Hess, Aud., v. Insurance Co.

• Decision Date: 26 April 1927
• Docket Number: 20054,20055,20052,20053,20051
• Citation: 116 Ohio St. 416,156 N.E. 504
• Parties: Hess, Aud., v. The Columbia Life Ins. Co. Hess, Aud., v. Federal Union Life Ins. Co. Hess, Aud., v. The Union Central Life Ins. Co. Hess, Aud., v. The Western & Southern Life Ins. Co. Hess, Aud., v. The Ohio National Life Ins. Co.
• Court: Ohio Supreme Court

156 N.E. 504

116 Ohio St. 416

Hess, Aud., v. The Columbia Life Ins. Co. Hess, Aud., v. Federal Union Life Ins. Co. Hess, Aud., v. The Union Central Life Ins. Co. Hess, Aud., v. The Western & Southern Life Ins. Co. Hess, Aud., v. The Ohio National Life Ins. Co.

Nos. 20051, 20052, 20053, 20054 , 20055

Supreme Court of Ohio

April 26, 1927

Taxation - Life insurance companies - Reserve represents indebtedness and deductible from gross taxable credits - Sections 5327 and 9357, General Code - Constitutional law.

1. The reserve created and maintained by an Ohio life insurance company as required by law represents an indebtedness of the company to its policy holders, and by virtue of Sections 5327 and 9357, General Code, the amount thereof may be deducted from its gross taxable credits in making its return of property for taxation.

2. Sections 5327 and 9357, General Code, are not violative of any provision of the Ohio Constitution.

The facts are stated in the opinion.

Mr Charles S. Bell, prosecuting attorney, and Mr. Chester S Durr, for plaintiff in error.

Messrs Waite, Schindel & Bayless and Mr. Herbert Shaffer, for the Columbia Life Ins. Co.

Messrs Jones, Morrissey & Terry and Mr. Chester R. Shook, for the Federal Union Life Ins. Co.

Mr. Robert Ramsey, Messrs. Maxwell & Ramsey and Messrs. Dinsmore, Shohl & Sawyer, for the Union Central Life Ins. Co.

Mr. Clyde P. Johnson and Messrs. Williams, Ragland, Dixon & Murphy, for the Western & Southern Life Ins. Co.

Messrs. Bettinger, Schmitt & Kreis, for the Ohio National Life Ins. Co.

MATTHIAS J.

These several actions originated in the court of common pleas of Hamilton county and were beard in the Court of Appeals on appeal. Each of the insurance companies, party plaintiff in the several cases, in making its tax return for the year 1923, as in the years prior thereto, deducted the amount of its legal reserve from its gross taxable credits, and the specific question presented by the issues made in the several actions is whether an Ohio legal reserve life insurance company may deduct the amount of its legal reserve from its gross taxable credits in making return of its property for taxation under the law. The Court of Appeals answered the question in the affirmative. Counsel representing the plaintiff in error and the several defendants in error having, during argument, specifically waived the question of procedure, we have not considered such question.

The deduction of the legal reserve from the gross taxable credits was made by each of said companies in the preparation of its tax return upon the theory that the same is authorized by the provisions of Sections 5327 and 9357, General Code, the essential portions of which provide as follows:

Section 5327: "The term `credits,' as so used means the excess of the sum of all legal claims and demands, whether for money or other valuable thing, or for labor or service due or to become due to the person liable to pay taxes thereon, including deposits in banks or with persons in or out of the state, other than such as are held to be money, as hereinbefore defined, when added together estimating every such claim or demand at its true value in money, over and above the sum of legal bona fide debts owing by such person."

Section 9357: "A company [legal reserve life] organized under the laws of this state may invest its accumulations as follows: * * * 4. In loans upon its own policies, not exceeding the reserve or present value thereof, computed according to the American experience table of mortality with interest at four per cent. or according to other higher standard or standards as the company has adopted, the reserve being the amount of debts of life insurance companies by reason of their outstanding policies in gross, and which may be so treated in the returns for taxation made by them. Such companies may sell, change, or reinvest such investments, or any part thereof, at pleasure."

It is urged by counsel for the auditor that the amount which the insurance company seeks to deduct as a "legal bona fide debt" from its credits in making its return for taxation is only a contingent liability of the company to its policy holders, and therefore that the deduction thereof as a "legal bona fide debt" is not authorized by the provisions of Section 5327, General Code, nor as a "debt" by the provisions of Section 9357, General Code.

It may be stated at the outset that it is difficult to make a distinction between the terms above quoted; that is "legal bona fide debt" and "debt," for if the fund in question is, in fact and in law, a "debt," then it is a "legal bona fide debt." Let us first ascertain what this legal reserve is, and its source. It is a fund created as a result of the method of fixing and determining the policy premiums, and is the accumulation of premiums resulting from the collection of a higher rate than is necessary to meet actual losses occurring in the earlier policy years, when costs are relatively low, in order to continue a level or equal premium and still create and maintain a fund sufficient to meet losses, which are sure to occur in later years of higher mortality. As well suggested by one author, Alexander, it is obvious that under the level premium plan all payments during the earlier years must be held for the purpose of making up the deficiencies of later years. The premiums which thus come to the company must be placed in a fund to the credit of the policy holders until needed, as of course it will be at a later time. The fund thus created is a trust fund and must be held and treated as such, and not otherwise used. This is a statutory requirement in this state as it is in practically all of the states. These statutes relating to the reserve or reserve fund and requiring the creation and maintenance thereof by life insurance companies are not of recent origin, the first statutory provision relating to reserves of such companies having been enacted in 1872, which, with some amendment, but with no substantial change of purpose or principle, now constitutes Section 9362, General Code. It is thereby required that there shall be set aside "an amount equal to the reserve on all its outstanding risks and policies, calculated by what is known as the American experience table, with interest at four per...