Opinion ID: 2792378
Heading Depth: 2
Heading Rank: 1

Heading: Disputed Insurance Policies

Text: MassMutual is a mutual life insurance company based in Massachusetts. In 1996, MassMutual merged MASSACHUSETTS MUTUAL LIFE INS v. US 5 with ConnMutual, with MassMutual emerging as the surviving entity. 2 For tax purposes, MassMutual was an accrual basis taxpayer for the relevant tax years of 1995, 1996, and 1997 and, before the merger, ConnMutual was also an accrual basis taxpayer for the 1995 tax year. Mutual life insurance companies, such as MassMutual, operate for the benefit of their policyholders, and do not have a separate group of shareholders. These companies typically offer policyholders two types of insurance plans: participating and non-participating policies. A participating policy is an insurance policy that is eligible to receive a portion of any distribution of the company’s yearly surplus, while a non-participating policy is ineligible to receive such a share. A mutual insurance company often will conservatively set premiums for its policyholders to ensure that the company will have sufficient funds to pay all benefits, even under extreme circumstances. This amount typically exceeds the funds necessary to cover the company’s operating expenses and contractual obligations, resulting in a surplus. At the end of each year, the company will calculate the portion of its total surplus, known as the divisible surplus, which it will return to the participating policyholders in the form of policyholder dividends or a credit towards the policyholder’s next insurance premium. This figure is approved by the company’s board of directors when set and is then distributed to policyholders the following year. 2 Unless otherwise noted in the opinion, a discus- sion of MassMutual includes both MassMutual and ConnMutual, since the two parties merged in 1996, and essentially were treated as the same entity by the parties and by the Court of Federal Claims. 6 MASSACHUSETTS MUTUAL LIFE INS v. US For most participating plans, including MassMutual’s, dividends are only payable to those policyholders whose policies are in force as of the anniversary date of the policy. A policy is considered in force if the premium for the policy has been paid through its anniversary date. Under the Tax Code, such policyholder dividends are deductible from a life insurance company’s gross income. 26 U.S.C. § 801(b). Specifically, Section 808(c) permits life insurance companies to deduct these payments in “an amount equal to the policyholder dividends paid or accrued during the taxable year.” 26 U.S.C. § 808(c). In 1995, MassMutual implemented a policy of guaranteeing a minimum amount of dividends (“guaranteed dividends”) it would pay the following year to a defined class of eligible policyholders—those with post-1983 policies. 3 The board of directors determined the guaranteed dividend each year, and passed resolutions memorializing this figure. MassMutual believed that this guarantee would fix the expense, such that the dividend would be considered accrued for tax purposes, because so long as there was at least one member of the defined class known by December 31 of the taxable year, it was certain that the entire guaranteed dividend would be paid the following year. In other words, because the guaranteed payment was guaranteed to an entire class of policyholders on a pro rata basis, if even one class member was eligible for receipt of a dividend, that class member would receive the 3 There is a distinction between pre- and post-1983 policies, because the tax implications for pre-1983 policies differ because of a statutory change implemented in 1984. This change, however, does not impact the policies at issue here. For a more detailed explanation of the tax consequences related to pre-1983 policies, see Mass. Mut. Life Ins. Co. v. United States, 103 Fed. Cl. at 115–16 (2012) and 26 U.S.C. § 808(f). MASSACHUSETTS MUTUAL LIFE INS v. US 7 entire guaranteed amount. Because at least one such class member could be identified by December 31 in each year the guarantees were set, MassMutual believed its payment liability was thus established, regardless of the number of policyholders who might ultimately share in that guarantee. ConnMutual adopted a similar policy in 1995. In light of this new policy, during the relevant tax years of 1995, 1996, and 1997, MassMutual (and ConnMutual for 1995) deducted from its tax refunds the portion of the guaranteed dividend that would be paid by September 15 of the next year in the year the dividend was guaranteed, believing this deduction complied with the Tax Code and Internal Revenue Service (“IRS”) regulations. See 26 U.S.C. § 461(h)(3)(A)(ii); 26 C.F.R. § 1.461–5(b)(ii) (“Economic performance with respect to the liability occurs on or before the earlier of (A) [t]he date the taxpayer files a timely . . . return for that taxable year; or (B) [t]he 15th day of the 9th calendar month after the close of that taxable year.”). For example, MassMutual claimed it could deduct $118,975,383 from its 1995 taxes, after it determined in late 1995 that its guaranteed dividend for 1996 would be $185 million. To arrive at this figure, MassMutual first calculated the dividends it expected to pay the class of eligible policyholders, multiplied this amount by 85% to account for the possibility that some policies might lapse, and then determined how much of this figure, i.e., the guaranteed dividend, would be paid by September 15, 1996. Thus, although the guaranteed dividend for 1996, was $185 million, MassMutual only deducted $118,975,383 from its 1995 taxes, instead of waiting to deduct the entire guaranteed dividend from its 1996 taxes. For each disputed year, MassMutual disclosed to the relevant state regulators that it would pay guaranteed 8 MASSACHUSETTS MUTUAL LIFE INS v. US amounts to a class of participating policyholders, and each year the regulators had no objections. MassMutual did not, however, actually disclose the amount of the guarantees to the state insurance regulators and did not disclose the guarantee to its policyholders or its sales force. For its guarantee in 1995, ConnMutual did disclose the guaranteed dividend in a footnote in its annual statement, but ConnMutual did not disclose the terms of the guarantee or that it would apply only to post-1983 policies. Like MassMutual, ConnMutual also disclosed to the state regulators that it would pay the guarantees and the regulators did not object. For each of the disputed years, the actual payment of dividends exceeded the guaranteed dividend by several million dollars—in 1996, the actual payment for both MassMutual and ConnMutual exceeded the guaranteed amount by $37.8 million; in 1997, the actual payment exceeded the guaranteed amount by $44.7 million; and in 1998, the actual payment exceeded the guaranteed amount by $55.1 million.