Scott, Judge:
Respondent determined deficiencies in petitioner’s Federal income tax for the taxable years 1964 through 1972 in the amounts of $1,230,582.18, $333,927.61, $391,439.10, $322,273.64, $403,803.07, $489,036.51, $522,283.19, $440,392.65, and $471,804.99, respectively. Following the settlement of numerous issues raised by the pleadings, those remaining for decision are:
(1) Whether additional reserves established by petitioner to supplement basic reserves for certain life insurance policies which provided an option to the insured or his beneficiary to elect a life annuity qualify as life insurance reserves under section 801(b), I.R.C. 1954,1 and
(2) Whether reserves established in connection with two nonqualified retirement plans qualify as life insurance reserves under section 801(b).
FINDINGS OF FACT
Some of the facts have been stipulated and are found accordingly.
Petitioner Equitable Life Insurance Co. of Iowa is an Iowa corporation which had its principal office in Des Moines, Iowa, at the time of filing its petition in this case. Petitioner filed timely Federal income tax returns for each of the calendar years 1964 through 1968 with the District Director of Internal Revenue in Des Moines, Iowa, and for each of the calendar years 1969 through 1972 with. the Internal Revenue Service Center in Kansas City, Mo.
Petitioner, during each of the years in question, was in the business of issuing and selling insurance policies and was taxable as a life insurance company for Federal income tax purposes.
Some of the life insurance policies issued by petitioner, at least since 1930, have provided for settlement options under which the person entitled to the policy proceeds upon the death of the insured may elect benefits other than a single lump-sum payment. Such settlement options often include the right to elect annuity payments. When such a right exists, the annuity rates (i.e., the monthly or other periodic payment per $1,000 of proceeds) are fixed in the policy as issued for various potential attained ages of the beneficiary or other payee. Petitioner, since the 1930’s, has also issued annuity policies with settlement options which included the right of the insured to select a lifetime annuity (hereinafter annuity guarantees) at predetermined rates set forth in the policy. Life insurance reserves were established with respect to the basic obligation of petitioner to pay the amounts required by the life insurance and annuity policies. The basic reserves were adequate for lump-sum settlements and such reserves are therefore not in controversy.
By the 1950’s, the basic reserves had become inadequate when the insured or the beneficiary elected, under the contract, the annuity in lieu of the lump-sum death settlement. The annuity guarantees of the contracts issued during the 1930’s and until 1943 were based on obsolete mortality tables.2 Additionally, by the 1950’s, average life expectancies had increased and interest rates remained relatively low.3
During the insurance examination by the Insurance Department of Iowa (hereinafter the department) for the year 1959, petitioner notified the department of its intention to establish additional reserves to reflect the inaccuracies in the mortality table and interest rate assumptions upon which the basic reserves were calculated. Following informal discussions, the department agreed to the additional reserves, which were to be maintained as life insurance reserves. Petitioner formally advised the insurance commissioner for Iowa of its additional reserves by letter dated October 28,1960. On November 14,1960, the letter was stamped approved by the insurance commissioner.
The additional reserves, upon creation, became subject to the control of the department and could not be reduced or removed without approval of the insurance commissioner.4 Beginning in 1959 and continuing through 1972, petitioner maintained the additional reserves on its books and records, reporting them each year on its annual statement filed with the department.5
Within the years in issue, 1964-72, the department made three triannual examinations of petitioner — 1964, 1967, and 1970. In each instance, a complete audit of petitioner’s reserves was made by the department. The audit ascertained that all of the reserves of petitioner were calculated correctly and that the reserves covered all of petitioner’s liabilities. At all times in issue, petitioner filed its tax returns on the calendar year basis. In the years 1964 through 1972, petitioner filed its Federal income tax returns on Form 1120L with the annual convention statement attached as part of the return in each year.
In the notice of deficiency, respondent determined that the additional reserves maintained by petitioner during the years 1964 through 1972, with respect to annuity guarantees, which it treated as life insurance reserves in computing its Federal income tax liability, did not qualify as life insurance reserves for Federal income tax purposes.
In 1950, petitioner established a retirement benefit plan known as “Equifund,” covering those of its field representatives who met certain qualifications. The Internal Revenue Service ruled that the plan was qualified under section 401(a). Additionally in 1950, petitioner adopted retirement benefit plans “Equi-fund B” and “Equifund C,” neither of which qualified under section 401(a). Each of these three retirement benefit plans was in existence during the taxable years at issue.
Equifund B is a retirement plan for part-time life insurance salesmen and those life insurance salesmen who were not participants in the Equifund plan. Equifund C is a retirement benefit plan for general agents of petitioner who are not full-time life insurance salesmen.
The Equifund B and C plans were funded6 by a combination of deposits by participants and contributions by petitioner. The contributions of petitioner, as well as interest accrued thereon, were contingent and subject to forfeiture.
Equifund B, in pertinent part, provides:
II. ADMINISTRATION.
Equifund B shall be under the direction of the Company. Depositors or annuitants in Equifund B shall furnish the Company with any information necessary for the administration of Equifund B, and the action of the Company on any question involving Equifund B or the interpretation or application of Equifund B shall be final.
