Lincoln Nat. Life Ins. Co. v. US

• Decision Date: 14 July 1978
• Docket Number: No. 521-69.,521-69.
• Citation: 582 F.2d 579
• Parties: The LINCOLN NATIONAL LIFE INSURANCE COMPANY v. The UNITED STATES.
• Court: U.S. Claims Court

582 F.2d 579

The LINCOLN NATIONAL LIFE INSURANCE COMPANY v. The UNITED STATES.

No. 521-69.

United States Court of Claims.

July 14, 1978.

COPYRIGHT MATERIAL OMITTED

Edward J. Schmuck, Washington, D.C., attorney of record, for plaintiff. Francis M. Gregory, Jr., Carolyn P. Chiechi, Leonard B. Terr and Sutherland, Asbill & Brennan, Washington, D.C., of counsel.

Herbert Grossman, Washington, D.C., with whom was Asst. Atty. Gen. M. Carr Ferguson, Washington, D.C., for defendant. Theodore D. Peyser, Jr. and Donald H. Olson, Washington, D.C., of counsel.

Before NICHOLS, KASHIWA and BENNETT, Judges.

OPINION

PER CURIAM.

This is the last phase of the liability determination portion of an action brought for the recovery of overpayment of federal income taxes and assessed interest thereon for each of the years 1958 through 1965, together with interest thereon as provided by law. Originally, the case involved numerous issues, but all except the six before the court today have previously been settled or resolved.

The six issues before us today were tried by the parties and, on November 12, 1976, Trial Judge Lloyd Fletcher filed his findings, opinion, and recommended conclusions of law holding that plaintiff was entitled to recovery on four of the issues and against the plaintiff on two of the issues. Both parties duly filed notices of intention to except under Rule 141. In addition, since the filing of the trial judge's opinion, the Supreme Court in Commissioner of Internal Revenue v. Standard Life & Accident Insurance Co., 433 U.S. 148, 97 S.Ct. 2523, 53 L.Ed.2d 653 (1977), has settled a conflict between the circuits over the correct tax accounting treatment to be given deferred and uncollected premiums.

Briefing by the parties of the deferred and uncollected premiums issue was suspended by this court pending the Supreme Court decision in Standard Life. Subsequent to that Court decision, the parties have completed briefing in the case and submitted the case to the court after oral arguments were presented. Since the court agrees with the trial judge's findings, opinion, and recommended conclusions of law, with modifications with respect to the correct tax accounting treatment to be given the deferred and uncollected premiums item, it hereby adopts the same, as modified, as the basis for its judgment in this case, as hereinafter set forth.^* The modification which the court makes merely applies the holding of the Supreme Court in Standard Life, that only the net valuation portion of the deferred and uncollected premiums, not the gross premiums, must be included in assets and gross premium income as well as in reserves, to the facts of this case.

In making this modification, we note that defendant, in its final supplemental brief in the case and at oral argument, urged this court to consider whether plaintiff had waived its right to claim the benefit of the ultimate decision in Standard Life, because plaintiff altered its legal position before the trial judge to the position that, although it had to include the full gross premiums in assets and income as well as reserves, it was entitled to a deduction for the cost of collecting those premiums. We hold that plaintiff did not make such a waiver nor that plaintiff is estopped from claiming the benefit of the ultimate decision in Standard Life because it adopted a different legal position before the trial judge. For there to be a waiver of a right, a party must have known what rights it had. See generally Brady v. United States, 397 U.S. 742, 748, 90 S.Ct. 1463, 25 L.Ed.2d 747 (1970); Miranda v. Arizona, 384 U.S. 436, 444, 86 S.Ct. 1602, 16 L.Ed.2d 694 (1966). Plaintiff can hardly be charged with knowledge of what its rights were in regard to the correct treatment to be given the deferred and uncollected premiums in view of the various positions taken by the courts on the subject. See Commissioner of Internal Revenue v. Standard Life & Accident Insurance Co., supra, 433 U.S. at 159-162, 97 S.Ct. 2523. Further, for this court to hold that plaintiff waived its rights to claim the benefit of the ultimate holding in Standard Life would, in effect, be punishing the plaintiff for adopting, at the time of trial, what appeared to be a reasonable legal position under the then existing legal climate of opinion. This would cause future plaintiffs to avoid adopting what seems to be a reasonable position at trial for fear of being subsequently charged with a waiver of their rights; thus, exacerbating the conflict between taxpayers and the Internal Revenue Service rather than encouraging a climate conducive to settlement. This court refuses to adopt such a position which would have the tendency to exacerbate conflicts. Nor is plaintiff estopped from claiming the benefit of the ultimate decision in Standard Life. For there to be an estoppel, the defendant must be prejudiced in some way. We can find no prejudice to the defendant in this case. Defendant still tried its alternative contention, that the deferred and uncollected premiums should be entirely ignored in calculating plaintiff's reserves, assets, and gross premium income, and the trial judge rejected it in his opinion. Defendant now tries to argue that the trial judge did not seriously consider this alternative contention because of the change plaintiff made in its position below. We note only that the trial judge devoted a page and a half to the defendant's alternative contention whereas the Supreme Court summarily dismissed the contention. Commissioner of Internal Revenue v. Standard Life & Accident Insurance Co., supra note 17 at 157, 97 S.Ct. 2523.

