T.C. Memo. 2000-134

UNITED STATES TAX COURT

BEST LIFE ASSURANCE COMPANY OF CALIFORNIA, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 11579-96. Filed April 12, 2000. 

Held: Accrued unpaid losses on cancelable

accident and health insurance policies are not to be

treated as part of total reserves in the life insurance

company qualifying fraction, and petitioner therefore

qualifies as a “life insurance company” under sec.

816(a), I.R.C. Statements made in United States v.

Occidental Life Ins. Co., 385 F.2d 1 (9th Cir. 1967)

(the Court of Appeals to which an appeal herein would

lie), do not control our holding herein.

Michael R. Schlessinger and Michael A. Clark, for

petitioner.

Milton J. Carter, Jr., Gregory M. Hahn, and Keith G. Medleau,

for respondent.
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MEMORANDUM OPINION

SWIFT, Judge: For 1991 and 1992, respondent determined

deficiencies in petitioner's Federal income taxes of $369,255 and

$242,132, respectively.

Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the years in issue, and

all Rule references are to the Tax Court Rules of Practice and

Procedure.

After settlement of some issues, the issue for decision is

whether petitioner (Best Life), in computing under section 816(a)

the qualifying fraction for life insurance company tax treatment,

should treat accrued unpaid losses on cancelable accident and

health (CA&H) insurance policies as part of its total reserves.

Background

This case was submitted fully stipulated under Rule 122, and

the facts are not in dispute.

During the years in issue, Best Life operated as an

insurance company with its principal place of business located in

Irvine, California. Best Life insured the following types of

insurance risks: Individual ordinary life, cancelable group-term

life, and CA&H. 

Insurance companies are required by insurance regulators to

maintain certain reserves to assure payment of future claims. 

All 50 States have adopted model regulations and utilize annual
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statement forms (Annual Statements) promulgated by the National

Association of Insurance Commissioners (NAIC) to calculate the

amount and to report minimum reserves that insurance companies

are required to maintain with respect to their outstanding

individual and group health insurance policies. See, e.g., Cal.

Code Regs. tit. 10, secs. 2311-2315 (1999).

Since the 1930's, on December 31 of each year (the valuation

date), life and accident and health (LA&H) insurance companies

have been required under the above NAIC regulations to report on

the Annual Statements the amount of their particular obligations

either as “liabilities” or as “reserves”. 

Liabilities, as reflected on Exhibit 11 of the Annual

Statements, correspond to claims for which the insurance

companies are currently liable including estimates of claims that

as of the valuation date have accrued but that have not yet been

reported to the companies. 

Reserves, as reflected on Exhibits 8 and 9 of the Annual

Statements, correspond to claims (computed using recognized

mortality and morbidity tables) for which the insurance companies

as of the valuation date are expected to become liable some time

in the future. On the Annual Statements, liabilities correspond

to accrued claims, and reserves correspond to unaccrued claims.

For the years in issue, the following schedule reflects, as

indicated on its Annual Statements, the computation by Best Life
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of its accrued liabilities and of its unaccrued reserves for 1991

and 1992: 

 Reported on Annual Statements 1991 1992 

Accrued liabilities

 

Exhibit 11, CA&H/Medical $2,666,371 $2,494,121

========== ==========

Unaccrued reserves

Exhibit 8, Ordinary & Group-Term Life 1,669,727 2,089,797

Exhibit 9, CA&H/Disability 419,786 442,261

Total unaccrued reserves 2,089,513 2,532,058 

========== ==========

Discussion

Since 1921, Congress has enacted separate rules of taxation

for life insurance companies and nonlife insurance companies. 

Compare sections 801 through 818 with sections 831 through 835. 

Generally, insurance companies qualify as life insurance

companies and are entitled to the related special tax treatment

if more than 50 percent of their total reserves represent life

insurance company reserves as defined in section 816(a). Section

816, in pertinent part below, provides the following description

of the elements of the life insurance company qualifying 50-

percent fraction and of life insurance total reserves.

