Case Name: Equity Fire Insurance Co., Petitioner, v. Commissioner of Internal Revenue, Respondent
Court: United States Board of Tax Appeals
Jurisdiction: United States
Decision Date: 1927-07-08
Citations: 7 B.T.A. 618
Docket Number: Docket Nos. 9257, 14847
Parties: Equity Fire Insurance Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
Judges: 
Reporter: Reports of the United States Board of Tax Appeals
Volume: 7
Pages: 618–621

Head Matter:
Equity Fire Insurance Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
Docket Nos. 9257, 14847.
Promulgated July 8, 1927.
Henry J. Richardson, Esq., for the petitioner.
John D. Foley, Esq., for the respondent.

Opinion:
OPINION.
Littleton :
Petitioner claimed in its original petition that the Commissioner erred in computing its tax upon the accrual basis. The Commissioner followed the accrual method in his determination and no evidence was submitted by petitioner to show that it regularly employed a different method in keeping its books, or that the method used by the Commissioner did not clearly reflect income. The petitioner tried the case upon the theory that the loss in question was not sustained in 1918 upon the accrual method of accounting.
In these circumstances we have the situation where the petitioner, a fire insurance company, is on the accrual basis and has sustained a loss under a policy of reinsurance. The fire occurred and was reported in 1918, the loss was not resisted but, because of the time required to secure the necessary proof of loss, payment was not made by the original insurer to the insured, and, likewise, by the petitioner to the original insurer, until 1919. The further fact exists that the petitioner did not receive payment on account of its reinsured risk until some months later, but during 1919.
At the outset it should be noted that these proceedings do not involve the question of whether a reserve set up by a fire insurance company against unpaid losses is a reserve within the meaning of the provisions of the Revenue Act of 1918, permitting a deduction from gross income in the case of insurance companies, of the " net addition required by law to be made within the taxable year to reserve funds." Such a question was before the Supreme Court in the case of McCoach v. Insurance Co. of North America, 244 U. S. 585, and also in the case of United States v. Boston Insurance Co., 269 U. S. 197, wherein it was held that the additions to such a reserve are not deductible from gross income.
In denying such a deduction, the court was not passing on the question of when a loss is deductible.
In the Appeal of Retailers Fire Insurance Co., 3 B. T. A. 1186, the question here presented was before us and in disposing of the case, the Board said:
The question remains, however, whether the amount of the policy loss by fire' is to be taken as a deduction in 1920, when the fire occurred and liability under the policy arose, or in 1921, when the amount of the loss was adjusted and paid. Section 234 (a) (10) of the Revenue Act of 1918 allows as a deduction in the case of insurance companies "(b) the sums other than dividends paid within the taxable year on policy and annuity contracts." Section 200 provides:
The term "paid," for the purposes of the deductions and credits under this title, means " paid or accrued " or " paid or incurred," and 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 212.
*
After careful consideration of the decisions of the Supreme Court, the rulings of the Bureau of Internal Revenue, and the legislative history of the tax statutes as they affect this deduction, we are of the opinion that the taxpayer is entitled to deduct in 1920 the amount of $3,225.58 paid by it in January, 1921, in settlement of the fire losses which occurred in December, 1920, liability for which it appears to have recognized when it set up reserves on its books in December, 1920.
Prior to December 31, 1918, the Reciprocal Exchange recognized a liability as existing on account of fire. The evidence shows that during 1918 an insurance adjuster for the Reciprocal Exchange had partly completed the proof of loss claim and that at the close of 1918, the petitioner recognized the liability as existing when it rendered its report to the State of Missouri.
Petitioner seeks to distinguish its case from one of the foregoing type on the ground that the petitioner is a reinsurer of risks and, therefore, could suffer no loss until a loss was realized by the original insurer, meaning by " realized " when the loss is paid. In this we can not concur. A loss accrued to the Reciprocal Exchange when the fire occurred on December 12, 1918, and, since the petitioner had insured the Reciprocal Exchange against a part of this loss, ipso facto an obligation arose, a liability accrued at the same time, to the extent of its policy with the original insurer. In a similar manner a liability accrued to the third insurance company with which the petitioner had insured a part of its risk.
It is true that on December 12, 1918, and for some time thereafter the exact extent of the loss could not be determined, but this does not change the fact that a loss had been sustained and it was merely a matter of determining the quantum of the loss. In effect, the original insurer said to the insured immediately after the fire, " We recognize a loss has been sustained by you on your policy with us; when the exact amount has been determined, we will make payment to you," and similarly said to the petitioner, "We have become liable under the policy which the Salisbury Ice Co. holds with us and on which you are a reinsurer; as soon as the amount of the loss is determined, we will advise you to the extent of your liability." The petitioner recognized its liability for the loss to the extent that it had reinsured the Reciprocal Exchange. The liability for the amount in question accrued and was recognized by petitioner, the only thing remaining was to determine the extent of the loss.
In view of the foregoing, the Board is of the opinion that the losses here in question accrued in 1918 when the fires occurred and, therefore, are not deductible by the petitioner when paid in 1919.
Reviewed by the Board.
Judgment will he entered for the respondent.