Lafayette Life Insurance Company v. Commissioner of Internal Revenue, Docket No. 41721
| Decision Date | 06 September 1932 |
| Docket Number | 42663.,Docket No. 41721 |
| Citation | 26 BTA 946 |
| Parties | LAFAYETTE LIFE INSURANCE COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
A. E. James, Esq., for the petitioner.
John D. Foley, Esq., for the respondent.
These proceedings, which were consolidated for hearing and decision, are for the redetermination of deficiencies in income taxes asserted by the respondent as follows:
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Year | Total tax | Deficiency
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1925 _____________________________________________ | $7,747.94 | $584.65
1926 _____________________________________________ | 7,205.92 | 3,672.55
1927 _____________________________________________ | 7,206.93 | 348.47
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Petitioner alleges as errors: (1) That respondent has added to petitioner's taxable net income amounts of interest paid on indebtedness as follows: for the year 1925, $7,888.33; for the year 1926, $30,465.62; for the year 1927, $7,760.19; (2) that respondent has included in gross income for each taxable year the rental value of space occupied by petitioner for its business purposes in a building owned by petitioner during said years; (3) that petitioner omitted to claim in its returns, and respondent failed to allow, reasonable deductions for the exhaustion, wear and tear of property amounting to $1,201.49 for the year 1926 and $2,058.34 for the year 1927. Respondent admits this error in his amended answer.
By his amended answer respondent alleges that he erred in allowing depreciation deductions of $788.88 for the year 1926 and $861.60 for the year 1927; that the correct amounts allowable are $201.07 and $217.20, respectively, and prays that petitioner's net income as shown by the deficiency letter be increased by the amount of $587.81 for the year 1926, and by $644.40 for the year 1927; and he further prays that the deficiency for each year be increased accordingly.
FINDINGS OF FACT.
Pursuant to stipulation of the parties, we find that petitioner is a mutual life insurance company, duly organized under the laws of the State of Indiana and having its principal place of business in that state.
During the years 1905 to 1909, inclusive, petitioner issued deferred dividend insurance policies which contained, among others, the following provisions:
Dividends in Case of Death. In the event of the death of the insured within 20 years from date, this Policy being in full force and effect, the Company will pay the principal sum of __________ Dollars, and in addition thereto this Policy's full share of the surplus profits, as apportioned by this Company.
Dividends if Living. If the insured be living and this Policy is in full force and effect on the _______ day of ____________, (20 years from the date of issue of the Policy) the Company will then apportion to this Policy its full share of the surplus profits, as determined by this Company, and the insured shall then have one of the following options: Then follow a number of options, none of which are here material.
In connection with its determination of surplus earnings petitioner annually determined the amount of dividends applicable to the deferred dividend policies, but, pursuant to the terms of the policy contract, retained the said dividends so apportioned and recorded. Said dividends were neither paid to the insured nor applied in the reduction of premiums prior to the death of the insured or a date 20 years after the date of said policy, whichever date was the earlier. In or about the year 1909, petitioner discontinued issuing deferred dividend policies and thereafter all policies written by petitioner provided for annual participation by the policyholders in the yearly surplus earnings and savings of the petitioner. The policyholder had the option to leave such dividends with the petitioner, in which event petitioner agreed to pay interest upon the amounts so left.
At about 20 years after the date the deferred dividend policies were first written, petitioner determined that it would pay to the living holders of such policies, as and when the date for distribution of dividends was reached, an amount equal to the interest at 3½ per cent compounded annually upon the surplus profits of the several years apportioned to said policies and theretofore retained by petitioner. In the year 1925, as to some of the deferred dividend policies, in the year 1926 as to a larger number of said policies, and in the year 1927 as to a smaller number, the date for distribution of the said dividends was reached, and in each of the said years petitioner computed an amount equivalent to interest at 3½ per cent compounded annually on the surplus profits theretofore apportioned to and set aside for the policyholders under said policies. Said amounts were $7,888.33 in 1925, $30,465.62 in 1926, and $7,760.19 in 1927, and these amounts computed as hereinabove set forth were paid or credited to policyholders during the respective years 1925, 1926 and 1927, and where credited to the said policyholders were applied by them in each of the said years respectively to payment of premiums upon the said or other policies.
In its returns of income for the years 1925, 1926 and 1927 petitioner deducted in each year, respectively, the sums of $7,888.33, $30,465.62 and $7,760.19. The Commissioner thereafter audited the returns, disallowed the $7,888.33 as a deduction in the year 1925, the $30,465.62 as a deduction in the year 1926, and the $7,760.19 as a deduction in the year 1927, and determined the deficiencies here in issue.
Petitioner kept its books and made its returns on the basis of cash receipts and disbursements.
In its income-tax returns petitioner included as a part of its gross income for each taxable year the rental value of the space occupied by it as its home office in the building owned by petitioner, as follows: For 1925, $13,067.61; for 1926, $8,546.36; for 1927, $7,862.03. The book value of the building during each taxable year was $425,952.92. Petitioner determined the rental value of the space it occupied by subtracting the net amount of rentals received from other tenants from $17,038.12, which was 4 per cent of the building's value. In computing net rentals petitioner made the following deductions from gross rentals received from tenants other than itself:
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Item | 1925 | 1926 | 1927
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Taxes on home office __________________________________ | $6,300.00 | $6,250.00 | $6,750.00
Depreciation __________________________________________ | 6,799.04 | 6,799.05 | 6,799.05
Other expenses ________________________________________ | 22,890.69 | 20,410.57 | 19,025.62
| _________ | _________ | _________
Total deductions ________________________________ | 35,989.74 | 33,459.62 | 32,574.67...To continue reading
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