SEC. 816(a). Life Insurance Company Defined.-– For

purposes of this subtitle, the term “life insurance

company” means an insurance company which is engaged in

the business of issuing life insurance and annuity
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contracts (either separately or combined with accident

and health insurance), or noncancellable contracts of

health and accident insurance, if–-

(1) its life insurance reserves * * *, plus

(2) unearned premiums, and unpaid losses

(whether or not ascertained), on noncancellable

life, accident, or health policies not included in

life insurance reserves,

comprise more than 50 percent of its total reserves (as

defined in subsection (c)). * * *

* * * * * * *

(c) Total Reserves Defined.–-For purposes of

subsection (a), the term “total reserves” means–-

(1) life insurance reserves,

(2) unearned premiums, and unpaid losses

(whether or not ascertained), not included in life

insurance reserves, and

(3) all other insurance reserves required by 

law.

The equation below summarizes the statutory elements of

the section 816(a) life insurance company qualifying fraction: 

 Numerator Denominator Ratio 

 Life insurance reserves + Life insurance reserves + Percentage

Unpaid losses on noncancelable life, ÷ Unpaid losses + = of life

 health, and accident claims All other reserves insurance reserves

In their computations of total life insurance company

reserves, the parties agree that the only dispute herein involves

whether the term “unpaid losses” in the denominator of the life
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1 The following schedule reflects the parties' conflicting

computations herein of Best Life's life insurance company

qualifying fraction under section 816:

For 1991:

 Best Life: $1,669,727 ÷ 2,089,513 = 79.9% Life Reserves

Respondent: $1,669,727 ÷ 4,755,844 = 35.1% Life Reserves

For 1992:

 Best Life: $2,089,797 ÷ 2,532,058 = 82.5% Life Reserves

Respondent: $2,089,797 ÷ 5,026,179 = 41.6% Life Reserves

insurance company qualifying fraction includes accrued unpaid

losses on CA&H insurance policies.1 

Best Life argues that the term “unpaid losses” in section

816(c)(2) refers only to unaccrued unpaid losses corresponding to

the amounts reflected on Exhibits 8 and 9 of its Annual

Statements. Best Life argues that accrued unpaid losses reflect

current liabilities, not reserves in the NAIC Annual Statement

sense, and that they should not be included in the denominator of

the qualifying fraction as part of an insurance company's total

reserves. Accordingly, for 1991 and 1992, Best Life calculated

that it qualified as a life insurance company under section 816

and timely filed U.S. Life Insurance Company income tax returns

claiming life insurance company treatment and deductions under

section 806 in the amounts of $615,971 and $712,152,

respectively. 

On audit, respondent treated the accrued amounts (shown on

Exhibit 11 of Best Life's Annual Statements) as unpaid losses in
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the denominator of Best Life's life insurance company qualifying

fraction. Based thereon, respondent determined that Best Life

did not qualify as a life insurance company as defined under

section 816(a). Accordingly, respondent disallowed the claimed

life insurance company deductions under section 806. 

We recently decided this same issue in favor of another

insurance company in Central Reserve Life Corp. & Subs. v.

Commissioner, 113 T.C. 231 (1999), which followed the Court of

Appeals for the Seventh Circuit's 1992 opinion and analysis in

Harco Holdings, Inc. v. United States, 977 F.2d 1027, 1029 (7th

Cir. 1992), revg. 754 F. Supp. 130 (N.D. Ill. 1990). We follow

the holdings and the analyses set forth in those two opinions.

Therein, it is recognized that Congress promulgated sections

801 through 818 using the specialized language of the insurance

industry and that Congress generally intended the language of

sections 801 through 818 to be given the technical meaning used

by the insurance industry. See Harco Holdings, Inc. v. United

States, 977 F.2d at 1030; Central Natl. Life Ins. Co. v. United

States, 216 Ct. Cl. 290, 574 F.2d 1067, 1074 (1978) (“the

definitions combine the 'labyrinthine composition' of the tax law

with the 'mystic processes' in life insurance reserves; they were

not 'written for ordinary folk.'”)(fn. ref. omitted); Alinco Life

Ins. Co. v. United States, 178 Ct. Cl. 813, 373 F.2d 336, 352-353
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(1967); Central Reserve Life Corp. & Subs. v. Commissioner, supra

at 244. 

