Union Mut. Life Ins. Co. v. United States
Citation | 420 F. Supp. 1181 |
Decision Date | 14 September 1976 |
Docket Number | Civ. No. 74-112-SD. |
Parties | UNION MUTUAL LIFE INSURANCE COMPANY, a Mutual Life Insurance Company organized under the laws of the State of Maine, and having its principal office in Portland, County of Cumberland, State of Maine, Plaintiff, v. UNITED STATES of America, Defendant. |
Court | U.S. District Court — District of Maine |
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Bruce A. Coggeshall, William C. Smith, James F. Keenan, Union Mut. Life Ins. Co., Portland, Maine, for plaintiff.
Peter Mills, U. S. Atty., Portland, Maine, Steven Z. Kaplan, Dept. of Justice, Tax Div., Washington, D. C., for defendant.
This is a suit for refund of some $535,946.24 federal income taxes and interest alleged to have been erroneously assessed to and collected from plaintiff for the calendar years 1958 through 1968. Plaintiff (the taxpayer) is a mutual life insurance company incorporated under the laws of the State of Maine and having its principal office at Portland. It is subject to taxation under Sections 801-820 of the Internal Revenue Code of 1954, as amended (the Code), 26 U.S.C. §§ 801-820 (1970), which sections were added to the Code by the Life Insurance Company Income Tax Act of 1959, 73 Stat. 112 (the 1959 Act).1 It is stipulated that the taxpayer has complied with procedures governing exhaustion of its administrative remedies and that it has properly invoked the jurisdiction of this Court under 28 U.S.C. § 1346(a)(1970). By its amended complaint, the taxpayer has presented in six counts six distinct and separate challenges to determinations affecting the taxpayer's federal income tax liability made by the Commissioner of Internal Revenue. In addition, the United States has raised as a counterclaim a seventh issue as grounds for an offsetting adjustment against any recovery by the taxpayer. All seven issues presented arise under the 1959 Act.
The action has been tried to the Court, without a jury, and has been fully briefed and argued by counsel. The following opinion contains the Court's findings of fact and conclusions of law as required by Fed.R. Civ.P. 52(a).
A description of the purposes and framework of the 1959 Act is needed at the outset to set the context of the issues presented by this action.
The purpose of the 1959 Act was to come to grips with certain difficulties inherent in the income taxation of life insurance companies. The two principal difficulties identified by Congress were (1) the need to determine what portion of a company's investment income is properly allocable to reserves which the company must hold for the purpose of meeting the company's future obligations to policyholders, and what portion is properly considered income taxable to the company and (2) the problem of calculating underwriting income on a yearly, as opposed to a long-term basis. See S.Rep. No. 291, 86th Cong., 1st Sess., 1959 U.S.Code & Ad.News 1577-82. The first step in Congress' approach to these difficulties was to decide that a life insurance company's taxable income would be calculated in three distinct parts or "phases." Id. at 1576. In Phase I the taxable portion of the company's investment income — its "taxable investment income" — is computed. Sections 804-806. In Phase II the company's gain (or loss) from operations — its "underwriting gain" — is computed. Sections 809-812. In Phase III the company's taxable income owing to certain distributions to stockholders is computed. Section 815.2 Once each of these amounts has been computed, the company's taxable income is then computed under Section 802(b) to equal the sum of (1) the lesser of Phase I or Phase II income; (2) 50% of the excess, if any, of Phase II income over Phase I income; and (3) Phase III taxable income, if any. The sum thus calculated — the company's "life insurance company taxable income" — is then taxed at the normal corporate rate. Sections 802(a), 11.
The issues presented in the instant case directly concern only Phase I of the overall computation, that is, the computation of the company's taxable investment income. The purpose of Phase I, simply stated, is to divide the company's investment income into two parts, that portion which is allocable to reserves held to meet the company's obligations to policyholders, which is not taxed; and that portion which is available to the company for other purposes, which is taxed. The Phase I computation proceeds as follows:
This process is well illustrated by the following example drawn from the Senate Finance Committee's report on the 1959 Act, S.Rep. No. 291, supra, 1959 U.S.Code Cong. & Ad.News 1593-94:
Each of the seven issues presented in this action by the six counts of the amended complaint and the counterclaim relates to one or more of the six steps of the Phase I computations:
1. Count I poses the question whether certain mortgage escrow accounts are "assets" of the taxpayer within the meaning of Section 805(b)(4). See Step (2).
2. Count II poses the question whether the taxpayer must include in its gross investment income "unearned interest" on loans made against the cash surrender value of policies issued by it. See Section 804(b)(1)(A); Step (1).
3. Count III poses the question whether the taxpayer may deduct from gross investment income certain expenses incurred in the process of investigating possible real estate investment opportunities. See Section 804(c)(1); Step (1).
4. Counts IV through VI pose questions regarding whether the taxpayer may include certain...
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