Massachusetts Protective Ass'n v. United States, 3416.

• Decision Date: 06 August 1940
• Docket Number: No. 3416.,3416.
• Citation: 114 F.2d 304
• Parties: MASSACHUSETTS PROTECTIVE ASS'N, Inc., v. UNITED STATES.
• Court: U.S. Court of Appeals — First Circuit

114 F.2d 304 (1940)

MASSACHUSETTS PROTECTIVE ASS'N, Inc., v. UNITED STATES.

No. 3416.

Circuit Court of Appeals, First Circuit.

August 6, 1940.

COPYRIGHT MATERIAL OMITTED

F. H. Nash, of Boston, Mass., and Erwin N. Griswold, of Cambridge, Mass., for appellant.

Edward H. Horton, Sp. Asst. to the Atty. Gen. (Samuel O. Clark, Jr., Asst. Atty. Gen., Sewall Key and Norman D. Keller, Sp. Assts. to the Atty. Gen., and Edmund J. Brandon, U. S. Atty., and C. Keefe Hurley, Asst. U. S. Atty., both of Boston, Mass., on the brief), for appellee.

Before MAGRUDER and MAHONEY, Circuit Judges, and PETERS, District Judge.

MAHONEY, Circuit Judge.

This is an appeal from a judgment of the District Court in favor of the government in a suit brought under the Tucker Act, 24 Stat. 505 (1887), 28 U.S.C.A. § 41 (20), by the Massachusetts Protective Association, Inc., a Massachusetts stock insurance corporation, to recover federal income taxes assessed for the years 1926 and 1928 and collected by a collector who is now out of office. The case was tried upon a stipulation and a supplemental stipulation of facts, and upon oral testimony taken in open court. The facts as found by the District Court from this evidence may be summarized as follows:

The plaintiff is a stock corporation organized under the laws of Massachusetts. During the calendar year 1926, the plaintiff was engaged, as it had been for many years previously, in writing accident and health insurance in Massachusetts, New York and in a number of other states, and was taxable for 1926 as an insurance company, other than life or mutual, under the provisions of Section 246 of the Revenue Act of 1926¹, 44 Stat. 48, 26 U.S.C.A.Internal Revenue Acts, page 195.

Since 1919 the plaintiff has been issuing an accident and health policy which is non-cancellable by the company and which the insured can keep in force until reaching the age of seventy simply by paying the premiums fixed in the policy. The premium on this type of policy from the date of issuance until the insured reaches the age of fifty is in a constant and fixed amount which cannot be increased by the company. The premium increases at fifty, the amount of such increase being fixed in the policy, and thereafter remains constant and fixed.

The plaintiff includes with its annual income tax return an annual statement in the form approved by the National Convention of Insurance Commissioners setting forth its income and disbursements, assets and liabilities, and other pertinent information. By Section 246(b)(1) of the Revenue Act of 1926, this statement is made the basis for the computation of statutory gross income. With its income tax return for 1926 the plaintiff submitted a copy of the statement for that year. On this blank, on page 5, line 25, the plaintiff reports its pro rata unearned premiums, i. e., the part of the net premiums received on all its policies proportioned to the unexpired term of the period for which the premiums were received. Of the last quarterly premiums paid on December 1, 1926, there was here reported 66 2/3 per cent of the whole which was paid for protection to be rendered in January and February of 1927, plus any premiums paid in advance.

On the same page on line 25½, the plaintiff reports its "Additional Reserve on Non-Cancellable Health and Accident Policies", as of the last day of the taxable year. This reserve is set up as a liability of the company and is held to meet the additional hazards on non-cancellable health and accident policies due to the fact that the premiums must remain constant while the risk and cost inevitably increase.

Before 1922, the plaintiff had on its books no additional reserve on non-cancellable health and accident policies similar to that shown on line 25½ of its annual statement for later years. In March, 1923, the New York Superintendent of Insurance required such a reserve to be set up; and pending a determination of the proper size of such reserve as shown by its own experience, the plaintiff set up an arbitrary reserve of $75,000 as of December, 1922. This was increased each year thereafter because of the growth of sales of this type of contract until in December, 1925, on the basis of the 1921 computed experience, the reserve set up was $750,000. This was reported on line 25½ of the annual statement and was approved by the state insurance commissioner. In 1926, a further increase of $491,098.68 was made to the reserve of $750,000, and the total of $1,241,098.68 was reported on line 25½.

