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

Heading: Existence of Obligations

Text: As an initial matter, the government again contests whether the dividend guarantees give rise to true obligations that can be deducted. If there is no obligation, it is irrelevant whether such an obligation is fixed. The government alleges that MassMutual’s disclosures to state regulators do not change the reality that these promises were revocable, because MassMutual never informed the policyholders of these dividends. To support its position, the government relies on New York Life Insurance Co. v. United States, which also addressed the timing of participating policyholder dividend deductions. 724 F.3d 256 (2d Cir. 2013). There, New York Life Insurance Company (“New York Life”) argued that it could deduct two types of dividends, annual dividends and minimum liability dividends, both of which it considered accrued in the tax year before the dividends were actually paid. Id. at 257. Regarding the annual dividends, New York Life’s practice was to credit an individual policyholder’s account before, but no more than thirty days before, the policy’s anniversary date. Id. at 259. This credit would be generated if a “policyholder had paid all the premiums necessary to keep the policy in force through its anniversary date. New York Life did not actually pay the dividend, however, until the ‘the Credited Policy’s anniversary date.’” Id. Because the credit date for January policies fell within the prior year, New York Life deducted these credits in the year before the dividend was paid. New York Life’s minimum liability dividend arose from its decision to also offer termination dividends, which are dividends paid to a policyholder when he or she ends a policy. New York Life understood that it could hypothetically pay an annual dividend, a termination dividend, or both an annual dividend and a termination dividend, to an individual policyholder in one year. New 14 MASSACHUSETTS MUTUAL LIFE INS v. US York Life then calculated the annual dividends and termination dividends that it anticipated it would pay in the following year. Surmising that it would pay at least the lesser of the annual or termination dividend to eligible policyholders, New York Life deducted the lesser amount in the tax year before any dividend was paid. Upon review, the Second Circuit disagreed with New York Life’s practices, finding that such deductions were improper because they failed to meet the “all events” test. For the annual dividends, the Second Circuit determined that the obligation to pay the annual dividends depended upon the individual policyholder retaining his or her policy through the policy’s anniversary date. Id. at 263. Because the decision to maintain the policy through the anniversary date would not occur before the close of the prior tax year, New York Life’s obligation to pay the annual dividend could not accrue when the individual policyholder accounts were credited the year before. Additionally, the Second Circuit concluded that there was no basis for New York Life’s minimum liability dividend deduction, because New York Life was under no obligation to pay the termination dividend when a policyholder ended his or her policy. Id. at 266. Without an actual requirement to pay these dividends, the Second Circuit concluded it was irrelevant that New York Life’s board of directors passed an “irrevocable” board resolution approving such a payment, since “a board’s resolution cannot convert a voluntary expense into an accrued liability for federal income tax purposes.” Id. at 267. Accordingly, the Second Circuit concluded New York Life’s deductions were improper. The government’s argument is largely premised on the idea that MassMutual had no obligation to pay its eligible policyholders a dividend, absent its board of directors’ resolution to pay a dividend, which was the case in New York Life with respect to the termination dividends. Unlike New York Life, however, the policies at MASSACHUSETTS MUTUAL LIFE INS v. US 15 issue here stated that MassMutual and ConnMutual would pay dividends to eligible policyholders. Mass. Mutual Life Ins. Co., 103 Fed. Cl. at 114 (“A sample MassMutual participating policy, included as a Joint Exhibit, stated: ‘Each year we determine how much money can be paid as dividends. This is called divisible surplus. We then determine how much of this divisible surplus is to be allocated to this [participating] policy.’”); see also Joint Appendix 139 (“While this [ConnMutual] Policy is in force, except as extended term insurance, we will credit it with dividends. Dividends are based on such shares of the divisible surplus (if any) as we may apportion at the end of each Policy Year.”). While MassMutual and ConnMutual ultimately would determine the portion of the guarantee eligible policyholders would receive based on the size of the surplus and the number of policyholders who were eligible for the payments, policyholders had a contractual expectation nonetheless that they would receive a policyholder dividend. For these reasons, we find the government’s assertion that New York Life forecloses a finding that the disputed guarantees are actual obligations unpersuasive. The government also alleges that MassMutual’s disclosure of the dividend guarantees to state regulators was merely an empty gesture. Because some dividend was virtually guaranteed each year, it contends that the disclosure to the regulators of a guaranteed dividend was meaningless. The government neglects to discuss the evidence on the record that the state regulators did have the authority to enforce MassMutual’s guarantees. Absent an argument that this finding was clear error, the court will not disturb the Court of Federal Claims’ determination that the government’s enforceability concerns did not prevent the guaranteed dividends from being fixed in the year in which MassMutual calculated the guaranteed dividends. 16 MASSACHUSETTS MUTUAL LIFE INS v. US