Monarch Life Insurance Company v. Commissioner of Internal Revenue

• Decision Date: 06 October 1938
• Docket Number: Docket No. 86861,87441.
• Citation: 38 BTA 716
• Parties: MONARCH LIFE INSURANCE COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Board of Tax Appeals

38 B.T.A. 716 (1938)

MONARCH LIFE INSURANCE COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket Nos. 86861, 87441.

Board of Tax Appeals.

Promulgated October 6, 1938.

Abbot P. Mills, Esq., and Frederick A. Ballard, Esq., for the petitioner.

R. P. Hertzog, Esq., for the respondent.

These are consolidated proceedings for the redetermination of deficiencies in income tax for the years 1933 and 1934 in the amounts of $3,844.59 and $3,574.58, respectively. The parties stipulated the facts and submitted for decision two issues of law, namely, (1) whether respondent erred in disallowing deductions claimed by petitioner representing 3¾ percent of the mean of five certain reserve funds required by law and held by petitioner at the beginning and end of the taxable years; and (2) whether respondent erred in refusing to allow deductions as interest paid, representing discount on premiums paid in advance during the taxable years.

FINDINGS OF FACT.

Omitting formal and immaterial matter, the parties stipulated the facts as follows:

The Monarch Life Insurance Co., petitioner herein, is a corporation organized and existing under the laws of the State of Massachusetts, having its home office in Springfield, Massachusetts. Petitioner was organized December 31, 1931, to take over the business of the Monarch Accident Insurance Co., which was organized in 1921, and the Monarch Life Insurance Co., which was organized in 1926, both under the laws of the State of Massachusetts. The petitioner was licensed to write life, and accident and health insurance contracts, and was so engaged during 1933 and 1934, the taxable years herein involved, in the State of Massachusetts as well as 23 other states and the District of Columbia.

More than 50 percent of petitioner's total reserve funds held during the taxable years were held for the fulfillment of life insurance contracts and petitioner was held to be taxable as a life insurance company.

For the taxable years petitioner filed separate statements for its life insurance business and for its accident and health insurance business, with the Commissioner of Insurance for the State of Massachusetts. These reports were required by chapter 175, section 25, of the General Laws of Massachusetts, and they were in the form adopted by the National Convention of Insurance Commissioners.

During the taxable years petitioner maintained the following reserves which it claims were insurance reserves required by law, but which respondent asserts were not insurance reserves within the meaning of section 203 (a) (2) of the Revenue Acts of 1932 and 1934, respectively:

                1933
                ------------------------------------------------------------------------------------------------------------------------
                                                                                                   |                 |
                                                                                                   |  Dec. 31, 1932  |   Dec. 31, 1933
                -----------------------------------------------------------------------------------|-----------------|-----------------
                                                                                                   |                 |
                                      Life Statement                                      |                 |
                                                                                                   |                 |
                Page 5, item 9—Reserve for incurred disability benefits ______               |      $3,843.00  |         $4,467.00
                Page 5, item 36—Reserve for nondeduction of deferred fractional premiums __  |       3,050.00  |          3,600.00
                                                                                                   |                 |
                                      Accident and Health Statement                       |                 |
                                                                                                   |                 |
                Page 5, item 25—Unearned premium reserve on accident and health policies     |     395,800.00  |        350,519.14
                Page 5, item 25½—Additional reserve on noncancelable accident and health |              |
                 policies ________________________________________________________________________ |     123,000.00  |        124,700.00
                Page'5, item 19—Reserve for unpaid and unresisted claims _______________     |1264,632.00 |   1180,539.23
                                                                                                   |  _______________| _________________
                                                                                                   |     790,325.00  |        663,825.37
                                                                                                   |                 |        790,325.00
                                                                                                   |                 | _________________
                                                                                                   |                 |      1,454,150.37
                                                                                                   |    =============| =================
                          Mean of reserves disallowed ____________________________________________ |                 |       $727,075.19
                          3¾% of mean, deducted on return but disallowed by respondent ____ |                 |         27,265.32
                ------------------------------------------------------------------------------------------------------------------------
                1 Deduction was claimed on return based on amounts of $458,700 and $376,000. The difference between
                these amounts, and the amounts now claimed represents claims accrued but unpaid at valuation date
                resisted claims and unreported claims, as to which petitioner concedes it is not entitled to a deduction
                 

                1934
                ----------------------------------------------------------------------------------------------------------------------------
                                                                                                      |                |
                                                                                                      |  Dec. 31, 1933 |       Dec. 31, 1934
                --------------------------------------------------------------------------------------|----------------|--------------------
                                                                                                      |                |
                                        Life Statement                                       |                |
                Page 5, item 9—Reserve for incurred disability benefits _______________________ |      $4,467.00 |           $7,102.00
                Page 5, item 36—Reserve for nondeduction of deferred fractional premiums        |       3,600.00 |            4,430.00
                                                                                                      |                |
                                   Accident and Health Statement                             |                |
                                                                                                      |                |
                Page 5, item 25—Unearned premium reserve on accident and health policies __     |    350,519.14  |    365,819.00
                Page 5, item 25½—Additional reserve on noncancelable accident and health|                |
                    policies ____________________________________________________________________    |  124,700.00    |       131,492.00
                Page 5, item 19— Reserve for unpaid and unresisted claims _________________    | 1180,539.23 |     1213,839.39
                                                                                                      | ______________ | ___________________
                                                                                                      |     663,825.37 |          722,682.39
                                                                                                      |                |          663,825.37
                                                                                                      |                | ___________________
                                                                                                      |                |        1,386,507.76
                                                                                                      | ===============| ===================
                         Mean of reserves disallowed ________________________________________________ |                |         $693,253.88
                         3¾% of mean, deducted on return, but disallowed by respondent _______ |                |           25,997.02
                ----------------------------------------------------------------------------------------------------------------------------
                1 Deduction was claimed on the return based on amounts of $376,000 and $416,130. The difference between
                these amounts and the amounts now claimed represents claims accrued but unpaid at valuation date
                resisted claims and unreported claims, as to which petitioner concedes it is not entitled to a deduction
                 

Reserve for incurred disability benefits. — Petitioner's life insurance policies during the taxable years contained a provision that petitioner shall waive the payment of premiums by a policyholder on proof of total disability, which waiver shall operate only during the continuance of such disability, petitioner reserving the right to require annual proof of such continuance. Inasmuch as petitioner's premium rates, and other reserves, are computed upon the assumption that the stated full year's premium will continue to be received when due during the life of the policy, the reserve for incurred disability benefits (item 9, page 5, of "Life Statements") represented a fund maintained to supply, during continuance of disability, the premiums thus to be waived. It was required during the taxable years pursuant to statutory authority by the Insurance Department of the State of New York, where petitioner was licensed and transacted business. This reserve was held during the taxable years. It was calculated upon the basis of selected tables of combined mortality and disability, with assumed interest of 3½ percent. The source...