Petitioners Brief — Commissioner v. Standard Life & Accident Insurance

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No. 75-1771

athe Supreme Gout of te Waited Sites

OocropeR TERM, 1976

COMMISSIONER OF INTERNAL REVENUE, PETITIONER

SranparD Lire & AccIDENT INSURANCE COMPANY

ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF

APPEALS FOR THE TENTH CIRCUIT

BRIEF FOR THE PETITIONER

BOBERT H. BORK,

Solkoitor General,

MYRON C. BAUM,

Acting Assistant Attorney General,

STUART A. SMITH,

Assistant to the Solkoitor General,

GARY 8. ALLEN,

STEPHEN M. GELBER,

Attorneys,

Department of Justice,

Washington, D.C, 20580.

JEANNE L. DOBRES,

Attorney,

Internal Revenue Service,

Washington, D.C., 20224

IESE EES Ss Se eT ee

(1) Taxable investment income_____.__._____

(2) Gain from operations__...._...-....____

B. The facts of this case and the proceedings below___

SUIRINNES CF CREEL. cccesccencecsqenseccaisteduamis

ATEN... ccctcccrecucwcrocnscwetscccunnsntccecccee

A life insurance company that includes the net val-

uation portion of its deferred and uncollected pre-

miums in its “reserves” for federal tax purposes on

the assumption that the gross annual premiums on its

policies have been paid in full on the policy anniver-

sary dates must consistently apply that assumption for

all of its tax computations and include the full amount

of its deferred and uncollected premiums in its “assets”

and “gross amount of premiums”_.........._..___-

A, TRIE sdtiticderctntubtnbidinndarsicuceccas

B. A life insurance reserve arises upon the company’s

assumption of the risk and the policyholder’s pay-

Stns 68 SUR nc nensvceeesessesestitondans

C. A life insurance company that increases its “re-

serves” by the net valuation portion of its de-

ferred and uncollected premiums must include the

gross amount of such premiums in its computa-

tion of “assets” under Section 805(b) (4) --------

D. A life insurance company that includes the net val-

uation portion of deferred and uncollected pre-

miums in “reserves” must include the gross

amount of such premiums in its computation of

“gross amount of premiums” under Section 809

(c)(1) -------------------------------------

a eee

Caan

noe

Cases:

Argument—Continned —

E. Alternatively, if deferred and uncollected pre-

miums are not included in “assets” and “gross

amount of premiums,” the net valuation portion

of those premiums must likewise be excluded

I eo vccinivanliinenitiittniiiedionsii

CED cnccccdonmuwccinentstdtaisbatiibblanmandt 58

REGUS ccc cctccunannintvinitinnbitiinidditnaasaaiipia 1A

CITATIONS

Bankers Union Life Insurance Co. v. Commissioner, 62

aie GB. cccscnenncincstvindiibncrinitaiciiniilinarsslishisliciiyhiiaiaiaiiipiatiaisia 14, 42, 46

Commissioner v. South Texas Co., 333 U.S. 496__...-- 28

Continental Life Insurance Co. v. Commissioner, 5

A cle Ci eanienieniennnirntnatitrincagitnisenmpiiieibiiailimaii aii 28

Franklin Life Insurance Co. v. United States, 399 F, 2d

757, certiorari denied, 393 U.S. 1118___ 15, 41, 48, 50, 52, 57

Helvering v. Independent Life Ins. Co.,292 U.S. 371. 54

Helvering vy. Inter-Mountain Life Ins. Co., 294 U.S.

FED entre teins teintnhiniguahilitldeninllaindiaiittiniibllials <histaitnniaicnsts 30

Helvering v. LeGierse, 312 U.S. 531_------.----.--- 29

Helvering v. Wilshire Oil Co., 308 U.S. 90_.-------- 28

Jefferson Standard Life Insurance Co. v. United

States, 408 F. 2d 842, certiorari denied, 396 U.S.

GE cccvncencuctanunuiéadinideibiads 15, 18, 42, 43, 50-51, 53

Mass. Mutual Life Ins. Co. v. United States, 288 U.S.

SD pcenecconcenscenss cesntiantnehitltntminednn 28

McCoach v. Insurance Company of North America, 244

Wee | Bicereinnnendenngaseeiidbaiitaliiniinn 47

Midland National Life Insurance Co. v. Commissioner,

OS FES: CeO cc ncnnwentsictinniimapintiilicsinadmpens 42

Monumental Life Insurance Co. v. United States, No.

71-73, decided November 19, 1976 (Ct. Cl.) (76-2

De GUUS Petinnicacantémininbéhpiapremeniban 57

New Colonial Co. v. Helvering, 292 U.S. 485_-------- 54

New York Life Ins. Co. v. Bowers, 283 U.S, 242______- 30

New York Life Ins. Co. v. Edwards, 271 US.

DUD sicher rescteitta cctdestasiedtabisieasnciiatbetiecieiadetatia ia 30, 44, 56

Union Mutual Life Insurance Co. v. United States. No.

74-112 S.D., decided September 14, 1976 (D. Me.)

OF a en 42

Cases—Continued

United Life and Accident Insurance Co. v. United

Biahen, GED Y.. Bapt.. Mba .cccvvsiucseccsscccee- 42

United States vy. Atlas Life Ins. Co., 381 U.S.

SRE ae tata ean) 9.6 4, 6, 21, 30, 39, 40

United States v. Catto, 384 U.S. 102_..------------- 28

W. L. Moody Cotton Co. v. Commissioner, 143 F. 2d

TID nnnashsemmnsscpimiabiniebibicseccsbaccasee 28

Western and Southern Life Insurance Co, v. Commis-

sioner, 460 F. 2d 8, certiorari denied, 409 U.S.

IT sinartntistcisimmsatipiondedsnddei cake diais 15, 42, 51, 53

Western National Life Insurance Co. of Texas v. Com-

missioner, 50 T.C. 285, modified, 51 T.C. 824,

reversed, 432 F, 2d 298___-_______- 15, 42, 45, 46, 49, 51,53

Williams v. Union Central Life Insurance Co., 291 U.S.

OD cchtiiitintinennpetimnnmmnanindiplsighiinitiiiniitinas 30

Statutes and regulations:

Income Tax Act of 1913, c. 16, Section II(G) (b), 38

bas... BAA, FR Bi Rcinciiecnttinpinadosiiiiguniidwocs 29

Internal Revenue Code of 1939, Section 203(a) (26

CR: CORI OE hited eitidesiiqntndcsabwwndencus 23

Internal Revenue Code of 1954, as amended (26 U.S.C.

