4 T.C. 732">*732 This case involves deficiencies in income tax for the taxable year ended December 31, 1940, in the amount of $ 34,818.34, and in excess profits tax for the same period in the amount of $ 21,923.20.

The first issue presented is whether petitioner's taxable year, within the language of section 203 (a) (2) of the Internal Revenue Code, began on March 23, 1940, or, on the other hand, on January 1, 1940. The date affects the amount of petitioner's deduction based upon its reserve funds.

The second issue is whether, in computing its excess profits tax liability for the taxable year ended December 31, 1940, petitioner is entitled to include in its invested capital the reserve funds held by it under the law for the fulfillment of its life insurance and annuity contracts.

FINDINGS OF FACT.

We incorporate herein by reference and make a part hereof the stipulation of facts filed, including the exhibits attached thereto and made1945 U.S. Tax Ct. LEXIS 233">*235 a part thereof. The following is a summary of the stipulated facts and the exhibits attached thereto, together with additional facts the finding of which is based upon evidence adduced at the trial.

4 T.C. 732">*733 Reserve Loan Life Insurance Co. of Texas, hereinafter referred to as petitioner, is a Texas corporation. Its charter was filed with and approved by the Board of Insurance Commissioners of the State of Texas on November 14, 1939, and was on the same day approved by the Attorney General of Texas. The original incorporators were C. W. Murchison, Toddie L. Wynne, and B. J. Wynne.

Petitioner's purpose at the time it was chartered was to acquire all of the business and assets, reserves, contracts, and liabilities of every character of Reserve Loan Life Insurance Co. of Indianapolis, Indiana, hereinafter sometimes referred to as the Indiana company, to continue the business previously conducted by the Indiana company and to engage in business as a life insurance company. Negotiations to effect this purpose were commenced in June 1939. An amended charter was filed for the Indiana company in September 1939, embodying, inter alia, an amendment to its articles of incorporation 1945 U.S. Tax Ct. LEXIS 233">*236 proposed by the board of directors on August 16, 1939, and adopted by the shareholders on September 19, 1939, whereby the capital stock of the Indiana company was increased from 20,000 shares of the par value of $ 10 each, aggregating $ 200,000, to 53,000 shares of the par value of $ 5 each, aggregating $ 265,000. The additional capital was contributed by C. W. Murchison and Toddie L. Wynne, in connection with their plan to acquire the Indiana company and move it to Texas. These changes in the Indiana company became advisable as a result of an examination of the Indiana company about that time by the Insurance Commissioner of the State of Indiana, in whose report the conclusion was reached that the Indiana company was in need of rehabilitation.

An agreement of reinsurance, duly executed and dated March 9, 1940, under the terms of which petitioner was to acquire all the assets and assume all the liabilities of the Indiana company, was acknowledged on March 9, 1940, by the president and secretary of the Indiana company, and on March 11, 1940, by the president and secretary of petitioner. It was approved by the chairman of the board of Insurance Commissioners of Texas, on March 12, 1945 U.S. Tax Ct. LEXIS 233">*237 1940, and by the Insurance Commissioner of Indiana on March 18, 1940. Petitioner's board of directors had held meetings with reference to this reinsurance agreement between November 14 and December 31, 1939. Petitioner's president, B. J. Wynne, held in trust the controlling interest of the Indiana company for the account of C. W. Murchison and Toddie L. Wynne. As petitioner's president, it was B. J. Wynne's job to get the Indiana company moved to Texas, and he conferred at various times prior to March 23, 1940, with the Insurance Commissioners of Texas and Indiana.

Petitioner acquired all of the assets and assumed all the liabilities of the Indiana company as of March 23, 1940. As of that date petitioner 4 T.C. 732">*734 took over 52,080 shares of the 53,000 outstanding of the capital stock of the Indiana company and all of its business, assets, reserves, contracts, and liabilities of every character, in exchange for which the stockholders of the Indiana company received $ 4 per share in cash and $ 8 per share in units of beneficial interest in petitioner. Actual physical delivery of the reserve funds and assets to the Board of Insurance Commissioners of the State of Texas, at Dallas, 1945 U.S. Tax Ct. LEXIS 233">*238 Texas, and to petitioner, and release by the Indiana company and by the Department of Insurance of the State of Indiana were not effected until March 29, 1940, after articles of reinsurance between the Indiana company and petitioner had been filed with and approved by the Insurance Commissioner of Indiana on March 23, 1940.

