New World Life Ins. Co. v. United States

• Decision Date: 06 March 1939
• Docket Number: No. 43549.,43549.
• Citation: 26 F. Supp. 444
• Parties: NEW WORLD LIFE INS. CO. v. UNITED STATES.
• Court: U.S. Claims Court

26 F. Supp. 444

NEW WORLD LIFE INS. CO. v. UNITED STATES.

No. 43549.

Court of Claims.

March 6, 1939.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Walter E. Barton, of Washington, D. C., for plaintiff.

Guy Patten, of Washington, D. C., and James W. Morris, Asst. Atty. Gen. (Fred K. Dyar and Robert Anderson, both of Washington, D. C., on the brief), for the United States.

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

LITTLETON, Judge.

The first question involves a construction of section 203(a) (5), Revenue Act of 1928, 26 U.S.C.A. § 203(a) (5), which relates to the deduction allowable to a life insurance company in respect of investment expenses. This section is in the following language: "In the case of a life insurance company the term `net income' means the gross income less * * * investment expenses paid during the taxable year: Provided, That if any general expenses are in part assigned to or included in the investment expenses, the total deduction under this paragraph shall not exceed one-fourth of 1 per centum of the book value of the mean of the invested assets held at the beginning and end of the taxable year."

The gross income of a life insurance company consists only of "the gross amount of income received during the taxable year from interest, dividends and rents," that is, investment income. Six specific deductions are allowed, among which is the deduction here involved. Two additional deductions are conditionally allowed under sec. 203 (b). A specific exemption is provided. A life insurance company is not taxable upon its general income from premium receipts or on gain or profit from sale of property.

As shown by the findings, the plaintiff, by a resolution adopted in 1929, undertook to apportion the salaries paid to its general officers and certain general employees as between the underwriting and the investment departments of its business and to include as a direct investment expense an amount ranging from 25 per centum to 80 per centum of such salaries. The amounts so apportioned to and included in the investment expenses, together with all actual and direct investment expenses, were claimed as deductions from gross income for 1929 and subsequent years. The salaries of such officers and cashiers were for services performed and expected to be performed; and such services related to all departments of plaintiff's business, that is, to both the investment and underwriting departments. The percentages of such salaries which the resolution directed be charged to the investment department represented estimates arrived at by such officers, and in the case of the cashiers by estimates arrived at by the supervising officers in charge of such cashiers. The direct investment expenses, that is, the actual expenses about which there is no controversy, which were wholly incurred and paid in the investment department, exceeded an amount computed upon the basis of one-fourth of 1 per centum of the book value of the mean of plaintiff's invested assets.

The case of Sun Life Insurance Company of America v. United States, 12 F. Supp. 450, 81 Ct.Cl. 892, involved a deduction under section 203(a) (5). The question of the proper construction of this section and the extent of the deduction for investment expenses which a life insurance company may take thereunder has been reargued in this case. In the prior case of Sun Life Insurance Company, supra, the history, purpose, and meaning of the section in its relation to the special plan for the taxation of life insurance companies and the relation of the section to the business practices of such companies under the statutes of many states concerning investment expenses were not fully briefed and argued. In view of the facts here disclosed and also in view of important considerations bearing upon the proper interpretation of the section not heretofore considered and discussed by the court, which are now pressed upon our attention with an earnestness and fullness of argument which they have not heretofore received, we deem the occasion an appropriate one to re-examine the whole subject.

In its returns for each of the years involved, plaintiff deducted from gross income as investment expenses all amounts charged in the investment department representing direct and actual investment expenses wholly incurred and paid in that department, and, in addition, the amounts on account of officers' and cashiers' salaries apportioned to and included in investment expenses in accordance with the resolution. The Commissioner of Internal Revenue determined and allowed the expenses directly and entirely incurred and paid in the investment department, and, inasmuch as these actual investment expenses exceeded one-fourth of 1 per centum of the mean of the book value of plaintiff's invested assets at the beginning and end of each taxable year, he excluded and refused to allow as a part of the deduction that part of the salaries of general officers and cashiers assigned to and included in investment expenses.

Plaintiff contends that this action was contrary to the provisions of section 203 (a) (5) supra. It insists that when a taxpayer makes a determination or when it can submit evidence to show that a certain portion of the time of general officers or employees and a certain percentage of the salaries paid to them for services rendered in all departments of the business reasonably relate to services performed and expenses incurred in the maintenance and operation of the investment department of the business, such percentage of the total salaries paid may, under the section mentioned, be included in investment expenses and deducted without limitation from investment income for the reason that in such circumstances the portion so assigned to and included in the investment department becomes a direct and actual investment expense.

Plaintiff's position, in substance, is that the term "general expenses" as used in the statute refer specifically and only to those expenses which are not susceptible of division and allocation to the investment and underwriting departments and are incurred for and in behalf of both. We think this position does not take into consideration the fundamental distinction which exists in fact and is observed in the taxing statutes between general expenses and investment expenses. With respect to the former, a part thereof may be susceptible of reasonable ascertainment and fairly chargeable against investment income and this was recognized and permitted by Congress, as shown by the Committee Reports, to the extent of one-fourth of 1 per centum of the book value of the mean of the invested assets. But, with respect to the latter, no question of division or allocation exists and Congress permitted them to be deducted without limitation. The first part of the section allowing the deduction of investment expenses paid and the proviso excluding all general expenses, in excess of a specified amount are to be read and construed together. In view of facts and circumstances which now appear, we think the inclusion of the first without limit and the exclusion of the second in excess of the specified limitation cannot be regarded the same as the inclusion without limit of all of one and a part of the other. And we think also it is of no controlling importance that the officers of the corporation in their judgment make an allocation of general salaries between the Investment and Underwriting Departments. In the circumstances an interpretation which would permit this to be done would require an unauthorized interpolation. The fact that general expenses may be reasonably susceptible of apportionment does not take them out of the class of general expenses within the meaning of the proviso. When so apportioned, either before or after they are incurred, the parts assigned are still impressed with the character of the services or matters in respect of which they are incurred.

We are therefore of opinion that the additional deductions here claimed cannot be sustained under the language and intent of section 203(a) (5) when that section is considered in the light of the history and reasons for the adoption in 1921 of the special plan for taxing the limited income of life insurance companies. Prior to the enactment of the Revenue Act of 1921, approved November 23, 1921, 42 Stat. 227, life insurance companies were by definition included within the term "corporation" and were taxable as ordinary corporations, their gross income, including not only their investment income — that is, their income from interest, dividends, and rents — but also their total premium receipts and all other gains and profits from sales of property.¹ This original plan of taxation, through the inclusion of premium receipts and the allowance of all deductions generally allowed corporations and, in addition, policy claims accrued and paid, etc., was generally unsatisfactory and was productive of almost constant administrative controversy and litigation. As a result the life insurance companies, through the Association of Life Insurance Presidents, proposed to Congress a new plan for the taxation of life insurance companies in connection with the consideration by Congress of the Revenue Bill of 1918.² In a written document filed with the Ways and Means Committee at the time the Revenue Bill of 1918 was being considered, the Association of Life Insurance Presidents said, among other things: "Although only a minor proportion of the premiums received by the insurance companies constitutes true income, the greater part being the policyholders' contributions toward current losses and to permanent capital, the entire premium income is included in gross income under the Income Tax Law. This departure from...