Court Opinion

ID: 8594658
Source: CourtListenerOpinion
Date Created: 2022-11-23 16:01:42.464994+00
Date Added: 2024-06-11T16:54:49.805911
License: Public Domain

Davis, Judge,
dissenting:
In this very close case, I would follow the Ninth Circuit (Commissioner v. Pacific Mutual Life Ins. Co., 413 F. 2d 55 (C.A. 9, 1969)), the dissenting judges in the Tax Court (Pacific Mutual Life Inc. Co., 48 T.C. 118, 144-45 (1967)), Trial Commissioner White, and the Internal Revenue Service’s ruling.
In my view there “are ambiguities in the legislative language that must be resolved”, and accordingly we should consider “arguments of policy” revealed in the search for the dominant Congressional purpose. See Unexcelled Chemical Corp. v. United States, 345 U.S. 59, 64 (1953). Neither section 809(d)(5) nor section 801(e) is absolutely clear by itself, and in combination they present substantial textual difficulties. We must look to the legislative history to construe and harmonize the provisions. I read that source, not as concentrating on the five-year period, but as attempting to help only those companies which cannot change their rates to build up additional surplus to protect against unexpected bad experience. As the dissenters in the Tax Court put it (48 T.C. at 144-45) : “Although the legislative history fails to explain the reason for the requirement that the policy be issued for 5 years, it seems clear that the accumulation of increased surplus was necessary only when the insurance com*49pany was committed for a -5-year or longer period. If tbe company is free to adjust its rates at -any time when its experience proves to be more unfavorable than expected, there is no need for allowing the tax-free buildup of increased surplus. In the case of noncancellable accident and health policies, the company cannot adjust its rates notwithstanding unfavorable experience. However, in the case of the guaranteed renewable policies involved herein, petitioner could alter its rate schedule. It could not increase the rates of an individual policyholder merely because he became an increased risk, but it could increase the rates for the class of policies if it became apparent that the risks for the whole class were greater than expected. * * * [S]ince the company is free to adjust its rate schedule, there is no reason to permit the tax-free accumulation of additional surplus to protect against unanticipated risks in connection with these guaranteed renewable policies * * On the same basis, Trial Commissioner White concluded that “there was a logical reason for Congress to give insurers the benefit of the Section 809(d) (5) alternative deduction based on 3 percent of the premiums received under noncancellable contracts, while withholding such benefit with respect to guaranteed renewable contracts” like those involved here.
From this standpoint, section 801 (e) does not have to be construed as mandating inclusion of taxpayer’s contracts under section 809(d) (5) even though they fail to meet the dominant purpose Congress had in mind. The language of section 801 (e) is not so demanding. For one thing, we do not really know what Congress meant by “guaranteed renewable life, health, and accident insurance”, or whether plaintiff’s insurance agreements fall within the category Congress wanted to cover. And even if they are included, this would not be the first definitional section found to contain an implied exception to words which may appear all-embracing. On balance, I agree with the Ninth Circuit (413 F. 2d at 60) and Commissioner White that, to avoid conflict between the specific purpose of section 809(d) (5) and the general words of section 801(e), the latter should not be understood as a wooden directive compelling treatment of these renewable policies “in the same manner” as noncancellable agreements *50in every instance, regardless of differentiating legislative policies.
Another factor influencing me is that this seems the type of narrow and close tax issue which, can properly be left to resolution by Congress (in the previous Congress, one house did pass an alleviating measure), and particularly in that light I see insufficient basis for disagreeing with the court of appeals which has already spoken.
Ktjnzig, Judge, concurs in the foregoing dissenting opinion.
Findings on Fact
The court, having considered the evidence adduced, the stipulations of the parties, and the hriefs and arguments of counsel, makes findings of fact as follows:
1. The plaintiff is a life insurance company, with its principal place of business at 1900 North Akard Street, Dallas, Texas.
. 2. (a) The plaintiff filed timely income tax returns for the years in question with the District Director of Internal Revenue, Dallas, Texas.
(b) On or about June 1, 1967, the plaintiff paid the defendant, through the District Director of Internal Revenue, Dallas, Texas, deficiencies asserted by the Internal Revenue Service for the years 1961 through 1964 in the aggregate amount of $123,622.27, plus interest on such amount, aggregating $25,234.07.