As we understand the history behind the life insurance

company qualifying fraction and the terms “unpaid losses” and

“reserves” in the LA&H industry, Congress considered and intended

that total reserves under section 816 include only “future,

unaccrued, and contingent amounts”. Harco Holdings, Inc. v.

United States, supra at 1031; Alinco Life Ins. Co. v. United

States, supra at 347-349; Commissioner v. Monarch Life Ins. Co.,

114 F.2d 314, 325 (1st Cir. 1940), affg. 38 B.T.A. 716 (1938). 

The Supreme Court has specifically held that, in the accident and

health insurance industry, unpaid losses constitute reserves only

as long as they are not accrued. See Helvering v. Oregon Mut.

Life Ins. Co., 311 U.S. 267, 271-272 (1940); Harco Holdings, Inc.

v. United States, supra.

Since the late 1930's, when NAIC first developed the

predecessors to current LA&H industry regulations and the Annual

Statement forms, the insurance industry and the Annual Statements

have consistently separated future policy claim reserves

(unaccrued unpaid losses on Exhibits 8 and 9) from accrued losses

(on Exhibit 11). Because the distinction between “reserves” and

“liabilities” has been present in LA&H accounting throughout the

relevant tax provisions, NAIC's treatment of accrued unpaid

losses on the Annual Statements represents an “authoritative
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interpretive guide” as to the item's treatment for Federal income

tax purposes. See Harco Holdings, Inc. v. United States, supra

at 1031; Central Reserve Life Corp. & Subs. v. Commissioner,

supra at 242. As explained in Harco Holdings, Inc. v. United

States, supra at 1033:

We do not accept the NAIC's treatment of unpaid losses

as the definitive answer to the question before us. 

Nevertheless, absent indications to the contrary, we

think it likely that Congress meant to enact a taxation

scheme that defines reserves and treats unpaid losses

as the NAIC does. The Annual Statement may not be

definitive, but it is an authoritative interpretive

guide to the meaning of the statute. [Fn. ref.

omitted.]

Congress also has mandated some measure of deference to NAIC

accounting principles by stating in section 811(a) that all

computations with regard to methods of accounting “shall be made

in a manner consistent with the manner required for purposes of

the annual statement approved by the [NAIC].” See also Harco

Holdings, Inc. v. United States, supra. 

We conclude that the term “unpaid losses” has acquired a

specialized meaning in the LA&H industry that includes only those

unpaid losses that represent actual reserves in the NAIC sense;

i.e., unaccrued unpaid losses. Accrued unpaid losses reflect

liabilities and are not to be included in the denominator of the

life insurance company qualifying fraction under section 816. 

See Harco Holdings, Inc. v. United States, supra; Central Natl.
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Life Ins. Co. v. Unites States, supra; Alinco Life Ins. Co. v.

United States, supra; Central Reserve Life Corp. & Subs. v.

Commissioner, supra. But see Prudential Ins. Co. v. United

States, 162 Ct. Cl. 55, 319 F.2d 161, 165-166 (1963). 

Respondent argues that since Congress did not expressly

distinguish between accrued and unaccrued unpaid losses, the

plain language of section 816 requires that all unpaid losses on

CA&H insurance policies (whether accrued or unaccrued) should be

included in the denominator of the life insurance company

qualifying fraction. Use by Congress of the word “unaccrued” in

section 816(b)(1)(B) does suggest that Congress knew how to

distinguish between accrued and unaccrued losses when it wanted

to, and, while respondent's plain meaning argument has some

appeal, we nevertheless recognize the historical context and the

specialized meaning in the LA&H industry of the terms “unpaid

losses” and “reserves”.

