Oxford Life Ins. Co. v. United States

• Decision Date: 03 October 1983
• Docket Number: No. CIV 81-1176 PHX CAM.,CIV 81-1176 PHX CAM.
• Citation: 574 F. Supp. 1417
• Parties: OXFORD LIFE INSURANCE COMPANY, Plaintiff, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — District of Arizona

574 F. Supp. 1417

OXFORD LIFE INSURANCE COMPANY, Plaintiff, v. UNITED STATES of America, Defendant.

No. CIV 81-1176 PHX CAM.

United States District Court, D. Arizona.

October 3, 1983.

COPYRIGHT MATERIAL OMITTED

Stephen E. Silver, Burch & Cracchiolo, Phoenix, Ariz., for plaintiff.

James P. Loss, U.S. Atty., Phoenix, Ariz., Nancy Morgan, Trial Atty., Tax Div., Dept. of Justice, Washington, D.C., for defendant.

MUECKE, Chief Judge.

This case involves a claim for recovery of taxes paid in connection with a reinsurance transaction entered into between Oxford Insurance Company, plaintiff herein, and Pioneer Insurance Company.

The dispute herein involves the computation of premium income reported by Oxford on its 1973 income tax return, the deductibility of an acquisition cost on a reinsurance transaction, and the timeliness of an election made pursuant to 26 U.S.C. § 818(a).

Defendant, United States, filed a Motion for Partial Summary Judgment, and Plaintiff filed a cross-motion. In addition, Defendant filed a Motion to Strike portions of the plaintiff's cross-motion. In making the following findings of fact, the Court considered all of the motions filed, together with the pertinent responses and replies, as well as the oral arguments of the parties, which were made in open court on June 13, 1983.

FINDINGS OF FACT:

(1) Oxford Life Insurance Company, hereinafter referred to as Plaintiff, was incorporated in 1965, with its principal place of business in Phoenix, Arizona.

(2) In December of 1973, Plaintiff learned that it would acquire from the Pioneer Insurance Company of Lincoln, Nebraska, hereinafter referred to as Pioneer, a block of insurance business, consisting of approximately ten thousand 20-payment whole life policies, written since 1968.

(3) Pursuant to certain documents, entitled Reinsurance Agreement and Amendment to Reinsurance Agreement, dated December 28, 1973, Oxford assumed liability for Pioneer's life insurance policies.

(4) The provisions of the Reinsurance Agreement are not disputed by the parties, and are as follows:

ARTICLE I

CEDING COMPANY hereby assigns and cedes to REINSURING COMPANY, and REINSURING COMPANY hereby assumes and reinsures each and every life insurance policy issued by the CEDING COMPANY pursuant to its Plan No. 423632 listed in Appendix A, attached hereto, which is in force as of the effective date of this Reinsurance, in accordance with the terms and conditions of such policies and as if the same had been originally issued by REINSURING COMPANY and further assumes and shall be liable after said effective date for all obligations and expenses which may accrue or become due in connection with such policies, including but not limited to the payment of premium taxes and agents' commissions and renewals.

* * * * * *

ARTICLE II

The effective date of the reinsurance provided by this Agreement shall be 11:59 p.m., Central Standard Time, December 31, 1973.

* * * * * *

ARTICLE III

On or before the 31st day of January, 1974, the CEDING COMPANY shall pay to REINSURING COMPANY a reinsurance premium which shall be calculated as of the close of business December 31, 1973, on the policies set forth in Appendix A as follows: The mean aggregate life reserves therefor plus net advance premiums with accrued interest thereon plus reserve for dividends for the calendar year 1974, less net due and deferred premiums and policy loans with accrued interest thereon (adjusted and unearned interest). Each of the foregoing computations shall be made by and at the expense of the CEDING COMPANY and on the same basis as it would make the same for its 1973 annual statement but for this reinsurance.

REINSURING COMPANY will allow a reinsurance commission to CEDING COMPANY in the amount of $2,500,000 which shall be netted against said reinsurance premium. The actual payment of said net reinsurance premium shall be by means of assignment of evidence of indebtedness to be selected by the REINSURING COMPANY from Appendix C, attached hereto, having unpaid principal balances and accrued but unpaid interest equivalent to the amount of said net reinsurance premium.

* * * * * *

ARTICLE IV

CEDING COMPANY will maintain all records on said policies including computer records through December 31, 1973, at which time they will be used for computations set forth in Article III, and then such records as are necessary to the accounting and administration of said reinsured policies shall be delivered to REINSURING COMPANY. The evidence of indebtedness assigned pursuant hereto shall be delivered to REINSURING COMPANY on or before January 31, 1974, but shall not be removed from the state of Nebraska unless and until REINSURING COMPANY is issued a certificate of authority by the Nebraska Department of Insurance.