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V. ACCOUNTS.
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B. Contributions by the Company will be allocated conditionally to the individual depositors and an account kept with each individual depositor showing the accumulated Company contributions to his credit, such allocated contributions to be subject to the provisions of Equifund B.
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D.
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Scott, Judge:
Respondent determined deficiencies in petitioner’s Federal income tax for the taxable years 1964 through 1972 in the amounts of $1,230,582.18, $333,927.61, $391,439.10, $322,273.64, $403,803.07, $489,036.51, $522,283.19, $440,392.65, and $471,804.99, respectively. Following the settlement of numerous issues raised by the pleadings, those remaining for decision are:
(1) Whether additional reserves established by petitioner to supplement basic reserves for certain life insurance policies which provided an option to the insured or his beneficiary to elect a life annuity qualify as life insurance reserves under section 801(b), I.R.C. 1954,1 and
(2) Whether reserves established in connection with two nonqualified retirement plans qualify as life insurance reserves under section 801(b).
FINDINGS OF FACT
Some of the facts have been stipulated and are found accordingly.
Petitioner Equitable Life Insurance Co. of Iowa is an Iowa corporation which had its principal office in Des Moines, Iowa, at the time of filing its petition in this case. Petitioner filed timely Federal income tax returns for each of the calendar years 1964 through 1968 with the District Director of Internal Revenue in Des Moines, Iowa, and for each of the calendar years 1969 through 1972 with. the Internal Revenue Service Center in Kansas City, Mo.
Petitioner, during each of the years in question, was in the business of issuing and selling insurance policies and was taxable as a life insurance company for Federal income tax purposes.
Some of the life insurance policies issued by petitioner, at least since 1930, have provided for settlement options under which the person entitled to the policy proceeds upon the death of the insured may elect benefits other than a single lump-sum payment. Such settlement options often include the right to elect annuity payments. When such a right exists, the annuity rates (i.e., the monthly or other periodic payment per $1,000 of proceeds) are fixed in the policy as issued for various potential attained ages of the beneficiary or other payee. Petitioner, since the 1930’s, has also issued annuity policies with settlement options which included the right of the insured to select a lifetime annuity (hereinafter annuity guarantees) at predetermined rates set forth in the policy. Life insurance reserves were established with respect to the basic obligation of petitioner to pay the amounts required by the life insurance and annuity policies. The basic reserves were adequate for lump-sum settlements and such reserves are therefore not in controversy.
By the 1950’s, the basic reserves had become inadequate when the insured or the beneficiary elected, under the contract, the annuity in lieu of the lump-sum death settlement. The annuity guarantees of the contracts issued during the 1930’s and until 1943 were based on obsolete mortality tables.2 Additionally, by the 1950’s, average life expectancies had increased and interest rates remained relatively low.3
During the insurance examination by the Insurance Department of Iowa (hereinafter the department) for the year 1959, petitioner notified the department of its intention to establish additional reserves to reflect the inaccuracies in the mortality table and interest rate assumptions upon which the basic reserves were calculated. Following informal discussions, the department agreed to the additional reserves, which were to be maintained as life insurance reserves. Petitioner formally advised the insurance commissioner for Iowa of its additional reserves by letter dated October 28,1960. On November 14,1960, the letter was stamped approved by the insurance commissioner.
The additional reserves, upon creation, became subject to the control of the department and could not be reduced or removed without approval of the insurance commissioner.4 Beginning in 1959 and continuing through 1972, petitioner maintained the additional reserves on its books and records, reporting them each year on its annual statement filed with the department.5
Within the years in issue, 1964-72, the department made three triannual examinations of petitioner — 1964, 1967, and 1970. In each instance, a complete audit of petitioner’s reserves was made by the department. The audit ascertained that all of the reserves of petitioner were calculated correctly and that the reserves covered all of petitioner’s liabilities. At all times in issue, petitioner filed its tax returns on the calendar year basis. In the years 1964 through 1972, petitioner filed its Federal income tax returns on Form 1120L with the annual convention statement attached as part of the return in each year.
In the notice of deficiency, respondent determined that the additional reserves maintained by petitioner during the years 1964 through 1972, with respect to annuity guarantees, which it treated as life insurance reserves in computing its Federal income tax liability, did not qualify as life insurance reserves for Federal income tax purposes.
In 1950, petitioner established a retirement benefit plan known as “Equifund,” covering those of its field representatives who met certain qualifications. The Internal Revenue Service ruled that the plan was qualified under section 401(a). Additionally in 1950, petitioner adopted retirement benefit plans “Equi-fund B” and “Equifund C,” neither of which qualified under section 401(a). Each of these three retirement benefit plans was in existence during the taxable years at issue.
Equifund B is a retirement plan for part-time life insurance salesmen and those life insurance salesmen who were not participants in the Equifund plan. Equifund C is a retirement benefit plan for general agents of petitioner who are not full-time life insurance salesmen.
The Equifund B and C plans were funded6 by a combination of deposits by participants and contributions by petitioner. The contributions of petitioner, as well as interest accrued thereon, were contingent and subject to forfeiture.
