New England Mut. Life Ins. Co. v. Welch
| Decision Date | 21 February 1945 |
| Docket Number | Civil Action No. 2558. |
| Citation | 59 F. Supp. 525 |
| Parties | NEW ENGLAND MUT. LIFE INS. CO. v. WELCH, Former Collector of Internal Revenue. |
| Court | U.S. District Court — District of Massachusetts |
George Hoague and Ralph C. Williams, Jr., both of Boston, Mass., for plaintiff.
Edmund J. Brandon, U. S. Atty., and George F. Garrity, Asst. U. S. Atty., both of Boston, Mass., Samuel O. Clark, Jr., Asst. Atty. Gen., and Andrew D. Sharpe and Leland T. Atherton, Sp. Assts. to Atty. Gen., for defendant.
The question presented in this action is whether the taxpayer, a life insurance company, is entitled to recover $12,610.20 and interest thereon in the amount of $1,416.14, a total of $14,026.34, representing an alleged overpayment of federal income tax for the calendar year 1934. It claims error on the part of the Commissioner in disallowing its claim either (a) as a reserve fund required by law or (b) as interest paid or accrued on an indebtedness.
Findings of Fact.
During the calendar year 1934 and for many years prior thereto the taxpayer, a mutual life insurance company, issued ordinary life insurance policies which gave to the insured, and in some cases to the beneficiary, the right to require the company to apply the net sum due under the policy upon maturity in accordance with one of the several modes of settlement provided therein. The First and Second Options, together with the Fourth Option (but excluding the deferred annuities under the Second Option), and the Fifth Option, are generally known as "Supplementary Contracts not involving Life Contingencies" and are so referred to in this proceeding. The only two options involved herein are the First and Second Options, one providing for deferred payments over a fixed period and the other for deferred payments in a fixed amount.
To provide for the payment of life policies which had matured in 1934 and prior years, and were payable in 1934 and subsequent years under these supplementary contracts the petitioner was required under various state laws to maintain on its books a liability denominated "Present value of amounts not yet due on Supplementary Contracts not involving Life Contingencies". The portion of this liability applicable to the First and Second Options at the beginning and end of the calendar year 1934 was as follows:
Beginning of the year $3,735,921.47
End of the year 4,006,855.56
The mean of these amounts for the year 1934 is $3,871,388.51 of which $3,651,424.40 was held in respect of supplementary contracts arising from the First and Second Options exercised or elected by the insured during his or her lifetime.
In computing petitioner's tax liability for the year 1934, the Commissioner of Internal Revenue determined that that portion of the liability arising under the First and Second Options which were elected by the insured and that part of the assets held to provide therefor, did not constitute "reserve funds required by law" within the meaning of Section 203(a) (2) of the Revenue Acts of 1932 and 1934, 26 U.S. C.A. Int.Rev.Acts, pages 547, 730, and accordingly allowed no deduction from the taxpayer's gross income for the year 1934 to the extent of 3¾% of such liability.
Pursuant to the terms of the policies the petitioner during the calendar year 1934 paid to the holders of supplementary contracts, wherein the option was exercised by the insured, amounts which included the sum of $113,135.37. The taxpayer claimed this amount as an interest deduction on indebtedness within the meaning of Section 203(a) (8) of the Revenue Acts of 1932 and 1934, but the item was disallowed by the Commissioner.
In support of the claim for refund the petitioner asserts that the Commissioner was in error in holding that reserves for supplementary contracts were not "reserve funds required by law" within the purview of Section 203(a) (2). Alternatively, the taxpayer maintains that if the reserve argument fails then it is entitled to a deduction from its gross income for the year 1934 in the amount of $113,135.37 as "interest paid * * * on its indebtedness" under Section 203(a) (8). If petitioner is sustained on either ground it will be entitled to recover the amount demanded in the complaint.
Conclusions of Law.
Reserves for supplementary contracts have had an uncertain place in the development of federal taxation of life insurance companies. These reserves certainly fall within the literal wording of Section 203(a), and it was originally so held by the Regulations of the Treasury Department. However, after the decision in Helvering v. Inter-Mountain Life Insurance Co., 294 U.S. 686, 55 S.Ct. 572, 79 L.Ed. 1227, the Treasury changed the Regulations to...
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