EQUITABLE L. ASSUR. SOC. OF UNITED STATES v. Helvering

• Decision Date: 26 July 1943
• Docket Number: No. 4.,4.
• Citation: 137 F.2d 623
• Parties: EQUITABLE LIFE ASSUR. SOC. OF UNITED STATES v. HELVERING, Com'r of Internal Revenue.
• Court: U.S. Court of Appeals — Second Circuit

137 F.2d 623 (1943)

EQUITABLE LIFE ASSUR. SOC. OF UNITED STATES v. HELVERING, Com'r of Internal Revenue.

No. 4.

Circuit Court of Appeals, Second Circuit.

July 26, 1943.

Campbell Locke, of New York City (James D. Ewing and John L. Grant, both of New York City, of counsel), for petitioner-appellant.

Samuel O. Clark, Jr., Asst. Atty. Gen. (Sewall Key, J. Louis Monarch, and L. W. Post, Sp. Assts. to Atty. Gen., of counsel), for Commissioner of Internal Revenue, respondent-appellee.

Before L. HAND, AUGUSTUS N. HAND, and FRANK, Circuit Judges.

AUGUSTUS N. HAND, Circuit Judge.

The question raised by the petition of the taxpayer, Equitable Life Assurance Society, is whether the Tax Court in determining that the taxpayer overpaid its income tax for 1933 by $40,175.79 improperly failed to allow various deductions which would have resulted in a determination of a claimed overpayment of $182,168.23.

The taxpayer is a mutual life insurance company engaged in the business of issuing life insurance and annuity contracts, transacting that business in every state except Texas. More than 50% of its total reserve funds have been held for fulfillment of its life insurance and annuity contracts.

During and prior to the year 1933 the taxpayer issued life insurance policies which gave to the insured and in some cases to the beneficiary, the right to require it to hold the face amount of policies after the date upon which they would otherwise be payable, supplement these amounts with annual increments of interest, and pay out the increased amounts in installments over varying periods of time. The contracts which evidence the exercise of such options under these provisions are known as "Supplementary Contracts," the form of which appears below.¹ When the payments to be made under these contracts are not affected by a life contingency (contracts arising from the exercise of options 1, 2 and 4) they are known as supplementary contracts not involving life contingencies and are thus referred to in the stipulation appearing in the record.

The Tax Court held that these "Supplementary Contract Reserves" were not "reserve funds required by law" within the meaning of Section 203(a) (2) of the Revenue Act of 1932, 26 U.S.C.A. Int.Rev.Acts, page 547,² inasmuch as they represented assets retained to meet the company's liabilities upon insurance policies which had already matured, and not assets held against unmatured policies. The supplementary contracts provided for interest at a guaranteed rate of 3% per annum. They also provided that in any year when the taxpayer declared that funds held thereunder should receive interest in excess of 3%, the payment should be increased for that year by an excess interest dividend as determined and apportioned by the Society.

The Tax Court allowed the taxpayer to deduct these 3% payments in computing its income tax for the years 1933 and 1934 when the options were exercised by beneficiaries but, on the authority of Penn Mutual Life Insurance Co. v. Commissioner, 3 Cir., 92 F.2d 962, did not allow the deduction when the option was exercised by the insured.

The foregoing allowance of a deduction of 3 per cent was on the theory that, while Section 203(a) (2) did not apply because the reserve funds were for Supplementary Contracts not Involving Life Contingencies, nevertheless Subdivision (8) of Section (a)³ was applicable in so far as it related to interest paid on supplementary contracts covered by options exercised by the beneficiary. But the Tax Court refused to allow, under Subdivision (8), the deduction of the 3 per cent guaranteed interest where the insured had exercised the option, and of socalled "excess interest dividends" paid in addition to the guaranteed 3 per cent under resolutions of the Board of Directors, on the ground that they were not interest and hence not deductible under Subdivision (8).

The taxpayer claims the deduction of 3 ¾ per cent of the mean of the reserve funds held at the beginning and end of 1933 and 1934 because of the literal words of Section 203(a), the former Regulations of the Treasury Department,⁴ which had for thirteen years expressly permitted the deduction, and the long settled practice thereunder, but in Helvering v. Inter-Mountain Life Ins. Co., 294 U.S. 686, 690, 55 S. Ct. 572, 574, 79 L.Ed. 1227, the Supreme Court determined that assets reserved by an insurance company against matured, unsurrendered and unpaid coupons attached to its 20-payment life non-participating policies were not "reserve funds required by law" within the meaning of Section 245(a) (2) of the Revenue Act of 1921 (of which Section 203(a) (2) of the Act of 1932 is a reenactment) allowing deduction of a percentage of the mean of such reserve funds in computing the net income of life insurance companies. The Treasury thereupon changed the Regulation.⁵ Justice Butler, who wrote the opinion, said (294 U.S. at page 690, 55 S.Ct. at page 574, 79 L.Ed. 1227): "As the act does not permit corporations other than insurance companies to make deductions of the kind here under consideration, `reserve funds' may not reasonably be deemed to include values that do not directly pertain to insurance."

In the later decision of Helvering v. Illinois Ins. Co., 299 U.S. 88, 516, 622, 57 S.Ct. 63, 64, 81 L.Ed. 56, 458, Justice Butler, citing Helvering v. Inter-Mountain Life Ins. Co., 294 U.S. 686, 55 S.Ct. 572, 79 L.Ed. 1227, repeating the court's former view as to the limited scope of the deduction allowed under Section 203(a) (2) said: "The phrase `required by law' includes only reserves that directly pertain to life insurance. Other reserves, even though required by state statutes regulatory of the business authorized to be carried on by life insurance companies, are not included. Under these policies the company's liabilities on account of the investment funds are independent of those attributable to life insurance risks. The right to participate in the investment funds is not dependent upon death of the insured."

In Helvering v. Oregon Ins. Co., 311 U. S. 267, 61 S.Ct. 207, 209, 85 L.Ed. 180, the Supreme Court again dealt with the types of "reserve funds required by law" which are deductible by life insurance companies under Section 203(a) (2). It adverted to the fact that it had theretofore held in the Inter-Mountain Life Insurance case that "reserves set aside by life insurance companies to protect payment of policy investment purchases cannot be used as the basis for deductions." In Helvering v. Oregon Ins. Co. we find no indication of a purpose to depart from the views expressed by Justice Butler in the earlier decisions we have mentioned.

While it may be argued with some plausibility that there is little basis for distinguishing between the investment and the insurance features of such policies as we are dealing with and that every payment to an insurance company has both contingent and investment features, we think the Supreme Court holds that Congress has not given the privilege of deduction to values that have as little relation to contingencies of life insurance as those involved in the Supplementary Contract Reserves under consideration. The reserves here were carried in order to provide for the payment of matured life insurance policies and not to meet life contingencies. If we are right in supposing that the foregoing represents the holding of the Supreme Court even where the earlier Regulations of the Treasury Department allowed such deductions as are claimed here, it is unnecessary to discuss Regulations 77 promulgated by the Treasury under the Revenue Act of 1932, Art. 971.

Because of the foregoing considerations we think that the Tax Court was right in holding that Section 203(a) does not allow the deduction claimed. We also think it was right in allowing the deduction of 3 per cent interest paid under settlement options exercised by the beneficiaries; but, we think it should also have allowed deductions where the options were...