Time Ins. Co. v. Comm'r of Internal Revenue
| Decision Date | 10 March 1986 |
| Docket Number | Docket No. 3075-80. |
| Citation | 86 T.C. 298,86 T.C. No. 20 |
| Parties | TIME INSURANCE COMPANY, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
HELD, computations of reserves for medical insurance claims in accordance with NAIC rules not inconsistent with accrual method of accounting because such computations not recognized in accrual accounting.
HELD, FURTHER, NAIC rules are applicable to such computations since Code and Regulations are silent on matter. Commissioner v. Standard Life & Accident Insurance Co., 433 U.S. 148 (1977). Thomas J. Donnelly, Peter C. Karegeannes, for the petitioner.
Seymour I. Sherman, Edward J. Roepsch, for the respondent.
Respondent determined deficiencies in petitioner's Federal income taxes as follows:
+-------------------+
¦Year¦Deficiency ¦
+----+--------------¦
¦1972¦$1,935,682.54 ¦
+----+--------------¦
¦1973¦397,760.23 ¦
+----+--------------¦
¦1974¦193,267.27 ¦
+----+--------------¦
¦1975¦483,091.21 ¦
+-------------------+
After a number of concessions, the issues remaining are: (1) whether petitioner properly computed its claim reserves on certain accident and health policies during the years in issue; (2) whether respondent's disallowance of a portion of petitioner's deductions for claim reserves was so arbitrary and unreasonable as to shift the burden of going forward with the evidence with respect to the correct amount of the reserves to respondent; and (3) if the deduction for claim reserves in 1972 is found to be improper, whether petitioner is entitled to spread forward any adjustment for that year over the ten- year period provided by section 810(d). 1
Some of the facts have been stipulated by the parties and are so found. Their Stipulation of Settled Issues, Stipulation of Facts, and Supplemental Stipulation of Facts and the exhibits attached thereto are incorporated herein by reference.
Petitioner is Time Insurance Company (‘Time‘). It is a stock life insurance company which was organized in 1910 under the laws of Wisconsin, and during all relevant times had its principal office and place of business in Milwaukee. For each of the calendar years 1972 through 1975, Time filed with the Internal Revenue Service Center at Kansas City, Missouri, original, amended, and ‘corrected amended‘ income tax returns as a life insurance company taxable under sections 801 through 820. Each return consisted of a Form 1120L, attached supporting schedules, and a copy of Time's annual statement for the particular year on a form prescribed by the National Association of Insurance Commissioners (‘NAIC‘).
During the years under consideration, petitioner as a life insurance company was required by state law to file the NAIC annual statements on a calendar year basis with the insurance regulatory agency of each state in which it did business. It was also required to file copies of such statements with and as of its Federal income tax returns. The form for and the information required by the annual statements are prescribed by the NAIC, an organization of which the insurance commissioner, or other principal insurance executive, of every state is a member.
During 1972 through 1975, petitioner sold life insurance and accident and health insurance in 45 states, including Wisconsin. Its accident and health (‘A & H‘) policies included both disability income and medical reimbursement insurance. The dispute in this case is limited, however, to the A & H medical reimbursement policies, which in the industry are sometimes referred to as medical expense policies. This type of policy insures against certain specified financial losses suffered by the insured as a result of an injury or sickness. Such policies generally provide for payment by the insurance company, either directly or through reimbursement to the insured, of all or part of the insured's covered medical expenses. 2
For purposes of administering benefit claims and establishing claim reserves, petitioner, during the years under consideration, divided its A & H medical reimbursement policies into the following categories:
(1) Individual Guaranteed Renewable (GR) hospital/surgical (class 6);
(2) Individual Guaranteed Renewable (GR) major medical (class 7);
(3) Individual Optionally Renewable (OR) hospital/surgical (class G);
(4) Individual Optionally Renewable (OR) major medical (class H);
(5) Group policies. 3
Petitioner's GR policies were renewable by the insured at a premium based upon the insured's age at original entry. Its OR policies were similar to GR policies except that they were renewable at the option of petitioner, not the insured, but petitioner never refused to renew such policies. 4 Group policies remained in continuous effect so long as the premiums were paid, but either the group holder or petitioner could terminate the policy at the end of any policy year by giving 30 days written notice prior to the year end.
