*625 In this proceeding, the petitioner seeks a redetermination of its income and profits taxes for the year 1920, for which year the respondent has asserted a deficiency in the amount of $43,287.80. Two issues are raised by the pleadings: (1) What portion, if any, of the unearned *626 premium reserve of $800,121.90, as of the beginning of the year, determined by respondent to have been released during the year, constitutes taxable income; and (2) whether respondent, by the use of improper comparatives, erroneously computed the profits taxes under section 328 of the Revenue Act of 1918.
FINDINGS OF FACT.
Petitioner, a Massachusetts corporation with its principal office at Boston, is engaged in writing fire and marine insurance.
The Insurance Department of Massachusetts requires that the reserve for unearned premiums be computed as follows:
| Fraction of gross premium unearned | |||||
| Term of risk | First year | Second year | Third year | Fourth year | Fifth year |
| 1 year or less | 1/2 | ||||
| 2 years | 3/4 | 1/4 | |||
| 3 years | 5/6 | 1/2 | 1/6 | ||
| 4 years | 7/8 | 5/8 | 3/8 | 1/8 | |
| 5 years | 9/10 | 7/10 | 1/2 | 3/10 | 1/10 |
*2544 For risks of a term of more than five years, the unearned premium is computed upon an absolute pro rata basis. All risks written during any year are treated as having been written on the average date of July 1. The Insurance Department required this method of computing the unearned premium reserve to be used from 1913 to 1920, inclusive.
At December 31, 1912, petitioner carried on its books a reserve for unearned premiums of $399,283.56. Changes in the reserve were made only at the close of each year. At January 1, 1920, the reserve for unearned premiums carried on petitioner's books and computed in accordance with the requirements of the Insurance Department, amounted to $800,121.90. This had been built up from $399,283.56 at December 31, 1912, by additions and deductions, as follows:
| Year | Reserve at beginning | Net additions | Net reductions | Reserve at end |
| of year | of year | |||
| 1912 | $399,283.56 | |||
| 1913 | $399,283.56 | $99,797.49 | 499,081.05 | |
| 1914 | 499,081.05 | 43,127.91 | 542,208.96 | |
| 1915 | 542,208.96 | 27,206.76 | 569,415.72 | |
| 1916 | 569,415.72 | 75,829.97 | 645,245.69 | |
| 1917 | 645,245.69 | 187,185.10 | 832,430.79 | |
| 1918 | 832,430.79 | $59,228.42 | 773,202.37 | |
| 1919 | 773,202.37 | 26,919.53 | 800,121.90 |
*2545 The net additions to the reserve shown above for 1913 to 1917, inclusive, and for 1919, were claimed as deductions in the income-tax *627 returns of those years, and the net reduction in the reserve for 1918 was returned as income in the return for that year.
On December 29, 1920, the petitioner reinsured all of its risks with the Great American Insurance Co., a New York corporation. The pertinent provisions of the reinsurance contract, in which the petitioner and the reinsuring company are referred to as the Massachusetts Company and the Great American Company, respectively, are as follows:
FIRST: The Great American Company hereby agrees to reinsure the Massachusetts Company against all its legal liability for losses occurring after twelve o'clock noon, Standard time, at the place where the property insured is located, on and after December 31, 1920, under all policies of insurance or reinsurance issued by the Massachusetts Company, which policies may, under the terms thereof be valid and in full force at the time of the occurrence of such loss, and to adjust and pay all such losses, except on such portion thereof as may have been previously reinsured.
* * *
FOURTH: *2546 The Massachusetts Company will pay to the Great American Company an amount equal to Fifty-five per cent (55%) of the gross unearned premiums, calculated pro rata, upon the policies of the Massachusetts Company in force at twelve o'clock noon, Standard time, on December 31, 1920, as herein provided, for the unexpired term thereof, excepting such policies, or portions of policies, as may have already been reinsured in the Great American Company or any other insurance company; and the Great American Company acknowledges receipt of the sum of Three Hundred & Sixty Three Thousand Dollars ($363,000.00) in cash and/or securities, as part performance of this contract, and to secure the full performance of the same by the Massachusetts Company.
The unearned premiums on December 31, 1920, as determined by the representatives of the petitioner and of the Great American Co., amounted to $677,547.24, and the amount paid by the petitioner to the Great American Co., as provided in the fourth paragraph of the contract, amounted to $372,650.98.
In its annual statement to the Insurance Department of Massachusetts for 1920 the petitioner reported a reserve for unearned premiums at December 31, 1919, of*2547 $800,121.90, and no reserve at December 31, 1920.
In its income-tax return for 1920, petitioner returned as income an item of "Released Reserve - $389,129.59." A statement attached to the return shows that the amount returned as income was determined as follows:
| Unearned premiums December 31, 1919 | $800,121.90 |
| Unearned premiums March 1, 1913 | 410,992.31 |
| Released Reserve | $389,129.59 |
The respondent has held that the petitioner realized taxable income of $800,121.90, as the result of releasing its reserve for unearned premiums on December 31, 1920.
*628 OPINION.
