Cent. Reserve Life Corp. v. Comm'r of Internal Revenue
| Decision Date | 12 October 1999 |
| Docket Number | No. 21390–96.,21390–96. |
| Citation | 113 T.C. No. 19,113 T.C. 231 |
| Parties | CENTRAL RESERVE LIFE CORPORATION and Subsidiaries, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Michael R. Schlessinger and Michael A. Clark, for petitioner.
Katherine Lee Wambsgans, for respondent.
P's subsidiary, L, writes cancelable accident and health (CA & H) insurance. R argues that L is not a “life insurance company” under sec. 816(a), I.R.C., because L's accrued unpaid losses on CA & H insurance are “unpaid losses” for purposes of ascertaining its “total reserves” under sec. 816(c), I.R.C. P argues that L is a life insurance company under sec. 816(a), I.R.C., because the term “unpaid losses”, as used in sec. 816(c), I.R.C., does not include accrued unpaid losses on CA & H insurance.
Held: L is a life insurance company under sec. 816(a), I.R.C .; its accrued unpaid losses on CA & H insurance are not “unpaid losses” for purposes of sec. 816(c), I.R.C.
This case is before the Court fully stipulated. See Rule 122. Central Reserve Life Corporation and Subsidiaries petitioned the Court to redetermine respondent's determination of deficiencies of $1,936,766 and $225,070 in its consolidated Federal income tax for 1991 and 1992, respectively. Following the parties' concessions, we must decide whether the phrase “unpaid losses * * * not included in life insurance reserves” as used to define the term “total reserves” in section 816(c)(2) includes accrued unpaid losses on cancelable accident and health (CA & H) insurance policies.1 We hold it does not. Unless otherwise stated, section references are to the Internal Revenue Code in effect for the subject years. Rule references are to the Tax Court Rules of Practice and Procedure. We use the term “petitioner” to refer solely to Central Reserve Life Corporation.
All facts have been stipulated. The stipulation of facts and the exhibits submitted therewith are incorporated herein by this reference. Petitioner's principal place of business was in Strongsville, Ohio, when its petition was filed.
Petitioner is the parent corporation of an affiliated group of corporations that files consolidated Federal income tax returns. Central Reserve Life Insurance Company (Central Life) is petitioner's wholly owned subsidiary. Central Life writes life insurance and accident and health (A & H) insurance.
Insurance regulators require that insurance companies maintain defined levels of assets to guarantee that they can pay their claims when the claims become due. These asset reserves generally must equal the amount of funds which, when increased at a stated rate of interest, will allow the company to pay its claims at their actuarially estimated due dates.
Insurance companies must report their anticipated obligations for claims on a standard annual statement promulgated by the National Association of Insurance Commissioners (NAIC) and adopted by all 50 States. The annual statement characterizes an insurer's life and A & H obligations as either “reserves” or “liabilities”, and it uses the word “accrual” to distinguish current obligations from future obligations.2 A reserve is an unaccrued claim for which the insurer will become liable in the future; e.g., the future rehabilitation expenses described supra note 1. A liability is an accrued claim for which the insurer is liable now; e.g., the emergency room expenses described supra note 1. Exhibit 8 of the annual statement lists an insurer's “Aggregate Reserve for Life Policies and Contracts”. Exhibit 9 lists an insurer's “Aggregate Reserve for Accident and Health Policies”. Exhibit 11 lists an insurer's “Policy and Contract Claims”; data on these claims is listed separately as to yearend liabilities for life insurance and A & H insurance.
Central Life filed its 1990 through 1992 annual statements with the Ohio Department of Insurance. As relevant herein, Central Life reported its claim obligations on life insurance policies and annuities on exhibits 8 and 11, and it reported its claim obligations on A & H insurance policies on exhibits 9 and 11. Central Life reported its unaccrued claim obligations for life insurance and A & H insurance as reserves on exhibits 8 and 9, respectively, and it reported all of its accrued claim obligations as liabilities on exhibit 11. During 1990 and 1991, Central Life wrote primarily guaranteed renewable A & H insurance. In the latter year, Central Life qualified as a life insurance company under the ratio (reserve ratio) set forth in section 816(a). In 1991, Central Life properly included unpaid losses with respect to its guaranteed renewable A & H insurance in the reserve ratio's numerator and denominator.
Beginning in late 1991, Central Life added a rider to its existing guaranteed renewable A & H insurance policies, which allowed it to terminate any of these policies upon 90 days' notice. By virtue of this rider, Central Life's A & H insurance policies issued after late 1991 were no longer guaranteed renewable policies; they were nonguaranteed renewable or CA & H insurance policies. Because Central Life stopped issuing guaranteed renewable A & H insurance policies in late 1991, unearned premiums and unpaid losses with respect to those policies were no longer properly includable in the reserve ratio's numerator in 1992 and years thereafter. Central Life's A & H insurance business in 1992 consisted almost exclusively of CA & H insurance; it also wrote a small amount of guaranteed renewable group A & H insurance.
