Source: https://supreme.justia.com/cases/federal/us/288/269/
Timestamp: 2019-04-25 03:52:53+00:00

Document:
1. Reenactment of a provision of a revenue act held a legislative adoption of the construction that had been placed upon it in administration by the Treasury Department. P. 288 U. S. 273.
2. Section 245(8) of the Revenue Act of 1926, applicable to Life Insurance Companies (which make their returns only on the cash basis) permits deduction from gross income of "[a]ll interest paid or accrued within the taxable year" on a company's indebtedness, with a certain exception. Held that interest accrued on dividends held for policyholders, but unpaid, is not deductible. Pp. 288 U. S. 271, 288 U. S. 275.
3. The general rule against accounting for and reporting income partly on the accrual and partly on the cash basis should apply to insurance companies; being required to treat interest received on the cash basis, they ought not to have the privilege of treating on the other basis the interest that they owe. P. 288 U. S. 273.
75 Ct.Cls. 117, 59 F.2d 116, affirmed.
Certiorari, 287 U.S. 591, to review a judgment rejecting a claim to recover money paid as income taxes.
the Revenue Act of 1926, [Footnote 1] to deduct from its gross income, as interest paid, the amount of interest credited to its policyholders during the taxable year but not withdrawn by them.
Petitioner agrees to repay a portion of its receipts to policyholders in the form of dividends. The policies provide that these dividends, when declared, may at the option of the insured by withdrawn in cash, applied as premium payments, or allowed to remain on deposit with the company at interest. If the last alternative be chosen, the dividends and interest accumulate, interest being added to the accumulated sum at the end of each policy year. The dividends and all accrued interest thereon may be withdrawn at any time on demand. Of the total which became due policyholders in 1926 as interest on sums so left with the company, $544,964.40, the portion not withdrawn, was credited in appropriate amounts to the individual accounts of the policyholders during that year. In its tax return, the petitioner deducted as interest paid the amount so credited. Interest actually withdrawn during 1926 totaled $248,405.97, some of which was credited to the policyholders in that year, but the greater portion of which had accrued prior to 1926, and had been credited in the respective years of accrual. No deduction was taken for this sum. The Commissioner disallowed the claimed deduction, and allowed in lieu thereof the amount of interest actually withdrawn in 1926. The resulting additional tax was paid under protest, a claim for refund filed, and, the Commissioner having failed to act upon the claim, suit was brought in the Court of Claims to recover the amount. That court dismissed the petition, [Footnote 2] and we brought the case here by certiorari.
"All interest paid or accrued within the taxable year on its indebtedness, except on indebtedness incurred or continued to purchase or carry obligations or securities . . . the interest upon which is wholly exempt from taxation under this title."
"the terms 'paid or incurred' and 'paid or accrued' shall be construed according to the method of accounting upon the basis of which the net income is computed under § 953 or 984 (212 or 232). . . ."
The sections mentioned are those applicable to individuals and to corporations generally; neither deals with insurance companies, which, as above said, are treated exclusively in §§ 242 to 247, inclusive.
In the light of these provisions, the petitioner insists that insurance companies are forbidden by the terms of the statute to keep their accounts and make their returns by the accrual method, but must report on the cash basis.
Hence, it is claimed the words "paid or accrued," as applied to interest, cannot grant an option in the matter of returns, depending upon whether the insurance company keeps its accounts on a cash basis or on an accrual basis, as in the case of other taxpayers, since the company has no choice in this respect; that the word "accrued" cannot be read out of the statute or left without meaning or effect, and that the phrase is employed to describe and allow deduction of interest accrued on dividends left with the company.
"The deduction allowed by § 245(a)(8) for interest on indebtedness is the same as that allowed other corporations by § 234(a)(2) (see Arts. 561 and 121), but this deduction includes item 18 of the disbursement page of the annual statement of life companies to the extent that interest on dividends held on deposit and surrendered during the taxable year is included therein."
actually paid policyholders, whereas accrued interest credited and not withdrawn is shown in item 22 on page 5 of the standard form of report. Insurance companies have without exception complied with the regulation and taken a deduction only for interest paid. The right to deduct interest credited to policyholders but not withdrawn is now asserted for the first time.
The Congress, in the Revenue Acts of 1928 and 1932, reenacted § 245 without alteration. [Footnote 8] This action was taken with knowledge of the construction placed upon the section by the official charged with its administration. If the legislative body had considered the Treasury interpretation erroneous, it would have amended the section. Its failure so to do requires the conclusion that the regulation was not inconsistent with the intent of the statute (National Lead Co. v. United States, 252 U. S. 140, 252 U. S. 146; Poe v. Seaborn, 282 U. S. 101, 282 U. S. 116; McCaughn v. Hershey Chocolate Co., 283 U. S. 488, 283 U. S. 492; Costanzo v. Tillinghast, 287 U. S. 341), unless, perhaps, the language of the act is unambiguous and the regulation clearly inconsistent with it. Compare Louisville & N. R. Co. v. United States, 282 U. S. 740, 282 U. S. 757-758. The petitioner insists that the statute needs no interpretation, and its plain mandate should be enforced. But, on examination, the proper application of the section is not so clear as is claimed.
expenditures on a cash basis, or vice versa. Nor may they accrue a portion of income and deal with the remainder on a cash basis, nor take deductions partly on one and partly on the other basis. Congress, we think, did not intend to make an exception of insurance companies. If they are not allowed to account on an accrual basis for interest owed them, there is no reason for permitting them to treat interest owed by them on any different basis. The very paragraph (8) on which petitioner relies as defining interest credited but not paid, by the use of the word "accrued," recognizes that insurance companies may have indebtedness of other sorts, such as that arising from borrowings to carry securities. Since the company is required to treat interest received on a cash basis, it ought not have the privilege of accruing interest owed. That privilege must be accorded, if petitioner is right. We think the result would be unreasonable, and is not intended by the act.
"Income which is credited to the account of or set apart for a taxpayer and which may be drawn upon by him at any time is subject to tax for the year during which so credited or set apart, although not then actually reduced to possession. [Footnote 10]"
of them until actual receipt of the money. The constructive payment theory is, we think, untenable.
We conclude Congress did not intend, by the use of the word "accrued" in § 245(a)(8), to permit the deduction of interest on policy dividends credited but not paid during the taxable year.
75 Ct.Cls. 117, 59 F.2d 116.
Rev.Act 1921, §§ 242-247, 42 Stat. 261; Rev. Act 1924, §§ 242-247, 43 Stat. 288 and Rev.Act 1926, §§ 242-247, 44 Stat. 47; Rev.Act.1928, §§ 201-205, 45 Stat. 842; Rev.Act 1932, §§ 201-205, 47 Stat. 223.
Treasury Regulations 62, art. 685(3). See Regulations 65, Art. 685(3); Regulations 69, Art. 685(3).
Regulations 33 (1918 ed.) Arts. 126, 180; Regulations 45, Arts. 23, 1533.

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