Equifund B, in pertinent part, provides:
II. ADMINISTRATION.
Equifund B shall be under the direction of the Company. Depositors or annuitants in Equifund B shall furnish the Company with any information necessary for the administration of Equifund B, and the action of the Company on any question involving Equifund B or the interpretation or application of Equifund B shall be final.
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V. ACCOUNTS.
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B. Contributions by the Company will be allocated conditionally to the individual depositors and an account kept with each individual depositor showing the accumulated Company contributions to his credit, such allocated contributions to be subject to the provisions of Equifund B.
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D. The net total of deposits, contributions, and interest shall constitute a part of the general funds of the Company and may be mingled therewith and shall be invested by the Company.
E. Any attempted alienation, assignment, transfer, sale, or pledge of any interest in any part of Equifund B or payments thereunder shall automatically forfeit, cancel, and terminate the depositor’s or annuitant’s interest, right and title to all of such part of the benefits of Equifund B as shall have arisen from the Company contributions with interest, and the benefits shall be accordingly reduced. * * *
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VII. OLD-AGE BENEFITS.
A. The sum of the accumulated deposits and the accumulated contributions credited to the account of the depositor at the age elected for commencement of old-age benefit payments, will be used to provide a life refund or last survivor annuity for the depositor, such annuity to be calculated on the basis of the net rates in accordance with the American Annuitants’ Male Select mortality table with 3% interest stepped back one age for males and five ages for females, and in accordance with the rules of the Company then in effect as to minimum payments on annuities and subject to satisfactory evidence of age.
B. In the event of the death of an annuitant in receipt of a refund annuity before the total of the annuity payments made by the Company is equal to the sum stated above used to provide the annuity, the Company will continue the annuity payments to the beneficiary named by the depositor and recorded by the Company until the total annuity payments made shall equal the said sum. If said beneficiary dies before receiving the balance of annuity payments due, then any such payments remaining will be commuted at the rate of 3% per annum compound interest, and paid in one sum to the executors or administrators of said beneficiary unless the depositor has named a contingent beneficiary or beneficiaries to whom the remainder of said payments shall be paid as they fall due. If any contingent beneficiary shall die while in receipt of payments, then any remaining payments which would have been paid to him if living, will be commuted at the rate of 3% per annum compound interest and paid in one sum to his executors or administrators. If there be no beneficiary living at the death of the annuitant then any further payments due will be commuted at the rate of 3% per annum compound interest and paid in one sum to the executors or administrators of the annuitant. If the payments to any beneficiary will be less than $10.00 a month, then said payments shall be commuted at the rate of 3% per annum compound interest and paid in one sum to said beneficiary.
C. If the last survivor annuity option is chosen, the annuity payments will be continued to the co-annuitant if the annuitant predeceases the co-annuitant. The co-annuitant must be the wife of the annuitant.
VIII. DEATH BENEFITS.
A.In the event of the death of a depositor before old-age or disability benefits commence, the sum of his accumulated deposits and the Company’s accumulated contributions will be paid to the beneficiary * * * , except if the depositor has not had five years of continuous service with the Company only his accumulated deposits will be payable.
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IX. DISABILITY BENEFITS
A. In the event a depositor, who has had five years continuous service with the Company, becomes totally and permanently disabled as determined by the Company before old-age benefit payments commence, contributions and deposits shall cease at the end of the month prior to that in which the Company determined that the depositor was totally and permanently disabled. The sum of his accumulated deposits and the accumulated contributions will be used to provide a refund annuity, on the basis shown in Section VII or in such other manner on an equivalent actuarial basis as may be mutually agreed upon between the Company and the depositor. The first annuity payments shall be made at the end of the month in which the Company determined that the depositor was totally and permanently disabled unless the depositor elects to defer the start of the annuity payments for a period not to exceed five years, in which event the annuity payments will be based on the sum of the accumulated deposits and the accumulated contributions at the date the annuity payments commenced. If said sum is not sufficient to provide an annuity of at least $10.00 per month, it shall be paid to the depositor in one sum.
B. Should a disabled depositor recover from his disability as determined by the Company no further payments will be made, but if the sum of the payments already made is less than the sum of the total accumulated deposits at the end of the month in which the Company determined the depositor was totally and permanently disabled, then the balance will be paid to the depositor in one sum, except that if upon recovery he re-enters the service of the Company, any excess of the sum of the accumulated deposits and the accumulated contributions over the amounts paid to the depositor will be credited to him in Equifund B and will thereafter draw interest as provided in Section V, C.
C. In the event of the death of an annuitant in receipt of a refund annuity before the total of the payments made is equal to the sum of the total accumulated deposits and accumulated contributions used to provide the annuity, the Company will continue the annuity payments in the same manner as provided for in the event of the death of an annuitant in Section VII, B.
D. If a depositor who has not had at least five years continuous service with the Company becomes totally and permanently disabled as determined by the Company, contributions and deposits shall cease and the sum of his accumulated deposits will be paid to him.
