Missouri State Life Insurance Company v. Commissioner of Internal Revenue
| Citation | 29 BTA 401 |
| Decision Date | 23 November 1933 |
| Docket Number | Docket No. 58241,62386. |
| Parties | MISSOURI STATE LIFE INSURANCE COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
Earl W. Shinn, Esq., for the petitioner.
John D. Foley, Esq., for the respondent.
Petitioner, a Missouri corporation, carrying on a life insurance business, with its home office at St. Louis, Missouri, by these proceedings consolidated for hearing and decision, seeks redetermination of deficiencies of $4,388.52 and $66,794.13, determined by respondent for the calendar years 1928 and 1929, respectively. The same eight issues are presented by each petition for each year. Respondent raises additional issues by amended answers, charging that he, in error, (a) allowed deductions in each of the taxable years of amounts representing taxes paid in those years upon real estate purchased by petitioner, where such taxes accrued as a liability of the former owner of the property and existed as a lien upon the property at the time of its acquisition by petitioner, and (b) for the year 1929 allowed deductions representing advances to tenants. He contends that such payments do not represent proper deductions and asks that net income as determined by him be increased by these amounts and the deficiencies be increased accordingly.
Most of the facts necessary to a determination of the issues are formally stipulated by the parties. Additional facts to those stipulated were established at the hearing. We adopt and incorporate herein by reference the formal stipulation as findings of fact. Additional facts found by us upon the testimony of witnesses at the hearing are set out under the separate headings of the issues to which such facts pertain.
Reserve for Premium Reduction Coupons.
Respondent reduced petitioner's reserve, as determined by it, for computation of its deduction under section 203 (a) (2) of the Revenue Act of 1928, by the amount set up by it to meet its liability upon matured coupons under policies known as "guaranteed premium reduction coupon policies." These policies carried coupons attached, maturing on given dates, the policy contract obligating the company to pay the fixed sum stated in the coupon upon maturity, if all premium payments then due had been met. The policyholder is given the option of receiving payment of the coupon in cash, using it to reduce premium payments, purchasing additional insurance, or leaving it at a fixed rate of interest subject to demand.
The record shows that the reserves maintained by petitioner in respect to these coupon obligations are necessarily set aside from premium payments to meet at maturity one of the fixed and definite obligations of the policy and are consequently legal reserves. McCoach v. Ins. Co. of North America, 244 U.S. 585; New York Life Ins. Co. v. Edwards, 271 U.S. 109; United States v. Boston Ins. Co., 269 U.S. 197.
The amounts of the reserves in question for each of the taxable years are stipulated. Upon this issue we sustain the petitioner. Farmers Life Ins. Co., 27 B.T.A. 423; Reserve Loan Life Ins. Co., 18 B.T.A. 359; petition for review dismissed, C.C.A., 7th Cir., Jan. 14, 1933; Standard Life Ins. Co. of America, 13 B.T.A. 13; affd., 47 Fed. (2d) 218; Commissioner v. Western Union Life Ins. Co., 61 Fed. (2d) 207.
Depreciation on Assets Used in the Underwriting Department of Petitioner's Business.
Respondent allowed depreciation upon assets used in the investment department of petitioner's business, but disallowed depreciation of assets used in the underwriting department. The amount of depreciation actually sustained is stipulated.
The question is controlled by our decision in Lafayette Life Ins. Co., 26 B.T.A. 946. We are advised of the decision of the Circuit Court of Appeals for the 7th Circuit (Oct. 20, 1933) upon the appeal of this case, reaching the opposite conclusion upon this question. However, since our decision we have consistently applied the rule there laid down. Manhattan Life Ins. Co., 28 B.T.A. 129, and several cases decided by memorandum opinion. We are still of the opinion that our conclusion on this question is correct, and, therefore, hold that petitioner is entitled to the deduction sought.
Deduction — Interest Paid on Dividends to Accumulate under Terms of Outstanding Policies.
Petitioner paid in 1928 the sum of $30,421.13 and in 1929 the sum of $33,945.05 to policyholders as interest upon dividends apportioned but left by the policyholder to accumulate at a specified rate of interest. Respondent admits that petitioner is entitled to the deduction of these amounts, and we accordingly so hold.