(c) On or about August 27,1968, the plaintiff paid the defendant, through the District Director of Internal Revenue, Dallas, Texas, deficiencies asserted by the Internal Revenue Service for the years 1965 and 1966 in the aggregate amount of $80,985.17, plus interest on such amount, aggregating $8,966.31.
(d) The deficiencies referred to in paragraphs (b) and (c) of this finding were based, at least principally, upon determinations by the Internal Revenue Service that guaranteed renewable accident and health insurance contracts issued by the plaintiff were not includable in computing the deduction provided for in Section 809(d) (5) of the 1954 Code based upon “nonparticipating contracts * * * which are issued or renewed for periods of 5 years or more.”
*513.(a) On or about December 31, 1968, the plaintiff filed timely claims for refund in the aggregate amount of $213,288.
(b) Upon examination, the Internal Eevenue Service allowed the plaintiff’s claims in the aggregate amount of $3,460.17.
(c) The amount of the claim, the amount allowed, and the amount disallowed, by years, are as follows:
Year ended December 31 Claim amount Allowed Disallowed
1951. $11,953 $314.08 $11,638.92
1962. 43,315 549.64 42,765.36
1963. 26,084 911.56 25,172.44
1964. 44,271 1,483.00 42,788.00
1965. 38,277 97.86 38,179.14
1966. 49,388 104.03 49,283.07
Total. 213,288 3,460.17 209,827.83
4. On or about August 5,1969, the plaintiff filed a Form 2297, Waiver of Statutory Eegistered Mail Notification of Claim Disallowance, with the District Director of Internal Eevenue, Dallas, Texas. This action is brought within the time provided in Section 7532 of the Internal Eevenue Code of 1954.
5. (a) The plaintiff is a life insurance company organized under the laws of the State of Texas on June 23,1947. It is qualified and licensed to do business in 49 States, in Puerto Eico, in the District of Columbia, and in Canada.
(b) At December 31, 1968, the plaintiff 'had $89,757,855 of insurance in force.
(c) For the year 1968, the plaintiff collected gross premiums of $9,074,411.92.
6. (a) The plaintiff issues nonparticipating contracts of health and accident insurance which are guaranteed renewable for the life of the insured. The plaintiff reserves the right under such contracts to adjust premium rates by class. During the years in issue and prior thereto, the plaintiff never, in fact, exercised its right under any guaranteed renewable policy to increase the premium rates.
(b) Under the plaintiff’s guaranteed renewable health and accident policies, the plaintiff has no right to cancel the policy except for the nonpayment of premiums. So long as the in*52sured pays the premiums as provided in the policy, the plaintiff is obligated to continue the policy in force.
7» (a) A guaranteed renewable policy is a health and accident insurance contract, or a health and accident insurance contract combined with a life insurance or annuity contract, which is not cancellable by the company but under which the company reserves the right to adjust premium rates by classes in accordance with its experience under the type of policy involved, and with respect to which a reserve, in addition to an unearned premium reserve, must be carried to cover the obligation.
(b) The terms of a guaranteed renewable policy cannot be modified by the insurer except to adjust premium rates by class.
(c) A class of insureds may be defined as insureds having the same policy form, being of the same age, sex, and occupational risk classification, and sometimes also being located in a particular territorial region.
(d) An increase in premium rates on a guaranteed renewable policy, even though permitted in the policy, would require the approval of a number of State Insurance Commissioners. Approximately 27 States require such approval. The States of Georgia, Hawaii, Louisiana, Missouri, South Carolina, and Texas have no specific requirements with respect to change in rates. The approximate percentage of guaranteed renewable business done in these States by the plaintiff is as follows:
State: Percent
Georgia- 5
Hawaii_^_ 0
Louisiana_ 4
Missouri_ 4
South Carolina_ 2
Texas_ 8
8. Reserves, in addition to unearned premium reserves, are required to be maintained by the plaintiff with respect to its guaranteed renewable policies. These reserves are computed on the same basis as that used to compute reserves for non-cancellable policies. The reserves maintained by the plaintiff on its guaranteed renewable policies qualify as life insurance reserves under Section 801 (e) of the Code.
*539. (a) A noncancellable policy is a health and accident insurance contract, or a health and accident insurance contract combined with a life insurance or annuity contract, which the company is under an obligation to renew or continue at a specified premium and with respect to which a reserve, in addition to an unearned premium reserve, must be carried to cover the obligation.
