Opinion ID: 316607
Heading Depth: 1
Heading Rank: 1

Heading: Accrual of the Gross Amount

Text: 8 The company first contends that it should not have been required to accrue the gross amount of deferred and uncollected premiums, despite our apparent holding to the contrary in Western National Life. In distinguishing that case, the company asserts that it involved 'only the question of whether gross deferred and uncollected premiums were assets under the Phase I 6 computation. The Western National Life case did not involve, and, therefore, this Court did not have before it, the question of whether gross deferred and uncollected premiums are includable in premium income under the Phase II 7 computation.' 9 It is true that the only contested issue in Western National Life was the accrual of gross deferred and uncollected premiums for purposes of the Phase I calculation. Nevertheless, the case is strongly suggestive that gross deferred and uncollected premiums should be accrued for all tax purposes. Although not strictly bound by that suggestion, we find it persuasive and adopt it. 10 Western National Life was a Phase I taxpayer, in the sense that its taxable investment income was taken into account in determining its taxable income under 802(b). By the terms of that section, the taxable investment income is taken into account only if it is less than or equal to the gain from operations. 802(b)(1). In such a case, the company's taxable income includes the Phase I taxable investment income and one-half of the excess of the Phase II gain from operations over the Phase I taxable investment income. In Western National Life, the Commissioner chose to attack the handling of deferred and uncollected premiums only under the Phase I computation. No doubt he did so because Western National had already accrued the gross amount for the Phase II calculation. Western National Life Insurance Co. v. Commissioner of Internal Revenue, supra, 432 F.2d at 302. In upholding the Commissioner's approach, the court explicitly approved the reasoning of the Seventh Circuit in Franklin Life and the Fourth Circuit in Jefferson Standard Life, both of which involved the Phase II computations. 11 It would be highly inconsistent to require accrual of the gross deferred and uncollected premiums under Phase I but only the net under Phase II. This inconsistency would be particularly glaring in cases in which the company's gain from operations exceeds its taxable investment income, since overall taxable income in those cases includes both Phase I and Phase II elements. This would add unnecessary complexity to an already complex tax formula. Great Commonwealth offers no justification for this procedure, and we certainly perceive none. Therefore, the district court was correct in requiring the accrual of the gross deferred and uncollected premiums.