Prior to March 23, 1940, petitioner did not employ any personnel; it had neither agents nor rate books, and its first policies were not printed until after March 23, 1940. Petitioner did not rent the building which it now occupies as its home office until after the reinsurance agreement had been approved by the parties, and it was agreed that the lease was not binding if the company did not move from Indiana. When the reinsurance agreement became effective on March 23, 1940, petitioner held a new election of officers, and it was not until March 28, 1940, that its first policy was written. Its activities prior to March 23, 1940, were limited to renting the building, as above stated, and to negotiating for taking over the business, assets, reserves, contracts, and liabilities of the Indiana company.

On January 1, 1940, the Indiana company was a life insurance 1945 U.S. Tax Ct. LEXIS 233">*239 company, engaged in the business of issuing life insurance and annuity contracts (including contracts of combined life, health, and accident insurance) and its reserve funds required by law and held for the fulfillment of such contracts on January 1, 1940, comprised more than 50 percent of its total reserve funds required by law and so held for the fulfillment of such contracts on January 1, 1940, and amounted to $ 10,258,754.85. Since the effective date of the articles of reinsurance, March 23, 1940, the Indiana company has been dormant and inactive and at December 31, 1940, reserve funds of the Indiana company held under the law for the fulfillment of its life insurance and annuity contracts were zero.

On March 23, 1940, petitioner was an insurance company engaged in the business of issuing life insurance and annuity contracts (including contracts of combined life, health, and accident insurance), and its reserve funds required by law and held for the fulfillment of such contracts were $ 10,258,754.85 and comprised more than 50 percent of its total reserve funds. Prior to March 23, 1940, petitioner's reserve funds required by law and held for the fulfillment of such contracts were1945 U.S. Tax Ct. LEXIS 233">*240 zero.

4 T.C. 732">*735 On December 31, 1940, the petitioner was an insurance company engaged in the business of issuing life insurance and annuity contracts (including contracts of combined life, health, and accident insurance), and its reserve funds required by law and held for the fulfillment of such contracts on December 31, 1940, were $ 10,272,773.07, and comprised more than 50 percent of its total reserve funds.

The mean of the reserve funds of petitioner required by law and held on March 23, 1940, for the fulfillment of life insurance and annuity contracts and contracts of combined life, health, and accident insurance and those reserves so held on December 31, 1940, amounted to $ 10,265,763.96. The reserve funds of petitioner and the Indiana company were computed at a lower assumption rate than 4 percent.

Petitioner filed for the calendar year 1940 with the collector of internal revenue for the second collection district of Texas at Dallas, Texas, Form 1120L (headed "For Calendar Year 1940"), insurance company income and defense tax return, ¹ and Form 1121, corporation excess profits tax return, reporting therein the taxable income and claiming therein deductions of petitioner and1945 U.S. Tax Ct. LEXIS 233">*241 those of the Indiana company. Petitioner claimed deduction under section 203 (a) (2) of the Internal Revenue Code of $ 389,577.90, being 3 3/4 percent of $ 10,388,743.93, the mean of the reserve funds of the Indiana company at January 1, 1940, held as required by law for the fulfillment of life insurance and annuity contracts and contracts of combined life, health, and accident insurance and those of petitioner so held at December 31, 1940, as reported on the return. Petitioner makes that claim now only in the alternative, contending primarily that the mean of reserves at March 23, 1940, and December 31, 1940, should be used in computing net income. Schedule No. 1 of the Form 1120L showed separately income and deductions for the period January 1 to March 23, 1940, and income and deductions for the period March 23 to December 31, 1940, but listed as taxable some items of income covering both periods, and listed as deductions some items covering both periods. The computation showed no tax payable, but a loss of $ 36,452.31. A return for the period March 23 to December 31, 1940, would also have shown a loss, if the $ 389,577.90 deduction were taken.

1945 U.S. Tax Ct. LEXIS 233">*242 The respondent has disallowed $ 196,963.40 of the deduction of $ 389,577.90 claimed on the basis that, for the purpose of computing the deduction under section 203 (a) (2) of the Internal Revenue Code, the reserve funds required by law and held at January 1, 1940, 4 T.C. 732">*736 for the fulfillment of petitioner's life insurance and annuity contracts were zero and that such reserve funds so held at December 31, 1940, amounted to $ 10,272,773.07. Respondent has also eliminated from taxable income and deductions items designated in the notice of determination of deficiency as items of income and deductions belonging to the Indiana company for the period January 1 to March 23, 1940.

