Massachusetts Mut. Life Ins. Co. v. United States

Decision Date30 January 2012
Docket NumberNo. 07-648T,07-648T
CourtU.S. Claims Court

Federal Tax; Federal Tax

Deductions; 26 U.S.C. § 461(h),

"All Events Test;" Treasury

Regulation § 1.461.4; Policyholder


B. John Williams, Jr., Skadden, Arps, Slate, Meagher & Flom LLP, Washington, D.C. With him were Alan J.J. Swirski and Melissa L. Galetto, Skadden, Arps, Slate, Meagher & Flom LLP, of counsel.

Robert Stoddart, Trial Attorney, Court of Federal Claims Section, Tax Division, United States Department of Justice, Washington, D.C. for the defendant. With him were G. Robson Stewart, Assistant Chief, Court of Federal Claims Section, United States Department of Justice, David I. Pincus, Chief, Court of Federal Claims Section and John A. DiCicco, Principal Deputy Assistant Attorney General, Tax Division.



"While in some cases, 'timing is everything,' here timing is the only thing...."1


The plaintiff, Massachusetts Mutual Life Insurance Company (MassMutual), on behalf of itself, and as successor to Connecticut Mutual Life Insurance Company (ConnMutual), brought this claim to recover funds allegedly overpaid to the InternalRevenue Service (IRS) for the tax years 1995, 1996 and 1997,2 when the IRS disallowed certain policyholder dividend deductions made pursuant to Board Resolutions in December 1995, 1996, and 1997, respectively. These Resolutions established a minimum amount of dividends that would be paid out to certain policyholders the following year (the Dividend Guarantees). As noted by the plaintiff, and not objected to by the defendant, "[p]laintiff is entitled to policyholder dividend deductions; the only issue is when." Plaintiff continued, "[i]t is undisputed that the dividends are deductible. The parties disagree solely about timing."

A trial was held and post-trial briefings on the legal and factual issues raised in this case were filed by both parties. After a review of the trial transcripts, the testimony, the exhibits entered into the record, and the submissions filed by the parties, the court makes the following findings of facts. MassMutual is a mutual life insurance company with its principle place of business in Springfield, Massachusetts. For the tax years 1995, 1996, and 1997, MassMutual was an accrual basis taxpayer, and timely filed its federal income tax return for each tax year at issue. In the fall of 1995, the Boards of Directors of MassMutual and ConnMutual approved a merger of the two companies. The merger was effective February 29, 1996, with MassMutual emerging as the surviving entity and succeeding to all of ConnMutual's rights and liabilities. Prior to the merger, ConnMutual was a mutual life insurance company with its principal place of business in Hartford, Connecticut. In 1995, ConnMutual was an accrual basis taxpayer, which also had timely filed its federal income tax return for the 1995 tax year.3

According to the Joint Stipulations of Fact, mutual life insurance companies, such as MassMutual and ConnMutual, operate for the benefit of their policyholders. Mutual life insurance companies typically issue two types of insurance policies, participating policies and non-participating policies. A participating policy is an insurance policy that is eligible to receive a share of any annual distribution of surplus, as declared by the Board of Directors of a mutual life insurance company. A non-participating policy does not receive a share of the annual distribution of surplus. Each year, mutual life insurance companies calculate their surplus, i.e., assets less reserves4 and otherliabilities. The mutual life insurance company's Board of Directors then approves the amount of surplus, known as the divisible surplus, to be returned to holders for participating policies, or participating policyholders. A sample MassMutual participating policy, included as a Joint Exhibit, stated: "Each year we determine how much money can be paid as dividends. This is called divisible surplus. We then determine how much of this divisible surplus is to be allocated to this [participating] policy."5 A mutual life insurance company's divisible surplus is distributed to participating policyholders, consistent with the dividend scale developed by the company's management, and approved by the Board of Directors.

Mutual life insurance companies typically declare policyholder dividends at the end of each year. Dividends are then payable to participating policyholders whose policies are in force as of the anniversary date of their policy. An insurance policy is in force if the premiums for the policy are paid through its anniversary date. A policy that is not in force has lapsed. A lapse rate, usually expressed as a percentage, is the number of life insurance policies that lapsed within a given period, divided by the number of policies in force at the beginning of that period. Participating policyholders may choose to have their policyholder dividends applied to the following year's premium or purchase additional insurance instead of receiving the dividend.