(1958 ed., Supp. IT)):

OEE Te nnccneccivccccceneccceswecsenceece 2,1A

OT: FER 6 nicdmctbovesitsestianicimenewst ‘ 8

SE BECP (3) cncrcmnncccmewecswesuds 4,12, 56,1A

EE GG iin sinc mitct a cbninnneinnca 31

Sections 801-820.....---------- mnetnbine mien 3, 21, 50

GONG, Bi iiiciincitinaictindvectoinavindewsiuces 2,2A

I I nctmineicsetinmengierpentcaienlgit 3,24

Battie BER (1) cine cenvnticcccwecewnns 3,2A-3A

Ee eRe 3, 3A

IGA BE icieviectwticdtecinvicsoosccedeecsus 2,3, 3A

ON | eee eae 39, 40, 3A

Deeb TRIES) siriicimcciisinednetivvaneinhowwss 5, 39,54

ell 2,12, 14, 8A

Bodies BIBGS) incccknncsonmeeceanedodcess 39, 40, 8A

Section 805(a) (4)---.------ snnpnnnnadiinadiiidin 27

ees BI iit eh nttite pe cicicivcneenionn 6, 39, 40, 8A

Besta, GIGI) (2) ncnnetrencnncccceensthssoncsion 5, 8A

PR BEEN ccanscncccnagummacccenesccce 5, 8A

Statutes and regulations—Continued

Page

Section 805(b)(8)................... 5, 8A-9A

t-te og, ae passim, 9A

UI Cid a eciet hiinsncicnmaidcakianiiin dais 6,10A

att ta aie, ELLIE LEE NES: 39,10A

ste sts Ce RE a 6

eb SPENT 2, 3, 12, 13, 14,51, 11A

Section 809(b)(1)(A)-............ 51,12A

RY I cahiitiiadessidciciinsidnaehe Yuden ceca 52, 13A

Section 600(¢)(1).................. passim, 13A

apie spect TTL: 7, 52,14A

pug tigth sg! en 7,52,144

SS Calica chcinisleitniein bikin tiaidnaechentas 2,17A

staat tage nL TE TE 4

UII i sississnaniihinchcsititiid-eclasciasan cha sisi se. 2,18A

NTN cinsonnsibenittinebidiiinininic. cites oc 42d 48

CUE DO iscsi nimniencicteesinaadbialiiecs polio 3

seeing ag, 14

Life Insurance Company Income Tax Act of 1959,

Section 4, 78 Gtet. 168i so 3

Life Insurance Company Tax Act of 1955, c. 83, Sec-

tion 806, 70 Ghat. 96,41 no 23

Revenue Act of 1916, c. 463, Section 12(a) Second, 39

RO. TO: Te iiinncnniteiicintiainamindiiaens tie a 22

Revenue Act of 1918, c. 18, Section 234(a) (10), 40

GUD. BIOL, WD ckccctniniiielandliee aoe 22

Revenue Act of 1921, c. 136, Sections 242-947, 42 Stat.

Sy We Sc vcitisentenseineiniidns heh Sie. 22

Revenue Act of 1924, c. 234, Section 245(a), 43 Stat.

TR 0 cece ssictctinpersienininertianiinaiain ee hme ca 23

Revenue Act of 1926, c. 27, Section 245 (a), 44 Stat. 9,

DF cccectantimemanymwnntiingntniitinkaite lil 23

Revenue Act of 1928, c, 852, Section 203(a), 45 Stat.

TE, BD cctsimcimarninnincgins iia Been 23

Revenue Act of 1932, c. 209, Section 203(a), 47 Stat.

FED, TB rccscesennnmtiavenntvatiiminiaiaiitbiae ha. 23

Revenue Act of 1934, c. 277, Section 203 (a), 48 Stat.

060, TED... .wecoccesansomevesidnutsiniosilldspeinds 23

Revenue Act of 1936, c. 690, Section 203(a), 49 Stat.

SOO, SIDI ese x ssesessorsensesicsioentslesbeabpaiananiapiaitninics 23

Statutes and regulations—Continued Page

Revenue Act of 1938, c. 289, Section 203(a), 52 Stat.

IDG, Gi ictbitimeteaios dit fi ei 23

Revenue Act of 1950, c. 994; Section 401 (a), 64 Stat.

aes TR RS NE PE RO aE RT AIS 23

Revenue Act of 1951, c. 521, Section 336, 65 Stat. 452,

sept SE EE Te 23

36 Okla. Stat. Ann, (1958) :-

ppd onan ge, og REE SESE Ce eT 33

ep tere. TR ETD a ee 33

Pe i itiditbdiincndbhtiiit cs a 25

Treasury Regulations No. 33 (Rev.), Art. 239, pars.

PI A ctesicmalebiiicwaiiebindee th i catta te a 22

Treasury Regulations No. 45, Arts. 548, 549, 569

FE SAINTS Save Om: SR eeN OT OOee eee oe 22

Treasury Regulations on Income Tax (26 C.F.R.) :

. &.. .. Serre 31

cea gE ee TT ee ee 2,19A

Section 1.801-4(f)___...___ 19, 27, 38, 56, 57, 58, 19A

ck TTL DIETS RESIS 2,20A

Section 1.805-5(a)(4)..............______ 13, 38, 204

Section 1.805(a) (4) (ii)_---______ 19, 27, 45, 55, 57, 20A

I 2

ee DOOR 13, 27, 52, 55

Section 1.809-4(a)(1)_-....... 19, 38, 57

Miscellaneous:

Beardsley, Life Company Annual Statement Hand-

eget tot ang IS ETI MENT Da 37

105 Cong. Rec. 8428-8429 (1959)_....... 24

Denney, Rua & Schoen, Federal Income Taxation of

Insurance Companies (2d ed. 1966)_______._______ 23

Ernst & Ernst, @AAP—Stock Life Companies (1974)_ 37,44

Greider and Beadles, Principles of Life Insurance

UN, iced en 32

Hearings on H.R. 4245 (Tax Formula for Life In-

surance Companies) before the Senate Committee

on Finance, 86th Cong., 1st Sess, (1959) _..________ 50

Hearings on the Taxation of Income of Life Insurance

Companies before the Subcommittee on Internal

Revenue Taxation of the House Committee on Ways

Ned and Means, 85th Cong., 2d Sess. (1958) .......____- 50

Saat

inc

Ns:

ihe, =

Miscellaneous—Continued Page

H.R. Rep. No. 34, 86th Cong., Ist Sess. (1959) __ 24, 39, 40, 49

Huebner and Black, Life Jnsurance (9th ed. 1976) _ 30, 31, 33

MacLean, Life Insurance (9th ed. 1962) ---.------ 9, 33, 37

Magee, Life Insurance (3d ed. 1958) ~------------ 30, 31, 32

McGill, Life Insurance (Rev. ed. 1967) -~------- 9, 30, 32, 39

Official Report of the Pruccedings of the National In-

surance Convention of the United States (1871) ---- 34

A Preliminary Statement of the Facts and Issues with

Respect to the Federal Taxation of Life Insurance

Companies, Subcommittee on the Taxation of Life

Insurance Companies, House Committee on Ways

and Means (November 1954) -.---..----------- 22, 23, 24

Report on the Taxation of Life Insurance Companies,

Subcommittee on Internal Revenue Taxation, House

Committee on Ways and Means (December 31,

MBGBD. .ndcncicncecowteencstenetbiihnitiieadbieliioins 23

S. Rep. No. 291, 86th Cong., Ist Sess. (1959) _.-.-- 24, 39, 49

Wightman, Life Insurance Statements and Accounts

CHEE OG) ncccnnnnnnasusncnesvtnntsiitaiindiage 8, 34, 37, 47

Gn the Supreme Court of the United States

OctToBeR TERM, 1976

No. 75-1771

COMMISSIONER OF INTERNAL REVENUE, PETITIONER

StTanDarD Lire & AccipentT INsuRANCE COMPANY

ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF

APPEALS FOR THE TENTH CIRCUIT

BRIEF FOR THE PETITIONER

CPINIONS BELOW

The memorandum opinion of the Tax Court (Pet.

App. A la-8a) is not officially reported. The opinion

of the court of appeals (Pet. App. B 9a-23a) is

reported at 525 F. 2d 786.

