Helvering v. Life Ins Co

• Decision Date: 01 April 1935
• Docket Number: INTER-MOUNTAIN,No. 537,537
• Citation: 79 L.Ed. 1227,294 U.S. 686,55 S.Ct. 572
• Parties: HELVERING, Commissioner of Internal Revenue, v. LIFE INS. CO
• Court: U.S. Supreme Court

294 U.S. 686

55 S.Ct. 572

79 L.Ed. 1227

HELVERING, Commissioner of Internal Revenue,

v INTER-MOUNTAIN LIFE INS. CO.

No. 537.

Argued March 5, 7, 1935.

Decided April 1, 1935.

The Attorney General and Mr. Frank J. Wideman, Asst. Atty. Gen., for petitioner.

Mr. Abram R. Serven, of Washington, D.C., for respondent.

Mr. Justice BUTLER delivered the opinion of the Court.

The question for decision is whether assets held by the company in 1922 against matured and unpaid coupons attached to 20-payment life coupon nonparticipating policies constituted a reserve fund required by law within the meaning of section 245(a)(2) of the Revenue Act of 1921 (42 Stat. 261).¹

That section declares that net income means gross income less, among other permissible deductions, an amount equal to 4 per cent. of the mean of the 'reserve funds required by law' held at the beginning and end of the taxable year. Respondent, a stock company, incorporated under Utah law and commenced business in 1911. The laws of that state require, as a condition of doing life insurance business, that the assets of the company shall equal or exceed all liabilities for losses reported, expenses, taxes, and other outstanding liabilities including the legal reserves. And they prescribe the rate of interest to be assumed and the motality table to be used for the purpose of making valuations of life insurance policies and determining the reserves required to be maintained.²

The record contains a specimen policy for $10,000 applicable to age 35 issued in consideration of 20 annual premiums of $420.90. Attached are 19 coupons maturing serially on anniversary dates of the policy beginning with the first and ending with the nineteenth. Each coupon is a promise that at its maturity the company will pay the amount specified to the owner of the policy.

The policy states: The company will credit insured the face amount of any matured coupon as it becomes due and pay compound interest thereon, thereby creating a fund to the credit of the insured which may be applied to the payment of premiums or at any time withdrawn in cash; and, if not so applied or withdrawn prior to his death, it will pay the coupon values with interest to date of death to the beneficiary in addition to the face amount of the policy. The insured during the first year or within a month after the due date of the second annual premium may elect to convert the coupons as they mature into paid-up life additions to the policy which are only reconvertible into cash surrender value.

At the end of 20 years if all premiums have been paid in cash and if the amount of each matured coupon has been left with the company to accumulate at interest, then upon surrender of the policy and all coupons the insured shall select one of the following options: A guaranteed cash payment of $8,000; a paid-up policy for $14,130, subject to insurability; a guaranteed annual income of $490 for at least 20 years and as many more as the insured shall survive; a paid-up policy for $10,000 and an annual income of $174.40 during life. At the end of 15 years the company will issue a fully paid-up policy of $10,000 upon surrender of the original policy and the first 14 coupons representing values left on deposit at compound interest.

The mean of the company's reserve funds in 1922 set up against liabilities other than matured coupons was $942,751.40. Later herein these are referred to collectively as 'insurance reserves.' The company claimed and the Commissioner allowed as a deduction 4 per cent. of that amount. It carried a separate reserve against matured, unsurrendered, and unpaid coupons, the mean of which in that year was $136,523.39. In its return the company deducted 4 per cent. of that amount, but the Commissioner disallowed the item. The Board of Tax Appeals, in harmony with its prior constructions of the clause in question, ³ held the coupon reserve deductible. It was sustained by the court, following cases in that and other Circuit Courts of Appeals.⁴ 71 F.(2d) 962. That being in conflict with a recent decision of the Court of Claims, ⁵ this court granted a writ of certiorari. 293 U.S. 553, 55 S.Ct. 346, 79 L.Ed. —-.

In the reserves required by the laws of Utah and of the other states in which the company issues policies of the described class, there is included an amount sufficient to cover not only all elements of insurance, but also the coupon liability. We are not here dealing with reserves in relation to solvency of the company. The thing to be ascertained is the meaning that Congress intended by the language '4 per centum of the mean of the reserve funds required by law.' The clause to be construed relates exclusively to life insurance companies. It is intended to define a deduction which they are permitted to make in the calculation of the net amount to be taxed. The rule that ambiguities in statutes imposing taxes are to be resolved in favor of taxpayers does not apply. Deductions are allowed only when plainly authorized. Ilfeld Co. v. Hernandez, 292 U.S. 62, 66, 54 S.Ct. 596, 78 L.Ed. 1127. New Colonial Co. v. Helvering, 292 U.S. 435, 440, 54 S.Ct. 788, 78 L.Ed. 1348.

The word 'reserve' has many meanings. Accounts creating reserves are set up in almost every line of business and...