UTAH HOME FIRE INSURANCE COMPANY v. COMMISSIONER OF INTERNAL REVENUE
| Decision Date | 29 September 1931 |
| Docket Number | 28942.,Docket No. 21673 |
| Citation | 24 BTA 225 |
| Parties | UTAH HOME FIRE INSURANCE COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
Benjamin H. Saunders, Esq., for the petitioner.
John D. Foley, Esq., for the respondent.
These proceedings, which were consolidated for hearing, involve the determination of petitioner's tax liability for the years 1921 and 1925, for which respondent has asserted deficiencies of $28,499.50, and $12,957.14, respectively. Petitioner alleges that respondent erred (a) in including in income for the year 1921 the sum of $115,832.74 of the net decrease in petitioner's "unearned premium reserve" for that year; (b) in including in income for the year 1925 the sum of $61,451.87 of the net decrease in petitioner's "unearned premium reserve" for that year. At the hearing petitioner amended its petition in Docket No. 28942 to affirmatively allege that section 246 of the Revenue Act of 1924 is unconstitutional if it be construed as permitting the inclusion in income, when released from reserve, of capital or surplus or tax-exempt items temporarily set aside into the reserve required by law.
FINDINGS OF FACT.
The petitioner is a Utah corporation, organized in 1886, having its principal office and place of business at Salt Lake City, Utah. It is engaged in the business of writing fire insurance.
For some time its business was confined within the States of Utah and Idaho, but after 1907 it extended its business until it was operating in some twenty-eight States.
As of October 1, 1919, petitioner entered into a contract of reinsurance with the Hartford Fire Insurance Company of Hartford, Conn., and, as a result, petitioner's business increased several fold.
Petitioner maintains on its books two classes of reserves. One is a reserve for unpaid losses and claims, which is set up after the books are closed for the year, the computation being based on the estimated amount required to settle outstanding and unpaid losses. The other is a reserve equivalent to the unearned premiums on insurance written during the year and is termed a "reinsurance reserve." This reserve is computed and adjusted once a year — at the end of the year, upon information furnished by the agencies and companies through which it does business. In case of business written in the home office the computation is made from information furnished by the general agents. It is petitioner's practice to compute its reinsurance reserve after first adjusting and providing for all operating expenses and the reserve for unpaid losses and claims. On January 28, 1921, petitioner received from the Hartford Company the information relative to insurance written under its contract with that company which was necessary to compute its reinsurance reserve as of December 31, 1920.
Prior to 1921 and in anticipation of the expansion of its business to result from its contract of reinsurance with the Hartford Company, petitioner had issued and sold additional capital stock to the amount of $100,000 par value, at a premium of $250,000, thereby creating additional capital and paid-in surplus of $350,000.
The annual statement of the petitioner for the year 1920 reflects increases or decreases in its surplus as follows:
The decrease in surplus for 1920 included reductions on account of charity, $163.50; dividends declared, $96,000; and a reduction on the books of the value of bonds and stocks in the amount of $227,312.28; amounting in the aggregate to $323,475.78. The remaining decrease in surplus in the amount of $60,786.39 is attributable to operation as follows:
Loss from underwriting, 1920 ___________________________________ $193,307.83
Taxable income from investments (net over expense)_ $77,475.09
Nontaxable income from dividends and interest _____ 55,046.35
__________ 132,521.44
___________
Loss attributable to operation ____________________________ 60,786.39
The condition of petitioner as shown by its annual statement as of December 31, 1920, was as follows:
The premiums written by petitioner during 1920 amounted to $1,322,399.38. Its unearned premiums as of December 31, 1919, amounted to $483,794.93; its unearned premiums as of December 31, 1920, amounted to $891,500.46; and the premiums earned during 1920 amounted to $914,693.85.
Petitioner's income from all sources for the year 1920 was $1,470,952.14, including $55,046.35 of nontaxable income. After charging up its operating expenses and setting up its estimated reserve for unpaid losses and claims there was income remaining in the amount of $346,919.14. The net addition which petitioner was required to make to its reinsurance reserve as of December 31, 1920, was $407,705.53. Its books disclosed therefore that its remaining income, excluding nontaxable income of $55,046.35, was $60,786.39 short of the amount required to make the necessary additions to its reserve. The sum of these two figures is $115,832.74, the amount which petitioner claims it transferred from surplus and nontaxable income in 1920 to its reserve and which is in controversy in the year 1921.
Petitioner's gross premiums allocable to business originating under the reinsurance contract with the Hartford Insurance Company amounted to $1,059,286.79 for the year 1920. Of this amount the Hartford Company withheld $370,750.38 to cover commissions and underwriting expenses, and $314,863.17 to cover losses and claims paid by it on account of business reinsured with the petitioner, and made a net cash remittance to petitioner of $373,673.24. In addition to the losses and claims thus paid directly by the Hartford Company, petitioner added the sum of $163,942.75 to its reserve for losses and unpaid claims at the close of 1920 to cover further liabilities incurred and allocated to its reinsurance risks under the Hartford contract.
The premiums written by petitioner during 1921 amounted to $347,028.53, its unearned premiums as of December 31, 1921, amounted to $447,544.18, and the premiums earned during 1921 amounted to $790,984.81.
The contract with the Hartford Fire Insurance Company was canceled as of July 1, 1921. All the business then in force thereunder was released by petitioner and turned back to the Hartford Company and the returned premiums were charged against the reinsurance reserve. The immediate effect of this transaction was to release the sum of $603,553.05 from the reinsurance reserve. The net decrease in petitioner's reinsurance reserve for the full year 1921 was $443,956.28.
On November 4, 1921, petitioner entered into a reinsurance contract with the Citizens Insurance Company of Missouri, with the result that its business was almost doubled in 1924.
The annual statement of petitioner for the year 1924 reflects increases or decreases in its...
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