day by day, day by day, and their income depends on how much of this fund that they put here is taken by the erosion of inflation and the power of taxation.

Mr. EBERHARTER. Thank you very much.

The CHAIRMAN. Mr. Reed.

Mr. REED. Mr. Adams, I believe you have made a fine presentation. I am interested in this subject of inflation. Was this document that you have put in the record gotten up by what they call the Life Insurance Protective Policy Association?

Mr. ADAMS. No, sir; no relation whatsoever. This was gotten out by a committee and the chairman of it is Mr. Carroll Schenk, president of the Prudential Life Insurance Co. Among the members is Mr. George Harrison, former president, now the chairman of the board, of New York Life, and former head of the Federal Reserve and on the Atomic Committee during the war, a very distinguished gentle

man.

Mr. REED. I assume in that you point out very definitely the reduction in the purchasing power of the dollar, do you not? Do you state in there about what that dollar is worth today as compared to a few years ago?

Mr. ADAMS. It is not my statement. I think it does. I do not think it says so probably in dollars and cents. Those figures are thrown around pretty easily and sometimes they are pretty hard to prove. You can tell me that better than I can tell you.

Mr. REED. I do not have any difficulty proving it in my own mind. I did not know but that you had made a special study of it. Mr. ADAMS. No.

Mr. REED. I recall very vividly that Duke University made one of the greatest surveys I have ever read with reference to the effect of inflation on life insurance, endowments, and all those things, some years ago. It certainly shows the devastating effect of inflation on nearly all of these institutions which means so much to the public provided they are kept in proper form. Have you read that survey? Mr. ADAMS. No; I have.not.

Mr. REED. I think you would enjoy it.

Mr. ADAMS. Of course it is the beneficiaries of life insurance who suffer a great deal. A lot of the other people living and working get some of the benefit passed on in increased wages and salaries.

Mr. REED. Inflation takes it all away eventually, if it is not held in check and stopped. The University at Frankfort on Main, Germany, realized 14 percent. They had one of the finest gilt-edged endowments of any university.

Mr. ADAMS. I think, from a fully objective point of view, Mr. Reed, that nobody differs very much in statements of principle. To the extent that we need to make America safe we want to pay the taxes and should. Now when it comes to integrating what is necessary and what else is necessary, that is a wide field of argument that it is not a life-insurance man's proper province.

The CHAIRMAN. Mr. Kean.

Mr. KEAN. From the point of view of the protection of those whom you serve, the question of preventing inflation is probably almost more in point than anything you would have to consider, is it not?

Mr. ADAMS. We think so to the extent that an institution without governmental power can exert influence on it.

life

Mr. KEAN. I am sorry to say this, but it seems to me that my insurance policy has been one of the worst investments I have made, owing to the fact that I have lived and the fact that the Government policies have resulted in such a reduction in the buying power of my wife when she gets the money.

Mr. ADAMS. Of course that is not because of life insurance.

Mr. KEAN. No.

Mr. ADAMS. That same thing would be true of any other kind of savings.

Mr. KEAN. Any fixed income investment.

Mr. ADAMS. That was not put into highly speculative things. The same thing is true of bonds.

Mr. KEAN. That is true of anything with a fixed income.

Mr. ADAMS. If you had left a trust fund and insisted that the trustees invested and reinvested in very conservative securities to be safe above everything else, you would have started in with your 44-percent Government bonds and would have finally gotten down to 21⁄2 percent and would have exactly the same situation. Now we have a choice between conservatism and safety and we sell safety and not income. I think we can do nothing else.

The CHAIRMAN. Mr. Martin.

Mr. MARTIN. That leads me to this question. I have had a similar observation regarding my insurance as Mr. Kean. Who has benefited by this reduction of return to the policyholder that has been caused by inflation? I bought a policy and paid for it over 35 years of time at a different rate of values than I am now anticipating my beneficiaries will realize from the policy when it matures. Now what has jhappened to the loss that I have incurred? Who has benefited from it?

Mr. ADAMS. Certainly not the company. We are just like the cow that gives you all the milk she has. Back 20 years ago conservative investments would bring 4 percent. Now they will not do it.

Mr. MARTIN. Can the result of inflation possibly be a greater power by the insurance companies to bestow on future policyholders a better rate or charge for the protection? Is it possible for that to be the ultimate result?

