[847]*847OPINION.
MoRRis:
Four allegations of error, one being an affirmative allegation of the respondent, involve the deductibility of “ interest ” under section 245 of the Revenue Act of 1926, which, for our purposes, is identical with section 203 (a) (8) of the Revenue Act of 1928, providing:
(a) In the case of a life insurance company the term “net income” means the gross income less—
* ‡ sji * # >fc
(8) All interest paid or accrued within the taxable year on its indebtedness
In Fall River Electric Light Co., 23 B. T. A. 168, we had under consideration the language of section 234 (a) (2) of the Act of 1926, providing for the deduction of “All interest * * * on its indebtedness.” We there adopted the following definition: “ Interest on indebtedness has a definite and well accepted meaning as ‘the compensation allowed by law or fixed by the parties for use, or forbearance, or detention of money.’ [citations] ”, and in Lafayette Life Insurance Co., 26 B. T. A. 946; reversed, 67 Fed. (2d) 209, we quoted with approval the dictionary definition of the word “interest ” as “An agreed or stipulated compensation accruing to a creditor during the time that a loan or debt remains unpaid.” See also Joseph W. Bettendorf, 3 B. T. A. 378.
The Supreme Court of the United States, in Duffy v. Mutual Benefit Life Insurance Co., 272 U. S. 613, used some pertinent language. In that case the respondent was a mutual life insurance company having no capital stock, conducting its business upon the “ level premium plan ”, under which the estimated annual cost of insurance is averaged and the maximum annual contribution of each member is uniform through the life of the policy. The annual contributions during the early years of the policy are in excess of the natural premiums and such excess premiums, augmented by interest thereon, are held as a reserve to maintain insurance in the later years. The company was required by state law to maintain its assets at a sum not less than the amount of “ legal reserve ” required by such laws. The [848]*848respondent there, in its return filed for the year 1917, included such reserve in its invested capital under the act then in force. The question of its inclusion was finally contested in the Supreme Court. It having been contended there that such reserve represented a present existing liability, the Court said in disposing of such contention:
* * * These assets, thus constituted, have never represented indebtedness any more than the capital of a stock corporation subscribed by its stockholders represents indebtedness. Until the maturity of a policy, the policyholder is simply a member of the corporation, with no present enforceable right against the assets'. Upon the maturity of the policy he becomes a creditor with an enforceable right. Then for the first time there is an indebtedness. * * * In the meantime, each member bears a relation to the mutual company analogous to that which a stockholder bears to the joint-stock company in which he holds stock. In either ease, the title to the assets is in the corporation and not in the members or stockholders. * * *
Because of the relationship which the respondent’s affirmative allegation bears to three similar issues raised by the petitioner, we shall dispose of this issue first. He claims to have erred in allowing the petitioner to deduct as “ interest on indebtedness ” the sums of $181,764.13 for the year 1926 and $10,117.19 for the year 1928, purporting to represent “ interest ” on deferred dividends paid to policyholders under the so-called “ accumulated-sürplus plan ” policy.
In support of this issue the respondent relies not only upon the total absence of a contractual obligation to pay interest to its policyholders under such policies, but upon our decision upon a very similar type of policy in Lafayette Life Insurance Co., supra. The petitioner, on the other hand, contends not only that there was an obligation to pay “ interest ”, but that the facts in the instant case are distinguishable from the case relied upon by the respondent, asserting, however, that even if the facts were identical it would still disagree with the conclusion there reached.
We have carefully considered the petitioner’s contentions urged by counsel at the trial and set forth on brief, but they fail to convince us of any statutory justification for the deduction claimed by it, and, in our opinion, erroneously allowed by the respondent. We base our conclusion upon a thorough consideration of the policy contract itself and the testimony respecting it, supported by Lafayette Life Insurance Co., supra, and Missouri State Life Insurance Co., 29 B. T. A. 401, in which we reiterated the position taken in the former proceeding, although reversed on that issue by the circuit court.
In the latter proceeding, after setting forth provisions of the policy strikingly similar to those here, the Board said:
The. method followed by petitioner with respect to the apportionment of the' deferred dividends on these policies was to set aside each year an amount as representing the profits of súeh year allowable to the policy, the total of these [849]*849sums representing the sum apportioned as a deferred dividend at the close of the tontine period. In each year it also set aside on each policy an amount designated as interest and computed at 3% per cent compounded annually upon the amounts theretofore set aside as apportioned profits of prior years. The total of these sums was paid to the policyholder at the close of the period. The question here presented is whether those portions of the payments made in the taxable years which represented the so-called interest computed, were in fact payments of interest upon debts or obligations of petitioner or whether the entire payment in each case was one of deferred dividends.