Deduction — Amounts Paid in 1928 and 1929 as Interest upon Deferred Dividends Under Policies Whose Tontine Period Ended in Those Years.
Petitioner paid in 1928 the sum of $46,237.13 and in 1929 the sum of $42,091.91 as interest upon deferred dividends under policies whose tontine period ended in those years. The following is a specimen of the material portions of the policy in question:
This policy shares in the profits of the company, as follows:
The accumulation period ends on the ___________ day of ________ 19__. If the insured is then living and all premiums have been paid, the company will apportion to this policy its share of the accumulated profits, and
| 1. The guaranteed cash value of THE ENTIRE CASH VALUE of this policy shall | $______ then consist of _________________________ The profits in cash then apportioned.
The insured may then select one of the following Options of Settlement:
1. Receive the entire cash value as stated above, | in cash; or | Surrender 2. Receive the entire cash value as stated above, | and in any such Options. converted into an annual cash income for > case discontinue life; or, | this policy, or 3. Receive the entire cash value as stated | above, converted into profit-sharing paid-up | life insurance. | 4. Receive the profits in cash; or, | 5. Receive the profits converted | into an annual cash income | and in any such case continue Continuing for life; or | this policy for $______ as Options. 6. Receive the profits converted | profit-sharing insurance for into additional profit-sharing > life by payment of the same paid-up life insurance, subject | premium as previously to evidence of insurability | satisfactory to the Company. |
At the end of the accumulation period the Company will send to the insured a written statement of the results under the foregoing options of settlement. If the insured's written selection of one of these options is not received at the Home Office within one month thereafter, it is agreed that settlement shall be made under Option 4, and the profits held by the Company at three per cent interest, subject to the written demand of the insured.
If this policy is continued beyond the accumulation period, profits will be apportioned at the end of each year thereafter during its continuance and shall be payable in cash.
The method followed by petitioner with respect to the apportionment of the deferred dividends on these policies was to set aside each year an amount as representing the profits of such year allowable to the policy, the total of these sums representing the sum apportioned as a deferred dividend at the close of the tontine period. In each year it also set aside on each policy an amount designated as interest and computed at 3½ percent compounded annually upon the amounts theretofore set aside as apportioned profits of prior years. The total of these sums was paid to the policyholder at the close of the period. The question here presented is whether those portions of the payments made in the taxable years which represented the so-called interest computed, were in fact payments of interest upon debts or obligations of petitioner or whether the entire payment in each case was one of deferred dividends.
In Lafayette Life Ins. Co., supra, we had a situation substantially similar to this before us. In that case we said:
Nor can it be said that the deferred dividends constituted debts owed by petitioner during the 20-year period of the tontine policies. A debt in its general sense is "a specific sum of money which is due or owing from one person to another, and denotes not only the obligation of the debtor to pay, but the right of the creditor to receive and enforce payment." J. S. Cullinan, 19 B.T.A. 930. During the tontine period none of the deferred dividends constituted "a specific sum of money due or owing" from petitioner to a policyholder and enforceable by the latter. Not until the end of such period could it be determined who of the policyholders might be entitled to deferred dividends. Indeed, it is quite conceivable that none would be so entitled. It is clear, we think, that under such circumstances the so-called interest payments could not properly be deemed interest. They constituted additional dividends rather than interest.
It will be noted that there is no agreement in the policy here in question to pay interest upon deferred dividends, and we think it immaterial how petitioner computes the amount allocable to the policy for each year, the total of which it pays at the close of the tontine period, which is the date its obligation to make any payment accrues. Petitioner attempts to distinguish the above cited case upon the ground that the apportionment of profits for each year and the computation of interest thereon was made at the close of the tontine period, whereas in the present case it was made each year and the tentative credits to the policy then transferred from surplus. We see in that no material difference. It was at most, in our opinion, merely a different method of recording upon the corporate books a transaction in all respects similar to the one before us in Lafayette Ins. Co., supra. In both cases the obligation was similar and the...
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