CARDINAL LIFE INSURANCE COMPANY v. United States

• Decision Date: 14 May 1970
• Docket Number: No. 28722 Summary Calendar.,28722 Summary Calendar.
• Citation: 425 F.2d 1328
• Parties: CARDINAL LIFE INSURANCE COMPANY, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

425 F.2d 1328 (1970)

CARDINAL LIFE INSURANCE COMPANY, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant.

No. 28722 Summary Calendar.

United States Court of Appeals, Fifth Circuit.

May 14, 1970.

Eldon B. Mahon, U. S. Atty., W. E. Smith, Asst. U. S. Atty., Fort Worth, Tex., Johnnie M. Walters, Asst. Atty. Gen., Lee A. Jackson, Atty., Tax Div., U. S. Dept. of Justice, Washington, D. C., William W. Guild, Atty., Tax Div., Dept. of Justice, Fort Worth, Tex., for plaintiff-appellee.

William Norton Baker, Edward R. Smith, Lubbock, Tex., for defendant-appellant.

Before GEWIN, GOLDBERG and DYER, Circuit Judges.

DYER, Circuit Judge:

This appeal involves the timeliness of the assessments of deficiencies in federal income taxes against taxpayer, Cardinal Life Insurance Company, for the years 1955 and 1956. The District Court rejected the Government's assertion that the taxpayer's omission of more than twenty-five percent of its income in each of the years in question resulted in a six year period of limitations and held that the deficiencies were barred by the three year limitation statute. We disagree and reverse.¹

The taxpayer was organized in 1955 as a limited capital stock life insurance company, under the provisions of the Texas Insurance Code. Since its inception the taxpayer has been authorized to write life, health and accident insurance, but taxpayer engaged in no insurance business prior to 1957. For 1955 and 1956 taxpayer filed its income tax returns on Form 1120L, the form prescribed for use by life insurance companies.

Taxpayer had long term capital gains of $9,164.55 in 1955 and $160,884.66 in 1956. It did not report these gains on its 1955 and 1956 returns and it did not file the required copy of its annual statement for either year. This latter omission was indicated on the face of the returns but without explanation of the omission as required by the instructions on the form. Taxpayer reported that it had no non-life insurance reserves for 1955 and 1956. Taxpayer sold no life insurance and had no premium income in either year in question.

The District Court determined that the taxpayer, as a matter of law, was not an insurance company during 1955 and 1956. This conclusion is not contested by either party. During this period life insurance companies did not have to pay any tax upon realized capital gains, while other corporate taxpayers had to pay the standard twenty-five percent capital gains tax on all gains realized. The Government argues that the taxpayer was obligated to pay the full taxes imposed upon ordinary corporations, including the taxes due on the $170,049.21 in capital gain income which had not been reported in 1955 and 1956. The District Court, however, held that the deficiencies in tax of $42,574.11, together with interest, assessed against the taxpayer on account of this unreported income, were barred by the three-year statute of limitations.

The statutory notice of deficiency for the years 1955 and 1956 was issued on June 11, 1963. This notice was not timely if the three-year period of limitations applied,² but was within the six-year period of limitations, as extended by waivers, provided in Section 6501(e) of the Internal Revenue Code of 1954. That section provides in part:

If the taxpayer omits from gross income an amount properly includible therein which is in excess of 25 percent of the amount of gross income stated in the return, the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time within 6 years after the return was filed. For purposes of this subparagraph —

* * * * * *

(ii) In determining the amount omitted from gross income, there shall not be taken into account any amount which is omitted from gross income stated in the return if such amount is disclosed in the return, or in a statement attached to the return, in a manner adequate to apprise the Secretary or his delegate of the nature and amount of such item. (Emphasis supplied)

* * * * * *

The District Court found Section 6501(e) inapplicable because "the only error in the returns as filed was in reporting as a life insurance company. This error was adequately disclosed on the returns themselves" because the returns "show clearly in each such year that Plaintiff did not have any life insurance reserves. The absence of reserves, furthermore, means the absence of premium income. The disclosed absence of such factors is definitely a `clue' that Plaintiff was not a life insurance company." To conclude the syllogism, the court, relying on The Colony, Inc. v. Commissioner, 1958, 357 U.S. 28, 78 S.Ct. 1033, 2 L.Ed.2d 1119, found that because of the "clue" the Commissioner was not placed "at a special disadvantage in detecting errors." Id. at 36, 78 S.Ct. at 1038.

The District Court misread Colony. This fact, coupled with the court's preoccupation with the taxpayer's use of an erroneous form of return, led the court away from the focal point of inquiry, i. e., whether the omission of the capital gains transactions was...