JURISDICTION

The judgment of the court of appeals (Pet. App. C

24a-25a) was entered on November 6, 1975. The court

of appeals denied a petition for rehearing with sug-

gestion for rehearing en bane on January 9, 1976

(Pet. App. D 26a-27a). By orders dated March 30

and April 26, 1976, Mr. Justice White extended the

(1)

time for filing a petition for a writ of certiorari to

and including June 6, 1976. The petition was filed on

June 4, 1976, and was granted on October 4, 1976

(A. 142). The jurisdiction of this Court rests on

28 U.S.C. 1254(1).

QUESTION PRESENTED

Whether a life insurance company that reduces its

federal tax liability by including in its “reserves’’ the

amount of the net valuation portion of its deferred

and uncollected premiums on the assumption that the

full annual premiums on all of its outstanding policies

have been paid on their anniversary dates, must apply

the same assumption and likewise include the full

amount of its deferred and uncollected premiums in

its “assets’’ and “gross amount of premiums’’ under

Sections 805(b)(4) and 809(c)(1) of the Internal

Revenue Code of 1954, or else must exclude such pre-

miums altogether in computing its “reserves,” ‘‘as-

sets” and “gross amount of premiums”; or whether,

as the court of appeals held, it may exclude its de-

ferred and uncollected premiums from “assets” and

“‘gross amount of premiums” but nevertheless include

the net valuation portion of such premiums in its

reserves.

STATUTES AND REGULATIONS INVOLVED

The pertinent provisions of Sections 801, 802, 804,

805, 809, 810 and 818 of the Internal Revenue Code

of 1954 as amended (26 U.S.C. (1958 ed., Supp. IT)),

and of Treasury Regulations on Income Tax, Sections

1.801+4, 1.805-5 and 1.8094 (26 C.F.R.), set forth

in the Appendix, infra, pp. 14-23a.

STATEMENT

A. THE STATUTE

The Life Insurance Company Income Tax Act of

1959, as set forth in Sections 801-820 of the Internal

Revenue Code of 1954, provides a three-phase pro-

cedure for the taxation of life insurance companies.’

The primary categories of inconie subject te tax are

‘‘taxable investment income’’ (as defined in Sec-

tion 804) and “gain from operations” (as defined in

Section 809). “Taxable investment income” is, as the

term implies, income from interest, dividends, and

the like. “Gain from operations” is a broader cate-

gory encompassing total net income from all sources,

i.e., investment income plus other income, principally

underwriting income from premiums.

Pursuant to Section 802(b), the total tax base of a life

insurance company to which the ordinary corporate

rates are applied is the sum of the tax bases derived

from computations under each of the three phases. The

Phase I tax base (Section 802(b)(1)) is the smaller

of “taxable investment income” or “gain from opera-

tions.’”’ The Phase II tax base is equal to 50 percent

of the excess, if any, of the gain from operations over

taxable investment income (Section 802(b)(2)). Fi-

nally, the portion of a company’s “gain from opera-

1 Section 4 of the Life Insurance Company Income Tax Act of

1959, 73 Stat. 141, makes the Act applicable to all taxable years

beginning after December 31, 1957. Pursuant to Section 843 of the

Code, life insurance companies are required to report their income

on a calendar year basis.

tions” or underwriting income that is not taxed under

Phase IT becomes the Phase III tax base when such

income is made available to shareholders (Section

815). See United States v. Atlas Life Ins. Co., 381

U.S. 233, 235 n. 2.

For purposes of the Phase I and II tax bases, the

determination of the total tax base involves a series

of computations directed toward arriving at the

fundamental categories of “taxable investment in-

come” and ‘‘gain from operations.” * The statute ree-

ognizes that life insurance companies are required to

compute their projected future liabilities to their

policyholders by establishing policyholder reserves to

meet future claims and that the annual additions to

those reserves should be free of tax. Section 801(b)

(1) of the Code defines life insurance reserves and the

statutory scheme provides a method for establishing

the amount which, for tax purposes, is deemed to be

added each year to these reserves.

Accordingly, the computations of both “taxable in-

vestment income” and “gain from operations” pro-

vide a mechanism for excluding from the total tax

base those portions of investment and premium in-

come that must be held to meet policyholder obliga-

tions. The payment of premiums necessarily results in

* There is a variation between the Phase I and II methods of

computing the company’s share of “investment income.” Simply

stated, the Phase I computation is based upon the company’s actual

earnings experience, while the Phase II computation permits the

use of the company’s assumed rate of interest.

the creation of a reserve liability reflecting amounts

that the company must invest at an assumed rate

of interest to meet future death claims. All other

elements of the tax computation remaining constant,

as the reserves and the ameunt of income necessary

to cover the reserves increase, the federal tax base

will correspondingly decrease.

(1) Taxable Investment Income.—With respect to

determining ‘‘taxable investment income,” the statu-

tory computations are generally directed toward divid-

ing the investment income for the taxable year on an

item-by-item basis between a nontaxable ‘‘policyhold-

ers’ share” deemed necessary for policyholder reserve

obligations and a taxable “life insurance company’s

share.’’ This is accomplished by dividing the com-

pany’s “investment yield’’* by the “assets’’ of the

company * to derive the company’s actual earnings

rate. This rate, after adjustment,’ is then multiplied

® Section 804(c) defines “investment yield” as “gross investment

income,” less specified deductions, including investment expenses,

real estate expenses, and depreciation and trade and business ex-

penses, subject to certain exceptions and limitations.

* Section 805(b) (4) defines “assets” as “all assets of the com-

pany * * * other than real and personal property (excluding

money) used by it in carrying on un insurance trade or business.”

Thus, a building owned by the company to house its offices and its

furniture and fixtures are excluded from the computation of its

“assets,”

° The adjusted earnings rate (which the statute calls the “ad-

justed reserves rate”) equals the current earnings rate, or the aver-

age of the current earnings rate and the rates from the four years

prior to the current year, whichever is lower. See Section 805(b)

(1), (2) and (3).

by the company’s adjucte ~ ue insurance reserves for

policyholders.’ The resulting produ*t is the exclusion

from the company’s tax base for tae amounts of in-

vestment income that are considered xecessary for tax

purposes to cover its life insurance reserves.

The foregoing computation may be expressed by the

following formuiae:

Investment Yield ;

(1) a = Earning Rate

(2) Earning Ratex Reserves=Tax Exclusion

(3) Investment Yield

Assets

X Reserves = Tax Exclusion

Reserves

Assets

These formulae demonstrate .aat the proportion of the

company’s reserves to its total assets controls the frac-

tional amount of the investment income that will be

excluded from tax. Thus, as “reserves” increase in pro-

Investment Yieldx< = Tax Exclusion

* Adjusted life insurance reserves are the company’s life insur-

ance reserves for policyholder obligations, adjusted for the differ-

ence bet ween the assumed interest rate used by the company in com-

puting the reserves and the actual earnings rate. The reserve is re-

duced by 10 percent for every 1 percent by which the applicable

earnings rate exceeds the company’s assumed rate. The resulting

figure—the adjusted life insurance reserves—is then multiplied

by the company’s adjusted earnings rate. To the amount so calcu-

lated are added pension plan reserve requirements and interest

paid during the taxable year, all of which are excluded from the

copmany’s tax base. See Sction 805; United States v. Atlas Life

Ins. Co., supra, 381 U.S. at 236 n. 4.

portion to the company’s assets, the tax exclusion will

likewise increase.

