Document: 491 U.S. 244 109 S.Ct. 2408 105 L.Ed.2d 199 COLONIAL AMERICAN LIFE INSURANCE COMPANY, Petitionerv.COMMISSIONER OF INTERNAL REVENUE. No. 88-396. Argued April 18, 1989. Decided June 15, Syllabus Insurance companies commonly enter into reinsurance agreements, whereby the reinsurer pays primary insurer, or "ceding company," an up-front fee—a commission"—and agrees to assume ceding company's liabilities on reinsured policies in return for future income generated from and their associated reserve accounts. Under "assumption" agreement, steps shoes, becoming directly liable policyholders receiving all premiums directly. In contrast, under indemnity assumes no direct liability, instead reimbursing company a specified percentage of claims expenses attributable risks that have been insured like by insurance those risks. 1975 1976, petitioner entered four agreements life written Transport Life Company, company, agreeing pay commissions. Sections 801-820 Internal Revenue Code which relate companies—do not specifically address tax treatment On its returns years question, claimed deductions full amount Respondent Commissioner disallowed ground commissions had be capitalized amortized over useful 7-year period, but Tax Court reversed. The Appeals, turn, reversed, holding are currently deductible. It reasoned since they represent payments acquire asset within producing extends substantially beyond one year, must estimated asset. Held: Ceding paid agreement anticipated agreement. Pp. 249-260. (a) Such investment stream and, as such, should treated same manner involved assumption reinsurance, amortized. See 26 CFR § 1.817-4(d). This analogy is appropriate none differences between goes function purpose Whether liability policyholder way alters commissions' economic role. Less compelling petitioner's agents' incurred issuing insurance, deductible ordinary necessary business 809(d)(2). agent's commission setting administrative expense—akin salary other sales writing new policies—to remunerate third party who helps facilitate same, whereas payment sold rather than services. Even accepting were true, this would undermine basic character capital expenditures, would, at most, prove Congress decided carve out exception commissions, notwithstanding arguable expenses. will extend such expenditures where has so provided. 249-253. (b) No provision requires question They 809(d)(12). Nor does 818(a) compute taxes accordance with accounting procedures National Association Commissioners (NAIC) preparing annual statement, except when inconsistent accrual rules—authorize current deduction even though NAIC prescribes NAIC's practice rules, require Moreover, reading unduly expansive, it inconceivable intended delegate industry core policy determination whether expense outlay expense. also "return premiums, consideration arising ceded," 809(c)(1) permits exclude gross included base, thereby reducing taxable income. commissions—which up-front, one-time secure share bear resemblance premiums—fall well outside 809(c)(1)'s purpose, general definition premium small, residual category resemble but, because fact never really accrued nominally receives them, do fairly recipient. Petitioner's highly implausible unlikely subsumed major fine details including discussed 809(d). 253-260. 843 F.2d 201 (CA5 1988), affirmed. KENNEDY, J., delivered opinion Court, REHNQUIST, C.J., BRENNAN, WHITE, MARSHALL, SCALIA, JJ., joined. STEVENS, filed dissenting opinion, BLACKMUN O'CONNOR, joined, post, p. 260. Carolyn P. Chiechi, Washington, D.C., petitioner. Michael R. Dreeben, respondent. Justice KENNEDY Court. 1 arcane financially important before us insurer contract fully year tendered agreements. 2 * case involves workings industry. order spread reduce required reserves, these negotiated policies. return, 3 Reinsurance comes two types, reinsurance. shoes respect policy, assuming responsi ility maintain reserves against potential claims. thereafter becomes holders reinsured. 4 issue case, remains policyholders, continues collect premiums. policyholders. Instead, indemnify, reimburse, reinsured, turns 5 Both ordinarily fee, known commission," company.1 may deducted paid, underlying Petitioner writes reinsures life, accident, health insurance. reinsure blocks company. indemnify 76.6% Transport's block policies.2 contracted $680,000 pair $852,000 1976 addition, "finder's fee" $13,600 1975, parties agree subject 6 federal finder's fee. deductions, concluding fee period later stipulated seven years. then review agreed could payment. 