Prudential Ins. Co. of America v. Howell

• Decision Date: 02 February 1959
• Docket Number: No. A--61,A--61
• Citation: 29 N.J. 116,148 A.2d 145
• Parties: PRUDENTIAL INSURANCE COMPANY OF AMERICA and Mutual Benefit Life Insurance Company, Plaintiffs-Respondents, v. Charles R. HOWELL, Commissioner of Banking and Insurance of the State of New Jersey, Aaron K. Neeld, Director of the Division of Taxation of the State of New Jersey, and Intervenor, State of New Jersey, Defendants-Appellants. EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES, Plaintiff-Respondent, v. Charles R. HOWELL, Commissioner of Banking and Insurance of the State of New Jersey, Aaron K. Neeld, Director of the Division of Taxation of the State of New Jersey, and Intervenor, State of New Jersey, Defendants-Appellants.
• Court: New Jersey Supreme Court

Page 116

29 N.J. 116

148 A.2d 145

PRUDENTIAL INSURANCE COMPANY OF AMERICA and Mutual Benefit

Life Insurance Company, Plaintiffs-Respondents, v. Charles R. HOWELL, Commissioner of Banking and Insurance of

the State of New Jersey, Aaron K. Neeld, Director of the

Division of Taxation of the State of New Jersey, and

Intervenor, State of New Jersey, Defendants-Appellants.

EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES, Plaintiff-Respondent, v. Charles R. HOWELL, Commissioner of Banking and Insurance of

the State of New Jersey, Aaron K. Neeld, Director of the

Division of Taxation of the State of New Jersey, and

Intervenor, State of New Jersey, Defendants-Appellants.

No. A--61.

Supreme Court of New Jersey.

Argued Jan. 5, 1959.

Decided Feb. 2, 1959.

David M. Satz, Jr., Deputy Atty. Gen., argued the cause for defendants and intervenor-appellants (David D. Furman, Atty. Gen., attorney).

Edward J. O'Mara, Jersey City, argued the cause for plaintiffs-respondents (O'Mara, Schumann, Davis & Lynch, Jersey City, attorneys; Sylvester C. Smith, Jr., Newark and James A. Hession, Jersey City, of counsel).

The opinion of the court was delivered by

BURLING, J.

These are consolidated actions instituted in the Superior Court, Law Division, for declaratory judgments, brought by plaintiff insurance companies against the Commissioner of Banking and Insurance and the Director of the Division of Taxation, and seeking a judgment declaring that certain payments made by plaintiffs to holders of annuity contracts are deductible from taxable considerations under N.J.S.A. 54:18A--5. The State of New Jersey was granted leave to intervene and filed counterclaims for back taxes and interest against each of the plaintiffs. The Superior Court, Law Division entered the judgment sought by plaintiffs and dismissed the counterclaims. The defendants and the intervenor prosecuted an appeal to the Superior Court, Appellate Division. While the cause was pending there, motion for direct certification, pursuant to R.R. 1:10--1A, was made by defendants and granted.

Pursuant to N.J.S.A. 54:18A--3, life insurance companies doing business in this State are required to pay a 2% Tax on 'taxable premiums collected' by them under all insurance policies issued on New Jersey residents and a 1% Tax on the 'taxable considerations collected' under annuity contracts on such residents.

N.J.S.A. 54:18A--5 defines these terms as follows:

'* * * taxable premiums and taxable considerations, as specified in section three of this act, are hereby defined to be gross contract premiums and gross considerations, less the sum of the following:

'(a) Premiums received for reinsurance assumed and premiums or considerations (but excluding cash surrender values) returned on policies or contracts,

'(b) Dividends paid in cash, used by policyholders in payment of renewal premiums, or left on deposit with the company, and

'(c) Discount on premiums paid in advance.'

The question at issue is whether N.J.S.A. 54:18A--5(a) permits a deduction as 'considerations returned * * * on contracts,' sums returned by the companies to holders of group and individual annuity contracts under the following circumstances:

Group Annuity Contracts

(a) Upon termination of employment of an employee prior to the commencement of annuity payments.

(b) Upon the death of an employee prior to the commencement of annuity payments.

(c) Upon the cancellation of the contract by the employer.

Individual Annuity Contracts

(a) Upon the death of a prospective annuitant prior to the commencement of annuity payments.

(b) Upon the cancellation of the contract by the prospective annuitant prior to the commencement of annuity payments.

Since the effective date of the Tax Act, 1945, plaintiffs have deducted from the amount of gross considerations collected under annuity contracts on residents of this State, all benefits returned by them to policyholders under the above listed circumstances during the years 1944 to 1955, inclusive, with the exception of Mutual and Prudential which did not, during the period, deduct benefits returned under individual annuity contracts in instances of withdrawal.