GREEN: In its return for 1920 petitioner returned, as income, the sum of $389,129.59 as the taxable portion of the reduction in its reserve for unearned premiums. The sum so returned as income represented the difference between the estimated amount of the reserve at March 1, 1913, and the amount of the reserve at the beginning of 1920. The petitioner returned such portion of the reduction in its reserve as income, on the theory that the reinsurance of all its outstanding risks with the Great American Insurance Co. had resulted in releasing the entire reserve to the free beneficial uses of*2548 the company, and that it was taxable upon such portion of the released reserve as exceeded the amount of the reserve at March 1, 1913. The respondent has held that the entire amount of the reduction in the reserve, to wit, $800,121.90, is taxable. In its pleadings, the petitioner alleged that the respondent erred in holding that the entire reduction in the reserve is taxable income, contending that only the increase in the reserve since March 1, 1913, could be taxed as income. However, at the hearing, the petitioner raised the further point, apparently as an alternative proposition, that no part of the reduction in the reserve, which was occasioned by the reinsurance of all outstanding risks, could be properly considered as taxable income, since the company was not discharged from its liabilities, but still remained primarily liable to its policyholders upon its outstanding policies. Therefore, in connection with the first issue, two questions are presented for decision: (1) Did the reinsurance of all outstanding risks result in the releasing of the entire reserve for unearned premiums to the free beneficial use of the petitioner? and, (2) if so, is the whole amount of the released*2549 reserve to the treated as taxable income, or only such portion thereof as represents the increase in the reserve since March 1, 1913?
As to the first of these questions, the petitioner presented no evidence which might serve as a premise for consideration of the issue. The petitioner alleged in its petition, and the respondent admitted in his answer, that "The petitioner, at the close of the year 1920, reinsured all of its outstanding risks as of December 31, 1920, thereby releasing the reserve for unearned premiums shown on its books, amounting to $800,121.90." Further, we have found that, in its annual statement to the Department of Insurance, the petitioner reported no reserve for unearned premiums at December 31, 1920, and there is no evidence that this particular feature of that statement was in any way questioned by, or did not meet with the approval of, the Commissioner of Insurance. As a premise for the inclusion of the entire amount of the released reserve in income, the respondent determined that the reserve had been actually released *629 to the free beneficial use of the petitioner, and such evidence as we have before us supports that determination.
*2550 As to the second question, it is the petitioner's contention that "to treat the amount of the reserve at March 1, 1913, as taxable income for the year 1920, would result either in taxing the Company for income and excess profits taxes at 1920 rates on premiums collected prior to March 1, 1913, which could not be done constitutionally and which the Revenue Acts in question did not purport to do, or in taxing the Company a second time on premiums which had already been reported and taxed once as income under those Acts." This contention of the petitioner is premised on the presumption that the reserve at March 1, 1913, was a part of the reserve released on December 31, 1920. Whether or not that is the case, is a question of fact that has not been proven. The reserve at March 1, 1913, existed in relation to the unearned premiums on policies outstanding on that date. If none of these policies were outstanding in 1920, then the reserve at March 1, 1913, could have formed no part of the reserve, which was released in 1920. The method of computing the reserve for unearned premiums required by the Insurance Department of Massachusetts, which is set out in the findings of fact, clearly*2551 shows that the reserve relates to policies outstanding at the close of the year. If any part of the released reserve related to policies outstanding on March 1, 1913, the petitioner has failed to establish the fact by proper proof.
In view of the foregoing, it seems unnecessary to answer the petitioner's contention that "insurance premiums, as well as any other income, actually collected prior to March 1, 1913, are not subject to taxation as income under the Revenue Acts; and the Revenue Acts did not purport to tax any income received prior to March 1, 1913, even though earned in whole or in part subsequent to that date." But if it needs an answer, no more effective one could be made than that of the United States Supreme Court in , when, in considering the Government's claim that the net reduction in the reserves required by law is to be considered as income of the year in which the decrease occurred, the court stated as follows:
The statute does not in terms dispose of the question thus presented.
Reserves, as we have seen, are funds set apart as a liability in the accounts of a company to provide for*2552 the payment or reinsurance of specific, contingent liabilities. They are held not only as security for the payment of claims, but also as funds from which payments are to be made. The amount "reserved" in any given year may be greater than is necessary for the required purposes, or it may be less than is necessary, but the fact that it is less in one year than in the preceding year does not necessarily show either that too much or too little was reserved for the former year - it simply shows that the aggregate reserve requirement for the second year is less than for the first, and this *630 may be due to various causes. If, in this case, it were due to an overestimate of reserves for 1912, with a resulting excessive deduction for that year from gross income and if such excess was released to the general uses of the company and increased its free assets in 1913, to that extent it should very properly be treated as income in the year in which it became so available, for the reason that in that year, for the first time, it became free income, under the system for determining net income provided by the statute, and the fact that it came into the possession of the company in*2553 an earlier year in which it could be used only in a special manner, which permitted it to become non-taxable would not prevent its being considered as received in 1913 for the purposes of taxation, within the meaning of the act. (Italics ours.)
No evidence was offered by petitioner in support of the assignment of error that respondent erroneously computed the profits taxes under section 328 of the Revenue Act of 1918, by the use of improper comparatives, so that respondent's determination must prevail.
Reviewed by the Board.
Judgment will be entered for the respondent.