In the computation of excess profits tax herein respondent has failed to include in invested capital reserve funds of petitioner required by law and held for the fulfillment of life insurance and annuity contracts (including contracts of combined life, health, and accident insurance), on the theory that they are not a part of invested capital for the computation of excess profits tax credit of 8 percent of the invested capital.

March 23, 1940, was the beginning of petitioner's taxable year ended December 31, 1945 U.S. Tax Ct. LEXIS 233">*243 1940, within the meaning of section 203 (a) (2) of the Internal Revenue Code.

OPINION.

Supplement G of chapter 1, subchapter C, of the Internal Revenue Code provides for income tax upon life insurance companies. Section 203 (a) (2), a part of Supplement G, provides:

(a) General Rule. -- In the case of a life insurance company the term "net income" means the gross income less --

* * * *

(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 3 3/4 per centum shall be substituted for 4 per centum. * * *

It is agreed that the rate of 3 3/4 percent applies here.

The first question in this case is whether March 23, 1940, is the beginning of petitioner's taxable year within the meaning of section 203 (a) (2). If so, petitioner is entitled to deduct from gross income the sum of $ 384,966.15, which is 3 3/4 percent of the mean of the reserve funds of $ 10,258,754.85 required by law and held by it on March 23, 1940, and reserve funds of $ 10,272,773.07 so held by it on December1945 U.S. Tax Ct. LEXIS 233">*244 31, 1940. Respondent argues that petitioner's taxable year began January 1, 1940, so that petitioner may deduct only 3 3/4 percent of the mean between zero, the amount of petitioner's reserve on January 1, 1940, and the reserve held on December 31, 1940.

To be entitled to any deduction based on its reserves, the petitioner must be a life insurance company. By section 201 (a), a life insurance company is defined as:

(a) Definition. -- When used in this chapter the term "life insurance company" means an insurance company engaged in the business of issuing life insurance and 4 T.C. 732">*737 annuity contracts (including contracts of combined life, health and accident insurance), the reserve funds of which held for the fulfillment of such contracts comprise more than 50 per centum of its total reserve funds.

Until March 23, 1940, petitioner did not comply with the above definition because it did not earlier hold reserve funds for the fulfillment of its contracts of more than 50 percent of its total reserve funds. It possessed no reserve funds at all until that date. As to this fact there is no disagreement between the parties, and it is agreed that on March 23, 1940, it had reserve funds1945 U.S. Tax Ct. LEXIS 233">*245 in the necessary amount. Therefore petitioner was not, within the intendment of the Federal statute here involved, a life insurance company until March 23, 1940, ² and it follows that it could not, until that date, compute its net income as life insurance companies may do, by deducting the mean of its reserves at the beginning and end of the taxable year. The respondent argues that, because the petitioner's charter was issued in November 1939 and its officers negotiated with the Indiana Company until March 23, 1940, and rented an office building prior to March 23, 1940, it was a life insurance company from before January 1. Such facts are clearly insufficient to make the petitioner a life insurance company under the statutory definition. Bowers v. Lawyers' Mortgage Co., 285 U.S. 182">285 U.S. 182, 285 U.S. 182">188.

1945 U.S. Tax Ct. LEXIS 233">*246 The petitioner, in effect, contends that because, as we above conclude, it was not a life insurance company until March 23, 1940, its taxable year began on that date, within the meaning of section 203 (a) (2); in other words, that the section, in referring to taxable year, refers only to its taxable year as a life insurance company. It cites Royal Highlanders, 1 T.C. 184 (reversed on other grounds, 138 Fed. (2d) 240), as authority that a life insurance company may consider its taxable year to begin, and use its reserves in the computation of the deduction, upon the day when it becomes a life insurance company, though it had prior thereto been in existence as a corporation. The respondent, however, takes the view (in addition as above, to contending that petitioner was a life insurance company from date of its charter in November 1939) not only that the petitioner's taxable year is to be measured by its existence as a corporation, so that the petitioner could not, under section 48 (a) of the Internal Revenue Code, ³ file a return for a fraction of a year, and so use the fraction as its taxable year, as was done in the 1945 U.S. Tax Ct. LEXIS 233">*247 Royal Highlanders case, but that in fact the petitioner 4 T.C. 732">*738 did file a return for the entire calendar year and so can not, under the text of section 48 (a), have a taxable year beginning on March 23, 1940. To this the petitioner, in substance, answers that, though it did in its return cover the calendar year 1940, it divided both income and deductions into two periods, before and after March 23, thus in reality filing a return for a fractional part of a year, that it was required to cover the entire year by Regulations 103, section 19.201 (b)-1, requiring the return to be upon Form 1120L (which has the caption "For Calendar Year 1940"), also by the instructions issued with the form. In addition, the petitioner points out that the income reported and deductions taken, so far as covering the period January 1 to March 23, 1940, were eliminated by the Commissioner, leaving the return in effect one for a fraction of a year. Therefore, the petitioner says, it comes squarely within section 48 (a) and its taxable year began on March 23, 1940.

