dissenting: I dissent from that part of the majority opinion which holds that the reserves maintained by petitioner for the ultimate payment of its obligations in respect of amounts not yet due on supplementary contracts not involving life contingencies are not reserves required by law.
I think these reserves are “Reserve funds required by law,” within the meaning of section 203 of the Revenue Acts of 1932 and 1934, which are applicable to these proceedings. I, therefore, think that under this section petitioner is entitled, in determining its net income, to a deduction of 3¾ percent of the mean of the reserve funds in question held at the beginning and the end of the taxable years.
It seems to me that these particular reserves are just as valid and essential as any that the life insurance companies are required to maintain. As said by. the court in Mutual Benefit Life Insurance Co. v. Herold, 198 Fed. 199; affirmed on another point, 201 Fed. 918; certiorari denied, 231 U. S. 755, “These obligations seem to come fairly within the definitions of reserve, as above given. Nothwithstanding the policy-holder has died, there still remain unpaid under the policy certain installments not presently due, but which will mature from time to time in the future. These are as much policy obligations as they would have been if payable in one sum immediately upon the death of the insured. They have a value, and that value must be estimated, and, when estimated, adequate provision made for their payment as they mature, which can only be done by the establishment of a suitable reserve. Furthermore, such reserves are ‘required by law’ within the meaning of the act. As appears by the agreed statement of facts, the commissioners of insurance of all the states require the establishment of a reserve to cover the obligations of the company on such supplementary policy contracts. This fact of itself tends strongly to show that they are required by law.”
While it is true that Mutual Benefit Life Insurance Co. v. Herold, supra, was decided in 1912, and dealt with the Corporation Tax Act of 1909, nevertheless I think what the court said respecting reserves for the fulfillment of obligations under these supplementary contracts not involving life contingencies being “reserves required by law” is entirely appropriate to the revenue acts which are applicable in the instant proceedings. The taxable years which we have before us are the years 1933 and 1934 and the applicable regulations are Regulations 77 and Regulations 86.
At the time petitioner filed its income tax return for the year 1933, the Treasury Regulations (art. 971, Regulations 77) held that the type of reserve here involved was a reserve required by law. Substantially the same provisions were contained in all of the regulations issued under all of the revenue acts beginning with the Revenue Act of 1921. Shortly after the Court of Claims handed down its decision *313in Continental Assurance Co. v. United States, 8 Fed. Supp. 474, the Treasury changed its regulations and provided that certain reserves maintained by life insurance companies which had been recognized in the regulations as “reserves required by law” should no longer be so considered. One of these was a reserve maintained for supplementary contracts not involving life contingencies.
In Pan-American Life Insurance Co., 38 B. T. A. 1430, we discussed in considerable detail this change in the Treasury regulations and we pointed out that there had been no corresponding change in the statute which would justify such a change in the regulations.
We held that the Commissioner’s changed regulations were invalid as to reserves for incurred but not yet accrued disability benefits maintained by the taxpayer insurance company, and that these reserves were reserves required by law, and that the taxpayer was entitled to deduct 3¾ percent of the mean of these reserves held-at the beginning and end of the taxable year. Our decision was affirmed by the Fifth Circuit, 111 Fed. (2d) 366, and was affirmed by the Supreme Court in Helvering v. Pan-American Life Insurance Co., 311 U. S. 372. In that opinion and in the opinion of Helvering v. Oregon Mutual Life Insurance Co., 311 U. S. 267, decided on the same day, the Supreme Court referred to the change in regulations made by the Commissioner referred to above and held that such change, in so far as it affected the reserves involved in those cases, was beyond the statute and was therefore invalid. While it is true that the Supreme Court’s decisions in the Oregon Mutual Life Insurance Co. and the Pan-American Life Insurance Co. cases involved disability reserves and not reserves for supplementary contracts not involving life contingencies, as here involved, nevertheless I think the same fundamental reasoning which caused the Supreme Court to hold that disability reserves are reserves “Required by law” would require a holding that reserves to meet an insurance company’s liability under its supplementary contracts, is a reserve “required by law.” I think that would be particularly true as to those policies where the insured himself has directed that the deferred payment plan of settlement with the beneficiary be used. As to the reserves maintained to ultimately pay these policies improved annually by interest, the Commissioner has denied all deduction for interest because, as he says, when these options of settlements have been elected by the insured within his lifetime the obligations thus created are the obligations of the policy rather than obligations of debt. This view has been upheld by the Third Circuit in Penn Mutual Life Insurance Co. v. Commissioner, 92 Fed. (2d) 962. and by the Fifth Circuit in Pan-American Life Insurance Co., supra, and is upheld in the majority opinion in the instant case.
If these decisions are correct on this point, and I think they are, then plainly the option settlements where elected by the insured in *314his lifetime aré policy obligations and reserves to insure payment of these obligations are reserves “required by law” within .the meaning of the applicable statute and the majority opinion errs in disallowing a deduction of 3% percent of the mean of these reserves in determining petitioner’s net income for the years 1938 and 1934. It follows of course that if petitioner were allowed a deduction of 3% percent of the mean of these reserves, it would not he entitled to a deduction for interest. This, petitioner concedes.
It may well be that a different rule applies to these policies where after the decedent dies the beneficiary of the policy elects to leave the proceeds with the life insurance company and take deferred settlements including interest rather than lump sum payments. As to these the majority opinion allows the deduction of guaranteed interest, following Penn Mutual Life Insurance Co. v. Commissioner, supra, and Pan-American Life Insurance Co., supra, and disallows the deduction of 3¾ percent of the mean of the reserves applicable to these particular supplementary contracts.
As to that, part of the majority opinion there may be considerable logic to support it. The strongest impediment against it would be the Commissioner’s own regulations from 1921 to 1932, inclusive. But be that as it may, I do emphatically disagree as to the holding of the majority concerning the reserves maintained by petitioner to fulfill its obligations on those supplementary contracts which represent elections made by the insured during his lifetime and which both the Board and the courts have held to be policy obligations and not mere indebtedness created by choice of the beneficiary, after the death of the insured.
Arundell agrees with this dissent.