Opinion ID: 1501659
Heading Depth: 1
Heading Rank: 2

Heading: Accumulated-Surplus Plan.

Text: Provisions applicable only to this form of policy. This Policy is issued upon the Accumulated-Surplus Plan, the particulars of which are as follows: I. The Accumulated-Surplus Period for this Policy shall be completed on the First day of July in the year nineteen hundred and Twenty-six. II. No distribution of Surplus shall be made upon this Policy unless the person whose life is hereby insured shall survive the completion of the said Accumulated-Surplus Period, and unless this Policy shall then be in force by the payment in cash, when due, of all the required premiums on this Policy up to the end of said period. III. All Surplus intermediately awarded to this Policy shall belong to and be retained by the Company until the completion of the Accumulated-Surplus Period, whereupon the aggregate of such Dividends of Surplus, as accumulated, shall become the property of the insured and be available under the Options hereinafter named. IV. Upon the completion of the Accumulated-Surplus Period, as above stated, provided this Policy shall then be in force by payment of premiums, as above specified, the insured shall have the following Options, viz.: First. To withdraw the Accumulated Surplus apportioned to this Policy by the Company, and to continue the Policy in force on the Ordinary Life Plan by payment of premiums. Or, Second. To withdraw in cash the full reserve by the American Three per cent. Table of Mortality, which will be Thirty-two Thousand Seven Hundred Fifty-eight & 00/100 Dollars, together with the Accumulated Surplus before mentioned, and thus terminate the contract. Or, Third. To surrender this Policy for a full paid Participating Life Policy for the amount that the said reserve and the said Accumulated Surplus together, used as a single premium, will purchase at the then age of the insured, at the present established rates of the Company; provided, however, that if such paid-up Policy shall exceed the sum originally insured by this Policy, satisfactory evidence of the continued good health of the insured must first be furnished to the Company. Or, Fourth. To apply the entire withdrawal value of the Policy, as per Second established Option above, to the purchase of a Life Annuity, at the rates of the Company, at the then age of the insured. Or, Fifth. To apply the Accumulated Surplus apportioned to this Policy to the purchase of an Annuity, to be applied to decrease the future payments required under this Policy. V. If the first option is selected and the Policy continued in force, it shall participate thereafter, annually, in all distributions of Surplus as made by the Company upon Policies of the same age and kind. It will be observed that, instead of being paid out annually, dividends under this type of policy accrue to the survivors of the group holding such policies who have kept them in force by the payment of premiums. The policy is therefore a semi-tontine policy. As dividends accrue upon this type of policy, interest in turn accrues upon the dividends at the usual rate. The accruals of dividends and interest are set up upon the books of the petitioner, but no distribution thereof may be made from surplus under the terms of the policy until the survivors of the group are ascertained at the completion of the tontine period. The policy provides that all surplus intermediately awarded to the policies belongs to and shall be retained by the petitioner until the end of the tontine period and that thereupon the aggregate of such Dividends of Surplus, as accumulated, shall become the property of the insured, and be available under the options set out in the policy. The Board of Tax Appeals refused to allow the petitioner to deduct from its gross income the interest accrued on the dividends over the tontine period. This interest, thus sought to be deducted, is in the sum of $181,764.13 for 1926 and in the sum of $10,117.18 for 1928. In this instance we do not have to deal with the exercise of any option under the policy. A question similar to that here presented was before the Board in the case of Lafayette Life Insurance Company v. Commissioner, 26 B.T.A. 946, and was decided unfavorably to the taxpayer. This decision of the Board was reversed by the Circuit Court of Appeals for the Seventh Circuit, 67 F.2d 209. The question was again determined unfavorably to the taxpayer in the case of Missouri State Life Insurance Company v. Commissioner, 29 B.T.A. 401. The Board's decision in this case was upheld by the Circuit Court of Appeals for the Eighth Circuit, the decision being reported in Missouri State Life Ins. Co. v. Helvering, 78 F.2d 778, 780. We have carefully considered the circumstances arising in the cited cases. In our opinion the ruling of the Circuit Court of Appeals for the Eighth Circuit upon this question was correct, and the principles there enunciated are applicable to the case at bar. Judge Sanborn, delivering the opinion of the court, stated: [5] The taxpayer issued a class of semi-tontine policies. Dividends were not to be paid upon these policies annually, but were to be accumulated. If the insured was living at the end of the twentieth policy year, he was to receive his proportion of the accumulated dividends. If he died prior to that time, his beneficiary received only the face of the policy. The dividends which the insured would have received had he lived until the end of the twentieth year went to swell the fund available to others of his class who would receive dividends. The taxpayer sought to take deductions for so much of the accumulated dividends paid to holders of such policies during 1928 and 1929 as represented interest, on the theory that this was interest paid upon an indebtedness of the taxpayer. The Commissioner refused to allow the deduction. In doing so, he was clearly correct. The liability of the taxpayer for the dividends was a contingent policy liability. To meet that liability for dividends when it matured, the taxpayer was required to maintain a reserve. The reserve was no doubt accumulated at a certain rate of interest each year, just as other reserves are accumulated. Until an insured reached his twentieth policy year and became entitled to receive the accumulated dividends, the liability of the insurer on that particular policy was not an indebtedness to the insured, but was in the nature of a reserve liability of the insurer. If, after the twentieth year, the insured elected to leave at interest with the insurer the share of the accumulated dividends to which the insured was then entitled, interest thereafter paid would be interest upon indebtedness. In view of our holding, it is unnecessary for us to pass on the applicability of the provisions of subsection (a) (4), § 203, of the Revenue Act of 1928, c. 852; 45 Stat. 791, 842 (26 U.S.C.A. 203 and note). We sustain the decision of the Board in disallowing the claim of the petitioner that the sums of $181,764.13 and $10,117.18 are interest upon indebtedness. In view of our opinion as heretofore stated in respect to interest paid out upon options exercised after the death of an insured under the Ordinary Life policy, we remand this case to the Board with instructions to redetermine the tax deficiencies of the taxpayer for the years in question in accordance with this opinion.