(%) Gain from Operations.—The company’s ‘‘gain

frum operations” includes its income from ail sources,

less certain specified deductions. Since ‘‘gain from op-

erations” includes the element of investment income,

the computation of “gain from operations”’ is further

directed toward taking inte account income from

other sources, principally underwriting income. Un-

derwriting gains result when the premium charged

for a policy exceeds the company’s costs in provid-

ing the coverage. Thus, in addition to its share of

investment income, the principal item in computing

“gain from operations” is the “gross amount of pre-

miums and other consideration * * * on insurance

and annuity contracts * * *.” (See. 809(c)(1)).

The specified deductions (Section 809(d)) include

noninvestment expenses, such as underwriting expenses,

salaries, general overhead, and claims paid. In accord

with the congressional decision to exclude net addi-

tions to policyholder reserves from the tax base,

Section 809(d)(2) generally permits a deduction for

increases in reserves during the taxable year attrib-

utable to the premiums included in income under

Section 809(c)(1). When the various deductions are

subtracted from the company’s gross income from all

sources, the resulting figure is the “gain from

operations.”

Since “gross amount of premiums” is an income

item in the above computation, increases in that ele-

ment will result in a higher figure for “gain from op-

erations”’ and a larger tax base. Conversely, since the

“net increase in reserves” is a deduction item, incre-

ments to that statutory element will decrease the tax

base.

B. THE FACTS OF THIS CASE AND ee —_— BELOW

1. Respondent is an Oxiahoma stock corporation

engaged in the business of issuing insurance. During

1958-1961, it qualified for preferential federal tax

treatment as a “‘life insurance company,” as that term

is defined by Section 801(a) of the Internal Revenue

Code of 1954. As a life insurance company, respondent

was subject to supervision and audit by the Oklahoma

Insurance Commissioner and by officials of the other

states in which it did business (Pet. App. A 2a-—3a;

Pet. App. B 10a).’

During the years in question respondent received

income consisting of life insurance premiums and the

return on the investment of those premiums and pre-

viously received premiums (Exs. A, B, and D, A.

23-24, 25, 33-34, 36, 45-46, 48). The “gross premium”

is the amount actually charged the insured, and con-

* In order to facilitate the work of making these examinations,

the National Association of Insurance Commissioners (NAIC)

has divided the United States intc various zones. Under this zone

system, an examination is made every three years of each company

whose operations extend beyond any one zone. The examinations

are performed by a team of auditors from the insurance depart-

ment of the company’s domiciliary state and from each of the

other zones in which the company does business. Where a company

operates in more than one state but not in more than one zone, the

outside auditors are chosen from one or more states in the zone.

See Wightman, Life Jnsurance Statements and Accounts 31-32

(1952 ed.).

sists of the “net valuation premium’”’ and “‘loading.”

The “net valuation premium’ is the amount com-

puted under applicable actuarial tables (based upon

mortality and interest rate assumptions) that the

company must accumulate in order to pay all death

claims." The net valuation premium reflects the

amount, together with assumed interest, that respond-

ent wes required under local iaw to add each year

to its policy reserves. “Loading” is the amount added

to the “net valuation premium” for agents’ commis-

sions and other acquisition costs, management and op-

erating expenses, profits and dividends. (Pet. App.

B 10a).

Respondent’s policyholders pay their premiums an-

nually on the anniversary dates of their policies, or

in semi-annual, quarterly, or monthly installments.

When the policyholders elect to pay their premiums

other than annually, respondent imposes a supple-

mental charge in addition to the annual premium

* On a level premium plan, the aggregate amount of the net valu-

ation premiums on a block of policies will more than cover the

assumed death claims during the initial years the policies are in

effect. In practical terms, the total amount of the net valuation

premiums on these policies will be greater during these early years

than the amount of death claims made against the company. Con-

versely, during the later years when the age of the policyholders

has increased, death claims will exceed the aggregate amount of

the net valuation portion of the level premiums currently paid by

the policyholders. The excess amounts received by the company

in the early years, together with interest at an assumed rate, will

enable the company to meet death claims during the later years,

See McGill, Life Insurance 32-36, 218-219 (Rev. ed. 1967);

MacLean, Life Insurance 13-17, 111-116 (9th ed. 1962).

(Stip. par 6, A. 16).° “Deferred premiums” are those

portions of the gross annual premiums that become

due after the end of each calendar year but before

the next anniversary date of the policy. Respondent’s

life insurance policies provide for a grace period of

31 days or longer for the payment of premiums dur-

ing which the policy is fully effective. “Due and

unpaid premiums” or ‘“‘uncollected premiums”’ are

premiums that are due and payable before the end of

the calendar year but which have not been paid (Pet.

App. B 11a; Stip. pars. 6-8, A. 16-17).

The insured has no obtigation to pay the deferred

or due and unpaid premiums on his policy. However,

the insurer has no obligation to continue the insurance

coverage beyond the period for which premiums have

been paid. Thus, non-payment causes the policy to

lapse (Pet. App. B lla).

2. Respondent computed its reserves on its policies

on the assumption that the annul premiums had been

paid in full as of the anniversary date of each policy,

whether or not this was in fact the case. Accordingly,

on its annual financial statements required to be filed

under state law, respondent increased its reserves by

the amount of the net valuation portion of both its

fully paid and its deferred and uncollected premiums

(Stip. par. 11, A. 17; Pet. App. A 3a; Pet. App. B

lla). Respondent reflected the resulting figure on its

* The increased annual premium charged to the policyholders

electing installment payment of their premium serves to compen-

sate the company for the interest it would have otherwise earned

had the premium been paid in full on the anniversary date.

annual statements as its “Aggregate reserve for life

policies and contracts” (Exs. E, F, H, A. 61, 76, 91).’°

On its annual statements, respondent offset the inclu-

sion of the net valuation portion of its deferred and

uncollected premiums in reserves by also including

such amounts on the assets side of the balance sheet

(Pet. App. A 4a; Exs. E, F, H, A. 60, 75, 90)."

Respondent likewise computed its reserves for fed-

eral income tax purposes on the basis of the same

assumption that the annual premiums on all of its

outstanding policies had been paid in full as of the

authorities are designed by the Nationa] Association of Insurance

Commissioners (NAIC) to promote uniform reporting require-

ments in the various states, As a result, they are ofte1. referred to

as the “NAIC annual statement” (see Pet. App. A 4a and n. 3).

These annual reports contain summary statements of the com-

pany’s total assets and the total of its various reserves and other

liability accounts established as of the end of each year. Examina-

tion of the company’s annual report enables the various insurance

commissioners in the states in which the company conducts busi-

ness to measure the company’s solvency and to determine whether

it has sufficient assets on hand to cover its potential obligations to

its policyholders (see Exs. E, F, H, A. 60-61, 75-76, 90-91).

* Respondent made a similar adjustment on the “Summary of

Operations” schedule of its annual financial statement designed to

offset the inclusion in its reserves of its deferred and uncollected

premiums. In order to compensate for the deduction of the in-

crease in reserves attributable to the deferred and uncollected pre-

miums, it included the gross amount of such premiums in income

and further deducted the increase in loading on such premiums as

an expense, The net effect of these offsetting entries was to elimi-

nate the impact of deferred and uncollected premiums on respond-

ent’s summary of operations (Pet. App. A 5a; Exs. E, F, H, A. 62,

77, 92). See pp. 35-37, n. 26, infra. |

226-549—77——2

anniversary dates of the policies. It therefore in-

eluded the net valuation portion of its “deferred

and uncollected premiums’’™” in its “life insurance

reserves” under Section 801(b)(1) of the Internal

Revenue Code of 1954. Respondent accordingly added

these amounts of its reserves in making the federal

tax computations under Sections 805 and 809 of the

Code (Pet. App. A 3a; Pet. App. B lla).

