

3. State, county, and municipal taxes paid by a bank under laws of Florida, 1907, chapter 5596, section 8, constitute a liability of the

stockholders, and are to be deducted from the gross income of the bank, to ascertain the net amount on which the 1 per cent of excise tax under act of August 5, 1909, * * * is to be calculated. (U. S. v. Guaranty Trust & Savings Bank, 253 Fed. 291, 1918.) 4. Where taxes on stock owned by a corporation have been paid in its behalf by the corporations in which it owns said stock, the corporation will not be allowed to deduct such payments made in its behalf from its corporation excise tax return. While it is true that a "statute providing for the imposition of taxes is to be strictly construed, and all reasonable doubt in respect thereto resolved against the Government and in favor of the citizen" (Mutual Benefit Life Ins. Co. v. Herold (D. C.), 198 Fed. 199, and cases therein cited), no doubtful meaning is here involved. The language of the act is clear and explicit. The allowable deductions in the case of a domestic corporation are plainly set forth: *** If it had been the intention to permit such a deduction as defendant urges, the act would have provided that there be included "all sums paid by it or in its behalf within the year * * *" (United States v. Aetna Life Ins. Co., 260 Fed. 333, 1919.)

Income.

of course

1. Income, within the meaning of section 38 * need not be such an income as would have been taxable as such. (But see C. C. C. & St. L. Ry. Co. v. U. S. 242 Fed. 18.) (Stratton's Independence v. Howbert, 231 U. S. 399, 416, 1913.)

1a. Income, within the meaning of the corporation tax law of 1909 includes the proceeds of ores mined by a corporation from its own premises. (Stratton's Independence v. Howbert, 231 U. S. 399, 400, 1913.)

2. So-called "dividends" paid annually to policyholders by a mutual life insurance company doing business on the level-premium plan, which arise from the excess of premiums collected during previous years over actual ascertained requirements, are not taxable as part of the company's "net income" under the act of August 5, 1909, so far as the same were used to reduce subsequent premiums, the same having been once taxed as a part of the income of the year when received. Such rule, however, does not apply to a "dividend" declared in the case of a full-paid participating policy, wherein the policyholder has no further premiums to make, which dividend constitutes a participation in the profits and income of the invested funds of the company. (Mut. Ben. Life Ins. Co. v. Herold, 198 Fed. 199, 1912; affirmed 201 Fed. 918, 1913; pet. for writ of certiorari denied 231 U. S. 755, 1913.)

3. In case of a life insurance company, which, although a stock company, conducts a mutual department, but collects premiums from the participating policyholders on the level-premium plan, and

at the end of the year, when the cost of carrying the policy has been ascertained, credits the policyholder with the excess paid, which he may have applied in reduction of the next premium, to purchase additional insurance, to shorten the premium-paying period of his policy, or to accelerate its maturity in case of an endowment policy, the surplus so applied is not a "dividend," within the meaning of the act, but represents nothing more than the excess of loading of the premium, which is returnable in some form to the policyholder. (Connecticut Gen. Life Ins. Co., v. Eaton, 218 Fed. 188, 1914: affirmed in 223 Fed. 1022, 1915.)

4. In computing the excise tax due from an insurance corporation, it was improper to include in the gross income accrued, but unpaid, interest on investments represented by unmatured interest coupons payable in the future. (Insurance Co. of North America v. McCoach, 218 Fed. 905, 1914.) (This point not appealed.)

5. The word "income," as used in such act, meant that which had "come in" or had been already received, and that the net income so taxable should be determined on a cash, as distinguished from a revenue, basis, and did not include uncollected and deferred premiums and interests, accrued and due, but not actually received. (Mutual Ben. Life Ins. Co. v. Herold, 198 Fed. 199, 1912; and Connecticut Mut. Life Ins. Co. v. Eaton, 218 Fed. 206, 207, 1914; affirmed in 223 Fed. 1022, 1915.)

6. An increase in the book value of the assets of a corporation by a revaluation of property does not constitute any part of the gross amount of its "income received within the year." On the other hand, a book charge because of the sale of an issue of bonds at less than par, or because of bad debts or for money paid out for charities, is not a part of the "expenses actually paid within the year out of income" to be deducted from gross income. (Baldwin Locomotive Works v. McCoach, 215 Fed. 967, 1914; affirmed in 221 Fed. 59, 1915, C. C. A.) and Chicago & Alton R. R. Co. v. U. S. (53 Ct. Cls. 41); also U. S. v. Alpha Portland Cement Co. (257 Fed. 432.)

7. Increase in book value of securities held by a banking and trust company does not constitute income received during the year, but should be treated as increase of capital. (Industrial Tr. Co. v Walsh, 222 Fed. 437, 1915.) U. S. D. C.

8. Where amounts which should have been charged to the depletion of corporate assets were carried in a surplus account, income taxes imposed by corporation excise tax law can not be based on such amounts, for that would allow the basing of taxes on mere bookkeeping. (Forty Fort Coal Co. v. Kirkendall, 233 Fed. 704, 705, 1915.)

8a. A corporation desired to increase its capital without using new money. Bookkeeping entries evidenced a cash transaction of