Respondent also argues that under the Golsen rule we should

defer to a statement made in United States v. Occidental Life

Ins. Co., 385 F.2d 1, 6 (9th Cir. 1967), by the Court of Appeals

for the Ninth Circuit (to which an appeal herein would lie) to

the effect that the term “unpaid losses” under former section 806

includes accrued unpaid losses. See Golsen v. Commissioner, 54

T.C. 742, 757 (1970), affd. 445 F.2d 985 (10th Cir. 1971).
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The Golsen rule, however, applies only where the relevant

Court of Appeals' decision is “squarely in point”:

We shall remain able to foster uniformity by giving

effect to our own views in cases appealable to courts

whose views have not yet been expressed, and, even where

the relevant Court of Appeals has already made its views

known, by explaining why we agree or disagree with the

precedent that we feel constrained to follow. [Id.

at 757.]

The Golsen rule does not apply where the precedent from the Court

of Appeals constitutes dicta or contains distinguishable facts or

law. See, e.g., Hefti v. Commissioner, 97 T.C. 180, 187 (1991)

(dictum not controlling), affd. 983 F.2d 868 (8th Cir. 1993);

Metzger Trust v. Commissioner, 76 T.C. 42, 72-74 (1981) (factual

distinctions render Golsen rule not squarely on point), affd. 693

F.2d 459 (5th Cir. 1982); Kueneman v. Commissioner, 68 T.C. 609,

612 n.4 (1977) (distinct legal question not governed by the

Golsen rule), affd. 628 F.2d 1196 (9th Cir. 1980). As we stated

in Lardas v. Commissioner, 99 T.C. 490, 493-495 (1992), the

Golsen rule only applies where the “clearly established” position

of a Court of Appeals signals “inevitable” reversal upon appeal.

In United States v. Occidental Life Ins. Co., supra, the

Court of Appeals for the Ninth Circuit analyzed the meaning of

the term “unpaid losses” under former section 806(c), a tax

deduction provision repealed in 1959. In that case, the parties

stipulated that unpaid losses in section 801 (now section 816)
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had the same meaning as unpaid losses in former section 806. The

Court of Appeals for the Ninth Circuit reached its ultimate

conclusion on the meaning of unpaid losses under former section

806 and construed the language of section 801 merely as support. 

Making clear its marginal reliance on its interpretation of the

language of section 801, the Court of Appeals for the Ninth

Circuit in Occidental Life Ins. Co. stated as follows:

Although an examination of section 801 along these

comparative lines is not required for a conclusion as

to the meaning of “unpaid losses” in section 806, our

interpretation of section 801 [now section 816] is

nevertheless persuasive in support of the result

which we reach. [United States v. Occidental Life

Ins. Co., supra at 5-6.]

The Court of Appeals for the Ninth Circuit has traditionally

accorded statements not necessary to its decision little

precedential weight. See, e.g., Export Group v. Reef Indus.,

Inc., 54 F.3d 1466, 1471-1472 (9th Cir. 1995) (“statements not

necessary to the decision” reflect dicta and not binding

precedent). The Court of Appeals for the Ninth Circuit's

statements and analysis in Occidental Life Ins. Co. do not

clearly establish a position on the meaning of the term “unpaid

losses” under current section 816 that signals to us an

inevitable reversal upon appeal. Therefore, the Golsen rule is

not applicable to our resolution of the issue in this case.
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We conclude that, for the years in issue, because its

accrued unpaid losses on CA&H insurance policies are not to be

included in total reserves under section 816(c)(2), Best Life

qualifies as a life insurance company under section 816(a) and is

to be allowed the claimed section 806 deductions. This reading

of section 816 conforms with the recent opinion of the Tax Court

and with the opinion of the Court of Appeals for the Seventh

Circuit that are directly on point and comports with the

insurance industry’s historical treatment of unpaid losses and

reserves.

To reflect the foregoing,

Decision will be entered

under Rule 155.