Western National Life Insurance Co. of Texas v. CIR, 28569.

Decision Date30 September 1970
Docket NumberNo. 28569.,28569.
PartiesWESTERN NATIONAL LIFE INSURANCE COMPANY OF TEXAS, Petitioner-Appellee, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant.
CourtU.S. Court of Appeals — Fifth Circuit

Thomas L. Stapleton, Atty., Johnnie M. Walters, Asst. Atty. Gen., Lee A. Jackson, Atty., Tax Div., U. S. Dept. of Justice, K. Martin Worthy, Chief Counsel, Eugene F. Colella, Atty., Internal Revenue Service, Washington, D. C., for appellant.

Francis A. Goodhue, Jr., New York City, Arthur K. Mason, Washington, D. C., J. Waddy Bullion, Buford P. Berry, Dallas, Tex., for taxpayer; William J. Glading, Newark, N. J., Alan R. Vogeler, Cincinnati, Ohio, Joseph Korff, New York City, of counsel.

O. Jan Tyler and Robert K. Sands, James L. Walsh, Gen. Counsel, Dallas, Tex., William B. Harman, Jr., Kenneth L. Kimble, William T. Gibb, Washington, D. C., G. Mason Connell, Jr., Richmond, Va., amici curiae.

Before TUTTLE, THORNBERRY and INGRAHAM, Circuit Judges.

TUTTLE, Circuit Judge:

In this appeal from the Tax Court of the United States the Commissioner of Internal Revenue challenges the correctness of the Tax Court's determination of the method to be used in the computation of life insurance company taxable income under the Life Insurance Company Income Tax Act of 1959, Sections 801-820 of the Internal Revenue Code of 1954, as amended. The Tax Court held that the company could accrue "deferred and uncollected" annual premiums for the purpose of complying with state statute requirements that an amount equal to the policyholder's share of the policy of such premiums must be added to reserves on the assumption that they had been paid, without being required to accrue such "deferred and uncollected" annual premiums for inclusion in the company's assets except in an amount that would balance off the amount added to reserves.

The commissioner's position, which was successfully urged before the courts of appeals of the Seventh and Fourth Circuits in Franklin Life Insurance Co. v. United States, 7th Cir., 399 F.2d 757 and Jefferson Standard Life Ins. Co. v. United States, 4th Cir., 408 F.2d 842 is that "once accrued for any purpose, accrued for all purposes."

The facts are not in issue. It is clear that a gross annual premium on an insurance contract is the agreed consideration for coverage for a period of a year from the policy anniversary date. It is also universally understood that of that amount a certain part must be set aside as a reserve for the protection of the policyholder. For the purpose of this litigation all parties seem satisfied with the definition of this amount as the "net valuation premium." Also, the parties all agree that the remainder of the premium, that is, the difference between gross and net valuation premiums may be referred to as the "loading." Uniform with all insurance companies is a condition that exists at the end of each taxable year that there are policies outstanding as to which a partial premium has been paid but remaining premiums are to be paid at quarterly or monthly intervals throughout the balance of the policy year. There is also at all times at the end of the taxable year a certain amount in premiums that are due which are not paid because of the grace period provided in the policies. These two classes of premiums are known as "deferred and uncollected premiums." The parties agree that under normal accounting procedures these deferred and uncollected premiums are not truly accruable as income in the usual accounting sense, since the companies have no legal claim to have them paid. Undoubtedly, many are never paid, but equally true is the fact that many are ultimately collected.

Because the policy is outstanding from the date of its issue, the life insurance industry either because of requirements of state regulating agencies or otherwise, universally considers these deferred and uncollected premiums as accrued at the end of the year for the purpose of dividing them into what might be called the "policyholder's share" and the "loading," and then covering the policyholder's share into reserves. It is also generally true, apparently, (as occurred in this case) that in reporting gross income for the purpose of determining "gain and loss from operations" under Section 809(c) (1) insurance companies do actually report under the item of "gross amount of premiums and other considerations * * * on insurance and annuity contracts" the total amount of deferred and uncollected premiums.

For many years the National Association of Insurance Commissioners, (hereinafter N.A.I.C.), has furnished annual statement forms to be used for reporting to the state insurance commissioners, and these annual statements are filed as exhibits to the income tax returns of the insurance companies. It is not disputed that under the N.A.I.C. forms only that part of the deferred and unpaid premiums representing the policyholder's share is shown as an asset. In other words, there is a corresponding entry in the asset column to offset the liability to reserves resulting from the state commissioners' requirement that the policyholder's share be accrued and added to reserves even though not legally collectable.

The Act with which we are concerned establishes a statutory framework which provides a measurement of life insurance company total income on an annual basis for use and application of the normal corporation tax to the result. It utilizes a series of separate computations in the determination of the final tax.1

It is not necessary, for an understanding of the issues here, for us to detail the computations that are to be made to ascertain the net result to which the rate of tax is applied. Suffice it to say, that the larger the reserve, which the numerator of a fraction is, the less the quotient which is to be taxed. So, too, the smaller the "assets," being the denominator of the fraction, the smaller the quotient which is to be taxed. Thus, the effect, possibly fortuitous, of the method used by this taxpayer as well as those in the cases cited above and by all other companies following the N.A.I.C. form of reporting, is that the inclusion of a part of the gross deferred and uncollected premiums representing the policyholders' share in the reserves as an accrued item and the omission of all or a part of such premiums in the asset column works to the tax advantage of the taxpayer.

This company claimed initially that although it was required to, and did, accrue a large percentage of the gross premiums on deferred and uncollected premiums in the reserve account, it was not required to add any part of this amount to assets. The commissioner issued a deficiency letter, and the insurance company litigated the matter before the Tax Court. That Court, in an initial opinion, decided that Western National Life Insurance Company correctly excluded any part of the deferred and uncollected premiums from the asset side of the ledger. Upon petition for rehearing and upon the filing of a brief by the American Life Convention and the Life Insurance Association of America as amicus curiae, the court adopted the...

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