Jefferson Standard Life Insurance Co. v. United States, 12326-12329.
| Decision Date | 13 March 1969 |
| Docket Number | No. 12326-12329.,12326-12329. |
| Citation | 408 F.2d 842 |
| Parties | JEFFERSON STANDARD LIFE INSURANCE COMPANY, Appellee, v. UNITED STATES of America, Appellant (two cases). JEFFERSON STANDARD LIFE INSURANCE COMPANY, Appellant, v. UNITED STATES of America, Appellee (two cases). |
| Court | U.S. Court of Appeals — Fourth Circuit |
Fred W. Peel, Washington, D. C., and Wm. J. Adams, Jr., Greensboro, N. C. (Charles G. Powell, Jr., Adams, Kleemeier, Hagan & Hannah, Greensboro, N. C., and Miller & Chevalier, Washington, D. C., on brief), for Jefferson Standard Life Ins. Co.
Thomas L. Stapleton, Atty., Dept. of Justice (Mitchell Rogovin, Asst. Atty. Gen., Lee A. Jackson and Gilbert E. Andrews, Attys., Dept. of Justice, and William H. Murdock, U. S. Atty., on brief), for United States.
Fred C. Scribner, Jr., Thomas C. Thompson, Jr., Washington, D. C., William C. Smith, Portland, Me., David A. Sutherland, Washington, D. C., and Bruch A. Coggeshall, Portland, Me., Scribner, Hall & Casey, Washington, D. C., and Pierce, Atwood, Scribner, Allen & McKusick, Portland, Me., on brief, for American Life Convention and Life Ins. Assn. of America as amici curiae.
Before BRYAN and WINTER, Circuit Judges, and McMILLAN, District Judge.
These appeals present myriad issues as to the application and interpretation of the Life Insurance Company Income Tax Act of 1959. 26 U.S.C.A. § 801 et seq.1 For the taxable years 1958 and 1959 Jefferson Standard Life Insurance Company ("taxpayer" and sometimes "Jefferson") filed consolidated returns with its wholly-owned subsidiary Pilot Life Insurance Company ("Pilot"). After assessment and payment of taxes beyond those self-assessed, taxpayer filed timely suits for refund. From judgments favorable in part to taxpayer and favorable in part to the government, these appeals and cross-appeals for the two taxable years have been taken. We defer further statement on the facts until discussion of the issue to which they relate.
The Life Insurance Income Tax Act of 1959 was a comprehensive revision of the scheme of imposing income taxes on life insurance companies, other than mutual life insurance companies. In recognition that a part of the premiums charged, and a part of the income derived from investments, will be repaid to policyholders at a future date, in satisfaction of a contractual obligation, the Act purports to tax only the portions of premium income and investment income which represent profit to the company, available legally for distribution to policyholders or stockholders as dividends, as distinguished from those gains which, under state law, must be set aside to meet the company's future contractual obligations. "In arriving at taxable investment income and gain from operations, the 1959 Act, consistent with prior law in this regard, recognizes that life insurance companies are required by law to maintain policyholder reserves to meet future claims, that they normally add to these reserves a large portion of their investment income and that these annual reserve increments should not be subjected to tax." United States v. Atlas Life Ins. Co., 381 U.S. 233, 235-236, 85 S.Ct. 1379, 1381, 14 L.Ed.2d 358 (1965). To accomplish this objective, "the Act establishes a statutory framework directed to the measurement of life insurance company total income on an annual basis for use in the application of an annual tax." Franklin Life Ins. Co. v. United States, 399 F.2d 757, 758 (7 Cir. 1968), cert den., 393 U.S. 1118, 89 S.Ct. 989, 22 L.Ed.2d 123 (March 3, 1969).
The determination of the final tax base, to which ordinary corporate rates of taxation are applied, involves a series of multiple computations which may be referred to as "phases." Phase I involves the measurement and determination of taxable investment income. § 804. The computations incident to Phase I are, in the main, devoted to dividing up the investment income for the taxable year between a nontaxable "policyholders' share," deemed necessary for policyholder reserve obligations, and a taxable "life insurance company's share." The division is made up by dividing the company's "investment yield,"2 by the assets of the company to produce an earnings rate. This rate, which is subject to a slight downward adjustment if the earnings rates in prior years are lower, is then multiplied by a figure representing the company's adjusted life insurance reserves3 for policyholders. The product of the adjusted earnings rate and adjusted reserves equals the exclusion from taxes attributable to life insurance reserves.
The exclusion so obtained is then increased by additional sums attributable to special pension plan requirements and certain interest payments. The final total exclusion figure is referred to as total "policy and other contract liability requirements." § 805. The ratio of policy and other contract liability requirements to total investment yield constitutes the ratio upon which each and every item of investment yield is to be divided between the excludable policyholders' share and the company's share. The company's share constitutes the Phase I tax base.
The Phase II computation is directed to determining gain or loss from operations, and is intended to reflect the insurance company's income from all sources less certain specified deductions. These sources include premium or underwriting income. Premium income results when the price charged for the policy is in excess of the cost to the insurance company for providing the coverage, and such cost may be less than estimated, because actual mortality may turn out to be less than tabular mortality, and expenses incident to the sale and servicing of the policies may be less than estimated.