X. WITHDRAWAL BENEFITS.
A. (1) If a member fails at the end of any calendar year to meet the requirements of Section IV, paragraph A hereof [required minimum premium production], he shall cease to be a member of Equifund B at the end of said year, and his own accumulated deposits and the Company’s accumulated contributions (except as hereinafter expressly provided) * * * , will be paid to him, or held for his benefit, in accordance with the following provisions:
(a) If the former member continues under contract as an agent, part-time agent, or general agent of the Company, or if he becomes a Home Office employee of the Company, * * * ; PROVIDED FURTHER, that at the written request of such former member, his own accumulated deposits will be paid to him in one sum, but the Company’s accumulated contributions standing conditionally to the credit of such former member shall be returned to the Company.
(b) If a member or a former member ceases before old-age benefits commence to be under contract as an agent, part-time agent, or general agent of the Company, and is not a Home Office employee, and is not receiving disability benefits under Sec. IX hereof, his own accumulated deposits will then be paid to him in one sum, but the Company’s accumulated contributions standing conditionally to the credit of such member or former member shall be returned to the Company.
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B. All the Company’s accumulated contributions standing conditionally to the credit of such withdrawing depositor, except as otherwise herein provided, shall be returned to the Company.
XI. TERMINATION OF EQUIFUND B.
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B. Anything in this or any other section of Equifund B to the contrary notwithstanding, in the case of any member or depositor covered by this plan, the Company reserves the right at any time in its uncontrolled discretion to forfeit the interest, rights and title of such member or depositor or annuitant or beneficiary or personal representative thereof, to all contributions or accumulated contributions made to the credit of such member under Equifund B or to any benefits arising therefrom; and upon exercise of such right of forfeiture the benefit or benefits shall be proportionately reduced. * * *
Equifund C,7 in pertinent part, provides:
II. ADMINISTRATION.
EQUIFUND [C] shall be under the direction of the Company. Depositors or annuitants in EQUIFUND [C] shall furnish the Company with any information necessary for the administration of EQUIFUND [C], and the action of the Company on any question involving EQUIFUND [C] or the interpretation or application of EQUIFUND [C] shall be final.
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V. ACCOUNTS.
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B. Contributions by the Company will be allocated conditionally to the individual depositors and an account kept with each individual depositor showing the accumulated Company contributions to his credit, such allocated contributions to be subject to the provisions of EQUIFUND [C].
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D. The net total of deposits, contributions, and interest shall constitute a part of the general funds of the Company and may be mingled therewith and shall be invested by the Company.
E. Any attempted alienation, assignment, transfer, sale or pledge of any interest in any part of EQUIFUND [C] or payments thereunder shall automatically forfeit, cancel, and terminate the depositor’s or annuitant’s interest, right, and title to all of such part of the benefits of EQUIFUND [C] as shall have arisen from the Company contributions with interest, and the benefits shall be accordingly reduced. No withdrawal of any portion of a depositor’s accumulated deposits will be permitted except as outlined in Sections VII, VIII, IX, and X.
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VII. OLD-AGE BENEFITS.
A. The sum of the accumulated deposits and the accumulated contributions credited to the account of the depositor, at the age elected for commencement of old-age benefit payments, will be used to provide a life, refund or last survivor annuity for the depositor, such annuity to be calculated on the basis of net rates determined as follows, and in accordance with the rules of the Company then in effect as to minimum payments on annuities and subject to satisfactory evidence of age:
(1) For deposits and contributions made prior to January 1, 1960, with interest accumulated thereon, annuity returns in accordance with the American Annuitant’s Male Select Mortality Table with 3% interest rated back one age for males and five ages for females, and
(2) For deposits and contributions made on and after January 1,1960, with interest accumulated thereon, annuity returns in accordance with the 1937 Standard Annuity Mortality Table with 3% interest rated back one age, provided, however, that the annuity returns shall not exceed 110% of the corresponding returns guaranteed in policies being issued by the Company at the time the deposits and contributions were made.
B. In the event of the death of an annuitant in receipt of a refund annuity before the total of the annuity payments made by the Company is equal to the sum stated above used to provide the annuity, the Company will continue the annuity payments to the beneficiary named by the depositor and recorded by the Company, if living, otherwise to the contingent beneficiary named by the depositor and recorded by the Company, if living, until the total annuity payments made shall equal the said sum; it being understood that said beneficiary after the death of the depositor, and said contingent beneficiary after the death of depositor and beneficiary, shall have the right to receive in one sum the value of any such payments remaining (said payments to be commuted at the rate of 3% per annum compound interest). In the event of the death of the last survivor of the annuitant, beneficiary, and contingent beneficiary before the total of annuity payments made by the Company shall equal the sum stated above used to provide the annuity, any remaining payments will be commuted at the rate of 3% per annum compound interest and the commuted value paid in one sum to the executors or administrators of the last survivor of the said annuitant, beneficiary, and contingent beneficiary. If the payments to any beneficiary will be less than $20 a month, then said payments shall be commuted at the rate of 3% per annum compound interest and paid in one sum to said beneficiary.