In Lafayette Life Insurance Co., supra, we had a situation substantially similar to this before us. In that case we said:
Nor can it be said that the deferred dividends constituted debts owed by petitioner during the 20-year period of the tontine policies. A debt in its general sense is “ a specific sum of money which is due or owing from one person to another, and denotes not only the obligation of the debtor to pay, but the right of the creditor to receive and enforce payment.” J. 8. Cullinan, 19 B. T. A. 930. During the tontine period none of the deferred dividends constituted “ a specific sum of money due or owing ” from petitioner to a policyholder and enforceable by the latter. Not until the end of such period could it be determined who of the policyholders might be entitled to deferred dividends. Indeed, it is quite conceivable that none would be so entitled. It is clear, we think, that under such circumstances the so-called interest payments could not properly be deemed interest. They constituted additional dividends rather than interest.
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[847]*847OPINION.
MoRRis:
Four allegations of error, one being an affirmative allegation of the respondent, involve the deductibility of “ interest ” under section 245 of the Revenue Act of 1926, which, for our purposes, is identical with section 203 (a) (8) of the Revenue Act of 1928, providing:
(a) In the case of a life insurance company the term “net income” means the gross income less—
* ‡ sji * # >fc
(8) All interest paid or accrued within the taxable year on its indebtedness
In Fall River Electric Light Co., 23 B. T. A. 168, we had under consideration the language of section 234 (a) (2) of the Act of 1926, providing for the deduction of “All interest * * * on its indebtedness.” We there adopted the following definition: “ Interest on indebtedness has a definite and well accepted meaning as ‘the compensation allowed by law or fixed by the parties for use, or forbearance, or detention of money.’ [citations] ”, and in Lafayette Life Insurance Co., 26 B. T. A. 946; reversed, 67 Fed. (2d) 209, we quoted with approval the dictionary definition of the word “interest ” as “An agreed or stipulated compensation accruing to a creditor during the time that a loan or debt remains unpaid.” See also Joseph W. Bettendorf, 3 B. T. A. 378.
The Supreme Court of the United States, in Duffy v. Mutual Benefit Life Insurance Co., 272 U. S. 613, used some pertinent language. In that case the respondent was a mutual life insurance company having no capital stock, conducting its business upon the “ level premium plan ”, under which the estimated annual cost of insurance is averaged and the maximum annual contribution of each member is uniform through the life of the policy. The annual contributions during the early years of the policy are in excess of the natural premiums and such excess premiums, augmented by interest thereon, are held as a reserve to maintain insurance in the later years. The company was required by state law to maintain its assets at a sum not less than the amount of “ legal reserve ” required by such laws. The [848]*848respondent there, in its return filed for the year 1917, included such reserve in its invested capital under the act then in force. The question of its inclusion was finally contested in the Supreme Court. It having been contended there that such reserve represented a present existing liability, the Court said in disposing of such contention:
* * * These assets, thus constituted, have never represented indebtedness any more than the capital of a stock corporation subscribed by its stockholders represents indebtedness. Until the maturity of a policy, the policyholder is simply a member of the corporation, with no present enforceable right against the assets'. Upon the maturity of the policy he becomes a creditor with an enforceable right. Then for the first time there is an indebtedness. * * * In the meantime, each member bears a relation to the mutual company analogous to that which a stockholder bears to the joint-stock company in which he holds stock. In either ease, the title to the assets is in the corporation and not in the members or stockholders. * * *
Because of the relationship which the respondent’s affirmative allegation bears to three similar issues raised by the petitioner, we shall dispose of this issue first. He claims to have erred in allowing the petitioner to deduct as “ interest on indebtedness ” the sums of $181,764.13 for the year 1926 and $10,117.19 for the year 1928, purporting to represent “ interest ” on deferred dividends paid to policyholders under the so-called “ accumulated-sürplus plan ” policy.
In support of this issue the respondent relies not only upon the total absence of a contractual obligation to pay interest to its policyholders under such policies, but upon our decision upon a very similar type of policy in Lafayette Life Insurance Co., supra. The petitioner, on the other hand, contends not only that there was an obligation to pay “ interest ”, but that the facts in the instant case are distinguishable from the case relied upon by the respondent, asserting, however, that even if the facts were identical it would still disagree with the conclusion there reached.
We have carefully considered the petitioner’s contentions urged by counsel at the trial and set forth on brief, but they fail to convince us of any statutory justification for the deduction claimed by it, and, in our opinion, erroneously allowed by the respondent. We base our conclusion upon a thorough consideration of the policy contract itself and the testimony respecting it, supported by Lafayette Life Insurance Co., supra, and Missouri State Life Insurance Co., 29 B. T. A. 401, in which we reiterated the position taken in the former proceeding, although reversed on that issue by the circuit court.
