Court Opinion

ID: 4482717
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:15:39.221618+00
Date Added: 2024-06-11T14:54:02.102503
License: Public Domain

Simpson, J., concurring: I agree with the Court’s conclusions in this case, including its treatment of the interest on loans to policyholders. However, as I understand the decisions of the circuit courts in Franklin, Life Insurance Co. v. United States, 399 F. 2d 757 (C.A. 7, 1968), certiorari denied 393 U.S. 1118 (1969), and Jefferson Standard Life Insurance Co. v. United States, 408 F. 2d 842 (C.A. 4, 1969), those cases are distinguishable, and we are not faced with a choice of whether to follow them in this case. In Jefferson Standard, the court understood the issue to be the same as that in Franklin Life and decided the issue simply on the basis of that court. In Franklin Life, it is clear that the court considered that it was dealing with interest which had been paid and was in the hands of the company. In setting forth the.facts, the court stated at page 761: Under the express terms of taxpayer’s policy loan agreements with borrowers interest is paid in advance at the time of the loan to the end of the current policy year and annually thereafter on the policy anniversary date for the ensuing year, and interest not paid when so due is added to the principal of the existing loan. * * * It stated at page 762 the company’s policy to be: “Interest on policy loans is taken into income or assets only as ratably earned.” In explaining the reasons for its conclusions, the court clearly indicated that it considered that it was dealing with interest ¡already prepaid; it said at page 762: But, non-deferral of prepaid items is not foreign to permissible or required accrual accounting for income tax purposes. * * * And, here the taxpayer receives the interest under a binding agreement with the borrower calling for its receipt and without restriction upon its use by the taxpayer. The money is “earned” in a context sufficient for full tax recognition in that taxpayer, when it receives the interest, is fully entitled to it under the express terms of the policy loan agreement. * * * It found that the Gunderson Bros. Engineering Corp., 42 T.C. 419 (1964), and Luhring Motor Co., 42 T.C. 732 (1964), cases were not apposite because in those cases, the taxpayer had not actually received the payments in advance. The court’s conclusion related only to prepaid interest; it said at page 763: “We conclude that the District Court’s conclusion with respect to prepaid and capitalized policy loan interest was erroneous.” The facts of the case now before us are significantly different: Judge Drennen found that, although the interest is put on the books of the company at the time the loan is made and at the beginning of each policy year, most of the interest is not paid at those times, and no interest is charged on the interest until the beginning of the succeeding policy year. Initially, the company sought to exclude interest which was in hand but which was not earned at the end of the calendar year, but subsequently, it changed its position and admits that all interest actually received must be included; it now seeks to exclude only the interest which has not been received and is not earned at the end of the calendar year. In view of the difference between the facts dealt with by the Seventh Circuit and those in this case, I am convinced that the Seventh Circuit opinion is not applicable to this case. The Seventh Circuit was dealing with money that was in hand, but we are only dealing with money which has not been received and not earned. It is true that the company has a reserve established with respect to the policy, and if the policyholder fails to pay the interest, the company can collect from the reserve. Yet, the mere existence of that fund from which payment can be secured does not indicate to me that this is a situation in which the company should be treated as having actually received payment of the interest. The existence of the loan gives the company a right to receive interest for it, and in the ordinary course of events, it will receive, in addition to a repayment of the principal, interest for the period for which the loan is outstanding. I see no reason to treat the company as having actually received that interest until it is in fact paid to it or until it exercises its right to charge the interest against the reserve. I agree with Judge Drennen’s conclusion that as to the interest not received and not earned, it should not be accruable, but I feel that conclusion is not inconsistent with the opinions of the circuit courts in Jefferson Standard Life Insurance Co. v. United States, 408 F. 2d 842 (C.A. 4, 1969), and Franklin Life Insurance Co. v. United States, 399 F. 2d 757 (C.A. 7, 1968), certiorari denied 393 U.S. 1118 (1969).. Goefe, /., agrees with this concurring opinion.