C. If the last survivor annuity option is chosen, the annuity payments will be continued to the co-annuitant if the annuitant predeceases the co-annuitant. The co-annuitant must be the wife of the annuitant.
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VIII. DEATH BENEFITS.
A. In the event of the death of a depositor before withdrawal, old-age or disability benefits commence, the sum of his accumulated deposits and the Company’s accumulated contributions will be paid to the beneficiary * * * , except if the depositor has not had five years of continuous service with the Company only his accumulated deposits will be payable.
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IX. DISABILITY BENEFITS.
A. In the event a depositor, who has had five years of continuous service with the Company, becomes totally and permanently disabled so that he is wholly prevented from following any gainful occupation whatsoever as determined by the Company in a nondiscriminatory manner before old-age benefits commence, contributions and deposits shall cease at the end of the month prior to the month in which the depositor becomes totally and permanently disabled. The sum of his accumulated deposits and the accumulated contributions will be used to provide a refund annuity, on the basis shown in Section VII or in such other manner on an equivalent actuarial basis as may be mutually agreed upon between the Company and the depositor.
The first annuity payment shall be made at the end of the month in which the Company determined that the depositor was totally and permanently disabled unless the depositor elects to defer the start of the annuity payments for a period not to exceed five years, in which event the annuity payments will be based on the sum of the accumulated deposits and the accumulated contributions at the date the annuity payments commence. If said sum is not sufficient to provide an annuity of at least $20 per month, it shall be paid to the depositor in one sum.
B. Should a disabled depositor recover from his disability as determined by the Company no further payments will be made, but if the sum of the payments already made is less than the sum of the total accumulated deposits at the end of the month in which the Company determined the depositor was totally and permanently disabled, then the balance will be paid to the depositor in one sum, except that if upon recovery he re-enters the service of the Company, any excess of the sum of the accumulated deposits and the accumulated contributions over the amounts paid to the depositor will be credited to him in EQUIFUND [C] and will thereafter draw interest as provided in Section V, C.
C. In the event of the death of an annuitant in receipt of a refund annuity before the total of the payments made is equal to the sum of the total accumulated deposits and accumulated contributions used to provide the annuity, the Company will continue the annuity payments in the same manner as provided for in the event of the death of an annuitant in Section VII, B.
D. If a depositor who has not had at least five years of continuous service with the Company becomes totally and permanently disabled as determined by the Company, contributions and deposits shall cease and the sum of his accumulated deposits will be paid to him.
X. WITHDRAWAL BENEFITS.
A. (1) * * *
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(b) If a member or former member ceases before old-age benefit payments commence to be under contract as an agent, part-time agent, or general agent of the Company, and is not a Home Office employee, and is not receiving disability benefits * * * , his own accumulated deposits will then be paid to him in one sum, but the Company’s accumulated contributions standing conditionally to the credit of such member or former member shall be left in EQUIFUND [C] and shall be used to reduce future Company contributions to Equifund [C]; * * * . The old-age benefits will be determined as provided in section VII by application of his accumulated deposits and his vested amount of accumulated contributions. PROVIDED, HOWEVER, that at any time prior to the date old-age benefits commence, such member or former member can request in writing a return of his own accumulated deposits and such accumulated deposits will be paid to him in one sum, but the Company’s accumulated contributions vested in him in accordance with this paragraph shall be divested and shall be left in EQUIFUND [C] and shall be used to reduce future Company contributions to EQUIFUND [C].
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XIII. CHANGE OR TERMINATION OF EQUIFUND [C] [8]
A. The provisions of Equifund C may be modified or terminated at any time by the Board of Trustees of the Company, and such modification or termination shall be binding on all members, depositors, annuitants, and beneficiaries thereof. No such change shall affect any accumulated deposits or contributions to the credit of any depositor that shall have accrued prior to the first day of the then current calendar year.
B. Anything in this or any other section of Equifund C to the contrary notwithstanding, in the case of any member or depositor covered by this plan, the Company reserves the right at any time in its uncontrolled discretion to forfeit the interest, rights and title of such member or depositor, or annuitant, or beneficiary or personal representative thereof, to all contributions or accumulated contributions made to the credit of such member under Equifund C or Equifund B if he has been a member of Equifund B or to any benefits arising therefrom; and upon exercise of such right of forfeiture the benefit or benefits shall be proportionately reduced; provided, however, the Company shall not take' action forfeiting any such interest, rights or title after it has been established by a final ruling of the U. S. Commissioner of Internal Revenue, or by a decision of the U. S. Treasury Department, or by a final decision of a court of competent jurisdiction or by an Act of the Congress of the United States that the member or depositor is or was an “employee” or is or was entitled to be treated as an employee for the purpose of applying the provisions of Section 403 of the 1954 Internal Revenue Code.
Under both Equifund B and Equifund C, regardless of the time of his participation in the plan, a participant had no right to any cash value in the plan. No actual annuity contracts were issued to participants or their beneficiaries prior to retirement, death, or disability. The Equifund B and Equifund C reserves, however, were established by petitioner on the basis of the amount of the pension petitioner determined would be provided to the part-time and general agents at retirement.