In the latter proceeding, after setting forth provisions of the policy strikingly similar to those here, the Board said:
The. method followed by petitioner with respect to the apportionment of the' deferred dividends on these policies was to set aside each year an amount as representing the profits of súeh year allowable to the policy, the total of these [849]*849sums representing the sum apportioned as a deferred dividend at the close of the tontine period. In each year it also set aside on each policy an amount designated as interest and computed at 3% per cent compounded annually upon the amounts theretofore set aside as apportioned profits of prior years. The total of these sums was paid to the policyholder at the close of the period. The question here presented is whether those portions of the payments made in the taxable years which represented the so-called interest computed, were in fact payments of interest upon debts or obligations of petitioner or whether the entire payment in each case was one of deferred dividends.
In Lafayette Life Insurance Co., supra, we had a situation substantially similar to this before us. In that case we said:
Nor can it be said that the deferred dividends constituted debts owed by petitioner during the 20-year period of the tontine policies. A debt in its general sense is “ a specific sum of money which is due or owing from one person to another, and denotes not only the obligation of the debtor to pay, but the right of the creditor to receive and enforce payment.” J. 8. Cullinan, 19 B. T. A. 930. During the tontine period none of the deferred dividends constituted “ a specific sum of money due or owing ” from petitioner to a policyholder and enforceable by the latter. Not until the end of such period could it be determined who of the policyholders might be entitled to deferred dividends. Indeed, it is quite conceivable that none would be so entitled. It is clear, we think, that under such circumstances the so-called interest payments could not properly be deemed interest. They constituted additional dividends rather than interest.
It will be noted that there is no agreement in the policy here in question to pay interest upon deferred dividends, and we think it immaterial how petitioner computes the amount allocable to the policy for each year, the total of which it pays at the close of the tontine period, which is the date its obligation to make any payment accrues. Petitioner attempts to distinguish the above cited case upon the ground that the apportionment of profits for each year and the computation of interest thereon was made at the close of the tontine period, whereas in the present case it was made each year and the tentative credits to the policy then transferred from surplus. We see in that no material difference. It was at most, in our opinion, merely a different method of recording upon the corporate books a transaction in all respects similar to the one before us in Lafayette Insurance Co., supra. In both cases the obligation was similar and the payments made were identical in character.
We can not conclude .from the mere use of the terms “ surplus ”, “ accumulated-surplus ” or “ accumulated-surplus plan ”, without even the slightest suggestion in the contract of the payment of “ interest ”, that there was either moral or legal obligation to pay such interest, as the petitioner would have us do. Furthermore, the policy being payable only after the conclusion of the accumulated-surplus period, which might be anywhere from ten to twenty or more years, not only were the survivors to benefit under such plan unknown, but the amounts of the obligations thereunder were impossible of exact ascertainment when the contracts were entered into. If all policyholders completed their accumulated-surplus period, the amount payable under the contract would be one thing, but if only a very few did so it would be quite another thing.
[850]*850For the above and foregoing reasons we hold that the respondent’s allowance of the amounts set forth under this issue as deductions was incorrect, and his affirmative allegation in respect thereto is accordingly sustained.
Coming now to the petitioner’s first and second assignments of error. Under those issues two classes of alleged interest are claimed as deductions: (a) “guaranteed interest” at 3 percent included in the installments-certain, and (b) the “ excess ” or “ additional ” interest, both of which are provided for in section 1 of the policy contract first set forth hereinabove.
The type of policy involved under this issue becomes payable, upon the death of the insured, in a stated number of installments over a period of years to the beneficiary therein named. The so-called guaranteed interest is the difference between the commuted value at the date of death of the insured and the total amount the petitioner is obligated to pay as installments-certain.
A feature of this policy which must necessarily be borne in mind is that although it matures upon the death of the insured, neither the beneficiary nor his estate has any contractual claim against the petitioner for the payment of installments-certain until each installment falls due and becomes payable and that the amount of such installment is determined at the time the contract is entered into, and does not change, and the reserve required by law to be set aside for such payment is based upon the amount found under “ The American Experience Table of Mortality with interest at 3 per cent, per annum, according to the net level premium method.” The 3 percent interest provided for in section 7 has no independent significance in the policy. It effects no change or alteration in the original basis of determining the installment-certain. Such provision was inserted there, according to our construction of the contract, for the sake of clarity, and so that there may be no dispute as to the rights of the beneficiary’s estate, in the event of his death prior to receiving the full number of installments, to receive the remainder of such installments, computed upon the same basis as theretofore employed in the case of the beneficiary himself.
