Source: https://lexroll.com/288-u-s-269/
Timestamp: 2019-03-20 13:34:43
Document Index: 486343638

Matched Legal Cases: ['§ 1001', '§ 1002', '§ 1003', '§ 1004', '§ 1004', '§ 955', '§ 986', '§ 931']

288 U.S. 269 | LexRoll.com
U.S. Supreme Court Opinions > 1933 > 288 U.S. 269
The earlier Revenue Acts made no distinction, in the method of computing the tax, between insurance companies and other corporations. The act of 1921 and those subsequently adopted embodied special and separate provisions respecting such companies.3 In the act of 1926, with which we are here concerned, the applicable sections are 242 to 247, inclusive (26 USCA § 1001 note, and § 1002 et seq.), the first four dealing with life companies. Section 244 (26 USCA § 1003) defines gross income as the amount received during the taxable year from interest, dividends, and rents. Section 245 (26 USCA §§ 1004, 1005) defines net income as the gross income, less certain enumerated deductions. Subdivision (a), paragraph (8), 26 USCA § 1004(a)(8), permits deduction of: ‘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 chapter.’
The language of paragraph (8) with respect to interest paid or accrued on indebtedness is precisely the same as the employed with respect to deductions allowed to individuals by section 214(a)(2), 26 USCA § 955(a)(2)4 and to corporations by section 234(a)(2), 26 USCA § 986(a)(2).5 Section 200(d), 26 USCA § 931(d)6 enacts that ‘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 section 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 sections 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 government replies that prior to 1921 there was no statutory direction as to how insurance companies’ returns should be made; a regulation required them to be upon the cash basis; when new sections were inserted in the act of 1921 as to insurance companies, the phraseology with respect to interest deductions of individuals and corporations generally was lifted bodily out of the sections applicable to individuals and corporations and inserted in these new sections; as the act does not permit insurance companies to account on the accrual basis, only interest paid is deductible, and the term ‘accrued’ has no application. It further points to a regulation adopted immediately upon the passage of the act of 1921 and carried forward in the regulations under the Acts of 1924 and 1926. This regulation is:7
‘The deduction allowed by section 245(a)(8) for interest on indebtedness is the same as that allowed other corporations by section 234(a)(2) (see articles 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.’
The regulations of the Treasury under all the Revenue Acts since 1916 have required taxpayers to report on the cash or accrual basis, depending on which method was pursued in their accounting.9 Since the adoption of the Revenue Act of 1921, the requirement has been statutory. It is settled beyond cavil that taxpayers other than insurance companies may not accrue receipts and treat 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.
We are referred to a regulation which provides: ‘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.’10 It is argued that the regulation requires the policyholder to report interest credited to him as received in the year of credit. The conclusion drawn is that, if the credit is income to the insured, it must constitute a ‘constructive payment’ by the company. In this view, the transaction is said to come within the term ‘paid,’ and we may disregard the word ‘accrued.’ This regulation has, however, not been applied in any case where income has been credited to another by a taxpayer employing the cash receipts and disbursements method of accounting; and specifically it has not been invoked to require policyholders to report as income the dividends or interest credited to them in cases such as this. No tax is demanded 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 section 245(a)(8) to permit the deduction of interest on policy dividends credited but not paid during the taxable year.