United States v. Boston Ins Co, 29

• Decision Date: 23 November 1925
• Docket Number: No. 29,29
• Citation: 70 L.Ed. 232,269 U.S. 197,46 S.Ct. 97
• Parties: UNITED STATES v. BOSTON INS. CO
• Court: U.S. Supreme Court

269 U.S. 197

46 S.Ct. 97

70 L.Ed. 232

UNITED STATES

v BOSTON INS. CO.

No. 29.

Argued Oct. 9, 1925.

Decided Nov. 23, 1925.

Mr. Alfred A. Wheat, of New York City, and The Attorney General, for the United States.

Mr. Abram R. Serven, of Washington, D. C., for appellee.

Mr. Justice McREYNOLDS delivered the opinion of the Court.

Appellee a domestic corporation, carries on the business of issuing fire and marine insurance policies in Massachusetts, New York, and elsewhere. It sued to recover $8,755.92, exacted as income tax for 1916 (Act Sept. 8, 1916, 39 Stat. 756 (Comp. St. § 6336a et seq.)), and maintains that the addition made during the year to its reserve funds, 'in the amount and on account of its liabilities for unsettled loss claims,' as required by the superintendent of insurance for New York, should have been deducted from gross income in order to determine the net sum subject to taxation. The amount of the deduction claimed was ascertained by subtracting $775,900.10, the reserve for loss claims on December 31, 1915, and required as condition precedent to doing business within New York during the following year, from $1,336,578.53, the amount necessary therefor during 1917.

The Revenue Act of 1916 levied an annual tax upon the net income received during the preceding year by domestic insurance companies, and provided:

'Sec. 12. (a) In the case of a corporation, joint-stock company or association, or insurance company, organized in the United States, such net income shall be ascertained by deducting from the gross amount of its income received within the year from all sources—

'First. All the ordinary and necessary expenses paid within the year in the maintenance and operation of its business and properties, including rentals or other payments required to be made as a condition to the continued use or possession of property to which the corporation has not taken or is not taking title or in which it has no equity.

'Second. All losses actually sustained and charged off within the year and not compensated by insurance or otherwise, including a reasonable allowance for the exhaustion, wear and tear of property arising out of its use or employment in the business or trade; (a) in the case of oil and gas wells a reasonable allowance for actual reduction in flow and production to be ascertained not by the flush flow, but by the settled production or regular flow; (b) in the case of mines a reasonable allowance for depletion thereof not to exceed the market value in the mine of the product thereof which has been mained and sold during the year for which the return and computa- tion are made, such reasonable allowance to be made in the case of both (a) and (b) under rules and regulations to be prescribed by the Secretary of the Treasury; * * * and (c) in the case of insurance companies, the net addition, if any, required by law to be made within the year to reserve funds and the sums other than dividends paid within the year on policy and annuity contracts.' (Comp. St. § 6336l).

During 1915, 1916, and 1917, as a condition precedent to the right to do insurance business in the state, the New York superintendent of insurance required the following reserves:

'Stock, Fire and Marine Insurance Companies—

'A. Loss reserve, including all unpaid losses and estimated expense of investigations and adjustment thereof, less admitted reinsurance.

'B. Reserve for unearned premiums as required by statute and departmental regulations; i. e. (a) on fire insurance risks a sum equal to the actual unearned premium on the policies in force claculated on the gross sum without any deduction except for admitted reinsurance, and (b) on marine hull risks calculated in the same manner and on marine cargo risks 100 per cent. of the last month's gross premium writings.

'C. Reserve for all other outstanding liabilities due or accrued.

'Stock, Casualty, Surety and Credit Insurance Companies—

'A. Loss reserve, including all unpaid losses and estimated expense of investigation and adjustment thereof, whether on account of compensation and liability insurance or otherwise, less admitted reinsurance, and such additional contingent reserves for losses as may be required by the superintendent of insurance.

'B. Unearned premium or reinsurance reserve calculated as required by statute and all premiums paid in advance at 100 per cent.

'C. Reserve for all other outstanding liabilities due or accrued.'

The superintendent did not direct that funds to meet liabilities should be kept separate and distinct from other assets. They were specified by book entries as (1) reserves to meet liabilities for unearned premiums; (2) unpaid loss claims; and (3) all other outstanding liabilities, due or accrued. He required all companies to keep on hand sufficient assets to meet every liability.

The opinion of the Court of Claims (58 Ct. Cl. 603) states:

'The one question, and the only one properly raised, is whether, within the meaning and intent of the federal Revenue Act, the net additions so made by the plaintiff to its reserve funds in pursuance of the requirements of the superintendent of insurance for New York, to cover accrued but unsettled loss claims, may be said to be such a fund as comes within the meaning of 'reserve funds,' as those terms appear in the Revenue Act. The defendant does not dispute that the sum involved was reserved, nor that it was required by the proper insurance authorities of New York to be reserved. Defendant's argument is predicated upon an assertion that Congress, in exempting net additions to reserve funds, clearly intended to exempt only such funds as are technically known and universally understood in the insurance word as reserve funds, and as thus understood the terms have a well-defined, limited and certain status and meaning.'

Following Maryland Casualty Co. v. United States, 251 U. S. 342, 350, 40 S. Ct. 155,...