Opinion ID: 1506221
Heading Depth: 1
Heading Rank: 2

Heading: Interest on Deferred Dividends.

Text: The taxpayer issued a class of semitontine 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. The Seventh Circuit in Commissioner v. Lafayette Life Insurance Co. (C. C. A.) 67 F.(2d) 209, held to the contrary, but we think the exact nature of the liability of the insurer was not made clear to the court in that case. As to what constitutes indebtedness or a debt, see City of Walla Walla v. Walla Walla Water Co., 172 U. S. 1, 20, 19 S. Ct. 77, 43 L. Ed. 341; Guaranty Trust Co. of New York v. Galveston City R. Co. et al. (C. C. A. 5) 107 F. 311, 317; Saleno v. City of Neosho, 127 Mo. 627, 30 S. W. 190, 192, 27 L. R. A. 769, 48 Am. St. Rep. 653; State ex rel. City of Hannibal v. Smith, State Auditor (Mo. Sup.) 74 S.W.(2d) 367, 372; 17 C. J. 1377.