Standard Life Insurance Co. of America v. Commissioner of Internal Revenue

• Decision Date: 23 July 1928
• Docket Number: 25842,29779.,Docket No. 12475
• Citation: 13 BTA 13
• Parties: STANDARD LIFE INSURANCE CO. OF AMERICA, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Board of Tax Appeals

13 B.T.A. 13 (1928)

STANDARD LIFE INSURANCE CO. OF AMERICA, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket Nos. 12475, 25842, 29779.

Board of Tax Appeals.

Promulgated July 23, 1928.

A. J. Barron, Esq., and Claris Adams, Esq., for the petitioner.

Alva C. Baird, Esq., for the respondent.

These proceedings, consolidated for the purpose of hearing and decision, involve deficiencies in income tax as follows:

                      1921 ______________________________________________ $1,133.11
                      1922 ______________________________________________  1,430.33
                      1923 ______________________________________________  1,568.49
                      1924 ______________________________________________  1,670.15
                

The deficiencies determined by the Commissioner for the above-mentioned years are in excess of the above-stated amounts but the petitioner concedes the correctness of the deficiencies except in the amounts stated. The assignments of error relating to the year 1921 are that the Commissioner erred in disallowing as deductions from gross income:

(1) Under section 245(a) (5) of the Revenue Act of 1921, $11,322.19 for investment expenses;

(2) Under section 245(a) (6), $2,008.89 for taxes paid upon capital stock; and

(3) Eight thousand dollars for other real estate expenses, which sum has been assigned by the petitioner to cover office and officer supervision of real estate owned by the petitioner.

The assignments of error for the years 1922, 1923, and 1924 are:

(4) That the Commissioner disallowed the deduction from gross income under section 245(a) (6) of the Revenue Acts of 1921 and 1924 of amounts paid by the petitioner to the Commonwealth of Pennsylvania for capital-stock taxes assessed by the Commonwealth against it; and

(5) That the Commissioner erred in his calculation as an allowable deduction under section 245(a) (2) of the Revenue Acts of 1921 and 1924 of the amount equal to the excess over interest exempt under section 245(a) (1) of 4 per centum of the mean of the reserve funds required by law and held by petitioner at the beginning and end of the taxable year; that he did not include in such reserve funds the petitioner's reserves for meeting its obligations on certain policies of life insurance known as its "Guaranteed Premium Reduction Policies" or "Guaranteed Premium Dividend Policies" where premium reduction credits, as evidenced by coupons attached to the said policies, had been left with the petitioner and allowed to accumulate in accordance with the provisions of the said policies.

FINDINGS OF FACT.

The petitioner is a Pennsylvania corporation engaged in the writing of insurance upon the lives of individuals and was incorporated in 1911. During the year 1921 and prior years it was licensed to do business under the laws of the Commonwealth of Pennsylvania. Since 1921 it has written policies in Ohio and Pennsylvania. It made Federal income-tax returns for the years 1921 to 1924 under the provisions of the Revenue Acts of 1921 and 1924. In its return for 1921 it deducted from gross income, under the heading "Investment Expenses," $7,000. In the audit of the petitioner's return the Commissioner disallowed the deduction of $1,322.19 of the amount and allowed a deduction of $5,677.81 for investment expenses. The difference in the figures arises wholly from the value assigned by the Commissioner to the petitioner's home office building. Petitioner carried the home office building upon its books of account at December 31, 1921, at $537,761.97. Petitioner purchased this building in 1917. From the time of purchase to the end of 1921, permanent improvements had been made in the building bringing the depreciated cost of same up to December 31, 1921, to $537,761.97. This item of real estate was carried on the books of the company at its net investment figure at that time of ($537,761.97 less $350,000) $187,761.97. The appraised value of the building at the end of 1921 was $798,427. The excess of the appraised value over the depreciated cost of the building to the petitioner on that date, $260,665.03, was carried in the petitioner's state report as market value of real estate over book value.

In its income-tax returns for 1921, 1922, 1923, and 1924, the petitioner deducted from gross income under section 245(a) (6) of the Revenue Acts of 1921 and 1924, amounts paid to the Commonwealth of Pennsylvania as capital-stock taxes as follows:

                      1921 _________________________________________ $1,647.89
                      1922 _________________________________________  1,668.86
                      1923 _________________________________________  1,718.53
                      1924 _________________________________________  1,734.28
                

The Commissioner disallowed these deductions in the determination of deficiencies.