All of petitioner's reimbursement policies were of a ‘per cause‘ type as opposed to a ‘calendar year‘ type in that they provided benefits after the satisfaction of a deductible amount during the specified benefit periods (usually two or three years) arising from a PARTICULAR claim event or cause, i.e., injury or sickness. However, with only slight variations not relevant here, each of petitioner's policies contained the following provision:
TIME * * * does hereby insure * * * and agrees to pay the Insured for Covered Expenses * * * INCURRED WHILE THIS POLICY IS IN FORCE, resulting from injury or sickness * * * in the manner and to the extent herein provided. (Emphasis added.)
Each policy also contained a grace period of 30 or 31 days for premium payments which was typically set out as follows:
A grace period of thirty-one days will be granted for the payment of each premium falling due after the first premium, DURING WHICH GRACE PERIOD THE POLICY SHALL CONTINUE IN FORCE. (Emphasis added.)
In the OR policies, the grace period did not apply if petitioner had given written notice of its intention not to renew the policy 30 days prior to the premium due date. However, such refusal to renew or any other cancellation or termination would be without prejudice to any claim arising while the policy was in force.
In a typical GR hospital/surgical policy (Class 6), petitioner agreed to pay a percentage (usually 80 percent) of the first $2,000 of covered medical expenses and another percentage (usually 100 percent) of such expenses thereafter, up to a lifetime maximum aggregate. The covered expenses were also subject to a maximum daily benefit set out in a policy schedule. Under these policies, reoccurring hospitalizations or surgical procedures caused by the same injury or sickness and separated by less than 90 days in some policies, and 180 days in other policies, were considered to be part of the same injury or sickness.
A typical OR hospital/surgical policy (Class G), contained a deductible amount, a maximum daily reimbursement for hospital confinement, and a maximum hospital miscellaneous expense benefit for each separate injury or sickness. Petitioner also agreed to pay surgical expenses, up to a maximum amount, for each injury or sickness based on a schedule of surgical benefits. Successive surgical procedures for the same cause were treated as the same procedure when they were separated by less than 12 months.
In a typical GR major medical policy (Class 7), petitioner agreed to reimburse the insured for covered expenses incurred with respect to each separate injury or sickness, over a deductible amount, during a specified benefit period. The reimbursement was subject to a maximum amount set out in a policy schedule. The benefit period was usually two or three years and began when the first eligible expense occurred that satisfied the policy's deductible amount. Expenses from a new cause had to satisfy a separate deductible amount before a benefit period for that cause was established.
Petitioner's OR major medical policies (Class H) were similar to its GR major medical policies in all material respects, except that the option to renew was with petitioner.
In a typical group policy petitioner agreed to pay hospital, miscellaneous, and other medical expenses, which exceeded a deductible amount, during a benefit period which usually lasted two years. The benefit period began on the date the policyholder incurred the first eligible expense which satisfied the policy's deductible amount. The payments were to be made in accordance with a benefit schedule and were not to exceed a maximum amount specified in the policy. Medical expenses for a separate injury or sickness were subject to a separate deductible amount and a separate benefit period.
Group policies typically contained the following additional provision:
EXTENSION OF BENEFITS: If the insurance of any Insured Member or dependent terminates because the insured leaves his employment, or ceases to be a member of the Group Holder while benefits are being paid hereunder, coverage will be continued as long as the covered person is continuously and totally disabled from the injury, sickness, or complication of pregnancy causing such disability; but only for: (1) a period of ninety (90) days, or (2) until the covered person is no longer totally disabled whichever occurs earlier; subject to the provisions of the Master Policy.
As required by state law, petitioner's group policies also provided extended maternity benefits where pregnancy commenced during the policy period.
Under Wisconsin's Administrative Code, sec. Ins. 6.51 (1976), the following extended benefit provisions were also made applicable to petitioner's group insurance:
(6) EXTENSION OF BENEFITS. (a) Every group policy * * * must provide a reasonable provision for extension of benefits...
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