Equitable Life Assurance Society v. Commissioner of Internal Revenue, Docket No. 31110
| Decision Date | 12 December 1935 |
| Docket Number | 33241,Docket No. 31110,57867. |
| Parties | THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
C. E. Locke, Esq., for the petitioner, John W. Townsend, as amicus curiae.
Chester A. Gwinn, Esq., for the respondent.
Respondent determined deficiencies in petitioner's income tax of $60,920.07 for 1924, $64,365.42 for 1925, $157,006.23 for 1926, and $10,129.93 for 1928. The question for decision is whether certain so-called reserves maintained by the petitioner are reserves required by law within the meaning of section 245 (a) (2) of the Revenue Acts of 1924 and 1926 and section 203 (a) (2) of the Revenue Act of 1928. All other issues raised by the pleadings have either been withdrawn or settled by stipulation. Full effect will be given to the stipulation in the recomputations under Rule 50. The proceedings were consolidated for hearing and decision.
The petitioner, a New York corporation with its principal office at 393 Seventh Avenue, New York City, was organized in 1859 and ever since has been engaged in the life insurance business. In the taxable years, it transacted business in every state of the United States except Texas.
In and prior to the taxable years, the petitioner issued cancellable and noncancellable accident and health policies insuring the holders thereof, in consideration for the payment of specified premiums, against loss from bodily injuries effected through external, violent and accidental means, and against disability from disease. The policies provided for the payment of sums certain in the case of loss of life, limb or sight by accident, for the payment of specified weekly indemnities during the continuance of disabilities caused by accident or disease, and for the reimbursement of the insured, up to specified limits, for surgical and hospital expenses.
Additional reserve on noncancellable accident and health policies.— In a noncancellable accident and health policy, although the risk insured against increases with the age of the insured and the claim costs of later years of the policy are, therefore, greater than those of the earlier years, the annual premium is uniform throughout the life of the policy. It follows that in each of the earlier years of a noncancellable policy the net annual premium exceeds the prospective claim costs, while in each of the later years the prospective claim cost exceeds the net annual premium.
This reserve is maintained and used for the purpose of supplementing the net annual premiums of such policies in their later years, to the extent that their prospective claim costs of such years exceed their net annual premiums.
The reserve is the amount, which, supplemented in each future year by the excess of the year's net premium over the year's prospective claim cost of every noncancellable policy in its earlier years, all accumulated with 3½ percent compound interest, it is necessary to maintain to meet in future years the excess of prospective claim costs over annual net premiums in respect to all noncancellable policies in their later years.
Viewed as a fund, the reserve on December 31 of any year is:
(a) The fund maintained by petitioner for that reserve on December 31 of the preceding year; plus
(b) The excess of the current year's net premiums over the current year's prospective claim costs for policies in their earlier years; less
(c) The excess of the current year's prospective claim costs over the current year's net premiums for policies in their later years; plus
(d) The year's interest increment, at the rate of 3½ percent. The maintenance of this reserve with annual interest increments was required in the taxable years by sections 52, 84, 86, 93 and 95 of the Insurance Law of New York; by express rulings of the Superintendent of Insurance of the State of New York pursuant to the authority conferred on him by the statutes; by sections 10501 and 10502 of the Oklahoma Statutes, 1931; and by sections 4139 and 4181 of the General Statutes of Connecticut, Revision of 1930.
The amount of the reserve held by the petitioner as so required by state laws, at the beginning and end of each of the taxable years, was as follows:
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Year | Beginning of | End of year
| year |
-------------------------------------|--------------|--------------
1924 _______________________________ | $842,385 | $1,121,437
1925 _______________________________ | 1,121,437 | 1,357,373
1926 _______________________________ | 1,357,373 | 1,012,283
1928 _______________________________ | 1,126,565 | 1,404,272
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The respondent, in making his determination as to each of the taxable years, has not allowed a deduction of 4 percent of the mean of the reserve held at the beginning and end of the taxable year.