In arriving at its net income for 1926, the plaintiff was required to compute its earned premiums according to Section 246(b)(5) of the Revenue Act of 1926. In so doing the plaintiff added to its gross premiums written during the year (minus return premiums and premiums paid for reinsurance) its "unearned premiums" as of December 31, 1925, including in this amount both the pro rata unearned premiums, shown on line 25 of the 1925 statement, and the sum of $750,000, the additional reserve for non-cancellable health and accident insurance, shown on line 25½ of the 1925 statement, and it deducted from the amount so obtained the pro rata unearned premiums, shown on line 25 of the 1926 statement, and the sum of $1,241,098.68, the additional reserve for non-cancellable health and accident insurance, shown on line 25½ of the 1926 statement. In other words, as one of the items of net "unearned premiums" which the plaintiff is entitled to deduct from gross premiums written, the plaintiff deducted $491,098.68 which equalled the net addition to the additional reserve for non-cancellable health and accident insurance between December, 1925, and December, 1926.

In 1930, an actuarial firm employed by the plaintiff completed a study of the plaintiff's experience in the years 1927-1929, and reported what the reserve should be for the coming year on the basis of that experience. It also informed the plaintiff that if the 1927-1929 experience had been known in December, 1925, the proper reserve at that time would have been $900,890 rather than the $750,000 based on the 1921 experience and actually held by the plaintiff.

Thereafter, in 1930, the Commissioner assessed against the plaintiff a deficiency in its 1926 income tax. A portion of this deficiency was made up by the Commissioner's determination that in computing the "earned premiums" according to Section 246(b)(5), the plaintiff should have taken as the reserve for December 31, 1925, shown on line 25½ of the statement for that year, the sum of $900,890 rather than the $750,000 actually held by the plaintiff and reported on line 25½, and accepted by the Commissioner in computing the 1925 tax. The result of this action by the Commissioner was to include in the plaintiff's "premiums earned" in 1926, the difference between $900,890 and $750,000, i. e., $150,890. This difference resulted in an additional tax, plus interest, of $23,428.29. The plaintiff duly filed a claim for refund which was rejected, and this suit was brought to recover the $23,428.29 with interest thereon.

The District Court also found as a fact that in all of the plaintiff's tax returns, the Commissioner has allowed as an exclusion from gross income through the nine years between 1922 and 1930, the net increase in the additional reserve for non-cancellable health and accident insurance except this amount of $150,890. Since 1930, the 1927-1929 experience has been used to figure the reserves set up, and the net increase in the aggregate reserves has been accepted each year by the Commissioner as an exclusion from gross income.

The refund for 1928 is claimed for the purely technical reason that a small portion of the $23,428.29 here sought to be recovered was not paid in cash but was a credit for an alleged 1928 overpayment which was applied by the Commissioner to the alleged 1926 deficiency. Since the defendant raised no question, either in the trial court or in this court, of the propriety of including this sum in the present suit, other than the general claim that it was not allowable as a deduction from gross income, we do not consider it necessary to pursue the matter further than to say that we consider it to be properly before us. See United States v. Bertelsen & Petersen Co., 1939, 306 U.S. 276, 59 S.Ct. 541, 83 L.Ed. 647.

At the close of all the evidence, both the plaintiff and defendant moved for judgment in their favor, and the plaintiff requested the court to make certain findings of fact and conclusions of law. The judge denied the plaintiff's motion, and filed an opinion containing findings of fact and conclusions of law, giving judgment for the defendant. To the denial of its motion for judgment and the refusal to make the requested findings and conclusions, the plaintiff excepted.

Later the plaintiff moved to vacate the judgment and reopen the trial on the ground that the judge had erred in not allowing it to see his opinion and take exception to the denial of its motions and requests for findings before judgment was entered. The judge denied the motion and held that the exceptions previously taken safeguarded the plaintiff's rights on appeal. This court has held that the opinion in a case brought under the Tucker Act, supra, is a part of the record, and exceptions taken to findings of fact and conclusions of law there made and to the judgment entered are duly taken during the course of the trial. United States v. Hyams, 1 Cir., 1906, 146 F. 15; United States v. Swift, 1 Cir., 1905, 139 F. 225. The first bill of exceptions was properly taken and is validly before this court. The District Court properly denied the motion to vacate the judgment and reopen the trial.

The real question involved in the present controversy is whether the plaintiff in computing its "premiums earned" for the year 1926, under Section 246(b)(5) of the Revenue Act of 1926, was entitled to exclude therefrom the net addition made during that year to the additional reserve...