Although respondent assumed that the annual pre-

miums had been paid in full on the anniversary

dates of all of the policies for purposes of computing

its reserves on its 1958, 1959, and 1961 tax returns,

it did not consistently apply that assumption in mak-

ing the other required computations on its returns

for those years. In computing its “assets’’ under

Section 805(b)(4) on its 1958 return, respondent

excluded the entire amount of deferred and uncol-

lected premiums on the converse assumption that it

did not receive the deferred and uncollected pre-

miums during the taxable year. On its 1959 and 1961

returns, respondent computed its “assets” under Sec-

tion 805(b) (4) in accordance with a different assump-

tion. For those years, it included in its assets only

the net valuation portion of its deferred and uncol-

lected premiums (t.e., exclusive of loading). Similarly,

in its Section 809(c)(1) computation of *‘eross

amount of premiums’ on its 1958, 1959, and 1961

returns, respondent included only the net valuation

_™ For purposes of convenience, we employ the conventional term

“deferred and uncollected premiums” to include deferred premi-

ums, and due and unpaid or ucollected premiums.

portion of its deferred and uncollected premiums.”

(Pet. App. A 5a-6a; Pet. App. B 1la-12a).

Respondent’s exclusions of its deferred and uncol-

lected premiums from the computations of its ‘‘assets”

and “gross amount of premiums,” coupled with its in-

clusion of such premiums in its ‘‘reserves,” had the

effect of reducing its ‘‘taxable investment income” and

its ‘‘gain from operations,” and thus its tax.

3. On audit, the Commissioner of Internal Revenue

accepted respondent’s computation of its reserves

based upon the assumption that the annual premiums

had been paid in full on alt policies in force. However,

pursuant to Treasury Regulations, Sections 1.805-5

(a) (4) and 1.809-4(a), the Commissioner applied this

assumption as well to the other tax computations;

he accordingly concluded that respondent was re-

quired to include the gross amount of its deferred and

uncollected premiums in “assets” and in “gross

amount of premiums’’ under Sections 805(b)(4) and

809(¢) (1), respectively (Pet. App. B 12a). The Com-

missioner thereby determined deficiencies ugainst re-

spondent for 1958, 1959, and 1961, of $25,974.93, $90,-

647.02 and $34,986.04, respectively (Pet. App. A la).™

‘* The courts below characterized respondent as having claimed

“deductions for the increases in loading” in computing its gains

from operations under Section 809 (Pet. App. A 6a; Pet. App. B

12a). In fact, respondent actually included the gross amount of

deferred and uncollected premiums in its “gross amount of pre-

miums” but claimed a deduction for the loading portion of these

premiums. The net effect was the same as if respondent included

only the net valuation portion of its deferred and uncollected pre-

miums in its “gross amount of premiums.”

‘* The Commissioner’s adjustments did not result in a deficiency

for 1960 (A. 103).

The Commissioner also imposed a five percent penalty under

On the authority of its unanimous reviewed decision

in Bankers Union Life Insurance Co. vy. Commissioner,

62 T.C. 661, the Tax Court upheld the Commissioner’s

determination that the assumption that the annual

premiums had been paid in full on all policies had to

be consistently applied to all of the tax computations.

It therefore held that respondent was required to in-

clude its deferred and uncollected premiums in

“assets’’ under Section 805(b)(4) and in “gross

amount of premiums’’ under Section 809(¢) (1), with-

out offset or deduction with respect to the loading

portion of these premiums (Pet. App. A 7a-8a).

A divided court of appeals reversed (Pet. App. B

9a-23a). The court held that respondent was not re-

quired to include any portion of its deferred and un-

collected premiums in ‘‘assets” and “yross amount of

premiums,” even though it included the net valuation

portion of these premiums in its reserves for purposes

of the Sections 805 and 809 computations. In so hold-

ing, the court accorded respondent the benefit of more

favorable tax treatment than it claimed on its 1959

and 1961 returns, when it included the net valuation

portions of the deferred and uncollected premiums in

‘“‘assets” and in “gross amount of premiums” as well

as in its ‘‘reserves” (Pet. App. B lla-12a).

While the court acknowledged that four other courts

of appeals had upheld the Commissioner’s position

Section 6653(a) of the Code because of respondent's negligence

or intentional disregard of the Regulations (Pet, App. A la; A.

103). The parties have stipulated that the five percent penalty

would apply to any deficiency upheld in the ultimate disposition

of the case (Stip. par. 22, A. 19).

(Pet. App. B 13a-14a), it stated that those decisions

“are predicated on a fiction” (Pet. App. B 16a). It

reasoned that respondent “has no legal, enforceable

right to collect any unpaid premiums * * *” (Pet.

App. B 18a), and that “it is * * * obvious that unpaid

premiums are not ‘assets used ly a company in

carrying on a trade or business’ and that they cannot

have any ‘viable’ asset basis until collected’’ (ibid.).

@he court likewise concluded that the “gross amount

of premiums” under Section 809(c)(1) “cannot ex-

tend to unpaid premiums ia which a taxpayer has no

legally enforceable right” (Pet. App. B 21a). In so

holding, the court invalidated the Treasury Regula-

tions that mandated the Commissioner’s consistent

treatment of deferred and uncollected premiums in

the computation of “reserves,’’ “assets,” and “gross

amount of premiums’’ (Pet. App. B 16a-19a).

After observing that the issue ‘“‘has been considered

‘y four other Circuits, and in ee 4 instance * * *

{those courts had] reached a conclusion contrary to

the result reached by the majority * * *,” the dis-

senting judge stated that he was ‘‘persuaded that

the result reached by the Fourth, Fifth, Sixth, and

Seventh Circuits is the proper one’ (Pet. App. B

22a).

* Franklin Life Insurance Co. v. United States, 399 F. 2d 757

(C.A, 7), certiorari denied, 393 U.S. 1118; Jefferson Standard

Life Insurance Co, v. United States, 408 F. 2d 842 (C.A. 4) cer-

tiorari denied, 396 U.S. 828; Western National Life Insurance Co.

of Texas v. Commissioner, 432 F. 2d 208 (C.A. 5); Western and

Southern Life Insurance Co. v. Commissioner, 460 F, 2d 8 (C.A.

6), certiorari denied, 409 U.S. 1068.

SUMMARY OF ARGUMENT

The Life Insurance Company Income Tax Act of

1959 provides a three-phase procedure for the taxa-

tion of life insurance companies. The primary catego-

ries of income subject to tax are ‘‘taxable investment

income’ and “gain from operations.” Pursuant to the

statute, the computations of both “taxable investment

income” and “gain from operations” provide a mecha-

nism for excluding from the total tax base those por-

tions of a company’s investment and premium income

that must be held to meet its policyholder obligations.

The three principal elements that enter into the fed-

eral income tax computations of a life insurance com-

pany are: (1) “reserves,” (2) ‘‘assets,” and (3) ‘‘gross

amount of premiums.” The computation of the tax-

free portion of investment income generally involves

multiplying the company’s total investment income by

the fraction Reserves, The computation of ‘gain from

Assets

operations” is a more traditional net income caleu-

lation, with “gross amount of premiums” included as

an income item and “reserves” subtracted as a deduc-

tible expense. Thus, all other elements of the tax

computation remaining constant, as a life insurance

company’s “reserves” increase, its tax liability will

_ correspondingly decrease, Conversely, as the com-

pany’s “assets” and “gross amount of premiums”

increase, its tax liability will also increase.