During the period in question plaintiffs filed annual reports with the Commissioner of Banking and Insurance on or before the first day of March in each year for the years 1945 to 1956, inclusive, as required by N.J.S.A. 54:18A--8, claiming the aforesaid deductions. After receipt of such annual report, the Commissioner is required on or before the first day of May each year, to ascertain and to report to the Director of the Division of Taxation, all facts necessary to enable the Director to fix the amount of tax payable by plaintiffs. N.J.S.A. 54:18A--8.

None of the reports, so filed by plaintiffs, was questioned or objected to by the Commissioner or Director. Taxes billed by the Director were paid by plaintiffs when due in each year.

In 1957 and prior to the institution of suit the Commissioner and Director asserted that under N.J.S.A. 54:18A--5(a) the sums deducted under the aforementioned circumstances from the amount of gross considerations by plaintiffs in their earlier annual reports were not 'considerations returned' within the meaning of the statute, but rather were 'cash surrender values' and hence not deductible, and that similar deductions would not be permissible in the annual report due March 1, 1957.

Plaintiffs on February 2, 1957 filed the instant consolidated actions under N.J.S. 2A:16--50 et seq., N.J.S.A., seeking a declaratory judgment as to the meaning of the statutory provision (N.J.S.A. 54:18A--5(a)) permitting deduction of 'premiums or considerations (but excluding cash surrender values)' returned on policies or contracts as applied to moneys paid to policyholders of group and individual annuity contracts under the previously outlined circumstances.

The State of New Jersey as intervening defendant filed counterclaims demanding judgment for additional taxes on the sums so deducted for the years 1944 to 1955, inclusive, together with interest and costs.

The Superior Court, Law Division, Judge Lane, entered a judgment construing the statute favorably to plaintiffs' position and dismissing the counterclaims.

Attention should first be focused upon the meaning of 'cash surrender value' as utilized in N.J.S.A. 54:18A--5(a). It is the position of the plaintiffs, and the trial court so found as a fact, that the term 'cash surrender value' is a technical term in the insurance industry and has reference only to policies of life insurance and has no application whatever to payments made under annuity contracts.

The asserted technical meaning stems in part, at least, from the basic difference between life insurance policies and annuity contracts. The risks assumed under life insurance policies and under annuity contracts are diametric opposites. Life insurance involves the traditional elements of insurance, I.e., shifting of risk of loss and distribution of risk of loss over a broad base. Annuity contracts, on the other hand, are basically investments. The fundamental distinction is aptly set forth in 1 Appleman, Insurance Law and Practice, § 83, p. 76 (1941), as follows:

'Ordinarily, it is recognized, even by laymen, that contracts of life insurance and of annuity are distinctly different. One involves payments of stated amounts known as premiums, by the insured over a period of years in return for which the insurer creates an immediate estate in a fixed amount in the event of his death while in good standing. * * * There is an immediate hazard of loss thrown upon the insurer, with the required performance by the insured of certain obligations at designated intervals of time.

'An annuity contract is almost diametrically opposed to this. The person designated as the recipient is the person paying the money. He pays in a fixed sum at one time, in return for which the company must then perform a series of obligations over a period of years, at designated times. The hazard of loss is no longer upon the company but upon the recipient who may die before any benefits are received. Instead of creating an immediate estate for the benefit of others, he has reduced his immediate estate in favor of future contingent income. The positions are almost exactly reversed. Annuity contracts must, therefore, be recognized as investments rather than as insurance.'

The courts have often had occasion to refer to these basic differences for purposes of estate and inheritance taxes, and have found them controlling in that sphere, see e.g., Cruthers v. Neeld, 14 N.J. 497, 103 A.2d 153 (1954); Central Hanover Bank & Trust Co. v. Martin, 129 N.J.Eq. 186, 18 A.2d 45 (Prerog.1941), affirmed 127 N.J.L. 468, 23 A.2d 284 (Sup.Ct.1942), affirmed 129 N.J.L. 127, 28 A.2d 174 (E. & A.1942), affirmed Central Hanover Bank & Trust Co. v. Kelly, 319 U.S. 94, 63 S.Ct. 945, 87 L.Ed. 1282 (1943); Hagy v. Kelly, 135 N.J.Eq. 436, 39 A.2d 386 (Prerog.1944); Helvering v. Le Gierse, 312 U.S. 531, 61 S.Ct. 646, 85 L.Ed. 996 (1941).

Bearing in mind the dichotomy between the two types of contracts, it is not strange that a technically descriptive term such as 'cash surrender value' would not be carried over from one type of contract to another within the trade. We concur in the factual finding of the trial court, as testified to by plaintiffs' experts, that within the insurance business 'cash surrender value' has a technical meaning, I.e., a refund of the accumulated reserve (the excess of net level premiums over the cost of insuring the policyholder for the time the policy was in force with, in some instances, an added surrender charge) plus interest, applicable only to policies of life insurance. The finding that the term 'cash surrender value' has in fact the technical and limited meaning in the insurance business contended for by the plaintiffs is buttressed by an exhibit introduced in evidence which is a blank form of annual statement...