Policyholder dividends are generally not taxable to the policyholder until the aggregate dividends paid to a policyholder exceed the aggregate premiums paid by the policyholder. The point at which the aggregate dividends paid to a policyholder exceed the aggregate premiums paid by the policyholder is known as the cross-over point.

1995 Tax Year
1995 MassMutual Dividend Guarantee

On October 9, 1995, the Board of Directors of MassMutual approved the 1996 dividend scale recommended by MassMutual's Dividend Policy Committee. The 1996 dividend scale resulted in the apportionment of $517.3 million to all MassMutual's participating policies. In order to determine the amount of dividends to be guaranteed, MassMutual first calculated the dividends it expected to pay policyholders of post-1983 policies, pursuant to its 1996 dividend scale, $217.3 million, and then set theguaranteed amount at 85% of that amount, or $184.7 million. The final guaranteed amount was rounded up to $185.0 million.

MassMutual, and as described below, ConnMutual chose to apply the Dividend Guarantees only to policies issued after December 31, 1983 because of unfavorable tax consequences that would have resulted from also applying the Dividend Guarantees to the policies issued before January 1, 1984. Under Section 216(b)(1) of the Deficit Reduction Act of 1984, Pub. L. 98-369, 98 Stat. 758 (1984), life insurance companies were allowed a fresh start for then-existing policies as a benefit for the change in tax treatment in the deduction of policyholder dividends from a reserve basis to an accrual basis.6 "The 'fresh start' for the change in policyholder dividend accounting was intended to mitigate the detriment caused taxpayers by the statutory change in such accounting; to the extent the detriment caused by the statutory change is mitigated in fact by a company's own change in business practices, the 'fresh start' was not intended to give a company additional tax benefits." Staff of the Joint Comm. on Taxation, 98th Cong., General Explanation of the Revenue Provisions of the Deficit Reduction Act of 1984 611 (Comm. Print 1984). Therefore, pursuant to 26 U.S.C. § 808(f),7 accelerationof pre-1984 policyholder dividends, could result in the recapture of the fresh start benefit the life insurance company received for the pre-1984 policies. To avoid the recapture of the "fresh start" benefit, MassMutual and ConnMutual limited the Dividend Guarantees to only post-1983 policyholders. In explaining why the Dividend Guarantees only applied to post-1983 policies, Margaret Sperry, the former chief compliance officer of MassMutual, testified at trial: "If a company changed its practices with regard to dividends in order to accelerate the tax deduction of dividends on that pre-[19]84 population, the population that got the fresh start, then there would be an adjustment and the company would...have to pay additional tax."

Ms. Sperry testified that, prior to 1995, MassMutual "was very aware of the difference between book and tax accounting on dividends.... " She further stated that MassMutual "wanted to align the economics of what was going on, which was reflected in our financial reporting, align the tax accounting with that financial reporting...." In 1995, Ms. Sperry stated she consulted with the accounting firm KPMG and their tax counsel at the time, Steptoe & Johnson LLP, about a dividend guarantee. According to Ms. Sperry:

what the guarantee did was it aligned a portion of our [MassMutual] dividends with the economics of what's going on where the board would have declared the amounts of divisible surplus reflective of the earnings of the company in 1995 and prior years, and by accruing that amount of dividends associated with the guarantee in 1995, you have alignment mapping of the tax accounting, financial reporting, where the liability was firmly established, and the economics of what was going on.

In November 1995, MassMutual representatives met with representatives from the Massachusetts Division of Insurance, including the Insurance Commissioner, Linda Ruthardt and Assistant Commissioner, Kevin McAdoo. MassMutual explained to the Massachusetts Division of Insurance representatives that it intended to implement a dividend guarantee for MassMutual's post-1983 policyholders. MassMutual further explained that the reason MassMutual had informed the Massachusetts Division of Insurance was to ensure that the Massachusetts Division of Insurance did not have any objections to the dividend guarantee. The parties agree, at that meeting the Division of Insurance did not raise any objections to the dividend guarantee. Subsequent to the November 1995, meeting, on December 7, 1995, MassMutual sent a letter to the Massachusetts Division of Insurance informing the Massachusetts Division of Insurance of...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT