Gerling Int'l Ins. Co. v. Comm'r of Internal Revenue
| Decision Date | 27 May 1992 |
| Docket Number | Docket No. 26765-83. |
| Citation | 98 T.C. 640,98 T.C. No. 44 |
| Parties | GERLING INTERNATIONAL INSURANCE CO., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
P reinsured a portion of the casualty insurance business of a Swiss company and received annual statements from that company in respect of the premium income, losses, and expenses of that business. In its Federal income tax returns, P included the data reflected in those statements. R adopted the premium income figures but disallowed the losses and expenses in their entirety. HELD, under sec. 832, I.R.C., P is required to report and prove the gross figures shown on the Swiss company's statements and not simply the net amount of income or loss. HELD, FURTHER, the statements are admissible in evidence as to the existence of losses and expenses of the Swiss company, but not the amounts thereof, under various exceptions to the hearsay rules set forth in rule 803, Fed. R. Evid. HELD, FURTHER, P has not satisfied its burden of proof as to the claimed amounts of the losses and expenses and the allowable amounts are determined. HELD, FURTHER, P's treatment of the taxable year for reporting the income, losses, and expenses is sustained. Jules Ritholz and Walter P. Stasiuk, for petitioner.
Anne Hintermeister and Lawrence Hoch, for respondent.
Respondent determined deficiencies in petitioner's Federal income taxes of $885.00 for the taxable year ending December 31, 1974, $2,043.00 for the taxable year ending December 31, 1975, $1,439,676.00 for the taxable year ending December 31, 1976, $1,917,174.00 for the taxable year ending December 31, 1977, and $2,503,934.00 for the taxable year ending December 31, 1978. The issues for decision are: (1) Whether petitioner should be required, under section 832, 1 to include in gross income its share of the underwriting income of Universale Reinsurance Company, Ltd. of Zurich, Switzerland (Universale), with whom it had a reinsurance treaty; (2) if this question is answered in the affirmative, whether petitioner has substantiated the deduction of its share of the losses and expenses of Universale attributable to that income; and (3) the correct taxable year for the inclusion of such income and the allowance of such deductions.
Some of the facts have been stipulated and are so found. The stipulations of fact, and the exhibits attached thereto, are incorporated herein by reference. Additional factual background is set forth in two prior opinions of this Court and an opinion of the Court of Appeals for the Third Circuit; it will not be repeated herein except to the extent necessary to an understanding of the issues to be decided. See Gerling v. Commissioner, 86 T.C. 468 (1986), supplemented by 87 T.C. 679 (1986), revd. and remanded 839 F.2d 131 (3d Cir. 1988). Additionally, in order to avoid unnecessary repetition, some of the facts underlying our disposition of the issues appear in our opinion herein.
Petitioner is a Delaware corporation with its principal office in Wilmington, Delaware. It filed its Federal income tax returns for the years at issue on an accrual basis with the Internal Revenue Service, Philadelphia, Pennsylvania.
During the years at issue, petitioner was engaged in the business of reinsuring risks under a quota share retrocession treaty (treaty) with Universale, dated December 3, 1957, the pertinent provisions of which are as follows:
Universale undertakes to share with Retrocessionaire [Gerling] the reinsurance business to the extent thereof as hereinafter exactly outlined in the addendum and Retrocessionaire obligates itself to accept such share unquestioningly.
This participation includes any facultative commitments which Universale accepts based on the original treaties retroceded herewith.
This retrocession is done under the conditions as itemized in the addendum. In all other respects the general terms of the original treaties are binding.
The liability of Retrocessionaire starts and terminates simultaneously with the one of Universale; and generally, Retrocessionaire to the extent of its share assumes in all instances and under all circumstances the fate of Universale emanating from the original treaties. This shall also be the case in the event that a ceding company for whatsoever reasons does not fullfil its commitments to Universale.
The entire business contact with the ceding companies shall be handled exclusively by Universale; Retrocessionaire acknowledges to the extent of its share all payments made by Universale to any ceding company and shares in all results which affect Universale to the extent of its quota.
Retrocessionaire shall assume all commitments which will be entered in the future between Universale and the ceding companies with reference to the insurance business which is the subject of this treaty and acknowledges the same as binding within the limits of its quota.
In the event of a change in the share of Universale in the original treaties, it reserves the right likewise to change or extinguish the share of Retrocessionaire after giving notice to that effect.
Retrocessionaire waives delivery of a Borderaux. However, it shall receive regularly summarizations of premium, commissions and loss payments for the same period of time for which Universale receives the same or accounts therefore.
Premium reserve and other deposits by Retrocessionaire and their interest rate shall be as itemized in the addendum.
Universale shall render an account to Retrocessionaire as soon as possible after the receipt of the original current accounts in the same currency and for the same period of time. Within two weeks after the receipt of the accounting, Retrocessionaire shall make objections to Universale, otherwise the account is considered accepted. Balances shall be equalized in the same way as it is done between Universale and its ceding companies if nothing else is agreed upon.
The share of Retrocessionaire in losses payable by Universale shall become due at the same day and shall be put at the disposal of Universale on which Universale itself must make payment.
Retrocessionaire shall have the right through an authorized agent to inspect in the office of Universale all the files which affect the risks under this treaty. This right of inspection, however, shall not permit delay in the liquidation of the respective agreed-upon obligations.
An addendum, dated September 12, 1959, set forth the following terms of agreement which were in effect during the years at issue:
+----------------------------------------------------------------------+
¦1. Quota share retroceded: ¦20% of the annual profit and loss ¦
+----------------------------+-----------------------------------------¦
¦ ¦accounting relating to casualty ¦
+----------------------------+-----------------------------------------¦
¦ ¦insurance of Universale ¦
+----------------------------+-----------------------------------------¦
¦2. Overriding commissions in¦ ¦
+----------------------------+-----------------------------------------¦
¦favor of Universale: ¦1% of ceded premium ¦
+----------------------------+-----------------------------------------¦
¦3. Deposits: ¦100% of technical reserves at the end of ¦
+----------------------------+-----------------------------------------¦
¦ ¦the year (premium reserve and loss ¦
+----------------------------+-----------------------------------------¦
¦ ¦reserve) ¦
+----------------------------+-----------------------------------------¦
¦4. Interest on deposits: ¦3% p.a. ¦
+----------------------------+-----------------------------------------¦
¦5. Account: ¦Annual ¦
+----------------------------+-----------------------------------------¦
¦6. Duration of treaty: ¦Indefinite ¦
+----------------------------+-----------------------------------------¦
¦7. Termination: ¦3 months in advance as of the end of each¦
+----------------------------+-----------------------------------------¦
¦ ¦year ¦
+----------------------------------------------------------------------+
Otto Schenker, either an officer or director of Universale, and Armin Solli, its general manager, negotiated the treaty on behalf of Universale. During and subsequent to the years in issue, Otto Schenker owned 9.22 percent of the stock of petitioner.
Petitioner also derived income from its investments in stocks and bonds.
Under an agreement, dated January 2, 1974, petitioner employed Robert Gerling Co. (RG Inc.) as an “investment adviser and to manage the investment and reinvestment of the assets of GIIC [petitioner] * * * and to administer its [petitioner's] affairs”. The agreement further provided that RG Inc. would “furnish office space and clerical and administrative services” for petitioner. The agreement, which was operative during the years at issue, was signed by Gerling on behalf of petitioner and by Horst Kurnik (Kurnik), an attorney, who was a director and vice president of petitioner, on behalf of RG Inc. Kurnik participated in the operations of RG Inc. and petitioner under the agreement and was compensated by RG Inc. for his services to RG Inc. and petitioner. Petitioner paid RG Inc. approximately $50,000 for its services during each of the years at issue.
At all relevant times, petitioner did not have a business office separate from the business office of RG Inc.
At all relevant times, Robert Gerling (Gerling) was the president and director of petitioner...
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