Opinion ID: 2064965
Heading Depth: 1
Heading Rank: 6

Heading: credit against judgment for tax escrow account

Text: The appellants' final contention is that they should be given credit against the judgment for that part of the tax escrow account for $2,200,000 which, after final determination by the Internal Revenue Service, might be found not subject to claim for federal corporate income tax of Old Union. The sources of the escrow account were the following three items: (1) $1,187,000 refunded by the Internal Revenue Service on account of income tax paid by Old Union for 1972 and prior years. The refund was made because of a deduction taken on the final return of Old Union for the period January 1, 1973, to March 1, 1973 (the time when it ceased to do business), consisting of the policyholders' dividend of $8,300,000 which it is claimed is deductible by reason of specific provision of the Internal Revenue Code relating to mutual insurance companies. The deduction resulted in a loss carryback for the years 1970, 1971, and 1972, hence the refund. (2) A deferred income tax reserve of $629,000 for the $1,250,000 ceding commission (deferred acquisition cost), paid to Old Union in 1973 and shown on its final return for the short period, but as to which it is claimed income tax was not payable because of the dividend deduction. (3) A $393,258 reserve for taxes because of a return to income from previous deductions in the Protection Against Loss account (a reserve for losses permitted by the Internal Revenue Code). Whatever the merits of the tax arguments with the Internal Revenue Service, that part of the tax escrow account remaining after final settlement with the Internal Revenue Service was Old Union's property, having arisen either from a refund of past income tax, or reserves for taxes which were not in fact payable. Furthermore, the bulk reinsurance contract specifically provided that the amount remaining would be paid to the policyholders of Old Union. The argument of the appellants on this item is ludicrous and merits no further discussion. Other assignments of error made by the appellants have been considered and found to be unmeritorious. AFFIRMED.