Opinion ID: 1506221
Heading Depth: 1
Heading Rank: 4

Heading: Accrued Interest on Loans of Reinsured Company.

Text: In 1928 the taxpayer reinsured the business of the International Life Insurance Company. Under the reinsurance agreement, that company sold to the taxpayer all of its business and assets. The taxpayer reinsured all of the life and annuity policies of the International, assumed all of its obligations, with certain unimportant exceptions, and agreed to carry on the reinsured business. The agreement recognized that the liabilities exceeded the assets. The taxpayer agreed to keep a separate account of the business reinsured and to apportion future earnings or profits 25 per cent. to the International and the balance to the reduction of the deficit so long as the balance sheet showed a deficit. When a surplus was shown, the taxpayer was to pay 75 per cent. thereof to the International and 25 per cent. to itself, the payments to the International to continue until $5,625,000, with interest, should be paid or until fifteen years from the date of the semiannual balance sheet in which a surplus should first appear had expired. After that time, all profits were to belong to the taxpayer. The taxpayer was to liquidate all assets to the best advantage, and at not less than their book value unless approved by a committee. The United States District Court for the Eastern District of Missouri, which had appointed receivers for the International, approved this contract of reinsurance. In approving the contract, the court found that the capital of the International was greatly impaired and its continuation in the life insurance business would be hazardous to its policyholders. It also found that no contract of reinsurance could be made unless the assets of the said Company be transferred to a reinsuring company engaged in the life insurance business. Among assets transferred to the taxpayer were loans upon which interest had accrued. This interest was subsequently paid. The Commissioner treated the interest accrued, as income of the taxpayer. The taxpayer contends that it was not income, but a capital asset. We think that the accrued interest on the loans transferred to and purchased by the taxpayer did not constitute income to it. True, it took over the business of the International and agreed thenceforth to conduct it, but not as the agent of the International. The consideration for the taxpayer's promise to reinsure, to assume all liabilities, and to account for profits, if any, was the transfer of the assets, including the accrued interest on loans. Had it paid cash for these assets, the situation would have been no different. The cases are remanded to the Board with directions to redetermine the tax deficiencies of the taxpayer for the years in question, in accordance with this opinion.