62 T.C. 661 (1974)
BANKERS UNION LIFE INSURANCE CO., PETITIONER
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
Nos. 5807-71, 442-73.
United States Tax Court
August 21, 1974
Duane F. Wurzer, for the petitioner.
Arthur B. Bleecher, for the respondent.
1. Held: Deferred and uncollected premiums, including loading, are includable in ‘ assets' under sec. 805(b)(4), I.R.C. 1954, for purposes of computing the tax on petitioner's investment income (phase I), and in ‘ gross amount of premiums' under sec. 809(c), I.R.C. 1954, for purposes of computing the tax on petitioner's gain from operations (phase II) under the Life Insurance Company Income Tax Act of 1959. Four Courts of Appeals decisions followed. Decisions of this Court in Western National Life Insurance Co. of Texas, 50 T.C. 285 (1968), modified 51 T.C. 824 (1969), revd. 432 F.2d 298 (C.A. 5, 1970), and in Western & Southern Life Insurance Co., 55 T.C. 1036 (1971), revd. 460 F.2d 8 (C.A. 6, 1972), not followed;
2. Held, mortgage escrow funds held by petitioner as trustee are not includable in ‘ assets' under sec. 805(b)(4), I.R.C. 1954. Liberty National Life Insurance Co. v. United States, 463 F.2d 1027 (C.A. 5, 1972), followed.
3. and 4. Held, interest on mortgage loans more than 90 days past due and on mortgage loans in foreclosure is includable in assets under sec. 805(b)(4), I.R.C. 1954, and in gross investment income under sec. 804(b)(1), I.R.C. 1954.
5. Held, unearned policy loan interest, not prepaid in cash, is not includable in gross investment income under sec. 804(b)(1), I.R.C. 1954. Franklin Life Insurance Co. v. United States, 399 F.2d 757 )C.A. 7, 1968), and Jefferson Standard Life Insurance Co. v. United States, 408 F.2d 842 (C.A. 4, 1969), not followed.
6. Held, legal fees paid in connection with the transfer of assets from a subsidiary are not deductible as ordinary and necessary business expenses in the year of payment,
Respondent determined deficiencies in petitioner's Federal income taxes as follows:
has been conceded by respondent; those remaining for decision, which mostly concern Code sections added by the Life Insurance Company Income Tax Act of 1959, 73 Stat. 112, are as follows: (1) Whether petitioner must include net deferred premiums and ‘ loading’ thereon in (a) ‘ assets' under section 805(b)(4), I.R.C. 1954,
and (b) ‘ gross premium income’ under section 809(c)(1); (2) whether petitioner must include mortgage escrow funds in assets under section 805(b)(4); (3) whether petitioner must include interest on mortgage loans in foreclosure and on mortgage loans on which interest is more than 90 days past due in section 805(b)(4) assets and in ‘ gross investment income’ under section 804(b)(1); (4) whether petitioner must include unearned interest on policy loans in section 804(b)(1) gross investment income; and (5) whether petitioner is entitled to deduct legal fees paid in connection with the liquidation of a wholly owned subsidiary acquired in 1965. FINDINGS OF FACT Some facts have been stipulated and are so found; Petitioner is a life insurance company incorporated and organized under the insurance laws of the State of Colorado, with its home office and principal place of business in Denver, Colo. At all material times, petitioner was engaged in business as a life insurance company within the meaning of the Internal Revenue Code of 1954. Petitioner made timely filings of its Federal income tax returns for the taxable years 1965 through 1967 with the district director of internal revenue at Denver, Colo. Petitioner timely filed its 1968 Federal income tax return with the Internal Revenue Service Center in Austin, Tex. The National Association of Insurance Commissioners (hereinafter NAIC) is a voluntary organization of insurance commissioners of various States who are charged with supervising insurance companies and their operations. The NAIC has adopted a uniform financial statement form for use by insurance companies in filing their annual statements with State insurance commissioners. Petitioner prepared its annual statements for the years 1965 through 1968 on the form approved by the NAIC and on the basis of NAIC requirements. Petitioner keeps cash receipts and disbursement records, as required by Colorado insurance laws, in addition to accrual records. In each year at bar petitioner was required to, and did, file a duplicate of its Page 663