The question presented in this case involves the

extent to which “deferred and uncollected premiums”

are taken into account in determining a life insurance

company’s “reserves,’’ “‘assets,” and “gross amount of

premiums.” Deferred and uncollected premiums are

the sum of: (1) those portions of the gross annual

premiums that become due after the end of the

calendar year but before the next anniversary dates

of the policies because of the policyholders’ election

to pay their annual premium in installments; and (2)

the premiums that have become due and payable be-

fore the end of the year but that have not been paid.

In both instances, it is undisputed that the company

does not, have deferred and uncollected premiums on

hand as of the end of the calendar year and has no

legal right to compel their payment. In the event of

nonpayment, the policy lapses.

Following the longstanding accounting convention

of the life insurance industry, respondent computed

its year-end reserves for both financial reporting and

federal tax purposes on the assumption that the full

annual premium had been paid as of the anniversary

dates of all of its policies in force. Insurance reserves

arise upon the acceptance of a risk and the payment

of premiums. Thus, respondent’s premium receipt

assumption resulted in an overstatement of its re-

serves by the net valuation portion of the deferred

and uncollected premiums because it had not in fact

received the full annual premiums and did not in fact

have any liability to the policyholders with respect to’

these unpaid premiums. Respondent’s increase in re-

serves based upon its assumption of full premium

payment had the effect of decreasing its tax liability.

However, in computing its ‘‘assets’’ and ‘‘gross

amount of premiums”—statutory elements that

increase a life insurance company’s tax liability—

respondent abandoned the full premium payment

assumption upon which it calculated its reserves. For

those purposes, it included none of the deferred and

uncollected premiums in “assets” for 1958, and only

the lesser ‘‘net valuation’’ portion of those premiums

in “assets” for 1959 and 1961 and “‘gross amount of

premiums”’ for all those years. j

Four courts of appeals have correctly held that a

life insurance company cannot first treat its deferred

and uncollected premiums as having been paid dur-

ing the taxable year for purposes of increasing its

“reserves” and thereby reducing its tax base; and then

turn around and claim that it has not received the

identical premiums for purposes of the “assets’’ and

“gross amount of premiums” computations. The deci-

sion below improperly treats the deferred and uncol-

lected premiums as both having been paid and

having not been paid during the taxable year.

The integrity of the federal tax formulae, which

rest upon the proportionate relationship between ‘‘re-

serves’’ and ‘‘assets,”’ demands that all of its statutory

elements be computed in accordance with a consistent

set of assumptions. As the Fourth Circuit succinctly

stated in Jefferson Standard Life Insurance Co. v.

United States, 408 F. 2d 842, 856, certiorari denied,

396 U.S. 828: “Symmetry would require * * * that

both sides of the equation by which taxable income

is determined be treated alike. Thus, if taxpayer treats

its reserve liabilities for tax purposes with a full

year’s net valuation * * * it should be required to

include gross annual premiums * * *” in its assets

and premium income.

The pertinent Treasury Regulations (Sections

1.805-5(a)(4)(ii) and 1.809-4(a)(1)), which the

court of appeals erroneously invalidated, likewise rec-

ognize the insurance industry’s convention of over-

stating reserves by assuming full annual premium

payment, They accordingly provide that a company

must include the gross amount of deferred and un-

collected premiums in “assets” and “gross amount of

premiums” as long as it computes its reserves on the

assumption that these premiums have been paid. If a

life insurance company asumes that the deferred and

uncollected premiums on all of its policies have been

paid as of their anniversary dates and increases its

reserves by the net valuation of such premiums, that

assumption necessarily stands on the hypothesis that

the company has received the full amount of those

premiums.

Hence, our primary position is that gross deferred

and uncollected premiums must be included in ‘‘as-

sets” and “gross amount of premiums” if the net

valuation portion of such premiums is to be included

in ‘‘reserves.” However, if the Court disagrees with

our submission that the full amount of deferred and

uncollected premiums be included in “assets’’ and

“gross amount of premiums,” the proper disposition

of this case is to exclude such premiums altogether

from the caleulation of both (1) “reserves’’ and (2)

“assets” and “gross amount of premiums,”’ in accord-

ance with Treasury Regulations, Section 1.801-4(f).

ARGUMENT

A LIFE INSURANCE COMPANY THAT INCLUDES THE NET

VALUATION PORTION OF ITS DEVERRED AND UNCOLLECTED

PREMIUMS IN ITS “RESERVES” FOR FEDEKAL TAX PUR-

POSES ON THE ASSUMPTION THAT THE GROSS ANNUAL

PREMIUMS ON ITS POLICIES HAVE BEEN PAID IN FULL ON

THE POLICY ANNIVERSARY DATES MUST CONSISTENTLY

APPLY THAT ASSUMPTION FOR ALL OF ITS TAX COMPU-

TATIONS AND INCLUDE THE FULL AMOUNT OF ITS DE-

FERRED AND UNCOLLECTED PREMIUMS IN ITs ‘‘ ASSETS”

AND ‘‘GROSS AMOUNT OF PREMIUMS”

A. INTRODUCTION

1. This case presents a question of major fiseal im-

portance affecting the federal income taxation of every

life insurance company. Life insurance companies gen-

erally permit their policyholders to pay their annual

premium either in full on the anniversary date of the

policy or in installments on a monthly, quarterly, or

semi-annual basis. In the event the policyholder elects

to pay the annual premium in installments, those por-

tions of the gross annual premiums that become due

after the end of the calendar year but before the next

anniversary date of the policy are known as “deferred

premiums.” ‘Due and unpaid premiums” or “uneol-

lected premiums” are premiuti that are due and pay-

able before the end of the ca! Jar year but which

have not been paid. These two types of premiums—

described in the aggregate by the insurance literature .

as “deferred and uncollected premiums”—are a sub-

stantial element in the business of all life insurance

companies. The issue here involves the proper federal

tax treatment of these deferred and uncollected

premiums.

A life insurance company receives its income from

the receipt of premiums and the imvestment of its

assets. As we have pointed out supra, pp. 3-8, the

Life Insurance Company Income Tax Act of 1959,

set forth in Sections 801-820 of the Internal Revenue

Code of 1954, provides a three-phase procedure for

the taxation of both types of life insurance company

income. The Act represented “a comprehensive over-

haul of the laws relating to the taxation of life in-

surance companies.” United States v. Atlas Life Ins.

Co., supra, 381 U.S. at 235.

The basic thrust of the statute is to permit a life

insurance company to exclude from its tax base that

portion of its premium and investment income that

is necessary to cover its reserve liabilities—the amount

computed to be sufficient under the statute to pay

future death claims. Thus, the cornerstone of the

statutory system is the reserve which, as we shall

explain infra, pp. 29-33, arises from the policyholders’

payment of premiums.

Under the 1959 Act, a life insurance company is

subject to tax on its “taxable investment income”

plus one-half of the amount by which its total “gain

from operations” exceeds its “taxable investment in-

come.” To the extent that it recognizes that amounts

computed by life insurance companies as necessary to

cover their reserves should be free of tax, the 1959

Act represents a continuation of the longstanding con-

gressional policy to treat increments to the reserves

99 °

as representing amounts belonging to the policyholders __

rather than to the company. See A Preliminary. State-

ment of the Facts and Issues with Respect to the Fed-

eral Taxation of Life Insurance Companies, Subcom-

mittee on the Taxation of Life Insurance Companies,

House Committee on Ways and-Means, p. 21 (No-

vember 1954).

