Franklin Life Insurance Company v. United States
| Decision Date | 30 August 1968 |
| Docket Number | No. 16580.,16580. |
| Citation | 399 F.2d 757 |
| Parties | The FRANKLIN LIFE INSURANCE COMPANY, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant. |
| Court | U.S. Court of Appeals — Seventh Circuit |
Mitchell Rogovin, Asst. Atty. Gen., Thomas L. Stapleton, Lee A. Jackson, Meyer Rothwacks, Harry Marselli, Tax Division, U. S. Dept. of Justice, Washington, D. C., Richard E. Eagleton, Springfield, Ill., Gilbert E. Andrews, Atty., Dept. of Justice, Washington, D. C., for appellant.
Louis F. Gillespie, George B. Gillespie, Frederick H. Stone, Springfield, Ill., for appellee; Gillespie, Burke & Gillespie, Springfield, Ill., of counsel.
Fred. C. Scribner, Jr., Thomas C. Thompson, Jr., Washington, D. C., for amicus curiæ.
David A. Sutherland, Washington, D. C., William C. Smith, Bruce A. Coggeshall, Portland, Me., for American Life Convention as amicus curiæ; Scribner, Hall & Casey, Washington, D. C., Pierce, Atwood, Scribner, Allen & McKusick, Portland, Me., William B. Harman, Jr., Washington, D. C., of counsel.
Before CASTLE, Chief Judge, HASTINGS, Circuit Judge, and KNOCH, Senior Circuit Judge.
The United States of America, defendant-appellant, prosecutes this appeal from a judgment in the amount of $1,303,011.88 entered against it in favor of The Franklin Life Insurance Company,1 plaintiff-appellee. The judgment represents a refund of amounts assessed against the taxpayer as income tax deficiencies, and interest thereon, for the calendar years 1958 through 1962. The taxpayer had paid the deficiencies and brought suit in the District Court for refund.
The issues presented on appeal involve the construction and application of the Life Insurance Company Income Tax Act of 1959, Sections 801 through 820 of the Internal Revenue Code of 1954, as amended (26 U.S.C.A. §§ 801-820). The Act establishes a statutory framework directed to the measurement of life insurance company total income on an annual basis for use in the application of an annual tax. It utilizes a series of separate computations in the determination of the final tax.2 A tax at corporation rates is levied on "life insurance company annual income". As it applies in the instant case, a third factor having no application to the taxpayer for the years here involved, such annual income is defined in Section 802(b) to be the sum of:
In addition to defining various of the items to be used in the computations required in the ascertainment of investment income and gain from operations, the Act (Section 818(a)) provides:
The first two specific issues presented on appeal involve basically the same problem — that is, the way in which deferred and uncollected portions of gross annual premiums3 are to be handled in the computations. The Commissioner held: (1) that taxpayer in computing gain from operations pursuant to Section 809 was not entitled to a deduction or offset for "increase in loading on deferred and uncollected premiums" and (2) that taxpayer was not entitled to exclude the loading on deferred and uncollected premiums from assets in the computation of investment income pursuant to Section 804, but was required to reflect the full gross premium in assets. The District Court concluded, to the contrary, that taxpayer was entitled to deduct or offset the item "increase in loading on deferred and uncollected premiums" in computing gain from operations, and was entitled to exclude the loading on deferred and uncollected premiums from assets for purposes of the Section 804 computation of investment income.
The other two specific issues involve the treatment of interest on loans to policyholders. The life insurance policies and annuity contracts issued by taxpayer, which have cash values, provide that a loan may be obtained on the sole security of the policy at any time that a cash value is available and while the policy is in force. Interest on policy loans is payable in advance at the time the loan is made to the end of the current policy year and annually thereafter on the policy anniversary date for the ensuing year. If interest on the policy loan is not paid when due, it is added to the principal of the existing loan and bears interest at the same rate. The Commissioner held that the full amount of the interest paid in advance must be included in investment income in the year of its receipt, and that the full amount of interest added to principal must be included in assets in the investment income computation in the year added. The District Court concluded that taxpayer need recognize as income only the portion of the interest received and deemed earned in the taxable year, and need recognize for asset purposes only the portion of interest added to principal deemed earned in the taxable year.
Examination of the District Court's findings and conclusions reveals that it rejected the Commissioner's holdings with respect to the treatment to be accorded to loading on deferred and uncollected premiums on the premise that the treatment of this item in the annual statements filed by taxpayer with the various state insurance departments reflects a method of accounting with respect to such item which must be given governing effect in the computation of the "gain from operations" and "investment income" factors of the tax formula contained in the Internal Revenue Code. In this connection the record discloses that the treatment accorded the loading on deferred and uncollected premiums under the method of accounting prescribed by the National Association of Insurance Commissioners (NAIC) for use in the preparation of the annual statement form it has designed to show the solvency status on a liquidation basis of life insurance companies permits the off-setting of increase in loading on deferred and uncollected premiums in the determination of company income and the exclusion of loading on deferred and uncollected premiums in the determination of company assets. The NAIC was organized in 1871 and is a national organization composed of the officials of the various states who are charged with the supervision of life insurance companies and their operations. Soon after its organization, the NAIC adopted a uniform annual statement form and life insurance companies have filed their annual statements since that time on such forms in accordance with the instructions prepared by the NAIC for such purpose. The taxpayer was required by the laws of Illinois, the state of its incorporation, and of the other states in which it did business to complete and file the NAIC annual statement form and to comply with the instructions approved by the NAIC for use in that connection. The taxpayer did so with respect to its annual statements for the tax years here involved.
But it is our opinion that the District Court erred in giving overriding effect to the method of accounting utilized by the NAIC for annual statement purposes. Reliance upon the provisions of Section 818(a) quoted supra does not warrant the conclusion the court reached. The crucial question here is not whether the method of accounting prescribed by the NAIC in connection with the annual statement form it has designed to show solvency status is in its nature a form of accrual accounting or whether the adjustments permitted thereunder are required or appropriate for the purpose the annual statement form is to serve. Nor is it of import that Section 818(a) in prescribing that "computations" entering into the determination of the tax imposed shall be made under an accrual method of accounting provides that except for such restriction4 computations shall be made in a manner consistent with that required for NAIC annual report purposes. The careful and detailed attention given by Congress throughout Sections 801 through 820 to definition of the particular items utilized as factors in the tax formula and in specifying and enumerating the permissible deductions and exclusions negates the existence of any intent on the part of Congress to relegate the substantive matter of offsetting or excluding loading on deferred and uncollected premiums, with its concomitant impact on the resulting tax, to the NAIC.
Section 809(c) (1) specifically requires the inclusion of "the gross amount of premiums" for the purpose of determining "gain from operations" as defined in Section 809(b) (1). Taxpayer concedes that the intent and purpose of the Act require that the deferred and uncollected premiums be included in income on a gross basis (which includes loading). In our view that concession leaves no basis for further controversy. This is especially so in view of the fact that Congress has provided twelve specific deductions in Section 809 but makes no provision for an offset or deduction for "increase in loading". And, the burden is on the taxpayer to show the express statutory authority for a deduction claimed. Equitable Life Insurance Co. of Iowa v. United States, 8 Cir., 340 F.2d 9.
Taxpayer seeks to justify the District Court's exclusion of loading on deferred and uncollected...
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