Massachusetts Mut. Life Ins. Co. v. United States, J-119.

• Citation: 56 F.2d 897
• Decision Date: 07 March 1932
• Docket Number: No. J-119.,J-119.
• Parties: MASSACHUSETTS MUT. LIFE INS. CO. v. UNITED STATES.
• Court: Court of Federal Claims

56 F.2d 897 (1932)

MASSACHUSETTS MUT. LIFE INS. CO. v. UNITED STATES.

No. J-119.

Court of Claims.

March 7, 1932.

COPYRIGHT MATERIAL OMITTED

Guy Patten, of Washington, D. C. (A. R. Serven, John W. Smith, and John G. Carter, all of Washington, D. C., on the brief), for plaintiff.

Lisle A. Smith, of Washington D. C., Charles B. Rugg, Asst. Atty. Gen., and Edward H. Horton, of Washington, D. C., for the United States.

Before BOOTH, Chief Justice and LITTLETON, WHALEY, WILLIAMS, and GREEN, Judges.

LITTLETON, Judge.

The Commissioner of Internal Revenue refused to allow the additional reserves claimed by plaintiff on the ground that they were not reserves required by law within the meaning of section 245 (a) (2) of the Revenue Act of 1921 and article 681 of reg. 62. The pertinent provisions of the revenue act of 1921, 42 Stat. 227, 261, are as follows:

"Sec. 243. That in lieu of the taxes imposed by sections 230 and 1000 and by Title III, there shall be levied, collected, and paid for the calendar year 1921 and for each taxable year thereafter upon the net income of every life insurance company a tax as follows:

"(1) In the case of a domestic life insurance company, the same percentage of its net income as is imposed upon other corporations by section 230. * * *

"Sec. 244. (a) That in the case of a life insurance company the term `gross income' means the gross amount of income received during the taxable year from interest, dividends, and rents. * * *

"Sec. 245. (a) That in the case of a life insurance company the term `net income' means the gross income less — * * *

"(2) An amount equal to the excess, if any, over the deduction specified in paragraph (1) of this subdivision, of 4 per centum of the mean of the reserve funds required by law and held at the beginning and end of the taxable year. * * *

"(8) All interest paid or accrued within the taxable year on its indebtedness, except on indebtedness incurred or continued to purchase or carry obligations or securities (other than obligations of the United States issued after September 24, 1917, and originally subscribed for by the taxpayer) the interest upon which is wholly exempt from taxation under this title."

Plaintiff is a mutual life insurance company organized under the laws of the commonwealth of Massachusetts, and transacted its business on the level premium plan. It complied with the insurance laws of Massachusetts and Connecticut. The laws in the commonwealth of Massachusetts contained the same provisions, in effect, as the laws of Connecticut, but in more general terms. The reserves maintained by plaintiff, in compliance with the laws of the strictest state, inured to the benefit of policyholders in the state and every other state in which it did business. Under the level premium plan the insured pays during his early years a sum in excess of the cost of his insurance. The excess is devoted to the creation of a reserve fund which enables the insurance to be maintained in later years when the stipulated level premium would be insufficient to meet the current costs of insurance on the mutual-premium plan.

The table rate of premiums provided for in life insurance on the mutual level premium plan is calculated, first, by adopting an accepted table of mortality showing the death rate for every age of life, and, second, by adopting an assumed rate of interest, such as the company may safely expect to realize upon the investment of the amounts of such premiums for the duration of all of its policies. With these two factors, a calculation is made of the sum each insured must pay in advance so as to put the company in funds with which to pay all outstanding policies as they become claims, providing deaths occur exactly in accordance with the table of mortality, and also providing the rate of interest earned on the company's invested funds is exactly the same as the rate assumed in calculating its premiums. The sum ascertained in this way is called the net or mathematical premium.

The calculation of the reserve is thus an actuarial function, and, being the amount theoretically necessary for reinsuring the risks, is sometimes called the reinsurance fund or reinsurance reserve. As applied to a policy, the term means value or valuation, but that part of the assets of the company which, according to a specified table of mortality, with interest at the assumed rate, must be set apart to meet or mature the company's obligation to the insured on his death or upon the surrender or cancellation of his policy.

Under the laws of the state of Connecticut, chapter 213, sections 4110, 4111, and 4112 of the Laws of the State of Connecticut, Revision of 1918, and chapter 76, 1919, Laws of the State of Connecticut, this reinsurance reserve is the minimum standard valuation for contracts issued before January 1, 1921, based upon the actuaries' or combined experience table of mortality, with interest at 4 per cent. per annum, and on policies issued after that date based upon the American Experience Table of Mortality, with interest at 3½ per cent. per annum. As thus calculated, this reinsurance reserve is, we think, the reserve which has a technical and special meaning in the law of insurance and is the reserve required by law within the meaning of the federal statutes in so far as the question here involved is concerned. None of the reserves here claimed is calculated upon the basis above set forth, and possess none of the characteristics of the legal reserve required by law, as above described. McCoach v. Insurance Co. of North America, 244 U. S. 585, 37 S. Ct. 709, 61 L. Ed. 1333; Maryland Casualty Co. v. United States, 251 U. S. 342, 40 S. Ct. 155, 64 L. Ed. 297; United States v. Boston Insurance Co., 269 U. S. 197, 46 S. Ct. 97, 70 L. Ed. 232; New York Life Insurance Co. v. Edwards, 271 U. S. 109, 46 S. Ct. 436, 70 L. Ed. 859; and Minnesota Mutual Life Insurance Co. v. United States, 66 Ct. Cl. 481, 498, certiorari denied 279 U. S. 856, 49 S. Ct. 352, 73 L. Ed. 998.

It may be conceded that the reserves here in question are required to be maintained by plaintiff under the laws of the commonwealth of Massachusetts and the state of Connecticut as a condition to the continued transaction by plaintiff of its business as a life insurance company. But all reserves required by state statutes or state officials are not reserves required by law within the meaning of the federal statutes, and only those may be considered reserves required by law which aid in determining what portion of the gross income constitutes the net income of a life insurance company for the purpose of the federal statutes. McCoach v. Insurance Co. of North America, supra; United States v. Boston Insurance Co. supra; and Minnesota Mutual Life Insurance Co. v. United States, supra.

The plaintiff argues that the cases above cited are not in point, since they arose under the revenue acts prior to 1921, and the Revenue Act of 1921 changed the method of taxing life insurance companies. We are of opinion, however, that the legal reserve required by law within the meaning of the federal statute was not changed by the Revenues Act of 1921. Under all of the revenue acts prior to that of 1921, beginning with the Corporation Excise Tax Act of August 5, 1909, a special excise tax measured by net income was imposed upon life insurance companies by the United States, although, under the various acts, the items to be included in gross income and the items subject to deductions have varied. Until the enactment of the Revenue Act of 1921, however, the gross income of such companies included...