Accordingly, we hold plaintiff is entitled to recovery as set forth in parts I, II, III, and V of the modified trial judge's opinion, as hereinafter set forth, and judgment is entered for plaintiff to that extent with the amount of recovery to be determined in a proceeding pursuant to Rule 131(c). Plaintiff is not entitled to recovery on its claims under part IV of the modified opinion. We hold defendant is entitled to the offset discussed in part VI of the modified opinion, and judgment for defendant is entered with the amount of the offset to be determined in a proceeding pursuant to Rule 131(c).

Trial Judge Fletcher's opinion, as modified by the court,^** is as follows:

This action is brought for the recovery of Federal income taxes and assessed interest thereon for each of the years 1958 through 1965, together with interest thereon as provided by law. The petition originally sought recovery of $7,314,657 in income taxes and $2,325,923 in assessed interest together with statutory interest for all of the eight years involved. Since the filing of the petition however, the parties have entered into certain stipulations, the court has granted plaintiff's motion for partial summary judgment as to one issue, and several of the numerous issues raised in the petition have been dismissed. Accordingly, the exact amount of plaintiff's recovery must be determined hereafter in Rule 131(c) proceedings.

The plaintiff is The Lincoln National Life Insurance Company and is frequently referred to herein as "Lincoln" or "the Company." It is a stock corporation organized and existing under the laws of Indiana. It is engaged, and at all times relevant to this action was engaged, in the business of writing various forms of life insurance, annuities, and accident and health insurance and in reinsuring such insurance written or reinsured by other companies. During each of the years 1958 through 1965, Lincoln was a life insurance company as defined in section 801(a) of the Internal Revenue Code of 1954, as amended, and as such was subject to tax under the provisions of sections 801 through 820. Thus, it was required to make all computations entering into the determination of its tax liability in the manner specified in section 818(a), that is to say, under an accrual method of accounting, or a combination of the accrual method with any other permitted method other than the cash receipts and disbursements method.

Sections 801 through 820 were enacted into law by the Life Insurance Company Income Tax Act of 1959, 73 Stat. 112.¹ That Act established a three-phase pattern for determining "life insurance company taxable income," only two of which are involved here.

The phase one tax base consists of "taxable investment income," as defined in section 804. The amount of a company's qualified "life insurance reserves" is an important factor in the determination of taxable investment income. Two of the issues involved in this case deal with the determination of plaintiff's life insurance reserves. They are whether Lincoln's reserve for future settlement options and reserve for term insurance policy and rider conversions meet the definition of life insurance reserves found in section 801(b).

The phase two tax base consists of "Gain from Operations," as defined in section 809. The computation of life insurance reserves and the increase or decrease in such reserves has significant phase two tax effects. In addition, a number of deductions are taken into account in the computation of gain from operations. Three of the remaining issues are concerned with deductions. They are whether Lincoln is entitled to a deduction of 3 percent of premiums attributable to certain coinsurance and modified coinsurance reinsurance contracts and whether a reserve for retrospective refunds to group contract holders may be deducted as a reserve for dividends to policyholders.²

The remaining issue involves the proper tax accounting procedure to be followed in accounting for deferred and uncollected premiums. The correct resolution of this issue has both phase one and phase two tax ramifications. In addition, the Supreme Court decision in Commissioner of Internal Revenue v. Standard Life & Accident Insurance Co., supra, has recently clarified the law on this issue.

The issues now remaining in the case are six in number and...