NAIC annual statement for that year with its Federal income tax return. The NAIC annual statements are prepared on a hybrid system in which petitioner must report its cash receipts and disbursements, which are then converted to a modified accrual basis, and are used for examination and audit by State insurance departments. Certain terms common to the life insurance industry have the following meanings. Gross annual premium: The amount of consideration paid by the insured for coverage for a policy year which is 12 months from the date of issuance of the policy and each anniversary thereof; the amount stated in the life insurance contract as the amount due on an annual basis to keep the contract in force, consisting of a ‘ net valuation premium’ plus ‘ loading.’ Net annual valuation premium: The amount required each year to provide the policy benefits for the current year and to establish the reserve for the payment of future benefits; this determination involves mortality and interest assumptions which are assumed for the policy or regulated by State law and represents the pure cost of providing life insurance benefits. Loading: The difference between the gross annual premium and the net annual valuation premium; the amount added to the pure cost of providing insurance benefits to cover the additional cost of estimated administration, management, and operating expenses, as well as contingencies and profits. Deferred and uncollected premiums: Premiums on policies with premiums payable more often than annually which become due after December 31 of each year; for purposes of simplicity, this term includes ‘ due and unpaid premiums' which were due on or before the end of the taxable years but were not then paid to the company. In such cases, the insurance nonetheless remains in force because of a grace period for payment of premiums provided in the policies. Net premiums deferred and uncollected: The amount of deferred and uncollected premiums exclusive of loading. Petitioner does not have a legal right to collect premiums when they become due on its policies since premiums which have not actually been paid to petitioner are not contractually due from its policyholders. Payment of premiums is at the sole election of an insured, who may decide to keep his policy in force by paying premiums as they fall due or elect to abandon or otherwise permit his policy to lapse by nonpayment of premiums. Petitioner has no legal right to collect deferred and uncollected premiums. Such premiums are not cash receipts. They cannot be invested, and they produce no income, until actually paid. As of any December 31, all events have not occurred which would fix the right to collect deferred and uncollected premiums in the following year. Page 664
Petitioner pays no investment expenses out of loading. Loading concerns only the writing of insurance and the conduct of the business of underwriting insurance. It is expected to cover agents' commissions and insurance operating expenses and to provide, if possible, an underwriting profit. Under State laws and NAIC requirements, an insurance company is obligated to establish and maintain reserves for its potential liability for all policies in force. The reserve is calculated, as a computational technique, as though all premiums had been paid in full 1 year in advance on each anniversary date commencing with the issuance date of the policy, even though premiums are not usually paid in this manner. The NAIC requires an insurance company, in preparing its annual statements, to show under assets an amount equal to that which the company expects to receive if all net premiums deferred and uncollected at the end of the year are in fact paid; loading expected to be received on those premiums is not required to be shown. This ‘ asset,‘ as an accounting matter, offsets the reserve liability attributable to deferred and uncollected premiums substantially in an equal amount. As required by the NAIC through its annual statement form, petitioner's annual statements for the years at bar included net premiums deferred and uncollected as an asset but did not so include loading on such premiums. In those annual statements, net premiums deferred and uncollected are listed as nonledger admitted assets, opposite the caption ‘ Life insurance premiums and annuity considerations deferred and uncollected.’ Loading on net premiums deferred and uncollected was also reflected in petitioner's annual statements for the years at bar but was not listed as an asset. On its Federal income tax returns for the years at issue, petitioner included net premiums deferred and uncollected as an asset and as a reserve. On those returns, petitioner did not include loading on such premiums either as an asset or as a reserve. Net premiums deferred and uncollected were shown as assets under section 805(b)(4) on petitioner's returns as follows:
Petitioner's returns did not include loading on net premiums deferred and uncollected as an asset under section 805(b)(4) in the following...