7 Appeals Fifth Circuit (1988). fundamental principles taxation law, 8 To resolve conflict Courts Appeals,3 we granted certiorari. 488 980, 527, 102 559 II 9 initially battle analogies. prescribed Part I Subchapter L 1954, U.S.C. §§ (1970 ed. Supp. V). Given provisions specify explicit terms taken each argue allegedly analogous controlling. analogizes "agents' directly-written insurance." Brief 21. insurers 809(d)(12) Code, incorporates allowance "ordinary necessary" 162(a).4 argues effect Parties points out, stand relation another conventional policy: premium, reimburse event certain designated reasons just deduct policies, able expends business. 10 counters which, established, 1.817-4(d) "[T]here essentially difference," respondent argues, "between transaction transaction." 19-20. both cases, according respondent's analysis, represents right inco e Id., 18-19. 11 As parties' dispute makes clear, bears some formal functional similarities But salient comparison asserted analogues forms At level inquiry, more one. Although different ways, them go role play kinds transactions. only rational explanation $1,500,000 was investing earnings thus insurance; rather, part purchase price profits. 12 parallels hand, chiefly nominal. agent sale; akin salary, overhead. setting, owns selling, substantial "commission" induce created; payment, words, itself services.5 point illustrated risk-premium extending 1-year term exchange Not coincidentally, typically involve n. 1, supra. 13 Finally, if accept arguments about resemblances here expenditures. argument most proves We take upon ourselves firmly established requiring capitalization, provided extension.6 14 therefore stream. sort established. our cases long recognized amounts expended income-producing acquisition 263 V.); v. Idaho Power Co., 418 12, 94 2757, 2764, 41 535 (1974); Woodward Commissioner, 397 572, 575, 90 1302, 1305, 25 577 (1970); see Massey Motors, Inc. United States, 364 92, 104, 80 1411, 1418, 1592 (1960) (the capitalization rules "mak[e] meaningful allocation cost entailed use . periods contributes [income]"). Our resolves absent specific statutory indicating rule authorized deduction. offers three possible sources authorization. 15 consider first contention Code. That authorizes described 162(a). rely deducting agents. there distinction applies latter context well. argument, hook hangs submission receive insurers. 16 Were premise, logical source authority rejected efforts analogize necessarily reject claimed. section permit salaries costs, fall category. 17 relies consistent purposes rules. Standard & Accident Ins. 433 148, 158-159, 97 2523, 53 653 (1977). practices prescribe through 818(a), prescription. n place, think begs question. Treasury Regulations taxpayers amortize procuring intangible assets produce benefits year. Thus, 1.461-1(a)(2) Regulations, (1988), entitled "Taxpayer using method," provides "any expenditure results creation having close deductible, part, incurred."7 Since apply application inapposite properly characterized "expenditure year." justifies loops back rejected. 18 More important, rests expansive reference trump many precise careful substantive sections interpretation, immediate answered simple NAIC. Indeed, appears less immediately appear distinguish Patterson, Underwriting Income, 539 (R. Strain ed.1980). Yet common among amortized, regardless accorded accounting. suffices illustrate, interpretation too much. 19 remaining based difficult dismiss. computation gains operations, calculate several categories, "Premiums." Section somewhat complicated formula governing instructs account 20 "[t]he (including advance deposits, fees, assessments, contracts issued taxpayer) annuity supplementary thereto)." 21 From taxpayer subtract 22 ceded. Except returned ceded, fixed depends experience discretion management shall premiums." ed.). 