While Congress has always recognized that amounts

that life insurance companies set aside to pay future

death claims should be excluded from their tax base,

it has employed various approaches in determining

the measure of this tax exclusion. Thus, from 1913 to

1920, life insurance companies were taxed like all

other corporations on their entire investment and pre-

mium income but were allowed a deduction for the _

“net addition required by law to be made within the

taxable year to reserve funds.” In 1921, however,

Congress abandoned this so-called “total income” ap-

proach and determined that life insurance companies

would be taxed only on their “free investment in-

come’’ not needed to cover policyholder obligations.

During this period, premium income was totally

excluded from the tax base. See Revenue Act of 1921,

c. 136, Sections 242-247, 42 Stat. 227, 261-264. The

concept that a tax should be levied on net investment

income after an allowance to meet obligations to

5 See, e.g., Income Tax Act of 1913, c. 16, 38 Stat. 114, 166,

172, See. 11(G)(b); Revenue Act of 1916, c. 463, 39 £ tat. 756,

768, See. 12(a) Second; Revenue Act of 1918, ¢, 18, 40 Stat. 1057,

1079, Section 234(a) (10). See also Treasury Regulations No. 33

(Rev.), Art. 239, pars. 673-674 (1918); Treasury Regulations

No. 45 (1920 ed.), Arts. 548, 549, 569.

policyholders was carried forward in subsequent acts |

and is also included in the broad revision of the 1959

Aet.” fr aa

The 1959 Act introduced two fundamental changes

in the taxation of life insurance companies. While

it retained the concept of excluding from tax that

portion of investment income necessary to cover

policyholder reserves, the Act abandoned the assumed

#* During the period 1921-1959, various formulae were used in

computing the amount of the reserve exclusion. See e.g., Revenue

Act of 1924, c. 234, 43 Stat. 253, 289, Sec. 245(a); Revenue Act

of 1926, c. 27, 44 Stat. 9, 47, Sec. 245(a); Revenue Act of 1928,

c. 852, 45 Stat. 791, 842, Sec. 203(a) ; Revenue Act of 1932, c. 209,

47 Stat. 169, 224, Sec. 203(a) ; Revenue Act of 1934, c, 277, 48 Stat.

680, 732, Sec. 202(a); Revenue Act of 1936, c. 690, 49 Stat. 1648,

1710, Sec. 203(a) ; Revenue Act of 1938, c. 289, 52 Stat. 447, 523,

Sec. 203(a); Internal Revenue Code of 1939, Sec. 203(a) (26

U.S.C. 203(a) (1952 ed.)).

Some of the formulae employed an industry-wide assufhed rate

of interest and resulted in the complete erosion of the tax base

of life insurance companies. Thus, in 1947 and 1948, no life insur-

ance company paid any federal taxes on profits from its life in-

surance business. See A Preliminary Statement of the Facts and

Issues with Respect to the Federal Taxation of Life Insurance

Companies, supra, at 16-17; Denney, Rua & Schoen, Federal Jn-

come Taxation of Insurance Companies, pp. 1.1-1.2 (2d ed. 1966).

Between 1949 and 1958, Congress accordingly enacted a series of

“stopgap” measures to provide a short-term remedy. Sce Report

on the Taxation of Life Insurance Companies, Subcommittee on

Internal Revenue Taxation, House Committee on Ways and

Means, pp. 2-3 (December 31, 1958). See, e.g., Revenue Act of

1950, «. 994, 64 Stat. 906, 961, Sec. 401(a); Revenue Act of 1951, —

c. 521, 65 Stat. 452, 507, Sec. 336; Life Insurance Company Tax

Act of 1955, c. 83, 70 Stat. 36,41, Sec. 804. Some of these “stopgap” -

measures were designed to impose a tax, at ordinary corporate

rates, on a smal] fixed percentage of investment income. Others

imposed a tax, at greatly reduced rates, on all investment income.

or industry-wide average rate of interest approach

that had been employed in the allocation formulae

under the prior law. Instead, the 1959 Act prescribed

a method of allocating investment income based upon

the company’s actual earnings experience. See 8S. Rep.

No. 291, 86th Cong., Ist Sess. 5 (1959); 105 Cong.

Ree. 8428-8429 (1959) (remarks of Senator Curtis).

The Act also expanded the companies’’ tax base to

include underwriting gains, i.c., the amount by which

premiums exceeded the actual expenses and policy

obligations. See H.R. Rep. No. 34, 86th Cong., Ist Sess.

2-3, 12-13 (1959); S. Rep. No. 291, supra, at 6-7.

Specifically, the .1959 Act taxes one-half of the com-

pany’s underwriting gains on a current basis and

generally postp mes taxation of the remaining half

until such gains are distributed to shareholders.

Thus, while the computations are more detailed, the

hasic approach of the 1959 Act was to return in part

to the pre-1921 ‘‘total income” approach under which

jusurance companies were immediately taxed on their

entire net investment and underwriting (premium)

income.”

2. Three principal elements that enter into the fed-

Accordingly, apart from the 1959 Act’s postponement of tax

on one-half of the underwriting gains, the approach of the 1959

Act and the pre-1921 law is essentially the same.

The pre-1921 Jaw has been described as follows: “Although

premiums were included as gross income, such part of each pre-

mium as was credited to the policyholder by way of a credit to a

reserve was deducted; and * * * although ali investment income

was includible, that part which was, in effect, credited to policy-

holders as interest on the reserves was deducted.” A Preliminary

Statement of the Facts and Issues with Respect to the Federal

Taxation of Life Insurance Companies, supra, at p. 14.

eral income tax computations of a life insurance

company under the 1959 Act are: (1). “reserves,”

(2) “assets,’’ and (3) “gross amount of premiums.”’

As a life insurance company’s ‘‘reserves” increase

relative to its assets and premiums, its tax liability

will correspondingly decrease. Conversely, as the com-

pany’s ‘‘assets’’ and “gross amount of premiums”

increase relative to its reserves, its tax liability will

increase (see pp. 6-7, supra). These three elements,

however, are not independent variables but are func-

tionally interrelated. As premiums are paid, the com-

pany’s “assets” and “gross amounts of premiwms”’

necessarily increase and its ‘‘reserves’’: likewise in-

crease (see pp. 30-31, infra).

The question here involves the extent to which

deferred and uncollected premiums are taken into

account’ for federal tax purposes in determining a

life insurance company’s “reserves,” ‘“assets,’’ and

“gross amount of premiums.’’ It is undisputed that

the company does not actually have such deferred

and uncollected premiums on hand at the end of its

taxable year and does not have any legal right to

compel their payment from the insured.” Nonpay-

ment relieves the company of its liability to pay

death benefits and causes the policy to lapse.

Nevertheless, in computing its ‘‘reserves” on its tax

returns for all three taxable years at issue, respondent

made the traditional assumption of the life insurance

** Upon the lapse of the policy, state law requires the company

to credit the cash surrender value to the account of the policy-

holder. The cash surrender value is calculated on the basis of

premiums actually paid to the date of the lapse. See, e.g., 36 Okla.

Stat. Ann., Sec. 4029H (1958).

industry that the full annual premium had been paid

on all its outstanding policies on their anniversary

dates. It thereby increased its ‘‘reserves” for tax pur-

poses by the “net valuation” portion of all annual

premiums, including the deferred and uncollected pre-

miums. Because increases in reserves reduce a life

insurance company’s “taxable investment income” and

“gain from operations,” respondent’s increase in re-

serves based upon its assumption of full premium pay-

ment had the effect of decreasing its tax liability.

