Evening star. [volume] (Washington, D.C.) 1854-1972, 1929-08-04
TAX BUREAU RULES
IN INSURANCE ISSUE
Question of Exempt Annuities
and Taxable Dividends De-
cided by Experts.

the taxability of annual payments re-
ceived by holders Of So-called combined
insurance and annuity policies or con-
tracts variously described as life
annuity with death benefit" and par
ticipating life income policy with
principle sum payable at DEATH" etc,
issued by leading domestic and foreign
insurance companies.
This ruling holds that in order to
arrive at taxable income, the peculiar
policies or contracts in question shall
be treated, In part, as annuity con.
tracts within the meaning Of the reve-
nue. act of 1926 and the revenue act of
1928 only II the issuing insurance
company properly allocates that por-
ton Of the total premium or considera-
ton paid to the annuity feature which
can fairly be so identified.
The precise issue to be settled was
whether the annual payments re-
ceived by the holders Of such contracts,
so that the holders are not required
to pay income tax on the amounts re-
ceived by them from the insurance
companies. In the National Income
Tax Magazine for July Joseph Conrad
Fehr, former attorney in the Internal
Revenue Bureau, and now engaged In
private law practice here, discusses the
problems involved. He says In sub
stance:
Type Of Policies Cited.
It Is apparent from an examination
of these policies that the understand
ing arrived at between the insurance
company and .ts policy holders is that
upon the payment of a single premium
Of, say $10.500, the policy holder is to
receive q fixed and guaranteed annual
return, designated as an annuity, plus
such additional amounts as the COM
pany declares from time to time in the
nature of dividends. The face value
or principal sum of $4,000, is the So
called benefit payable to a designated
value to the holder. The $500 covers
the insurance company's commission
and incidental expenses.
Such instruments of various fact
values may be purchased from almost
every insurance company by paying a
single premium which is S per cent
greater than the principal sum named
in the contract. Whoever owns such a
policy is entitled to receive annual pay
ments in an amount not less than 3
per cent of the principal sum or cash
surrender value named in the policy.
And some companies guarantee annual
as high as 3lz per cent.
Under these contracts the annual pay
ments are increased from time to time
by such additional amounts as may be
allocated or allotted thereto from sur
plus or earnings, thus augmenting the
income payments for the year in some
cases to as high as 512 per cent OF the
principal sum. The principal sum or
cash surrender value, known as the
death benefit, Is not. except as to the
loading charge, decreased or exhausted
by the yearly or periodical payments to
the holder, and the death benefit pay
able to a designated beneficiary Is at all
times the same as the cash surrender
value during the holders lifetime.
Chief Points in Policies.
Policies or contracts of this charac-
ter. although issued in various amounts
and various face values, are essentially
along the lines of the following out
line.
Annuity Payments.-This company
hereby binds itself to pay to IA Chere-
in called the annuitant) the sum OF
$3.50 on the 1st day of December. 1928.
If the said annuitant be then alive and
a like yearly payment on the LIST day
of December in each year thereafter,
during the subsequent lifetime OF the
same annuitant.
Death Benefit.-The company fur
ther agrees that on receipt at its ONCE
in the city of e OF due proof OF
the death of the said annuitant, it will
pay to "B" therein called the bene-
ficiary) or in the event of her death, to
the executors, administrators or as
signs of the annuitant the sum Of ten
thousand ($10,000) dollars (herein
called the death benefit) together with
a proportionate part Of the annuity
for hA afiova1 r,ApiNd Ne.
tween the date on which the last an
nuity payment becomes due and the
date Of the death of the annuitant shall
not be less than the premium herein
after set forth after deducting there
from the total annuity payments re-
ceived by the annuitant.
Participation in profits.-Al annuity
payments, including the proporttonate
payment on the death Of the annuitant,
shall be increased by such dividends as
may be allotted by the company out OF
its surplus interest earnings.
This policy is issued in consideration
Of the payment Of the sum Of ten thou
sand five hundred ($l0,500) dollars
therein called the premium), the receipt
of which is hereby acknowledged.
Cash value.-This policy may be sur
rendered to the company at any time,
provided there is no legal restriction to
the contrary, for a sum equal TO the
amount Of the death benefit as set forth
on the first page hereof. The company
shall have the right to defer the pay
ment Of any surrender value OF this
policy for a period not exceeding 90
days from the date of the application
therefor.
Are Payments Taxable Dividends?
The precise problem which the In
ternal Revenue Bureau concerned itself
with was whether the annual payments
received by the holders of such con-
tracts constitute exempt annuit1es
within the meaning of the applicable
provisions Of the revenue acts of 1926
and 1928 or whether such payments
were really interest accretions or IN the
nature Of dividends and therefore tax
able income.
In the absence Of court decisions
directly in point the Bureau OF Internal
Revenue decided the issue with the
utmost fairness to both the Government
and the insurance companies by hold7
g. where the insurance compa-
MES are able to make fair allocation
Of the total premium or consideration
paid for q particular contract between
The annuity and the life insurance Tea
ture thereof, and the portion OF the
premium or consideration allocated TO
the annuity feature is exhausted as
the annual annuity payments are made,
- 49, La troofad in mart