Court Opinion

ID: 4614983
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:31:23.359386+00
Date Added: 2024-06-11T07:54:52.649061
License: Public Domain

WESTERN CASUALTY CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Western Casualty Co. v. CommissionerDocket No. 34551.United States Board of Tax Appeals20 B.T.A. 738; 1930 BTA LEXIS 2045; September 10, 1930, Promulgated *2045  Evidence held insufficient to overcome respondent's determination of a deficiency.  Gail L. Ireland, Esq., for the petitioner.  A. H. Fast, Esq., for the respondent.  LOVE *738  This proceeding is for the redetermination of a deficiency in income taxes for the calendar year 1926 in the amount of $733.54.  the only issue is whether the respondent erred in refusing to allow as a deduction from gross income an item of $8,538.30 claimed on petitioner's income-tax return as a "Reserve For Premium Dividends." FINDINGS OF FACT.  Petitioner is a corporation organized and existing under the laws of the State of Colorado.  It is engaged in the business of writing health and accident insurance.  For approximately twenty years prior to about the year 1924 or 1925, petitioner had been issuing a health and accident insurance policy containing the following provision: After the premiums have been paid on this Policy for five years, and at the end of each fifth year period thereafter that the Policy is maintained in force, the Insured shall receive as a dividend, to be applied on the premiums of this Policy, twenty per cent of the premiums paid hereon*2046  during said five years period.  At the close of the taxable year 1926 petitioner had outstanding a number of policies which contained the above-quoted provision.  Prior to and during the year 1926 petitioner had always reported as income the entire premium paid on policies containing the above-quoted provision, without making or claiming any deduction for unearned premiums or any deduction for a reserve to take care of the premium for the year following the close of each five-year period.  *739  The insured was always credited with a full year's premium at the end of each five-year period, and the amount so credited was also reported by petitioner as income in the same manner as if it had been actually paid by the insured.  During the year 1926 petitioner was examined by a joint insurance commission from the States of Colorado, Arizona, and Kansas.  The report of this commission was addressed to (1) the Chairman of the Committee on Examinations of the National Convention of Insurance Commissioners, (2) the Commissioner of Insurance for the State of Colorado, (3) the Chairman of the Arizona Corporation Commission, and (4) the Superintendent of Insurance for the State of Kansas. *2047  Among other things contained in the report, the examiners set out the above-quoted provision, and said: The company has heretofore set aside no reserve to cover this dividend provision.  Your examiners are convinced that there should be set aside out of all premiums collected under policies containing this provision an amount equal to 20% of such premiums collected each year.  From the sum of these amounts there should be deducted the dividends as they are credited to the policyholders and there should also be deducted the reserve released by reason of the lapsation of such policies.  Your examiners have calculated on the above basis the accrued reserve commuted at 6% for the preceding five years and have determined the amount to be that shown in this report.  * * * This procedure should hereafter be followed by the company so long as there remains outstanding any policies containing this dividend provision.  The amount so determined by the joint insurance commission was $31,816.28 and was set out in the financial statement accompanying the report under the heading of "Liabilities," and was captioned as "20% dividend earned upon 5-year dividend policies $31,816.28." Petitioner, *2048  upon receipt of the report of the joint insurance commission, protested to the Commissioner of Insurance for the State of Colorado with respect to that part of the report calling for a reserve to be set up in the amount of $31,816.28, and in its annual report to the Commissioner of Insurance for the State of Colorado for the calendar year 1926, petitioner did not set up any reserve to meet the premium for the year following the end of each five-year period on policies containing the above-quoted provision.  Considerable negotiations were had between petitioner and the Commissioner of Insurance for the State of Colorado regarding the contested reserve, until on February 21, 1927, the commissioner wrote petitioner in part as follows: You were advised that your liability for future dividends contained in the report of recent examination by Colorado, Kansas and Arizona had been reduced from $31,816.28 to $8,538.30.  * * * *740  Petitioner, in its income-tax return for the calendar year 1926, deducted from its gross income for that year the above-mentioned amount of $8,538.30.  The respondent disallowed the claimed deduction, and in a "Statement" attached to the deficiency letter*2049  gave the following explanation for his action: Careful consideration has been given to your protest dated November 7, 1927, but your contention with respect to this item can not be conceded.  The reserves of casualty insurance companies as explained in Bulletin "H," "Rulings Peculiar to Insurance Companies," consist of unearned premiums and unpaid claims, which are shown on Lines 20 and 26, Page 5, of your annual insurance statement.  