Court Opinion

ID: 9642434
Source: CourtListenerOpinion
Date Created: 2023-08-22 17:57:42.083809+00
Date Added: 2024-06-11T18:10:47.438257
License: Public Domain

MANTON, Circuit Judge
(dissenting).
In 1924 petitioner insured the life of one of its officers for $100,000. The petitioner was designated as the beneficiary and paid the gross annual premiums of $9,097 for seven years, or a total of $63,679. Of this sum $13,117 was received hack as dividends, leaving as the sum paid for insurance $50,562. The policy was surrendered and canceled in 1931 and the petitioners received its surrender value $24,600.
The petitioner claims a loss in 1931 of the difference between the net premiums paid and the cash surrender value in the sum of $25,962. The Board of Tax Appeals sustained the disallowance of this loss by the Commissioner. The Revenue Act of 1928, May 29, 1928, c. 852, § 23 (f), 45 Stat. 799, 26 U.S.C.A. ¿ 2023 (f), see 26 U.S.C.A. § 23 (f) and note, provides for the allowance of deductions in computing net income: "(f) Losses by Corporations. In the case of a corporation, losses sustained during the taxable year and not compensated for by insurance or otherwise.”
Upon cancellation of the life insurance policy, there was a loss sustained. It was a transaction purely for business and its closing out constituted an actual-loss within section 23 (f) to the petitioner of the difference between the cash surrender value of the policy and the premiums paid thereon. Section 22 (b) (2) of the Revenue Act of 1928, 26 U.S.C.A. § 2022 (b) (2), see 26 U.S.C.A. § 22 note, lists, under the headings of items not to be included in gross income and to be exempt from taxation, “Amounts received (other than amounts paid by reason of the death of the insured and interest payments on such amounts) under a life insurance, endowment, or annuity contract, but if such amounts (when added to amounts received before the taxable year under such contract) exceed the aggregate premiums or consideration paid (whether or not paid during the taxable year) then the excess shall be included in gross income.”
Thus it is definitely stated in the statute that where there is a taxable gain from the closing of a policy, the aggregate premiums paid measure the cost of the amount received. Nothing in this section of the act or elsewhere in the taxing statutes refutes the applicability of this principle for the determination of the cost of a policy where loss is sustained upon its surrender.
In Lucas v. Alexander, 279 U.S. 573, 49 S.Ct. 426, 428, 73 L.Ed. 851, 61 A.L.R. 906, the question involved two paid-up deferred dividend life insurance policies which were closed out by the insured at a net gain over the total premium expenditures. The Commissioner took the difference between the amount received by the insured and the total net premium expenditures made by him and taxed the difference as taxable income. The policy had antedated March 1, 1913, and the case was governed by section 202 (1) of the Revenue Act of 1918 (40 Stat. 1060), which provided that for the purpose of ascertaining gain or loss from disposition of property, the basis should be, in the case of property acquired prior to March 1, 1913, the fair market value of such property as of that date. The Supreme Court adopted the principle of setting up the amount by taking the total amount paid in premiums and the total amount received when the transaction was closed and in that manner arriving at the total gain to the taxpayer. It adopted this principle independently of any statutory provision for -arriving at the amount of taxable gain such as is now to be found in section 22 (b) (2) of the Revenue Act of 1928. The court said: “In view of the provisions of section 213 (b) (2) of the act, see Regulations 45 (1920) art. 72 (b), ex*234empting from taxation the return of premiums on the maturity of the policy, it [the government] concedes that the taxable gain of the insured may be taken at the amount, fixed by the commissioner, by which the proceeds of the policies exceeded $78,100, the total premiums paid.”
No criticism was made of the use of such a principle in ascertaining the total gain to the taxpayer. The purpose of ascertaining the value of the policies as of March 1,. 1913, was simply to measure that part of the total gain which had accrued after the constitutional enactment of any statute taxing income and thus to arrive at the gain which, under the facts of that case, could be taxed as income.
In Forbes Lithograph Mfg. Co. v. White, 42 F.(2d) 287 (D.C.Mass.), the court, ruling on the precise question involved here, considered itself bound by Lucas v. Alexander, supra. It set up the account by taking the total amount paid on the one side and the total amount received when the transaction was closed on the other side, and allowed the beneficiary paying the premiums to deduct the difference as a loss. Century Wood Preserving Co. v. Com’r of Internal Revenue, 69 F.(2d) 967 (C.C.A. 3), held that to the extent by which the premiums paid exceeded the surrender value of the policy they constituted earned payments for insurance and that the other part of the premiums represented an investment built up as a reserve until the policy matured or was surrendered, and upon surrender of the policy, the holder received as a surrender value the equivalent cost of his investment and therefore suffered.no loss. When net .gain is measured by the Board of Tax Appeals, it arrives at the amount by taking the difference between the amounts received and the aggregate premiums paid basing it upon section 22 (b) (2) of the Revenue Act of 1928, 26 U.S.C.A. § 2022 (b) (2), see 26 U.S.C.A. § 22 note. But nothing prevents the Board from the use of the same measure when confronted with an insurance situation involving a loss to the taxpayer. In Appeal of Standard Brewing Co., 6 B.T.A. 980, and Keystone Consolidated Publishing Co. v. Commissioner of Internal Revenue, 26 B.T.A. 1210, the Board refused to allow a loss based upon the difference between the amounts received and the aggregate premiums paid, allowing only that part which it considered going into a reserve built up by the insurance company and refusing to allow the balance of the premiums paid, on the ground that such balance represented annual costs of insurance protection. If such a rule prevails, the determination of gain would also involve the elimination of part of the premiums paid as representing the actual cost of insurance and the net gain would thus be increased pro tanto. As yet the Board has never advanced this method of accounting in cases involving gains and no logical explanation demands it where the taxpayer has actually received less than he has paid out by way of premiums.
The prevailing opinion says that part of the premium is an investment built up as a reserve until the policies matured ; if it is surrendered, the holder is entitled to the cash surrender value from the insurer or the return of the equivalent of his investment after the cost of annual protection is deducted from the premiums. This does not reveal the surrender value as it actually exists under the contracts of insurance companies. The cash surrender value offered to the insured upon his surrendering his policy is differently described. Vance on Insurance (2d Ed. 1930) p. 55, says: “The amount of this surrender value offered is based upon the reserve value of the policy at the time of surrender, and it is plain that the insurer can well afford to pay to the insured the entire reserve value of his policy in consideration of his surrendering it for cancellation; but, in as much as insurance companies desire to discourage the surrender of policies as far as they can equitably do so, the surrender value fixed upon a policy is usually set at a considerably lower figurc than that which would be established by its reserve value.”
Moreover, the contract of insurance which the petitioner obtained was fixed in terms and values at the time it was executed. For the time it paid the premiums, the insurance company promised to pay $100,000 at any time during the term of the policy if the insured died: It gave an option to take a cash surrender value to be exercised by the petitioner. In case of the death of the insured, whether within six months or six years, the petitioners would have been compensated to the extent, of $100,000. *235The amount paid" in premiums varied with the life of the insured. There was no separation of the premiums agreed upon such as might be regarded, by the insured as one part paid for protection only and the balance as a reserve investment. The method of calculation found useful by the insurance companies in determining reserves and cost of insurance was no affair of the petitioner and no part of its agreement.
The decision should be reversed.