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

Heading: Unearned Interest on Policy Loans.

Text: In Part IX, supra, we held that the amount charged by the company as interest on policy loans to its policyholders is includable in taxpayer's investment income. In doing so, we rejected taxpayer's argument that such amounts were not truly interest because the policy loans were not real loans. Taxpayer here argues that such accrual interest is not includable as an asset for the same reason. We reject this argument for the same reason. We have heretofore held that such interest is to be accounted for as income because such policy loans are to be treated for tax purposes as the loan which the company says they are in its dealings with its policyholders. The trial court therefore correctly held that this item should be included in the § 805(b) assets. C. Advances to Insurance Agents; (D) Amounts Due From Reinsurers; (E) Taxpayer's Participation Interest in Reinsurance Pools; and (F) The Unamortized Cost of Insurance Policies in Force Acquired from Atlantic Life. Aside from its underlying argument, previously discussed, to the effect that only those assets which produced income are to be included under § 805(b), an argument now foreclosed by Standard Life, supra, taxpayer cites no authority for its contention that the trial court erred in its disposition of these four last issues. The amounts representing each of these items, as recognized by the trial court, must be included in assets because of the broad definition of the term used in the statute and the underlying regulations as interpreted by the courts. See Jefferson Standard Life Ins. Co. v. United States, 408 F.2d 842 (4th Cir. 1969) and regulations § 1.805-5(a)(4)(iii), § 1.805-5(a)(4)(i). The judgment is vacated and the case is remanded to the trial court for further proceedings consistent with this opinion. Each party shall bear its own costs. 1 The taxpayer contends that this regulation does not fit a situation where the amount paid is not paid to the reinsurer but is paid to the owner of the reinsured's capital stock. This argument, it seems to us, backfires in the sense that if this agreement, which was a three-way contract including an agreement with the reinsured to reinsure its policies does not fall within the language of the regulations, because the purchase price was paid to someone other than the reinsured itself, it is clearly then the price paid by the taxpayer to acquire the capital stock of a life insurance company, which by all definitions would be a capital expenditure. 2 Section 809(d)(5) provides as follows: (d) Deductions. For purposes of subsection (b)(1) and (2) there shall be allowed the following deductions: . . . (5) Certain nonparticipating contracts. An amount equal to 10 percent of the increase for the taxable year in the reserves for nonparticipating contracts or (if greater) an amount equal to 3 percent of the premiums for the taxable year (excluding that portion of the premiums which is allocable to annuity features) attributable to nonparticipating contracts (other than group contracts) which are issued or renewed for periods of 5 years or more. For purposes of this paragraph, the term reserves for nonparticipating contracts means such part of the life insurance reserves (excluding that portion of the reserves which is allocable to annuity features) as relates to nonparticipating contracts (other than group contracts). For purposes of this paragraph and paragraph (6), the term premiums means the net amount of the premiums and other consideration taken into account under subsection (c)(1).