Equitable Life Assurance Society v. Commissioner of Internal Revenue

• Decision Date: 29 April 1941
• Docket Number: Docket No. 89294,93805.
• Citation: 44 BTA 293
• Parties: THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Board of Tax Appeals

44 B.T.A. 293 (1941)

THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket Nos. 89294, 93805.

Board of Tax Appeals.

Promulgated April 29, 1941.

Campbell E. Locke, Esq., John L. Grant, Esq., and Donald M. Dunn, Esq., for the petitioner.

Thomas H. Lewis, Jr., Esq., and L. A. Spalding, Jr., Esq., for the respondent.

OPINION.

SMITH:

These proceedings, consolidated for hearing, involve income tax deficiencies for 1933 and 1934 of $267,677.39 and $299,461.89, respectively. The respondent claims additional deficiencies for each of the taxable years.

The questions in issue are as follows:

(1) Is the petitioner entitled to a reserve deduction for its "additional reserve on non-cancellable accident and health policies"? (The respondent in his answer, as amended, asserts that the allowance of this deduction for 1934 was in error.)

(2) Is the petitioner entitled to a reserve deduction for a reserve called "unpaid and unresisted accident and health claims"?

(3) Is the petitioner entitled to a reserve deduction for its reserve for "unearned accident and health premiums"?

(4) Is the petitioner entitled to a reserve deduction for its reserve called "total and permanent disability benefits, active lives" (sometimes called "extra-reserve for total permanent disability benefits")? (The respondent in his answer, as amended, asserts that the allowance of this deduction for 1933 was in error.)

(5) Is the petitioner entitled to a reserve deduction for its reserve called "total and permanent disability benefits, disabled lives" (sometimes called "present-value of amounts incurred but not yet due for total and permanent disability benefits")?

(6) Is the petitioner entitled to a reserve deduction for its "extra reserve for additional accidental death benefits"? (The respondent in his answer, as amended, asserts that the allowance of this deduction for 1933 was in error.)

(7) Is the petitioner entitled to a reserve deduction for its reserve for "supplementary contracts not involving life contingencies"?

(8) Is the petitioner entitled to a deduction (as interest paid on indebtedness) for the "guaranteed" interest which, during the respective taxable years, accrued and was paid by petitioner on its supplementary contracts not involving life contingencies? (The respondent in his answer, as amended, asserts that the allowance of this deduction for 1933 and 1934 was in error. The petitioner claims this deduction only as an alternative to the reserve deduction involved in issue 7.)

(9) Is the petitioner entitled to a deduction (as interest paid on indebtedness) for "guaranteed" interest which it accrued in prior years on its supplementary contracts not involving life contingencies and which was paid by the petitioner during the respective taxable years? (Petitioner appeals from the respondent's determination of deficiencies for 1933 and 1934, which were computed without allowing this deduction, but the petitioner claims this deduction only as an alternative to the reserve deduction involved in issue 7.)

(10) Is the petitioner entitled to a deduction (as interest paid on indebtedness) for "excess interest dividends" which during the respective taxable years accrued and were paid by the petitioner on its supplementary contracts not involving life contingencies? (Petitioner appeals from the respondent's determination of deficiencies for 1933 and 1934, which were computed without allowing this deduction, but the petitioner claims this deduction only as an alternative to the reserve deduction involved in issue 7.)

(11) Is the petitioner entitled to a deduction (as interest paid on indebtedness) for the amount of interest which during the respective taxable years it credited to funds which it held on demand and which (together with such funds) it applied to the payment of premiums becoming due on its policies, all in accordance with the agreements under which such funds were held?

(12) Is the petitioner entitled to a deduction for depreciation on the improvements on the farms which it owned during the respective taxable years? (The respondent concedes this issue and agrees that the depreciation shall be taken upon the stipulated costs of the improvements on the farms at the stipulated rates.)

(13) Is the petitioner entitled to a deduction for depreciation on its home office building in respect of the architect's fees, contractor's fees, and other general costs not allocated to the various component elements of the building?

These proceedings have been submitted to the Board upon a signed stipulation of facts, a supplementary stipulation of facts, and exhibits, all of which are made a part of our findings by reference.

