Opinion ID: 364034
Heading Depth: 1
Heading Rank: 2

Heading: The commissions

Text: 13 Like most other insurance companies, Liberty Life issues loans on the security of its customers' insurance policies. Unlike many other insurance companies, the work required to service these loans (explaining the terms of the loans, filling out applications, and collecting the loan payments, for example) is done not by home office employees but by field representatives. The district court found that these representatives spent about 5 percent of their total working time performing loan services. 14 Liberty Life pays its field representatives by commissions, which are calculated by using a number of factors related to the insurance policies they issue. None of these factors depends in any way on the work done in servicing policy loans. Liberty Life assigned dollar values (in amounts found to be reasonable by the trial judge) to the loan services performed by the field representatives and, using these figures, determined the total amount of the field representatives' compensation that was attributable to the loan services. The company then deducted this amount ($238,356) as an investment expense on its 1965 income tax return. The trial judge held that this deduction was allowable. The Government disagrees. 15 The Government maintains that agents' commissions are deductible solely as underwriting expenses under the statutory taxation scheme. Since investment expenses receive more favorable tax treatment than underwriting expenses, the Government argues that in order to effectuate the Congressional intent, investment expense treatment should be allowed only to those expenses which actually generate investment income. The Government points to the following facts in support of its contention that field representatives' commissions do not meet this standard: (1) The commissions are based solely on premium income, regardless of the loan services actually performed by each individual agent; (2) the policy loans made by Liberty Life are more in the nature of a service to its customers, since they are not particularly profitable to the company; (3) the calculations for the premiums to be paid take into account possible loan services to be rendered on the policy; (4) the primary function of the agent is the generation of underwriting income, and the servicing of policy loans as a convenience to the customer is merely another aspect of this primary function; and (5) the National Association of Insurance Commissioners (NAIC) specifically recommends that commissions of field representatives, including compensation for collection or service fees, be treated as underwriting expenses, not as general expenses subject to allocation. 16 Keeping in mind the applicable standard, 5 we find that we do not need to dip deeply into the statutory history and the analysis of commentators to assess the significance of the facts enumerated above. The issue is simple and clearcut: Does the loan servicing work of the field representatives generate investment income? If so, an allocable portion of the commissions paid as compensation for those activities is a legitimate investment expense. The district court determined that the field representatives' duties in making and servicing the policy loans generated investment income and, finding the allocated compensation for those duties reasonable, allowed the deduction as an investment expense. We find ourselves in complete agreement with that conclusion. 17 There is no question that if these services had been performed by home office employees, the salaries of those employees would have been deductible as an investment expense. We fail to see any difference in effect when those duties are performed as Liberty Life has arranged by agents in the field. The Government's arguments enumerated above fail to persuade us otherwise: (1) the use of premiums alone for calculating the agents' commissions is not dispositive, since those commissions are intended as full compensation for all of the agents' duties, including the loan work. (2) The profitability of the policy loans as investments is also of little significance in this inquiry; profitable or not, the loans were legitimate interest-bearing investments with expenses connected to them. (3) The inclusion in the premium calculation of the costs of loan services actually supports the plaintiff's position, since the compensation for the field representatives' services is calculated directly from those premiums. (4) Plaintiff's motive in making the policy loans is irrelevant to the question of whether or not they were investments. Plaintiff no doubt offered these loans to make its underwriting business more attractive to prospective clients. Nevertheless, the loans generated investment income, and we find no requirement of investment intent in the statute, regulations, or legislative history. (5) The NAIC standards are applicable to computations made in determining the federal tax on life insurance companies. 26 U.S.C. § 818(a); See Commissioner v. Standard Life & Accident Ins. Co., 433 U.S. 148, 158-59, 97 S.Ct. 2523, 53 L.Ed.2d 653 (1977). They are not controlling on substantive questions of allocation. Jefferson Standard Life Ins. Co. v. United States, 408 F.2d 842, 849-50 (4th Cir. 1969), Cert. denied 396 U.S. 828, 90 S.Ct. 77, 24 L.Ed.2d 78 (1969). The deduction as an investment expense of that portion of the field representatives' compensation which was fairly allocable to loan services was permissible under the applicable statute and regulations. 18