The parties agree that unpaid losses with respect to Central Life's CA & H insurance policies are not includable in the reserve ratio's numerator. The parties dispute whether those amounts must be included in the reserve ratio's denominator. Respondent determined and argues that the denominator includes these amounts. Petitioner argues that the denominator does not include these amounts. If petitioner is correct, Central Life qualifies as a life insurance company under section 816(a). If respondent is correct, Central Life fails to qualify as a life insurance company for Federal income tax purposes, and petitioner's taxable income would include Central Life's policyholder surplus of $2,869,768. Central Life also would not be entitled to the small life insurance company deduction in the amounts that it reported for the subject years.
The parties dispute whether Central Life qualifies as a life insurance company for Federal income tax purposes. Congress has enacted in the Internal Revenue Code different rules of taxation for insurance companies that are life insurance companies as opposed to nonlife insurance companies such as property and casualty (P & C) insurance companies. Compare secs. 801–818 () with secs. 831–835 (). The rules that apply to life insurance companies are more favorable to insurance companies from a tax point of view than are the rules which apply to nonlife insurance companies. See United States v. Consumer Life Ins. Co., 430 U.S. 725, 727–728 (1977).
An insurance company is a life insurance company for Federal income tax purposes if it meets the definition set forth in section 816. Section 816 provides in part:
SEC. 816. LIFE INSURANCE COMPANY DEFINED.
comprise more than 50 percent of its total reserves (as defined in subsection (c)). * * *
(b) Life Insurance Reserves Defined.—
(1) In general. For purposes of this part, the term “life insurance reserves” means amounts—
(A) which are computed or estimated on the basis of recognized mortality or morbidity tables and assumed rates of interest, and
(B) which are set aside to mature or liquidate, either by payment or reinsurance, future unaccrued claims arising from life insurance, annuity, and noncancellable accident and health insurance contracts (including life insurance or annuity contracts combined with noncancellable accident and health insurance) involving, at the time with respect to which the reserve is computed, life, accident, or health contingencies.
(2) Reserves must be required by law.—Except—
(A) in the case of policies covering life, accident, and health insurance combined in one policy issued on the weekly premium payment plan, continuing for life and not subject to cancellation, * * *
in addition to the requirements set forth in paragraph (1), life insurance reserves must be required by law.
* * * (4) Amount of reserves. For purposes of this subsection, subsection (a), and subsection (c), the amount of any reserve (or portion thereof) for any taxable year shall be the mean of such reserve (or portion thereof) at the beginning and end of the taxable year.
(2) unearned premiums, and unpaid losses (whether or not ascertained), not included in life insurance reserves, and
(3) all other insurance reserves required by law.
In a case of first impression in this Court, we must decide whether the phrase “unpaid losses * * * not included in life insurance reserves” as used in section 816(c)(2) to define an insurer's “total reserves” includes accrued unpaid losses on CA & H insurance policies. The Court of Appeals for the Seventh Circuit has concluded it does not. See Harco Holdings, Inc. v....
To continue reading
Request your trial
-
Anderson v. Comm'r of Internal Revenue , No. 7425–02.
...140 L.Ed.2d 542 (1998); Hedden v. Richard, 149 U.S. 346, 348–349, 13 S.Ct. 891, 37 L.Ed. 763 (1893); Central Reserve Life Corp. v. Commissioner, 113 T.C. 231, 237, 1999 WL 810557 (1999) (it is appropriate to construe the meaning of section 816 of subchapter L of the Code, involving insuranc......
-
Best Life Assurance Company of California v. Commissioner
...under section 806. We recently decided this same issue in favor of another insurance company in Central Reserve Life Corp. & Subs. v. Commissioner [Dec. 53,581], 113 T.C. 231 (1999), which followed the Court of Appeals for the Seventh Circuit's 1992 opinion and analysis in Harco Holdings, I......
-
Best Life Assur. Co. of California v. C.I.R., 00-71082.
...and therefore intended to have the meaning generally attributed thereto by the experts." Id.; see also Central Reserve Life Corp. v. Commissioner, 113 T.C. 231, 237, 1999 WL 810557 (1999) ("Congress drafted subchapter L [in which § 816 is found] and its predecessors using the specialized la......
-
Chrysler Corp. v. Comm'r of Internal Revenue, 22148–97.
...to construe the legislative intent underlying that section. We do not do likewise. As we stated in Central Reserve Life Corp. & Subs. v. Commissioner, 113 T.C. 231, 238, 1999 WL 810557 (1999) (citations and quotation marks omitted): It is emphatically the province and duty of the judicial d......