Opinion ID: 1036113
Heading Depth: 2
Heading Rank: 1

Heading: The Annual Dividend for January Policies

Text: In compliance with New York law, see N.Y. Ins. Law § 4231, and the terms of its policies, the Company paid certain of its whole life policyholders an Annual Dividend on the relevant policy’s anniversary date.2 This Annual Dividend comprised the policyholder’s share of the Company’s surplus. The timing of the Company’s distribution of the Annual Dividend to eligible policyholders depended on the policy’s anniversary date and the schedule for the policyholder’s premium payments. According to the terms of the policies at issue here, New York Life paid an Annual Dividend to a policyholder only if, as of the policy’s anniversary date, “the policy [was] then in force and all premiums due ha[d] been paid to that anniversary.” Compl. ¶ 34. For a policyholder paying monthly premiums, for instance, payment of the twelfth premium in any single twelve-month period would keep the policy in force through its anniversary date. The Company’s practice in the relevant period was to credit a policyholder’s account with the amount of the Annual Dividend on a date (the “Credit Date”) that was before, but not more than thirty days before, the policy’s anniversary date. The credit would occur if, as of the Credit Date, the policyholder had paid all premiums necessary to keep the policy in force through its anniversary date. New York Life 2 Generally, a “whole life” (also called an “ordinary life” or straight life”) insurance policy “remains in full force and effect for the life of the insured, with premium payments being made for the same period.” Harvey W. Rubin, Dictionary of Insurance Terms 358 (4th ed. 2000). A “term life insurance” policy, by contrast, “stays in effect for only a specified, limited period.” Id. at 517. 5 did not actually pay the dividend, however, until “the Credited Policy’s anniversary date.”3 For most policies—those with anniversary dates falling from February 1 through December 31—the Credit Date fell within the same calendar year as the anniversary date. For policies with January anniversary dates, however, the Credit Date and the anniversary date typically fell in different calendar (and thus tax) years. The Company deducted from its gross income for tax year 1990 the cumulative Annual Dividends on policies that had Credit Dates in December 1990 and anniversary dates in January 1991. It did the same for tax years 1991 through 1995. We refer to this deduction as the deduction for the “Annual Dividend for January Policies.” B. The Termination Dividend and the Minimum Dividend Liability Deduction Certain policies eligible for the Annual Dividend were also eligible, under New York Life’s practices, to receive an amount the Company called a “Termination Dividend.” This was a share of the Company’s surplus that it paid the policyholder or beneficiary upon the policy’s termination, whether the termination occurred because the policy matured, the policyholder died, or the policyholder surrendered Thus, if a policyholder contracted to pay monthly premiums on a policy with a May 15 3 anniversary date, she would be obligated to pay her twelfth monthly premium on or before April 15 to keep the policy in force through its anniversary date. If the April payment was timely made, the Company would credit the policyholder’s account with the Annual Dividend on April 15. 6 the policy to obtain its cash value.4 Although the Termination Dividend, like the Annual Dividend, was drawn from the Company’s surplus, the two dividends were calculated on different bases. In the complaint, New York Life alleged that, in every year from 1990 through 1995, it made one of three possible combinations of dividend payments to eligible policyholders: (1) an Annual Dividend, (2) a Termination Dividend, or (3) both an Annual Dividend and a Termination Dividend. It reasoned as follows: If the terminating event—the policy’s maturity, or the policyholder’s surrender of the policy or death—occurred before it credited the policy with the Annual Dividend, the Company would pay the Termination Dividend only. If the terminating event occurred after New York Life credited the policy with the Annual Dividend, the Company would pay both the Annual and the Termination Dividends. And, if no terminating event occurred in a given year, the policyholder would receive only the Annual Dividend. Therefore, New York Life alleged, under any scenario during these years, it paid at least the lesser of the Annual or Termination Dividend to these policyholders.5 New York Life’s accrual and payment methods for the Termination Dividend were as follows. In each December from 1990 through 1995, the Company calculated 4Each of the sample policies recognizes a holder’s right to surrender the policy for its cash value at any time. 5 The complaint is silent as to whether New York Life paid a Termination Dividend when a policy lapsed for nonpayment of premiums. 7 the Annual Dividends and Termination Dividends it expected to pay in the following year to eligible policyholders. The Company then determined, on a policy-by-policy basis, the lesser of the two amounts. It claimed the aggregate of those amounts on its returns for 1990 through 1995 as a deduction for an accrued dividend under Code Section 808. For present purposes, we will refer to this claimed deduction as the Company’s deduction for the “Minimum Liability Dividend.”6 2. Prior Proceedings New York Life timely filed tax returns for the years 1990 through 1995, claiming in each year a deduction for the Annual Dividend for January Policies and a deduction for the Minimum Dividend Liability. Upon audit, the IRS rejected both claimed deductions, ruling that the Company was entitled to deduct these policyholder dividends only in the years of actual payment. New York Life paid the resulting deficiency and then filed a claim for a refund, which the Service denied. The instant action in the United States District Court for the Southern District of New York ensued. 6 To avoid making a duplicate deduction, New York Life excluded from its calculation of the Minimum Liability Dividend deduction the amount it claimed as a deduction for the Annual Dividend for January Policies. Additionally, for reasons related to other tax concerns not at issue here, New York Life claimed the Minimum Liability Dividend deduction with respect only to payments on policies whose anniversary dates fell within the first eight and one-half months of the following taxable year. See Code § 461(h)(3)(A)(ii); Treas. Reg. § 1.461-5(b)(1)(ii). Because we conclude that neither the Annual Dividend for January Policies deduction nor the Minimum Liability deduction satisfied the “all-events” test, this practice does not affect our decision and we need not address it further. 8 In its complaint, the Company sought principally a refund of $99.66 million plus interest, claiming that it was entitled to accrue and deduct the two dividendrelated amounts in each of the six tax years at issue.7 The District Court granted the Service’s motion to dismiss under Fed. R. Civ. P. 12(b)(6). The court concluded that the deductions did not satisfy the “all-events” test, a requirement under Treasury Regulation § 1.1.461-1(a)(2)(i) for deduction of an accrued expense. See New York Life, 780 F. Supp. 2d at 329. In the court’s view, New York Life failed to allege sufficient facts from which to infer that, in the tax year for which the deduction was claimed, all events had occurred to establish the fact of the liability. As to the Annual Dividend for January Policies, the Company’s claim fell short because it “had no obligation to pay [the policyholder] an Annual Dividend if he surrendered the Policy on the day before the Policy anniversary.” Id. at 328. As to the Minimum Dividend Liability, the Company’s claim fell short because “as of December 31 of each taxable year at issue, New York Life did not have an obligation to pay either an Annual Dividend or a Termination Dividend in the following taxable year because neither dividend was unconditionally due.” Id. at 329.