Mr. ADAMS. It would be just the reverse of that, sir.

Mr. MARTIN. This situation will have some effect on what we do on anything bearing on the reserve or the stability of the reserve fund, for instance, a tax policy that might possibly cripple the reserve fund to some extent.

Mr. ADAMS. Cripple the company's ability to pay.

Mr. MARTIN. We must try to figure out where the incidence of that action finally rests.

Mr. ADAMS. It rests nowhere except on the policyholder.

Mr. MARTIN. Suppose we do double the tax, whom are we affecting there? Who is going to stand the brunt of it?

Mr. ADAMS. Mr. Martin, it cannot come from anybody except the policyholder.

Mr. MARTIN. I got that out of the discussion. I am just trying to enlarge on Mr. Kean's comment. Who benefits from the money I paid on my policies and the reduction in the actual value of my policies for which I have been paying over the past years?

Mr. ADMAS. Of course there are two ways. As a matter of fact, you have the advantage. If your premium was calculated maybe 10

or 15 years ago, it was a lower rate than the same premium would be now because 15 years ago it looked reasonable that we could make more interest than we make now.

Where you would lose, and the only place you would lose, is that in the case of death or your retirement and endowment we could not give you as much income after your policy expires as we would have otherwise. That is the point. That was usually the case, sir, where a certain rate was guaranteed but when we made extra we gave extra, what was called excess interest. Of course the principal thing is protection; that is the first thing. If you die, your widow always gets the savings but the income from it is less because we cannot earn as much on $1,000 for her, and neither can you, as we could 20 years ago. Mr. MARTIN. Now the differences of opinion expressed and to be expressed before the committee today as indicated in your statement have more to do with the distribution of the tax between the different types of companies?

Mr. ADAMS. Mr. Schmuck, representing Acacia, will speak for himself. He will be against what I argued here on this averaging basis. He thinks stock companies can be treated differently than mutuals. I have given the best argument I knew how and have said that he represents the only company in the United States that asks a competitive damage for the mutuals. The Metropolitan does not, the Prudential does not, New York Life does not.

Mr. MARTIN. You are not in disagreement as to the Government's total tax?

Mr. ADAMS. That is right.

Mr. MARTIN. It is only in the distribution between the different types of companies?

Mr. ADAMS. That is right. And Mr. Jenkins' very good friend and my very good friend, John Lloyd, represents the only other company. He said to me, "Claris, we are good friends, we get on different sides of more questions." I said, "John, that is not because I am a mule," and he knows what I am talking about.

Mr. MARTIN. You are largely in agreement, are you not, that if we should increase the taxes paid by insurance companies that would come out of the policyholders? There is no disagreement there? Mr. ADAMS. No, sir.

The CHAIRMAN. We thank you, Mr. Adams, for your appearance before the committee.

Mr. ADAMS. Thank you very much, gentlemen.

The CHAIRMAN. Mr. Lloyd K. Crippen, vice president and actuary, and Edward J. Schmuck, general counsel, Acacia Mutual Life Insurance Co., Washington, D. C. Will you give your name and address to the reporter and the capacity in which you appear?

STATEMENT OF EDWARD J. SCHMUCK, GENERAL COUNSEL, AND LLOYD K. CRIPPEN, VICE PRESIDENT AND ACTUARY, ACACIA MUTUAL LIFE INSURANCE CO., WASHINGTON, D. C.

Mr. SCHMUCK. My name is Edward J. Schmuck. I am general counsel of the Acacia Mutual Life Insurance Co., Washington, D. C. I am accompanied by Mr. Lloyd K. Crippen, vice president and actuary of the company.

Mr. JENKINS. Mr. Chairman, I should like to say at this point that Mr. John Lloyd, vice president of the Cincinnati Life Insurance Co., could not be here today. I should like permission for him to place a statement in the record following the remarks of this present witness. The CHAIRMAN. Without objection that may be done.

Mr. SCHMUCK. Acacia Mutual Life Insurance Co. appreciates the opportunity to be represented and to have its views heard by your committee in your consideration of the income taxation of lifeinsurance companies. Acacia is a mutual life-insurance company holding a charter granted by special act of the Congress of the United States. It is composed of 202,000 policyholders with total insurance in force of more than a billion dollars and assets of $228 million.