23 sum identified clause minus excluded second earned figure added 809(b) (c), total subtracts any allowable result net gain loss basis bill. way, items subtracted contribute eventually reduction 24 contends allows either ways. qualify premiums" "premiums ceded." construing phrase premiums," Regulations. Title 1.809-4(a)(1)(ii) (1988) provides: "The 'return premiums' means credited depend management. includes refunded due cancellations erroneously computed Furthermore, ceded compress labyrinthine prevail encompassed ceded" regulatory "consideration ceded."8 27 cannot denied language relies, isolation, read authorize seeks. might loosely "arising of" "in parsed carefully, position dubious, background structure, untenable. 28 difficulty "returned " all. belong until naturally refers insuring reinsuring remit individual as, example, pursuant experience-rated refund clause, readjusts reflect unanticipated savings. 29 find snug fit th either. Unlike companies, reinsurers Therefore, plausible reinsurer, simply passing received obligated deliver indemnity-reinsurance "other consideration" phrase, while admittedly open ended, can quite sensible tagalong kind, broad catchall encompasses kind party. supported identical portion 809(c)(1), furnishes content consideration." refer incidental "advance [and] fees" 30 What closer augurs, broader examination structure confirms: sought 809(c)(1). fact, nothing calculations provision. ensure "premium income" base exactly what term. begins income, fine-tunes excluding otherwise considered come definition. Eighth written, "serves eliminate 'gross consideration' portions not, end, 'belong' turned shared agreement." Modern American Co. 830 110, 113-114 (1987) (footnote omitted). 31 fine-tuning mechanism exclusion phantom strict them. include, refunds; overcharge cancellation policy; pass reinsurer. S.Rep. 291, 86th Cong., 1st Sess., 39, 54 (1959). provision, There need delineation apart thought place. above examples, premiums; 32 note light intricate attention detail displayed throughout L. submission, conclude especially surprising given 809(c) entirety concerns income; separate subsection, incredible Congress, whisper, tucked away magnitude. III 33 concluded costs General provide asset, dictates contrary result. judgment 34 Affirmed. 35 whom O'CONNOR join, dissenting. 36 Charting one's course intricacies text hazardous. Intuitively, concludes constitutes produces intuition lead conclusion bring profits expenditure. everyone ante, 250.* 37 If begun analysis 809 ed.) regulations promulgated thereunder waiting after view respond provision—it merit taxpayer's position. distinguishes providing received. 256. confirm made purchases Treas.Reg. 1.817-4(d)(2)(ii)(B), 1.817-4(d)(2)(ii)(B) [by reinsurer] reinsurer's 1.809-4(a)(1)(ii), warrant Court's rulings alike purposes, 251, refunds constitute not. 257-258. transaction, netted initial literally "reinsuring company." Ante, 258. events, stated Judge Will's Seventh Merit 853 1435 cert. pending, 88-955, reverse Appeals. form risk-premium, yearly-renewable-term, much normal promises losses arise. structured actual transfer small cash. understand arrangement, touch types coinsurance, These coinsurance modified coinsurance. differ liabilities, estimate present value "reinsurance commission" equal establish support assumed; transfers generate. frequently proportion roughly commission, being very little money changes hands. So case: covering 70% 6.6% policies; designed actually $5,000. elected treat co nsurance permitted. 820 (1976 difference is, mercifully, legal significance case. Compare Prairie States 828 1222 (CA8 1987) (requiring capitalization), (CA7 1988) (permitting deduction). explicitly permitted historically, approved historic practice. 7, (1959); H.R.Rep. 98-432, 1428 (1984), U.S.Code Cong. Admin.News 1984, 697. suggests originally so, however, confuses seller. partial reimbursement seller pivotal, often assets. 19, 11. how breaks down interest For reason, STEVENS' suggestion, 261, n., receipt creates relevance Likewise, mean imply greater strictures confront today prescription equally cash-basis taxpayers. dictate questions save rare instances special applicable accrual-basis decline interpret "under method accounting," 818(a)(1), extent 1.809-4(a)(1)(iii) specifies Similarly, constituted purchaser should, least circumstances, create Yet, conceded oral Tr. Oral Arg. 20-21.

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