Opinion ID: 348404
Heading Depth: 2
Heading Rank: 1

Heading: Deferred and Uncollected Premiums.

Text: As is common in the life insurance industry, taxpayer's policyholders may elect to pay premiums on life insurance and annuity contracts in semi-annual, quarterly or monthly installments. The portions of the gross annual premiums which are not due until after December 31 of each year, and which in fact remain unpaid as of that time, are generally referred to as deferred premiums. Furthermore, as a general rule such contracts provide for a grace period during which the policy remains in force notwithstanding the failure of the insured to pay the required premium. At the end of the years in issue, taxpayer had a number of policies in force by virtue of the grace period provision. Premiums owing but uncollected with respect to those policies as of December 31 of each year are normally referred to as due and unpaid. We refer to these two classifications as deferred and uncollected premiums. The method of dealing with these items for tax purposes has been much mooted in the courts, this Court in Western National Life Insurance Co. of Texas v. Commissioner of Internal Revenue, 432 F.2d 298 (5th Cir. 1970) having held that since the insurance companies accrued these items in computing their reserves they would have to accrue them for all other purposes, including inclusion as assets under § 805(b)(3). Other Circuits arrived at the same conclusion, see Jefferson Standard Life Ins. Co. v. United States, 408 F.2d 842 (C.A.4 1969), cert. denied 396 U.S. 828, 90 S.Ct. 77, 24 L.Ed.2d 78; Western & Southern Life Ins. Co. v. Commissioner of Internal Revenue, 460 F.2d 8 (6th Cir. 1972), cert. denied 409 U.S. 1063, 93 S.Ct. 555, 34 L.Ed.2d 517; Franklin Life Ins. Co. v. United States, 399 F.2d 757 (7th Cir. 1968). The Court of Appeals for the Tenth Circuit disagreed, Standard Life & Accident Ins. Co. v. Commissioner of Internal Revenue, 525 F.2d 786 (10th Cir. 1976), and created a conflict which has now been resolved by the Supreme Court. The Supreme Court recognized that the statute which in § 818 provided for the use for computation purposes either of an accrual method of accounting or a combination of an accrual method with any other except cash receipts and disbursements further provided except as provided in the preceding sentence, all such computations shall be made in a manner consistent with the manner required for purposes of annual statement approved by the National Association of Insurance Commissioners. The Court then said: The legislative history makes it clear that the accounting procedures established by the NAIC apply if they are 'not inconsistent' with accrual accounting rules. (Footnote omitted). In other words, except when the rules of accrual accounting dictate a contrary result NAIC procedures 'shall' apply. (Footnote omitted).  --- U.S. at ----, 97 S.Ct. at 2529. Commissioner of Internal Revenue v. Standard Life & Accident Ins. Co., supra. The NAIC procedure as to the treatment of deferred and unpaid premiums is to require the inclusion of the net valuation portion of such premiums but not the loading portion in the reserves and also in the assets. The net valuation premium is that part of the premium determined under mortality and interest assumptions that must be held to assure that the company will have sufficient funds to pay death benefits. The rest of the premium is called loading and covers profits and expenses such as salesmen's commissions, state taxes, and overhead. The trial court's treatment of this item was in accord with our earlier decision in the Western National Life case which has now been partially overruled. The final disposition of the amounts involved under this issue can, however, be readily ascertained, since the Court has now mandated the treatment of this item for tax purposes in the same manner as is required to be accounted for in the statement prescribed by NAIC.