Since the extended hearings before your committee on the stop-gap legislation (H. R. 371, 81st Cong., later absorbed into the 1950 Revenue Act), which established a special tax formula for life-insurance companies for the taxable years 1949 and 1950, and the hearings on the Treasury proposals in February 1950 for permanent legislation covering life-insurance company taxation, we have continued our study of that problem. World conditions in recent months have turned our attention increasingly to the needs of the Government for added revenue.

With respect to the taxation of life-insurance companies, we are renewing the recommendations we made to your committee last year that

1. Mutual life-insurance companies should be taxed directly on their full free investment income, on a company-by-company basis without averaging or any other artificial formula.

2. Consideration should be given to some form of total netincome basis for taxing stock life-insurance companies. We are firmly convinced that these recommendations are sound and fair and will eliminate the gross inequities of the industry-wide averaging formula constituting the unique, unsound, and unfair method of taxing life-insurance companies. In addition, our studies show clearly that had our proposals been adopted by the Congress in 1950, tax revenues, currently and in the foreseeable future, would have been substantially greater for the Government than under either the method laid down in the stop-gap legislation or the 1942 formula which will become effective again unless the Congress acts upon the expiration. of the stop-gap formula.

As we shall show later in this statement, taxes paid by the lifeinsurance companies for the year 1949, if levied in accordance with our recommendations, would have aggregated approximately $124,000,000. The amount actually paid under the stop-gap legislation aggregated approximately 42.5 million dollars.

The history of Federal legislation affecting life-insurance companies indicates a keen appreciation by the Congress of the social and economic value of encouraging the American people to make individual and independent provision for themselves and their dependents against the hazards of death and old age through the medium of life insurance and retirement benefit policies. We are confident, therefore, that your committee will keep before it in your deliberations that amendment of the tax law affecting life-insurance companies should not impair the ability of individuals to acquire and maintain adequate lifeinsurance protection.

Our approach to the problem of establishing a fair and proper method of taxing life-insurance-company income, proceeds from the three basic principles which we have always considered fundamental to any tax law affecting the life-insurance business. These principles are as follows:

1. The life-insurance industry as a whole should pay income taxes in an aggregate amount which is fair to the industry as a whole and to the Government.

2. There should be a fair and equitable distribution of the aggregate income tax among the individual life-insurance companies comprising the industry.

3. The tax basis or formula should give recognition to the statutory and contractual obligation of each individual company for adding interest to its policy reserves.

Approximately 68 percent of the life insurance in force in this country has been issued by mutual life-insurance companies. These companies are a form of cooperative enterprise owned by the policyholders and from which, therefore, no individual proprietary interest derives any personal profit. The policyholders are the mutual lifeinsurance companies and all rights and privileges of these companies belong to the policyholders. The management of these companies are in effect trustees for their policyholders.

The premiums paid by the policyholders of a mutual life insurance company are actually a deposit with the management of the company to cover the individual policyholder's share of the mortality funds, the legal reserve to support policy obligations, and the operating expenses. As a cooperative enterprise, a mutual life-insurance company might reasonably contend that it should not be subjected to an income tax. However, it is not now, and never has been our position that mutual life-insurance companies should be exempt from income taxation.

Since 1921 life-insurance companies have been taxed on the basis of their net investment income (interest, dividends, and rents, less investment expenses) less a deduction for interest required to maintain policy reserves and, also, a deduction for other miscellaneous interest obligations. The income which mutual life insurance companies earn by the investment of both their legal reserves and their surplus funds is their only real income. To the extent that investment income is not needed to satisfy contractual and statutory requirements to policyholders it is in our opinion properly subject to an income-tax levy consistent with the basic principles set forth above.

The remaining 32 percent, a substantial portion of the life insurance in this country, has been issued by stock life-insurance companies. These companies are organized, as are any other privately owned business corporations, for the personal profit that their stockholders may derive from the sale of life insurance and retirement benefit contracts to the public.

The sources of the profits of stock life-insurance companies are the premiums paid by the policyholders in excess of the cost of the insurance protection they receive and the investment income in excess of reserve requirements. The profits paid to the stockholders in the form of cash dividends or allocated to them in the form of stock dividends are business profits in every sense of the word. The surplus accumulations also belong to the stockholders.