Respondent now concedes, on brief, that this reserve is "includible in the reserve funds required by law to be used in determining the deduction of `4 per centum of the mean of the reserve funds required by law and held at the beginning and end of the taxable year.'" Believing this concession to be proper and in line with the decisions in McCoach v. Insurance Co. of North America, 244 U. S. 585; Maryland Casualty Co. v. United States, 251 U. S. 342; United States v. Boston Insurance Co., 269 U. S. 197; New York Life Insurance Co. v. Edwards, 271 U. S. 109; Minnesota Mutual Life Insurance Co. v. United States, 66 Ct. Cls. 481; Massachusetts Mutual Life Insurance Co. v. United States, 56 Fed. (2d) 897; Helvering v. Inter-Mountain Life Insurance Co., 294 U. S. 686; Continental Assurance Co. v. United States, 8 Fed. Supp. 474; and Midland Mutual Life Insurance Co., 19 B. T. A. 765, we deem it unnecessary to pursue the question further. The net income determined by the respondent for the taxable years will be reduced by the amounts of $39,276.44 for 1924, $49,576.20 for 1925, $47,393.12 for 1926, and $50,616.74 for 1928.
Reserve for unpaid and unresisted accident and health claims. — The purpose of this reserve is to maintain and accumulate funds to provide for the payment of benefits expected to arise from disabilities which have already commenced.
On December 31 of any year this reserve is the amount prospectively determined which it is necessary to maintain to cover:
(1) the present value, at 3½ percent interest, of the total benefits which will probably accrue in the future years as a result of disabilities which commenced prior to the current year; plus
(2) the amount of unpaid benefits which have accrued as a result of disabilities which commenced prior to the current year; plus (3) the present value, at 3½ percent interest, of the total benefits which will probably accrue in future years as a result of disabilities which commenced during the current year; plus
(4) the amount of unpaid benefits which have accrued as a result of disabilities which commenced during the current year.
Viewed as a fund, the reserve on December 31 of any year is:
(a) the fund maintained by petitioner for the reserve on December 31 of the preceding year, less the funds spent during the year on benefits arising from disabilities which commenced prior to the current year; plus
(b) the excess of funds held to meet the year's claim costs over amounts paid on benefits which arose from disabilities commencing during the year; plus
(c) the year's interest increment, at the rate of 4½ percent.
Any deficiency in the amount maintained for the reserve on December 31 of the preceding year plus the current year's interest increment for the reserve, below the sum of items (1) and (2) of the prospective valuation plus benefits paid during the year as a result of disabilities which commenced prior to the current year, is taken from petitioner's surplus funds and entered in its annual statement as a loss item for the year. Any surplus of the amount of the reserve held on December 31 of the preceding year plus its current year's interest increment, over the sum of said items (1) and (2) plus the said benefits paid during the year as a result of disabilities which commenced prior to the current year, is added to the petitioner's surplus funds and entered in its annual statement as a profit item for the year.
Ten percent of the reserve at the beginning or end of any taxable year is held for the payment of benefits which have accrued and are unpaid, in respect to disabilities which have already commenced, and the remainder is held for the payment of benefits which will become due in the future, if the policyholders survive and remain disabled. The petitioner concedes that this 10 percent is not a reserve required by law, within the meaning of the applicable taxing statutes; and, therefore, we have only to consider whether the remaining 90 percent is such a reserve.
The maintenance of this reserve with annual interest increments was required in the taxable years by sections 52, 84, 86, 93 and 95 of the Insurance Law of New York; sections 10501 and 10502 of the Oklahoma Statutes, 1931; sections 4139 and 4181 of the General Statutes of Connecticut, Revision of 1930; and by the express ruling of the Commissioner of Insurance of Indiana made on January 22, 1923, pursuant to the statutes of that state. It was also required by the express rulings of the Superintendent of Insurance of New York dated July 21, 1925, and December 18, 1926, made pursuant to authority conferred by section 93 of the New York Insurance Law.
The amount of the reserve held by the petitioner, as so required by state laws, at the beginning and end of each of the taxable years, was as follows:
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