Reserve Loan Life Insurance Co. v. Commissioner of Internal Revenue
| Citation | 18 BTA 359 |
| Decision Date | 29 November 1929 |
| Docket Number | 29554,32965.,Docket No. 21489 |
| Parties | RESERVE LOAN LIFE INSURANCE CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
Frank G. West, Esq., for the petitioner.
Arthur Carnduff, Esq., for the respondent.
These proceedings, which were consolidated for hearing and decision, are for the redetermination of deficiencies in income taxes as follows:
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Docket No. | Year | Deficiency
-------------------------------------------|-------|------------
29554 ____________________________________ | 1923 | $1,509.01
21489 ____________________________________ | 1924 | 2,630.13
| 1925 | 21.78
32965 ____________________________________ | 1926 | 948.43
| |
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The matters in controversy are, (1) the deductibility of the following amounts representing reserves to cover liability on outstanding coupons attached to "guaranteed premium reduction policies":
1923 ______________________________________ $11,254.58
1924 ______________________________________ 12,898.91
1925 ______________________________________ 14,437.72
1926 ______________________________________ 7,586.07
(2) As an alternative to (1), the deductibility of the following amounts representing interest paid or accrued within the taxable years on matured coupons attached to "guaranteed premium reduction policies":
1923 ______________________________________ $36,430.11
1924 ______________________________________ 44,235.11
1925 ______________________________________ 52,189.92
1926 ______________________________________ 60,430.73
(3) The action of the respondent in reducing the amount of the 4 per cent of the mean of the reserve funds required by law by the following amounts representing interest received on the tax-exempt securities:
1923 _______________________________________ $8,408.32
1924 _______________________________________ 6,668.92
1925 _______________________________________ 5,216.66
1926 _______________________________________ 59,626.20
(4) The action of the respondent in including in taxable income the following amounts representing accrued and unpaid interest on loans on mortgages on farms to which the petitioner took title:
1924 _______________________________________ $220.50
1925 _______________________________________ 2,638.41
1926 _______________________________________ 17,043.09
(5) The action of the respondent in eliminating from gross income for 1924 the amount of $3,000 representing the rental value of property occupied by the petitioner for home office purposes and eliminating from deductions the amount of $5,642.15 for taxes paid and other real estate expenses.
FINDINGS OF FACT.
The petitioner is a life insurance corporation organized and existing under the laws of Indiana. It was incorporated in 1909. It is a stock company and not a mutual company.
The petitioner had outstanding during the years here involved certain policies commonly known as "guaranteed premium reduction policies," to which were attached numbered coupons, each subsequent coupon being for a larger amount than the preceding one. The coupons were all alike except for the number, amount and date of payment. The following is a typical coupon:
On or after Feb. 5, 1929
RESERVE LOAN LIFE INSURANCE CO
of Indianapolis, Indiana
Will pay to the order of the insured under Policy No. Sample
14
90
Ninety and ___________________________________________________ ___ Dollars
100
Provided all premium due on said policy up to and including said date have
been paid
(Signed) G. L. STAYMAN
$90.90 Secretary
Payable at its Home Office
The policyholder had the following options with respect to the coupons: (1) Receive in cash the coupons as they became due; (2) apply the amount of the coupon to the reduction of the premiums, if any; (3) convert the coupons, as they became due, into paid-up nonparticipating insurance; and (4) if the coupons were not used when they became due, the petitioner would allow 3½ per cent interest thereon, compounded annually, so long as the policy should be kept in force by the payment of the required premiums. The policies also provided that the coupons with accrued interest should be withdrawable on demand and that should the policy mature by reason of the death of the insured, all coupons and interest accumulated thereon should be paid in addition to the face of the policy.
The following ruling was issued by the Commissioner of Insurance of the State of Indiana on January 22, 1923:
To Indiana Life Insurance Companies:
You are hereby advised of the following ruling of this Department, effective on and after January 1, 1923.
The reserve deposit requirement of the Indiana Statutes shall be construed as follows: net reserve, paid-for basis, plus the extra reserve for disability and double indemnity benefits, plus the present value of supplementary contracts involving and not involving life contingencies, plus the present value of amounts incurred, but not yet due, for disability benefits, plus dividends and coupons left with the company to accumulate at interest and accrued interest thereon.
As an offset to excess liability occurring in the above, there shall be deducted from the above total, the net amount of uncollected and deferred premiums, less the excess of premium notes, policy loans and other policy assets, over net value on individual policies.
Very truly yours (Signed) T. S. McMURRAY, Jr. Commissioner.
The amounts the petitioner had on deposit with the Insurance Commissioner of Indiana among other reserves to cover the liability on outstanding coupons on "guaranteed premium reduction policies," the mean of the reserves on account thereof and 4 per cent of the mean of such reserves, were as follows:
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| Amounts on deposit | |
|----------------------------| Mean of | 4 per cent
Year | Beginning | End of year | reserves | of mean of
| of year | | | reserves
--------------------------|--------------|-------------|-------------|-----------
1923 ____________________ | $260,879.60 | $301,849.89 | $281,363.93 | $11,254.58
1924 ____________________ | 301,849.89 | 343,095.28 | 322,472.63 | 12,898.91
1925 ____________________ | 343,095.28 | 378,790.80 | 360,943.04 | 14,437.72
| | | |
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In determining the deficiencies for 1923, 1924 and 1925, the respondent eliminated as deductions the 4 per cent of the mean of reserves as shown above for the respective years. In determining the deficiency for 1926 the respondent diminished by $7,586.07, the excess of 4 per cent of the mean reserve fund on account of the reserves to cover liability on outstanding coupons on "guaranteed premium reduction policies" as shown on line 6 of Schedule A of the petitioner's income-tax return for that year.
The petitioner paid interest to holders of coupon policies and credited to holders of such policies for interest on outstanding coupons as follows:
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Year | Interest | Interest
| paid | credited
------------------------------------------|----------|------------
1923 ____________________________________ | $904.97 | $35,525.14
1924 ____________________________________ | 1,166.45 | 43,068.66
1925 ____________________________________ | 1,870.44 | 50,319.48
1926 ____________________________________ | 1,921.93 | 58,508.80
| |
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The petitioner received interest on its tax-exempt securities as follows:
1923 ___________________________________________ $8,408.32
1924 ___________________________________________ 6,668.92
1925 ___________________________________________ 5,216.66
1926 ___________________________________________ 59,626.20
In determining the taxable income of the petitioner for the respective years the foregoing amounts of tax-exempt interest were not deducted. In determining the deficiencies for the years here involved, the respondent reduced the amount of 4 per cent of the mean of reserve funds by the amount of the exempt interest received during the respective years.
At the commencement of 1924 the petitioner occupied as its home office a building owned by it in Indianapolis, Ind. This building was vacated on April 1, 1924, and razed for the purpose of erecting a new home office building. At the beginning of 1924 the home office property was carried on the books of the petitioner at $196,980. Four per cent of such book value is $7,879.20. In 1924 the petitioner received rents from tenants of its home office building in the amount of $20 and received as rents from tenants occupying other property the amount of $353.81. The petitioner charged itself with a rental of its home...
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