Among the policies of life insurance issued by the petitioner is a form of policy known as "Guaranteed Premium Reduction Policy." Each of these policies is issued with a sheet of coupons attached, each coupon bearing a specific date and a specific value and providing that the petitioner will pay to the order of the insured under the policy, or to the order of the assignee if the policy is assigned, a reduction of the amount specified in the coupon provided all full annual premiums due on the policy up to and including the date of the coupon have been paid in cash. A specimen coupon attached to a sample policy introduced in evidence reads:

Guaranteed Reduction. On demand on or after Mar. 20, 1931. STANDARD LIFE INSURANCE COMPANY OF AMERICA Home Office Pittsburgh, Penna.

will pay to the order of the Insured under POLICY No. XXXXX (or to the order of the assignee, if said policy is assigned.)

A Reduction of FIFTY-EIGHT & 00/100 Dollars

provided all full annual premiums due on said policy up to and including said date have been paid in cash.

$58.00. PAYABLE AT ITS HOME OFFICE. JOHN C. HILL, Prest.

By the terms of the policy itself following the covenant of the company to pay the amount specified in the policy at the death of the insured to his beneficiary, it is stipulated that the insurance is granted for one year in consideration of the application made therefor and the payment in advance of the premium called for, the first year's insurance under the contract being stated to be preliminary term insurance. It is also stipulated that the contract will be renewed on like terms as a limited payment life guaranteed premium reduction policy by the payment of the premium called for in the policy on or before the first day of the second year and on each anniversary of the policy thereafter, until a stated number of full-year premiums, including the first, shall have been paid, or until the prior death of the insured. Among the benefits and privileges granted to the insured are the specific covenants of the petitioner covering the annual reductions of the premiums and the use which the insured may make of the coupons representing said reductions. Under these covenants, while the policy is kept in force by the payment of the premiums in cash, the company guarantees after the second year the annual reductions of premiums shall be as shown on the coupons attached to the policy and that said coupons may be used in several ways, namely, to reduce the succeeding year's premium; to purchase nonparticipating paid-up additions to the face of the policy; to reduce the number of premium payments; or they may be left with the company to accumulate with interest at 3½ per cent and may be withdrawn at any time or in the event of death they will be added to the principal sum payable to the insured under the policy. If the reductions are allowed to accumulate for the purpose of reducing the number of premium payments or to accumulate with interest, the policy becomes paid-up in a certain specified number of years, that is, it is changed from an ordinary life policy to a limited payment life policy.

Prior to 1912, the policies thus issued by the petitioner were designated "Guaranteed Dividend Policies," and the coupons annexed thereto called for a "dividend" of a stated amount. At the request of the Insurance Department of the Commonweath of Pennsylvania in 1912, the word "Dividend" was changed to "Reduction," the department having stated that such coupons were not dividend coupons but premium reduction coupons. Since then the policies have been designated "Guaranteed Premium Reduction Policies."

Under the requirements of the laws of the Commonwealth of Pennsylvania, the petitioner sets up and carries the reserves necessary to meet not only the mortality risk, but also the company's obligation to the insured who allows his premium reduction credits to remain with the company instead of demanding and receiving cash therefor as they mature. Not only are the reserves set up on the company's books to meet the company's liability on the premium reduction coupon policies with interest, but such reserve liabilities are reported each year in the annual statements which the company must file as required by law with the Insurance Department of the Commonwealth of Pennsylvania. These reserves were reported for the years 1921 to 1924, inclusive, on page 5, line 22, of the convention form of report used by the petitioner in making its reports to the Insurance Department. The reserves are reported in two items, one being the principal amount of the reserve fund necessary to enable the petitioner to meet any and all of the obligations recited above to the insured or his beneficiary where coupon reduction credits are not cashed, and the other being the accrued interest thereon.

The reserves carried by the petitioner for the purpose of enabling it to meet its obligations in respect of the premium reduction coupons at the beginning and close of the calendar years 1922 to 1924, were as follows:

                      December 31, 1921 __________________________ $229,626.69
                      December 31, 1922 __________________________  259,062.40
                      December 31, 1923 __________________________

...