* * * * * *

ARTICLE V

REINSURING COMPANY shall, at its own expense, prepare and send Assumption Certificates to the owner of each policy reinsured hereby within sixty days from the effective date of this reinsurance. The CEDING COMPANY will make available its computer system and records for this purpose, without charge to REINSURING COMPANY.

(4) Plaintiff contends that during negotiations held prior to entering into the Reinsurance Agreement with Pioneer, certain inherent problems of the policies were revealed, including:

(a) Pioneer was prohibited by the Insurance Department of the State of Nebraska from writing any new business;

(b) Many of the sales people who sold the subject policies misrepresented them as investment contracts, rather than as policies of insurance;

(c) Demands were being made to Pioneer and various state insurance departments for refunds;

(d) Many of the policies were high-premium, low-coverage policies;

(e) The subject policies were almost exclusively sold to farming people in the midwestern states of Nebraska, Iowa, Kansas and Minnesota;

(f) Pursuant to a short-term option contained in the subject policies, the policyholder could elect, subject to certain conditions, during the eighth through eleventh years of the policies, to receive a paid-up policy in the face amount of the original policy, plus a small cash refund.

(5) Nevertheless, Defendant contends, and Plaintiff does not deny, that several tax advantages to Plaintiff would result from the acquisition of the block of subject policies from Pioneer.

(6) In any event, in accordance with the Reinsurance Agreement mentioned above, a block of policies with a face amount of $58,672,232.00 was assumed by Plaintiff.

(7) Plaintiff was on a preliminary term basis of computing reserves for state insurance department regulatory purposes.

(8) Pursuant to the preliminary term basis, Plaintiff was required to set aside $3,952,531.00 as reserves to cover this particular block of business and also assumed liabilities of Pioneer on the policies, totalling $262,400.23; Pioneer then transferred tangible property consisting of debt instruments owed by outside parties to it in the total amount of $1,714,931.23.

(9) On its 1973 federal income tax return, Plaintiff deducted assumed liabilities in the amount of $262,400.23 and the reserve it was required to set aside to cover the Pioneer policies, but elected to recompute those reserves on a net level premium basis, pursuant to 26 U.S.C. § 818(c), thereby increasing the deduction for increase in reserves from $3,952,531.00 to $5,101,677.00.

(10) On its 1973 federal income tax return, Plaintiff reported as income the $1,714,931.23 tangible property it had received from Pioneer, and also filed its Annual Statement with the Insurance Department for the State of Arizona, indicating net consideration in the same amount.

(11) The Annual Statement was audited by the Insurance Department of the State of Arizona and approved, and the 1973 and 1974 federal income tax returns were also audited by the Internal Revenue Service, hereinafter referred to as IRS.

(12) Pursuant to the IRS audit, a Statutory Notice of Deficiency for the 1973 and 1974 tax years was issued to Plaintiff for federal corporate income tax deficiencies of $770,205.62 and $351,898.61 plus interest and penalties.

(13) On November 5, 1976, Plaintiff filed a protest with the IRS regarding the proposed adjustments for 1973 and 1974.

(14) However, on or about March 4, 1979, Plaintiff paid the assessments in full.

(15) On March 21, 1980, Plaintiff filed a refund claim with the IRS for the 1974 tax year, claiming a refund for the amount of $351,898.61 contained in the Statutory Notice of Deficiency.

(16) As grounds for its claim, Plaintiff noted that "Recalculations of reserves and of tax should be made due to allowance of Taxpayer's § 818(c) election made on 1973 Income Tax Return and appropriate corresponding adjustments for calculations of Taxpayer's 1974 Income Tax liability will result in a refund of at least the amount claimed hereon."

(17) On or about May 26, 1980, the IRS refunded the tax, penalties and interest in the amount of $487,713.97 to Plaintiff for the 1974 tax year.

(18) On or about November 12, 1980, Plaintiff filed a claim for refund of its 1973 income taxes, penalties and interest in the amount of $1,132,600.41, which claim was disallowed by the IRS by its letter dated October 16, 1981.

(19) On October 26, 1981, Plaintiff then filed its Amended Complaint for refund of its 1973 income taxes, penalties and interest, and Defendant counterclaimed, seeking a repayment of Plaintiff's 1974 income taxes, penalties and interest erroneously refunded.

MOTION TO STRIKE

Defendant has moved the Court to strike portions of the Affidavit of Mr. Ted Wilkins, which was appended to Plaintiff's Cross-Motion for Summary Judgment, served on Defendant on March 6, 1983.

The statement made by Mr. Wilkins which is objectionable to Defendant concerns his characterization of the interpretation of Mr. Werner Marwitz of the definition for the useful life of an insurance policy. Defendant denies that the purported interpretative statement was...