The item in question appears to be a contingent liability and is not, therefore, an allowable deduction.  OPINION.  LOVE: The only question involved in this proceeding is whether the net income of petitioner as determined by the respondent should be reduced by the amount of $8,538.30, which amount the Commissioner of Insurance for the State of Colorado required petitioner to set up, as of December 31, 1926, as a reserve to meet the premium for the year following the end of each five-year period on policies containing the quoted provision set out in our findings.  Petitioner is a health and accident insurance company.  Its Federal income-tax liability for the year 1926 must, therefore, be determined under the provisions of sections 246 and 247 of*2050  the Revenue Act of 1926.  Both parties are agreed that these are the applicable sections of the statute.  Section 246(a) merely imposes the rate of tax on net income.  Section 246(b)(1) defines "gross income" as "the combined gross amount earned during the taxable year, from investment income and from underwriting income." Section 246(b)(2) defines "net income" as "gross income" less the "deductions" allowed by section 247.  The next paragraph (3) defines "investment income." Sections 246(b)(4) and (5) provide as follows: (4) The term "underwriting income" means the premiums earned on insurance contracts during the taxable year less losses incurred and expenses incurred; (5) The term "premiums earned on insurance contracts during the taxable year" means an amount computed as follows: From the amount of gross premiums written on insurance contracts during the taxable year, deduct return premiums and premiums paid for reinsurance.  To the result so obtained add unearned premiums on outstanding business at the end of the preceding taxable year and deduct unearned premiums on outstanding business at the end of the taxable year.  Section 246(b)(6) defines "losses incurred," and*2051  section 246(b)(7) provides that: *741  The term "expenses incurred" means all expenses shown on the annual statement approved by the National Convention of Insurance Commissioners, and shall be computed as follows: To all expenses paid during the taxable year add expenses unpaid at the end of the taxable year and deduct expenses unpaid at the end of the preceding taxable year.  For the purpose of computing the net income subject to the tax imposed by this section there shall be deducted from expenses incurred as defined in this paragraph all expenses incurred which are not allowed as deductions by section 247.  (Italics supplied.) Section 247 1 specifies the deductions to be allowed in computing the net income of an insurance company subject to the tax imposed by section 246, none of which would include the item here in question.  The issue is thus narrowed to whether the item here in dispute is to be "deducted" in arriving at the net income as defined in section 246.  *2052  Petitioner contends that the item of $8,538.30 should be deducted from "underwriting income" as representing "expenses incurred" as the latter term is defined in section 246(b)(7), supra, in that it was shown as an expense on the annual statement approved by the National Convention of Insurance Commissioners.  This statement was not introduced in evidence, but regardless of that objection, we believe that the last sentence of section 246(b)(7), supra, would preclude its deduction from "underwriting income" as "expenses incurred," since the item in question is not allowed as a deduction by section 247.  The petitioner's contention in this respect must be denied.  Reviewed by the Board.  Judgment will be entered for the respondent.Footnotes1. SEC. 247. (a) In computing the net income of an insurance company subject to the tax imposed by section 246 there shall be allowed as deductions: (1) All ordinary and necessary expenses incurred, as provided in paragraph (1) of subdivision (a) of section 234; (2) All interest as provided in paragraph (2) of subdivision (a) of section 234; (3) Taxes as provided in paragraph (3) of subdivision (a) of section 234; (4) Losses incurred; (5) Bad debts in the nature of agency balances and bills receivable ascertained to be worthless and charged off within the taxable year; (6) The amount received as dividends from corporations as provided in paragraph (6) of subdivision (a) of section 234; (7) The amount of interest earned during the taxable year which under paragraph (4) of subdivision (b) of section 213 is exempt from taxation under this title, and the amount of interest allowed as a credit under section 236; (8) A reasonable allowance for the exhaustion, wear and tear of property, as provided in paragraph (7) of subdivision (a) of section 234; (9) In the case of such a domestic insurance company, the net income of which (computed without the benefit of this paragraph) is $25,000 or less, the sum of $2,000; but if the net income is more than $25,000, the tax imposed by section 246 shall not exceed the tax which would be payable if the $2,000 credit were allowed, plus the amount of the net income in excess of $25,000.  (b) In the case of a foreign corporation the deductions allowed in this section shall be allowed to the extent provided in subdivision (b) of section 234.  (c) Nothing in this section or in section 246 shall be construed to permit the same item to be twice deducted. ↩