Commissioner of Internal Rev. v. Illinois Life Ins. Co.

• Decision Date: 09 January 1936
• Docket Number: No. 5469.,5469.
• Citation: 80 F.2d 280
• Parties: COMMISSIONER OF INTERNAL REVENUE v. ILLINOIS LIFE INS. CO.
• Court: U.S. Court of Appeals — Seventh Circuit

80 F.2d 280 (1935)

COMMISSIONER OF INTERNAL REVENUE v. ILLINOIS LIFE INS. CO.

No. 5469.

Circuit Court of Appeals, Seventh Circuit.

November 26, 1935.

Rehearing Denied January 9, 1936.

Frank J. Wideman, Asst. Atty. Gen., and Sewall Key and Edward H. Horton, Sp. Assts. to Atty. Gen., for petitioner.

Roy O. West, William M. Klein, and Samuel B. Kraus, all of Chicago, Ill., for respondent.

Before EVANS and ALSCHULER, Circuit Judges, and LINDLEY, District Judge.

LINDLEY, District Judge.

The Revenue Act of 1928, c. 852, 45 Stat. 791, § 203 (26 U.S.C.A. § 203 note), provides that net income of life insurance companies shall include gross income, less, among other items, "4 per centum of the mean of the reserve funds required by law and held at the beginning and end of the taxable year." In pursuance of this provision, in reporting its income, the respondent deducted, from its gross income for the year 1929, 4 per cent. of the mean of a reserve carried by it, in accordance with the Illinois statute, termed "survivorship investment fund." The Commissioner disallowed the deduction and assessed an additional tax. The Board of Tax Appeals allowed the deduction. The Commissioner now petitions to review the Board's decision. The sole question involved is whether or not the "survivorship investment fund" of respondent is "a reserve fund required by law" within the meaning of the act of Congress.

Respondent is an Illinois life insurance corporation. During the taxable year it issued "survivorship investment" policies, which provide that the company will set aside a specific portion of each premium payment and place the same in the fund under consideration. This fund accumulates by the addition of 3½ per cent. per annum compound interest from the dates of the respective payments. At the expiration of the twenty-year period of a policy, the insured, if living, has the option to continue it as fully paid up without further premium payments and receive in addition thereto payment in cash of the survivorship investment thereto apportioned; or to receive a paid-up nonparticipating life policy, for such amount as can be purchased by the survivorship investment fund at the applicable single premium rate; or to surrender the policy and receive its cash surrender value, plus the portion of the survivorship investment fund apportioned to the policy. If the insured dies prior to the expiration of the twenty-year period, his beneficiary receives the face value of his policy but no part of the investment fund. In such case his contingent interest in the latter lapses in favor of those of the same class who survive the period.

The Illinois statute (Smith-Hurd Ann. St. c. 73, § 261) provides that if any company shall issue any policy under the terms of which stipulated parts of the premiums are to be placed in a separate fund for subsequent apportionment, same "shall be carried as a distinct * * * reserve liability of the company for the benefit of the classes of policies, * * * on which the sum was accumulated." It is further provided that no part of such fund, prior to the time of distribution provided in the policy, shall be considered in determining the surrender values of the policy provided for by the act.

The Supreme Court of the United States, in the case of Helvering, Commissioner of Internal Revenue, v. Inter-Mountain Life Ins. Co., 294 U.S. 686, 55 S.Ct. 572, 575, 79 L.Ed. 1227, because of the conflict in various circuits as disclosed by certain cases Commissioner of Internal Revenue v. Standard Life Ins. Co. (C.C. A.3) 47 F.(2d) 218; Commissioner of Internal Revenue v. Western Union Life Ins. Co. (C.C.A.9) 61 F.(2d) 207; Commissioner of Internal Revenue v. Great American Life Ins. Co. (C.C.A.10) 70 F. (2d) 133; Continental Assur. Co. v. United States (Ct.Cl.) 8 F.Supp. 474; Cf. Minnesota Mutual Life Ins. Co. v. United States, 66 Ct.Cl. 481; Massachusetts Mutual Life Ins. Co. v. United States (Ct. Cl.) 56 F.(2d) 897, granted certiorari in a case involving the question of whether reserves against matured but unpaid coupons attached to a policy are within the meaning of the Revenue Act. By the terms of the policy the company agreed to accept the coupons involved in payment of premiums or to pay them in cash at any time after maturity, with interest. The court held that the liability upon such coupons was not contingent but matured, unconditional, and absolute, payable in cash or its equivalent, saying: "In life insurance the reserve means the amount, accumulated by the company out of premium payments, which is attributable to and represents the value of the life insurance elements of the policy contracts. * * * Life insurance matures only upon the death of the insured and the life reserve is based upon that contingency, whereas liability on the matured coupons depends upon no contingency. It follows that the insurance reserves alone constitute the base on which the deduction is to be computed. Reserves against matured coupons are excluded."

It is apparent from the language that the determining element was the fact that the matured coupons no longer represented contingent liabilities.

It is contended by petitioner that the survivorship investment fund here involved is like that involved in the case cited. But we find what, we think, are essential distinctions. Here, there is no matured liability; and there can be none unless the insured shall survive the maturity of his policy. That contingency is uncertain; it may or may not occur; and unless it occurs, the insured has no right to participate in the fund. Whether the company will ever become indebted to the insured, therefore, is contingent and uncertain. Furthermore, the amount payable remains uncertain and undeterminable until the first contingency shall have been removed. It is not possible to determine until the end of the period of the policy whether the insured will ever participate in the fund, or, if he does survive, what the amount of his participation will be.

These facts, it seems to us, effectively distinguish matured liabilities upon coupons, noncontingent in character, from the contingent liabilities protected by the survivorship investment fund.

It is said that the words of the Supreme Court in the Inter-Mountain Case defining life insurance reserves are to be construed strictly, and that we must eliminate from deductible reserves all funds that are not within the original and elemental meaning of life insurance. In this connection respondent also relies upon the decision of the Court of Claims in Minnesota Mutual Life Ins. Co. v. United States, 66 Ct.Cl. 481, certiorari denied 279 U.S. 856, 49 S. Ct. 352, 73 L.Ed. 998, wherein the court held that all accumulated undistributed cash surrender funds are in the nature of savings deposits, not strictly life insurance, and therefore not within contemplation of Congress when it used the term "reserves required by law."

If we are to limit our conception of life insurance to the narrow class of sums payable in case of death, we shall thereby remove from reserves, it seems to us, all sums accumulated in any reserves payable in case of survivorship. Strictly speaking, perhaps, life insurance does not necessarily include guaranteed cash surrender values. Rather, if we speak literally, life insurance probably includes...