At all times material herein the petitioner was a mutual life insurance company; a corporation organized and existing under and by virtue of the laws of the State of New York, with its principal office and place of business in the Borough of Manhattan, City, County, and State of New York, and engaged in the business of issuing and selling life insurance and annuity contracts (including contracts of combined life, health, and accident insurance), and accident and health insurance contracts.

From some time prior to the taxable year 1933 continuously to the present time the petitioner has been duly authorized in every state of the United States, except Texas, to transact the business of issuing life insurance and annuity contracts and has been transacting that business in each of such states, except Texas, pursuant to the laws thereof. During this entire time more than 50 percentum of the petitioner's total reserve funds have been held for the fulfillment of its life insurance and annuity contracts.

For convenience of treatment the findings of fact and opinion applicable to groups of issues raised will be set forth in order.

Issues 1-6.

FACTS. — During 1933 and 1934 the petitioner had outstanding life insurance and annuity contracts (including contracts of combined life, health and accident insurance) and accident and health insurance policies. The six reserves covered by the first six issues in these proceedings were maintained and computed as required by the laws of the State of New York and by the rules and regulations of the insurance commissioner of that state, and also as required by the laws of other states in which the petitioner did business, and the rules and regulations of the insurance commissioners of such other states; and, as so required, the petitioner at all times held admitted assets sufficient to provide for these and for all other reserves and liabilities.

OPINION. — The above reserves have received the consideration of the Board in the following cases:

Equitable Life Assurance Society of the United States, 33 B. T. A. 708;

Monarch Life Insurance Co., 38 B. T. A. 716;

Pan-American Life Insurance Co., 38 B. T. A. 1430;

Oregon Mutual Life Insurance Co. (Memorandum Opinion entered Jan. 4, 1939), Docket Nos. 85182 and 88299.

In all the Board has held that the reserves were reserves required by law within the meaning of section 203 (a) (2) of the Revenue Acts of 1932 and 1934. Our decision in Monarch Life Insurance Co., supra, was affirmed (C. C. A., 1st Cir.), 114 Fed. (2d) 314, in Pan-American Life Insurance Co., supra (C. C. A., 5th Cir.), 111 Fed. (2d) 366, which was in turn affirmed by the Supreme Court, 311 U. S. 272, and in Oregon Mutual Life Insurance Co., supra, 112 Fed. (2d) 468; affd., 311 U. S. 267.

In support of his argument that these reserve funds are not "reserve funds required by law" within the meaning of section 203 (a) (2) of the Revenue Acts of 1932 and 1934, the respondent cites New World Insurance Co. v. United States, 26 Fed. Supp. 444. The Supreme Court affirmed the decision of the lower court in that case, with the following comment:

* * * the views expressed on the second question considered by the Court of Claims as to the right of deduction on account of insurance reserves not being an essential basis for the judgment and being contrary to Helvering v. Oregon Mutual Life Insurance Co. No. 564, decided this day.

Upon the authority of the above cited cases the contentions of the petitioner that these reserves are "reserve funds required by law" within the meaning of section 203 (a) (2) of the Revenue Acts of 1932 and 1934 are sustained.

Issues 7, 8, 9, 10.

FACTS. — The facts relating to these issues have been stipulated as follows:

XXXI

During and prior to the calendar years 1933 and 1934, the taxpayer issued life insurance policies which gave to the insured and in some cases to the beneficiary the right to require the taxpayer to apply the net sum due under the policy upon its maturity, in accordance with one of the optional modes of settlement set up in Stipulation Exhibit D attached hereto and made a part hereof. Options exercised under provisions 1, 2 or 4 of Stipulation Exhibit D are generally known as "Supplementary Contracts not Involving Life Contingencies" and are so referred to in these proceedings. To provide for the payment of life policies which had matured and were payable during 1933 and subsequent years under these "Supplementary Contracts not Involving Life Contingencies" the petitioner carried on its books a liability (which the petitioner contends is a reserve liability) named "Present Value of Amounts not yet Due on Supplementary Contracts not Involving Life Contingencies", in the following respective amounts at the beginning and end of the calendar years 1933 and 1934:

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                                         Year                    | Beginning of | End of Year
                                                                 |     Year     |
                -------------------------------------------------|--------------|-------------
                1933 ___________________________________________ |  $34,806,201 | $42,326,682
                1934

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