1945 U.S. Tax Ct. LEXIS 233">*248 In the consideration of this question, we seek first the purpose of the provision in section 203 (a) (2) which allows life insurance companies an unusual deduction, based upon a mean average of its reserves during its taxable year; for it is obvious that, though Supplement G does not provide an entirely separate tax code fully covering life insurance companies, ⁴ any application of other more general sections, such as 48 (a), should be interpreted in the light of the special nature of life insurance companies, as provided for in Supplement G. ⁵ The purpose of this deduction allowed life insurance companies by section 203 (a) (2) is clear: "The reason for allowing the deduction of 4 per cent. of the reserve is that a portion of the 'interest, dividends, and rents' received have to be used each year in maintaining the reserve; i. e., adding to it on the basis of a certain interest rate, varying from 3 per cent. to 4 per cent. according to the requirements of the statutes of the several states." Mr. Justice Brandeis, dissenting in National Life Ins. Co. v. United States, 277 U.S. 508">277 U.S. 508. The report of the Committee on Ways and Means on the Revenue Act1945 U.S. Tax Ct. LEXIS 233">*249 of 1942 refers to "The liberal deduction allowed for the amount of interest required for the maintenance of reserves." It thus appears that the 3 3/4 percent deduction based upon the mean of reserves is an attempt to render tax-free an amount sufficient to cover the amount of income which must actually go into policy reserves under the state statutes governing insurance companies.

The view of the respondent in this case, in our opinion, is opposed to the purpose of the statute, as above set forth; for the respondent would require a life insurance company to be in existence the entire calendar year in order to secure the deduction of 3 3/4 percent of the 4 T.C. 732">*739 mean reserves handled by it while engaged in life insurance business during such year, and a company which, on the respondent's theory, began business and had reserves1945 U.S. Tax Ct. LEXIS 233">*250 on January 3 would, because of the use of zero as representing its reserves, receive only one-half of the deduction which would be received by a company starting on January 1 with the same reserves and ending with the same reserves at the end of the year. The one company, starting on January 1, would receive, in accordance with Congressional intent, deduction of approximately the amounts required to be placed in the reserve, but the second company, starting on January 3, would, though required to place identically the same amount in reserve, receive only one-half as much as a deduction. The same is true, except in degree, in the instant case or in any other case where the life insurance company engages in business for some fraction of a calendar year. ⁶1945 U.S. Tax Ct. LEXIS 233">*253 Such a result should be countenanced only if clearly required by statute. We do not find such statute. ⁷Section 48 (a) of the Internal Revenue Code, as it existed in 1940, is not sufficiently clear in that respect to compel the result for which respondent argues. The first part of the section, defining "taxable year" as calendar year (or fiscal year), adds "upon the basis of which the net income is computed under this Part"; 1945 U.S. Tax Ct. LEXIS 233">*251 but "this Part" does not include Supplement G, and section 14 (d) of the Internal Revenue Code, as amended by section 201 of the Revenue Act of 1939, specifically provides that, "In the case of insurance companies, the tax shall be as provided in Supplement G." That supplement provides for computation of net income of life insurance companies, by consideration of both income and deductions in a manner peculiar to such life insurance companies, and it appears no strained construction to say that such life insurance company income is not computed under Part IV of subchapter B, referred to as "this Part" in section 48 (a), but is computed under Supplement G, a part of subchapter C. The latter part of section 48 (a) provides specially that "'Taxable 4 T.C. 732">*740 year' includes, in the case of a return made for a fractional part of a year * * *, the period for which such return is made" (italics supplied), and does not define the term as that section does after the amendment of "includes" to "means" by section 135 of the Revenue Act of 1942. Such language does not forbid us to consider taxable year as including, in this case, a portion of a year, even though we assume for the moment1945 U.S. Tax Ct. LEXIS 233">*252 that the return was not filed merely for such portion of the year; and if under any circumstances the language of the latter part of section 48 (a) so permits, it would seem to be permissible here, where we are considering a special kind of income, with the object of the statute so clear as expressed in the quotations above set forth, and perhaps more particularly where, as here, the Commissioner in the deficiency notice does not increase the petitioner's income by any amounts contended to have been earned prior to March 23, 1940, but on the contrary has eliminated all income reported and deductions taken by the petitioner for the period from January 1 up to March 23, thus in effect leaving a return for a period beginning March 23.

