Court Opinion

ID: 9467483
Source: CourtListenerOpinion
Date Created: 2023-08-05 01:50:13.232157+00
Date Added: 2024-06-11T17:40:22.543027
License: Public Domain

PELL, Circuit Judge,
dissenting in part, concurring in part.
At the risk of taking an overly simplified view of a more than ordinarily complicated example of tax law, and notwithstanding the scholarly analysis and treatment by the majority opinion of the issues presented, I respectfully dissent as to the matter of the tax benefit rule.
The ultimate situation appears to me as follows: When the losses which comprised the December 31, 1962, unpaid loss accrual were settled at less than the amount accrued therefor, Home Mutual received, in effect, a “recovery” of a prior expense. By means of bookkeeping entries these excess accruals were eliminated from its liabilities and restored to its earned surplus. Under the “tax benefit rule,” as developed by numerous court decisions (which decisions are discussed in the majority opinion), such recoveries of prior expenses are includable in taxable income only to the extent that some “tax benefit” was received from their deduction against taxable income in a prior year. In Home Mutual's case, no prior tax benefit was received from the accrual of its unpaid losses as of December 31, 1962, because mutual insurance companies, such as Home Mutual, were not taxed on their underwriting income prior to 1963. Therefore the tax benefit rule should preclude the inclusion of such recoveries in Home Mutual’s taxable income for the years 1963 through 1975.
Although the Tax Court declined to label the basis for its holding as the “tax benefit rule,” per se, it appears to me from the Tax Court’s opinion that that court was recognizing the principles underlying the tax benefit rule as being applicable to the facts of the present case.
The majority opinion, as I read it, rests in part on the basis that applying the tax benefit rule to the present case would be an extension beyond any existing authority. It appears to me that the present situation is squarely of the type that calls for the application of the rule.
In sum, inasmuch as the taxpayer realized no real economic gain from its payment of the claims made against its policies, and it received no tax benefit from the excess accruals for unpaid losses made prior to 1963, it should not be subjected to tax on its subsequent recovery of these excess accruals. This is the essence of the long standing “tax benefit rule.” Dobson v. Commissioner, 320 U.S. 489, 64 S.Ct. 239, 88 L.Ed. 248 (1943).
Because of the result I would reach in this case, it is not necessary for me to reach the cash subrogation recoveries issue. If I were to do so I would join in the remand provided for in Part II of the majority opinion with the exception that I find persuasive the reasoning in American Financial Corp. v. Commissioner, 72 T.C. 506 (1979). I concur in Part III of the majority opinion.