(b) A noncancellable policy can be defined as a guaranteed renewable policy which does not permit the insurer to adjust the premium rates. Once the policy is issued, the insured receives a guaranteed premium rate for the entire life of the policy.
10. A yearly renewable term policy can be defined as one in which the premium differs for each year, or a stated interval of years, according to the age of the insured (generally increasing as the insured’s age increases), as contrasted with the guaranteed renewable policy, which has an originally stated level premium. The yearly renewable term policy has at least two basic and distinct forms in the life insurance field:
(a) The annual premium for a particular insured can be guaranteed at the inception of the policy at the graduated rates stipulated and guaranteed in the policy. This form guarantees renewal.
(b) The annual premium for a particular insured can vary from time to time depending upon the rate in effect at the renewal date for the particular age group. This form guarantees renewal at whatever the new rate wall be.
11. In the accident and health insurance field, still another variety of “1-year renewable term” policy is found. In this form the annual premium for a particular insured' may vary or be stated in the policy, but the insurer has the right, in either event, upon proper notice to cancel or refuse to renew the policy at its annual renewal date.
12. A level premium is one that remains constant during the entire premium-paying period of the policy. Although the guaranteed renewable policy initially provides for a level premium, such premium can be adjusted 'by the issuing company by class of insureds, either with or without the approval of the State Insurance Commissioner, depending upon the *54particular State where the changes are effected. Many State Insurance Commissioners require approval before a rate change can be made; and in other States business, economic, and other considerations, particularly competition, may substantially restrain any rate change.
IB. (a) Guaranteed renewable policies and noneancellable policies all involve long-term risks to the insuring company because, for each of these policies, the company has surrendered the right to terminate the policy or modify its terms (except for the premiums in the case of a guaranteed renewable policy). With respect to all these policies, so long as the insured pays the premium, the insurer must keep the policy in force.
(b) The common characteristics of guaranteed renewable policies and noneancellable policies are the guarantee of re-newability, the guarantee that there will be no change in the insuring conditions or terms (other than the premium, in the case of a guaranteed renewable policy), and the guarantee that there will be no reclassification of the insured by virtue of change in occupation, deterioration in health, or any other reason. Also, the underlying formula for the computation of reserves is identical with respect to the two types of policies. Both types of policies cover risks of disability, death, hospital and medical expense, and accidental death or dismemberment.
14. Approximately one-fifth of the plaintiff’s guaranteed renewable business during the pertinent period was done in States where no Insurance Department approval was required for a change in rates by class. In those States, the only restraints on rate changes were competition and company policy.
15. In the States where Insurance ¡Department ¡approval is necessary before rate changes are effective, the loss experience of the company requesting the change must be supplied. ■If justified, experience indicates that the rate change will be granted, ¡but the process is difficult in some States and time-consuming in most of the others.
16. Under Section 809(d)(5) of the ¡Code, the plaintiff claimed deductions based on B percent of premiums attributable to its nonparticipating contracts, including its guaran*55teed renewable health and accident contracts, in the following amounts:
Tear: Amount
1961 $54,177.23
1962 85,172.74
1963 127,084.84
1964 189,431.86
1965 236,336.38
1966 240,097.16
17. The Internal Bevenue 'Service determined that the plaintiff was entitled to a deduction with respect to its nonparticipating guaranteed renewable policies only on the basis of 10 percent of the reserve increases, rather than on the basis of 3 percent of premiums.
18. The difference between the amount ¡now claimed by the plaintiff, based on 3 percent of premiums, and the smaller amount allowed by the Internal Eevenue Service, based on 10 percent of reserve increases, is as follows:
Tear: Difference
1961 $13,992
1962 49,176
1963 46,970
1964 106,774
1965 137,585
1966 186,918
19. 'For the year 1961, the plaintiff filed its return on the basis of deducting 10 percent of its reserve increase attributable to its nonparticipating contracts. As a result of subsequent adjustments in reserves for the year 1961, the plaintiff now claims its deduction under Section 809(d)(5) on the basis of 3 percent of premiums.
20. Persistency studies demonstrate that the average renewal period for guaranteed renewable health and accident insurance policies is at least 7 years.
Conclusion or Law
Upon the foregoing findings of fact and opinion, which are adopted by the court and made a part of the judgment herein, the court concludes as a matter of law that the plaintiff is entitled to recover, and judgment is entered to that effect. The *56amount of recovery will be determined in subsequent proceedings under Kule 131(c).