If the petitioner had filed a return strictly covering only the period from March 23 to December 31, 1940, we think it clear that, under Royal Highlanders, supra, the petitioner would be entitled to the deduction claimed, for therein the petitioner, as in this case, had been in existence throughout the entire year, though there as an exempt corporation. The petitioner reported only as to the fraction of the year covered by its business as a life insurance company, and we allowed deduction based upon consideration of its reserves at the date it began business as a life insurance company on May 4, 1937. Thus, the difference between this case and Royal Highlanders is the narrow one of possible difference between a return filed for the fraction of the year and one filed, as respondent contends and petitioner denies in this case, for the whole calendar year. We have above observed that section 48 (a) in its latter portion does not, in fact, limit1945 U.S. Tax Ct. LEXIS 233">*254 taxable year (in case of fractional years) only to the fraction reported. That question, of course, did not need to be answered in the Royal Highlanders case, since the fraction of a year during which life insurance business was transacted was carefully reported. Such a narrow distinction, even if it existed in fact, would not, in view of the generality of "includes" in section 48 (a), be a sound basis upon which to base a holding so essentially out of line with Congressional purpose as the respondent's view herein entails.

In fact, however, we think it may be said that the petitioner did file a return for a fractional part of the year. It did use Form 1120L, which is labeled "For Calendar Year 1940," but the same form was used in Royal Highlanders, yet we there found as a fact that the return 4 T.C. 732">*741 was for a fraction of a year. Regulations 103, section 19.201 (b)-1, and the instructions with Form 1120L require a domestic life insurance company to use that form. The petitioner may not, therefore, by the use thereof, be considered to have done more than obey regulations and instructions. It is true, of course, that the petitioner did report income and claim deductions1945 U.S. Tax Ct. LEXIS 233">*255 covering the entire calendar year, but this was only compliance with the regulation and instructions. The income and deductions were separated into two periods, before and after March 23, indicating a recognition that a situation different from the earlier part of the year existed after that date, which can only have reference to the beginning of the life insurance business. The petitioner, reporting the entire year, reported no tax, but a loss of about $ 36,000; and a return for the fractional year beginning on March 23 would likewise have reported a loss, so that the petitioner was, tax-wise, not interested in whether the return included only its own income beginning on March 23 or the income also of the Indiana company up to that date. Under such circumstances, a return covering in one sense the entire year should not, in our opinion, be considered to cause such a distinction between this case and Royal Highlanders, supra, as to deny, to the extent of approximately one-half, a deduction which we consider Congress intended the petitioner to have. The petitioner in Royal Highlanders, though in existence during the entire calendar year, had no1945 U.S. Tax Ct. LEXIS 233">*256 taxable income prior to the beginning of its life insurance status and business, and the same is true of the petitioner here. Great Southern Life Ins. Co., 33 B. T. A. 512; affd., 89 Fed. (2d) 54; and Western & Southern Life Ins. Co. v. Huwe, 116 Fed. (2d) 1008 (affirming U. S. Dist. Ct., S. Dist. Ohio, Aug. 14, 1939), are not authority contrary to Royal Highlanders, supra, or to our conclusion here; for in those cases the companies were life insurance companies from the beginning of the year and merely acquired business of other companies during the year, so that the effect of any reserve so acquired would be reflected in the reserves at the end of the year and the company thus would get deductions based thereon, within the intent of Congress and the rationale of our conclusion here. We hold that the petitioner's taxable year as a life insurance company began March 23, 1940, and that the respondent erred in denying the deduction based upon a mean between petitioner's reserves at March 23 and December 31, 1940.

The parties are in agreement that the above conclusion1945 U.S. Tax Ct. LEXIS 233">*257 renders unnecessary the consideration of the second issue; and the same is true of petitioner's alternative contention.

Decision will be entered for the petitioner.