Under Phase II, all sources of company income are recognized. Items to be taken into account include the company's share of investment yield computed in a manner similar (but not identical) to its computation in Phase I. The essential difference is that, for purposes of Phase II, the interest rates assumed by the company in setting up its reserves are used, rather than the actual earnings rates used in Phase I. This assumed rate is multiplied by a figure representing not only life insurance reserves, but reserves set aside for supplementary contracts without life contingencies, dividend accumulations, premiums paid in advance and premium deposit funds. § 810(c). The result, referred to as the share of investment yield set aside for policyholders (or the "required interest"), is subtracted from total investment yield. The remainder constitutes the company's share of investment yield for purposes of Phase II and is includable in the tax base. Also included in the Phase II base are gross premiums, decreases in certain reserves and other amounts not relevant here. § 809(c). The sum of these items constitutes gross income for purposes of Phase II.
From gross income, certain specified deductions are allowed. § 809(d). These include deductions for underwriting expenses, salaries and other operating expenses, as well as charitable contributions. Also included are deductions for losses on insurance and annuity contracts, as well as for the company's share of tax-exempt interest and dividends received. Additionally, the company is allowed a deduction for increases in reserves during the taxable year. § 809(d) (2). When the various deductions are taken, the final result is the gain or loss from operations — the Phase II tax base.
Life insurance company taxable income consists of (1) the smaller of taxable investment income or the gain from operations, plus (2) 50% of the excess, if any, of gain from operations over taxable investment income,4 to which is added any amount subtracted from the policyholders' surplus account.5 § 802 (b). This final amount is subject to taxes at normal corporate rates. § 802 (a) (1).
We turn to the particular problems which these cases present arising from application of the framework thus summarized.
Prior to 1958, taxpayer acquired by purchase all of the outstanding stock of Pilot. During each of the years 1958 and 1959, Pilot paid cash dividends out of current earnings and profits to taxpayer in the amount of $1,250,000. For the years 1958 and 1959, these companies filed consolidated income tax returns. In both returns taxpayer and Pilot were treated as a single taxable entity. At every step in the computations required to determine the Phase I and Phase II taxable investment income, the figures for both companies were consolidated on an item-by-item basis, and there was eliminated from all computations the above-described investment of taxpayer represented by the Pilot stock, together with the dividends paid by Pilot to taxpayer.
The district court approved taxpayer's treatment of the consolidated returns and the elimination of the Pilot dividend. In this we think there was error, and on this issue we reverse.
Although the Act specifies how taxpayer's investment in other corporations and how dividends received by taxpayer from other corporations are to be treated, the Act makes no special provision for the treatment of dividends received by one life insurance company from its investment in another or the treatment of the investment of one life insurance company in another. Such a determination is, of course, crucial to the Phase I and Phase II computations which have been described.
The Treasury Regulations governing the filing of consolidated income tax returns antedate the Act. They provide that consolidated taxable income is the combined taxable income of the affiliated corporations and that the taxable income of each corporation shall be computed in accordance with the provisions covering the determination of taxable income of separate corporations except that "there shall be eliminated * * * dividend distributions from one member of the group to another member of the group." 26 C.F.R. § 1.1502-31A(b) (1) (i).6
...
To continue reading
Request your trial
-
United States v. Consumer Life Insurance Company First Railroad Banking Company of Georgia v. United States United States v. Penn Security Life Insurance Company
...in United States v. Atlas Life Ins. Co., 381 U.S. 233, 85 S.Ct. 1379, 14 L.Ed.2d 358 (1965), and Jefferson Standard Life Ins. Co. v. United States, 408 F.2d 842, 844-846 (CA4), cert. denied, 396 U.S. 828, 90 S.Ct. 77, 24 L.Ed.2d 78 (1969). Stock companies that fail to qualify as life insura......
-
Bankers Union Life Ins. Co. v. Comm'r of Internal Revenue
...804(b)(1), I.R.C. 1954. Franklin Life Insurance Co. v. United States, 399 F.2d 757 )C.A. 7, 1968), and Jefferson Standard Life Insurance Co. v. United States, 408 F.2d 842 (C.A. 4, 1969), not followed. 6. Held, legal fees paid in connection with the transfer of assets from a subsidiary are ......
-
Union Mut. Life Ins. Co. v. United States
...Standard Life Insurance Co. v. United States, 272 F.Supp. 97, 125 (M.D.N.C.1967), aff'd, rev'd and remanded on other issues, 408 F.2d 842 (4th Cir.), cert. denied, 396 U.S. 828, 90 S.Ct. 77, 24 L.Ed.2d 78 (1969); National Life Insurance Co. v. United States, 521 F.2d 1406 (Ct.Cl.1975); Bank......
-
Morgan Guaranty Trust Co. of New York v. US
...faith exercise of administrative discretion. Further, defendant states that this case is identical to Jefferson Standard Life Insurance Co. v. United States, 408 F.2d 842 (4th Cir. 1969), cert. denied, 396 U.S. 828, 90 S.Ct. 77, 24 L.Ed.2d 78 (1969); Franklin Life Insurance Co. v. United St......