In principle this case is no different from Missouri State Life Insurance Co., supra. There is no agreement in this contract to pay interest, as such, and the fact that the petitioner in writing its contract separates the component parts of the reserve to be set aside for the ultimate payment of such installments into strict reserve, as determined by the American Experience Table of Mortality, and the amount of interest required to maintain such reserve at a level sufficient to insure payment upon maturity, is merely a matter of computation which, in our opinion, is quite immaterial. The amount so arrived at and paid to the policyholder constitutes a [851]*851policy obligation and as such is not “interest paid or accrued on indebtedness within the meaning of section 245 (a) (8) of the applicable Revenue Acts.” Reserve Loan Life Insurance Co., 18 B. T. A. 859.
It is obvious from what we have said respecting the two preceding issues that the so-called excess interest deductions deserve the same treatment, for there is considerably less justification for their deduction than for those where there is at least an obligation to pay the amounts claimed as deductions. Under this issue there was no obligation on the part of the board of trustees ever to award additional amounts. At any rate, what was paid amounted to nothing more than voluntary distributions of earnings.
The “ ordinary life policy ”, under which the disputed amounts arise in allegation of error numbered three, provided in section I thereof for certain options available to the beneficiary, or to the insured during his lifetime, among which there was one permitting such beneficiary upon the death of the insured to leave the “ net proceeds * * * with the company at interest at the rate of 3 per cent per annum, increased annually by such additions as may be awarded by the Board of Trustees * *
The respondent disallowed the deductions claimed under this issue and he opposes the petitioner’s efforts in this action to have such amounts allowed upon the sole ground that they have been included in the reserves required by law and the 4 percent mean thereof allowed as a deduction under the statute in the computation of net taxable income. He asserts as a fact that such amounts were included in the reserve, but we are unable to so conclude from the proof offered. However, whether the amounts were included in the reserve required by law or not — such inclusion might have been made erroneously under the statute, though it is unnecessary to decide that question in this proceeding. See Standard Life Insurance Co. of America, 13 B. T. A. 13; affd., 47 Fed. (2) 218; Continental Assurance Co. v. United States, 8 Fed. Supp. 474, and Helvering v. Inter-Mountain Life Insurance Co., 294 U. S. 686.
The respondent concedes that the arrangement under this contract “ is somewhat similar to a beneficiary loaning the insurance company a sum certain at 3 per cent interest ” and he says “ It may even be conceded that under certain circumstances the payments made to the beneficiaries, particularly the 3 percent,'might possibly be deducted as interest on indebtedness.”
It will be observed that the arrangement under the provisions of the contract here discussed are supplementary to the policy obligation. The petitioner agrees that if the beneficiary will forego the right to receive the net proceeds payable to him under the contract immedi[852]*852ately upon the death of the insured and if he will permit the petitioner to retain such amount for a stated period of time, it will compensate him by the payment of 3 percent interest. A new relationship between new and different parties springs into being — an indebtedness actually arises upon the death of the insured and the immediate satisfaction thereof is postponed by the debtor, on the one hand, and the creditor on the other. There is no life contingency involved in this new transaction. An indebtedness arises under the contract between the petitioner and the beneficiary and the interest is paid upon such indebtedness. Therefore, we are of the opinion that the guaranteed interest payments of 3 percent are allowable deductions under the provisions of the applicable sections of the act hereinbefore set forth and discussed. There was no obligation upon the petitioner to pay any amounts in excess thereof, and such excess is not deductible.
Issues numbered four and five pertain to the disallowance of deductions from gross income, for the taxable year 1928, of realty taxes, maintenance expenses and depreciation upon the petitioner’s home office building and to the inclusion in its gross income of an amount representing the assumed rental value of space occupied by it in its said building during the year 1926. Deductions may not be allowed to a life insurance company for depreciation, taxes, and expenses incurred in connection with a building owned by it, unless there is also included in gross income the rental value of the space occupied by it. Helvering v. Independent Life Insurance Co., 292 U. S. 371 and Rockford Life Insurance Co. v. Commissioner, 292 U. S. 382, decided after the submission of this proceeding. There is therefore no merit in the petitioner’s present contention that it erroneously included such rental value in its return for 1926. As to the year 1928, the petitioner is entitled to the claimed deductions but, in order to compute the net benefit which it is entitled to, the rental value of the space occupied by it must be included in its gross income. Peoples Life Insurance Co., 31 B. T. A. 706; see also Commonwealth Life Insurance Co., 31 B. T. A. 887.
Beviewed by the Board.
Decision will be entered wider Rule 50.
Matthews dissents.