Petitioner set up the necessary pension plan reserves on its books to meet obligations to provide annuities under Equifund B and Equifund C if and when a participant retired as if it were a life insurance obligation. These reserves appeared on petitioner’s books when they were examined by examiners from the Iowa Department of Insurance.
Life annuity reserves established under the Equifund B and Equifund C plans were computed on the basis of a recognized mortality table and assumed rates of interest. They were set aside to mature or liquidate future unaccrued claims arising from the annuity contracts as they would be issued pursuant to election of the annuity option.
Petitioner treated the reserves with respect to its Equifund B and Equifund C plans as life insurance reserves in computing its Federal income tax liability. Each year, petitioner reported as premium income both its contributions and the participants’ contributions in Equifund B and Equifund C. Additionally, it reported as premium income those amounts considered as the taxable portion of annuity payments due to retirees under nonqualified pension plans. Petitioner deducted as death benefits those benefit payments made under the Equifund B and Equifund C plans. In the statutory notices of deficiency for the taxable years 1964 through 1972, respondent determined that the reserves for Equifund B and Equifund C did not qualify as life insurance reserves for Federal income tax purposes.
Additionally, in the statutory notices of deficiency for the taxable years 1964 through 1972, respondent treated the Equi-fund B and C plans as plans for deferred compensation. In accordance with such characterization, respondent (1) allowed deductions in full for all actual benefits paid to participants in each respective taxable year; (2) eliminated from premium income all contributions to the plans; and (3) eliminated amounts designated as funding the plans from the computation of life insurance reserves for purposes of computing policy and other contract liability requirements, required interest, and life insurance reserves. Employee contributions were treated as interest-bearing liabilities, and petitioner was allowed a deduction for the interest liability accrued thereon. When an employee acquired a vested interest in the Equifund B or Equifund C plans, the accumulated contributions of the employee, including interest increments, were treated as premium income. And on this basis, qualifying life insurance reserves were allowed.
OPINION
Section 801(b)(1),9 defines “life insurance reserves” as amounts (1) computed or estimated under recognized mortality or morbidity tables and assumed rates of interest (sec. 801(b)(1)(A)); and (2) set aside to mature or liquidate, by payment or reinsurance, future unaccrued life insurance, annuity, and noncancelable health and accident insurance contracts involving life, health, or accident contingencies (sec. 801(b)(1)(B)). Section 801(b)(2), in addition, provides that life insurance reserves must be required by law.10
In the instant case, section 508.36 of the Iowa Code Annotated11 requires reserves for all outstanding life insurance policies and annuity and pure endowment contracts at minimum standards. The statute provides that these reserves “may be calculated” on a standard which produces a greater aggregate reserve than the minimum reserve. When a standard producing a greater reserve than the minimum has been adopted, the statute requires the company to obtain the permission of the insurance commissioner before reduction or removal of that reserve. The parties specifically stipulated that the additional “reserves” established by petitioner, once created, became subject to the control of the Insurance Department of Iowa, and could not be reduced or discontinued without approval of the insurance commissioner.
Under our holding in Mutual Benefit Life Insurance Co. v. Commissioner, 58 T.C. 679, 689-690 (1972), affd. 488 F.2d 1101 (3d Cir. 1973), cert. denied 419 U.S. 882 (1974), petitioner’s additional reserves are required by law for purposes of section 801(b)(2). Respondent does not contend that petitioner’s additional reserves are not “required by law” under our holding in the Mutual Life case and the holding in Lincoln National Life Insurance Co. v. United States, 582 F.2d 579 (Ct. Cl. 1978), but argues that these cases are incorrectly decided, are contrary to Union Mutual Life Insurance Co. v. United States, 570 F.2d 382 (1st Cir. 1978), cert. denied 439 U.S. 821 (1978), and should not be followed.
In our view, the Union Life case is distinguishable from the instant case and the Mutual Ufe and Uncoln Ufe cases. Union Ufe involved reserves for the option permitting an insured at stated intervals to obtain additional insurance without a physical examination, and no provision of State law required a reserve for that contingency. In the instant case, the statute required reserves at the minimum rate for life insurance and annuity contracts and permitted such reserves at a higher rate. Once the higher rate was established, it could not be lowered without the permission of the insurance commissioner. Compare United States v. Consumer Life Insurance Co., 430 U.S. 725, 750, 752 (1977).
Respondent contends that even if the additional reserves otherwise meet the “required by law” criterion, they are not life insurance reserves, since, for the years 1964 through 1972, the computations of the additional reserves were erroneous in that the 1959 assumptions were not updated with available current information. Respondent’s brief declares that “it would appear almost axiomatic that a reserve based on data other than that relevant to the year in question cannot pass muster.”
Section 508.36 of the Iowa Code Annotated (n. 11 supra), permits an insurance company to adopt a standard for computing reserves which produces greater aggregate reserves than the minimum standard provided in the statute. The exhibits received in evidence in this case show that the reserves computed by petitioner for the years 1964 through 1972 based on 1959 data are greater than the reserves based on current data. Respondent does not contend that the reserves based on the 1959 data did not meet the requirements of section 508.36 but apparently is contending that they were greater than required under section 508.36. This section, however, provides that a company “may, with the approval of the commissioner, adopt any lower standard of valuation, but not lower than the minimum herein provided.” Iowa Code Ann. sec. 508.36, n. 11 supra.
The stipulated facts in this record show that petitioner, during the years 1964 through 1972, did not request or obtain the approval of the Insurance Commissioner of Iowa to adopt a standard for computing its additional reserves lower than the standard using the 1959 data.12 The facts in the Mutunl Life case show that the reserves there involved were recomputed on updated data. However, our holding in the Mutual Life case was not based on that fact, but rather on the fact that any change in the reserves required the approval of the State regulatory agency. In the Lincoln Life case, a contention that the additional reserves were excessive was made and rejected by the court (582 F.2d at 586). The factual situation in United States v. Consumer Life Insurance Co., supra, differed from that here present. That case involved whether unearned premium reserves with respect to accident and health policies which were the subject of reinsurance contracts should be required in determining whether the taxpayer was a life insurance company within the meaning of section 801. However, in determining that the taxpayer was not required to maintain reserves for the rein-sured health and accident policies, the Supreme Court placed great reliance on the acceptance by the State insurance commissioners of the annual reports of the insurance companies reporting reserves as the companies contended they should be reported. In this respect the Court stated (430 U.S. at 749-752):
“Congress was aware of the extensive, continuing supervision of the insurance industry by the states. It is obvious that subjecting the reserves to the scrutiny of the state regulatory agencies is an additional safeguard against overreaching by the companies.” * * * In presenting the 1959 legislation to the full House, members of the committee that drafted the bill were careful to underscore the continuing primacy of state regulation, with specific reference to the question of reserves.
In two of the cases before us the courts below expressly found that the reserves were held in accordance with accepted actuarial and accounting standards, while the third court did not address the issue. In all three, it was found that no state insurance department required any change in the way the taxpayers computed and reported their reserves. * * *
[Fn. refs, omitted.]
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The insurance departments of the affected States consistently accepted annual reports showing reserves held as the taxpayers claim they should be.36 It is well established that the consistent construction of a statute “by the agency charged with its enforcement is entitled to great deference by the courts” * * * This is no less the rule when federal courts are interpreting state law administered by state regulatory officials,37 at least where, as here, there is no reason to think that the state courts would construe the statute differently. * * *
The reliance placed on the supervision of insurance companies by State insurance departments in the majority opinion in the Consumer Life case was criticized in the dissenting opinion by Mr. Justice White as follows (430 U.S. at 756-757):
II. The majority holds that the taxpayers may obtain these tax savings despite the predominantly nonlife character of their insurance business, “[s]ince the taxpayers neither held the unearned [A&H] premium dollars nor set up the corresponding unearned premium reserves, and since that treatment was in accord with customary practice as policed by the state regulatory authorities . . .” Ante, at 750. * * * Under the majority’s rule, these reserves held by the third party to cover risks assumed by the A&H company would not be attributed to that company; its total reserves for purposes of sec. 801 would consist almost entirely of whatever life insurance reserves it held; and the company would satisfy the reserve-ratio test.4 * * *
There is nothing in the Iowa law which requires a continual updating of the assumption on which reserves are based as long as the standard used by an insurance company results in reserves in excess of the reserves computed under the minimum standard. The reserves as computed by petitioner were included in its annual statement and were not questioned by the Iowa Insurance Commissioner even though there were three audits made of petitioner during these years.
In our view, these reserves are “life insurance reserves” which are “required by law” under the rationale of the holding of the Supreme Court in the Consumer Life Co. case and under our holding in the Mutual Life case. Therefore, we hold these reserves to be life insurance reserves under section 801(b) for the years 1964 through 1972.
Respondent contends that the reserves petitioner maintains with respect to its Equifund B and Equifund C plans fail to qualify as life insurance reserves since (1) they do not meet the requirements of section 801(b)(1)(B) that they be set aside to mature or liquidate claims arising from life insurance or annuity contracts, and (2) they do not meet the requirements of section 801(b)(2) that they be required by law.
Under respondent’s regulations, sec. 1.801-5(b), Income Tax Regs., n. 10 supra, the term “reserves required by law” is defined as reserves which are required either by express statutory provisions or by rules and regulations of the insurance department of a State, Territory, or the District of Columbia. In discussing the first issue in this case involving the additional reserves which petitioner maintained with respect to its life insurance contracts that provided an option in the beneficiary or insured to elect annuity payments, we discussed at some length circumstances under which a life insurance reserve is considered to be “required by law.” We pointed out that reserves are required by law if established under a State law which either requires or permits such a reserve, if the reserve, once established, cannot be reduced or eliminated without the approval of the State insurance department. Sec. 508.36 of the Iowa Code Ann., n. 11 supra, insofar as here applicable, provides for reserves “for all outstanding life insurance policies and annuity and pure endowment contracts of every life insurance company.” These are the only reserves provided for by the Iowa insurance laws other than reserves with respect to health and accident and similar types of insurance benefits and group insurance policies, none of which are involved in the present case. Therefore, it is clear that insofar as reserves with respect to life insurance policies and annuity and endowment contracts are concerned, the only reserves provided for or permitted are with respect to “outstanding” policies or contracts.
The facts here show that no actual life insurance policy or annuity or endowment contract was issued to any part-time life insurance salesman of petitioner or to any general agent of petitioner who was not a full-time life insurance salesman because of the participation by the part-time salesmen and general agents in the Equifund B or C plans, until the participant reached retirement age, became disabled, or died. We have set forth provisions of the Equifund B and C plans in detail in our findings. From the portions of these plans we have set forth, it is clear that until such time as a participant under one of these plans retired or became disabled, he had no right in any contribution to the plan made by petitioner, and the only right he had under the plan was for a refund of his own contribution. It is equally clear that no beneficiary of a participant in the Equifund B or C plans had any rights under those plans until the death of the participant or until the participant retired upon attaining retirement age or became disabled. It is therefore clear that no participant nor beneficiary of a participant obtained any vested rights in the contribution to the plan made by petitioner, or any life insurance policy or annuity or endowment contract until the participant reached retirement age, became disabled, or died.
Eespondent has not disallowed reserves with respect to insurance policies or annuity contracts issued to participants or their beneficiaries after the rights of the participant or beneficiary became vested. Therefore, unless we could conclude on the facts here present that the Equifund B and C plans themselves constitute life insurance policies or annuity or endowment contracts, there were no insurance policies or annuity or endowment contracts outstanding with respect to which reserves could properly be maintained for these plans. In our view, clearly, these plans did not constitute life insurance policies, annuity, or endowment contracts. See Huff v. St. Joseph’s Mercy Hospital of Dubuque Corp., 261 N.W.2d 695 (Iowa 1978).
Since the Equifund B and C plans were not life insurance policies or annuity or endowment contracts with respect to which reserves were either required or permitted to be established under Iowa law, in our view, petitioner could have discontinued the reserves with respect to these plans which it established, at any time, without consent of the Iowa Insurance Commissioner. The provision that an insurance company which has adopted a standard of valuation producing higher aggregate reserves than those calculated according to the minimum standard provided in section 508.36 of the Iowa Code Annotated is required to obtain the approval of the commissioner to lower or eliminate the reserve has application only to the reserves required to be maintained under that section of the Iowa Code. This statute did not require reserves to be maintained for petitioner’s Equifund B and C plans. Petitioner makes much of the fact that its books showed the Equifund B and C reserves and that the examiners from the Iowa Department of Insurance did not question these reserves when examination was made of petitioner’s records. The record does not show that petitioner ever sought or obtained permission from the Iowa Insurance Commissioner to establish these reserves. Under the circumstances, the fact that the reserves were not questioned by the examiners of the Iowa Department of Insurance in no way supports petitioner’s contention that these reserves were “required by law.” In fact, the better presumption would be that the examiners from the Iowa Department of Insurance concentrated their examination on reserves and other accounting records of petitioner which petitioner was required under Iowa law to maintain.
In order to be life insurance reserves as defined in section 801(b), reserves must be “required by law.” Since we have concluded that the reserves maintained by petitioner under its Equifund B and C plans were not “required by law,” it is unnecessary for us to consider respondent’s contention that these reserves fail to meet the definition of life insurance reserves under section 801(b)(1)(B). However, it should be pointed out that respondent relies for this position primarily on the holding in Jefferson Standard Life Insurance Co. v. United States, 408 F.2d 842, 859-860 (4th Cir. 1969), cert. denied 396 U.S. 828 (1969), in which it was held that supplemental retirement plans established by an insurance company for branch office managers, which plans were quite comparable to petitioner’s Equifund B and C plans, did not qualify as life insurance reserves under section 801(b)(1)(B).13 The court, in the Jefferson, Life case, held that these reserves were not life insurance reserves since treating reserves of a nonqualified pension plan as life insurance reserves was inconsistent with the treatment of qualified pension plan reserves provided for under sections 805(c)(1) and 805(d)(1)(C).14 The court further held that the forfeiture possibilities under the plans were contrary to the nature of true life insurance reserves.15
Petitioner recognizes that the facts in the Jefferson Life case are indistinguishable from the facts with respect to its reserves under its Equifund B and C plans, but argues that the Jefferson Life case was wrongly decided. Petitioner states that section 805(c) pertains only to the formula to be used to calculate the policyholder’s investment and has no bearing on the definition of life insurance reserves. Petitioner further argues that section 805(d)(1)(C) was not designed to give recognition to qualified pension plan reserves as life insurance reserves, but to give life insurance reserves with respect to such qualified pension plans preferential treatment.
Petitioner argues that what constitutes life insurance reserves is not a relevant consideration outside the definition of such reserves in section 801(b). Since we have concluded that petitioner’s reserves were not required by law within the requirements of section 801(b)(2), it is unnecessary for us to consider the merit of petitioner’s arguments with respect to the holding in the Jefferson Life case.
Decision will be entered under Rule 155.