However, in computing its “assets” and “gross

amount of premiums”—the related statutory elements

that increase a life insurance company’s tax liabil-

ity—respondent did an about-face and abandoned the

assumption upon which it calculated its reserves, viz.,

that it received the full annual premium on all of its

policies. For those purposes, it included no part of

the deferred and uncollected premiums in “assets”

for 1958 and only the “net valuation” portion of those

premiums for 1959 and 1961. For 1958, 1959, and 1961,

respondent included only the net valuation portion of

its deferred and uncollected premiums in “gross

amount of premiums” (see p. 13, n. 13, supra). Re-

spondent’s exclusion in 1958 of the full amount of

deferred and uncollected premiums from “assets,”

its partial exclusion of such premiums from “gross

amount of premiums” for that year, and its partial

exclusion of such premiums from both “assets’’ and

“gross amount of premiums’’ in 1959 and 1961 re-

duced respondent’s tax liability for those years.

Our submission is that a life insurance company

must adhere to a consistent set of assumptions in com-

— as ae. —<= ae

puting its federal tax liability. It cannot first treat its

deferred and uncollected premiums as. having been

paid during the taxable year for purposes of

increasing “reserves” and thereby reduce its tax

base, and then turn around and assert that it has not

received those premiums for purposes of computing

its “assets” and “gross amount of premiums.” The

fundamentai error of the court of appeals is that it si-

multaneously assumed that the deferred and uncol-

lected premiums were both paid and not paid during

the taxable year. Deferred and uncollected premiums

are deemed either to have been paid for purposes of

all of the prescribed computations or not to have been

paid for any of the computations. __ ;

The pertinent Treasury Regulations, which have

been upheld by four courts of appeals, rest upon this

same requirement of consistency. Sections 1.805-5(u)

(4) (ii) and 1.809-4(a) of the Regulations, Appendix,

infra, pp. 20a-23a, respectively provide that a life

insurance company must include its deferred and

uncollected premiums in its “assets” and “gross

amount of premiums” under Sections 805(a)(4) and

809(c)(1). However, in the event that it is deter-

mined that deferred and uncollected premiums are

not properly includable in “assets” and “gross

amount of premiums,’’ Section 1.801-4(f) of the

Regulations, Appendix, infra, pp. 19a-20a, alterna-

tively requires the exclusion of such premiums in

the computation of “reserves.”

3. Viewed in the larger context, these Treasury

Regulations are in accord with the “long-established

226-549— 77-3

congressional policy that a taxpayer generally cannot

compute income taxes by reporting annual income on

a cash basis and deductions on an accrual basis”

(Commissioner v. South Texas Co., 333 U.S. 496, 501).

As this Court there recognized (ibid.), “[s]uch a

practice has been uniformly held inadmissible because

it results in a distorted picture which makes a tax

return fail truly to reflect net income.’’ Thus, this

Court has consistently rejected such hybrid methods

of accounting, in which the taxpayer chooses the best

of both worlds. See Helvering v. Wilshire Oil Co., 308

U.S. 9, 96-99; United States v. Catto, 384 U.S. 102,

116-117. See also W. L. Moody Cotton Co. v. Commis-

sioner, 143 F, 2d 712, 714 (C.A, 5).

Moreover, in Mass. Mutual Life Ins. Co. v. United

States, 288 U.S. 269, the Court unanimously held that

this principle of uniformity of accounting assump-

tions applied to the taxation of life insurance com-

panies. There, the Court ruled that a life insurance

company that filed its returns on the cash basis

method of accounting could not claim a current deduc-

tion for unpaid interest owed to policyholders. In so

holding, the Court stated—‘It is settled beyond cavil

that taxpayers other than insurance companies may

not accrue receipts and treat expenditures on a cash

basis, or vice versa. Nor may they accrue a portion of

income and deal with the remainder on a cash basis,

nor take deductions partly on one and partly on the

other basis. Congress we think did not intend to make

an exception of insurance companies” (id. at 273-

274). See also Continental Life Insurance Co. v. Com-

missioner, 5 B.T.A, 407, 412,

The rule of uniformity and consistency announced

in Mass. Mutual Life Ins. Co. applies with equal force

to the deferred and uncollected premiums at issue in

this case. Respondent cannot take those premiums into

account in its ‘‘reserves” when it suits its purpose of

reducing its tax base but turn its back on them when

their inclusion in “assets’’ and “gross amount of pre-

miums” would increase its tax liability. Simply stated,

our position is that such premiums must be consist-

ently deemed to have been paid for all purposes under

the statute or not to have been paid for any purpose.

The concept of a life insurance reserve is funda-

mental to an understanding of the taxation of life in-

surance company income. Before discussing the impact

of deferred and uncollected premiums on the federal

tax computations, we believe it would be helpful to

describe the nature and function of that reserve.

B. A LIFE INSURANCE RESERVE ARISES UPON THE COMPANY'S ASSUMP-

TION OF THE RISK AND THE POLICYHOLDER'S PAYMENT OF PREMIUMS

1. “Historically and commonly insurance involves

risk-shifting and risk-distributing” (Helvering v. Le-

Gierse, 312 U.S, 531, 539). The consideration paid by

an insured for the assumption of the risk by an in-

surance company is the premium. The amount of the

premium is calculated on the assumption that the pre-

miums received by the company will be invested and

earn interest which, when added to the accumulated

premiums, will be sufficient to pay the policyholders’

death claims as they arise. As the standard texts on

life insurance make clear, a life insurance reserve is

made up of the sum of net valuation premiums paid

to date, plus interest at the assumed rate, minus

assumed death claims. See, e.g., MacLean, Life Insur-

ance, 90-116 (9th ed. 1962).”

In setting a life insurance premium, the company

first chooses a mortality table 1d assumes an interest

rate for the investment of the premiums. With these

elements established, the net valuation premium can

be calculated. Net valuation premiums, plus interest

at the assumed rate, will be adequate to pay all claims

on the assumption that deaths will occur according

to the mortality table. The gross premium that is

charged the policyholder is determined by adding to

the net valuation premium an amount known in the

aggregate as “loading,’’ which covers the company’s

estimated expenses for agents’ commissions and other

overhead and profits.

The decisions of this Court likewise define a life

insurance reserve for federai tax purposes as derived

from the premiums paid by the policyholder. See, e.g.,

New York Life Ins. Co. v. Edwards, 271 U.S. 109,

115, 119; New York Life Ins. Co. v. Bowers, 283 U.S.

242, 244; Helvering v. Inter-Mountain Life Ins. Co.,

294 U.S. 686, 690. Accord: Williams v. Union Central

Life Insurance Co., 291 U.S. 170, 177. As the Court

more recently observed in United States vy. Atlas Life

Ins. Co., 381 U.S. 233, 247, “[t]he receipt of pre-

miums necessarily entails the creation of reserves and

additions to reserves from investment income. Thus.

the insurance company is not only permitted to in-

‘* While other texts are cast in somewhat more technical terms,

they are to the same effect on this basic point. See, e.g., Huebner

and Black, Life /nsurance 277-279 (9th ed. 1976); Magee, Life

/nsurance 559-562 (3d ed. 1958) ; McGill, Life /neurance 182-185,

218-223 (Rev. ed. 1967).

vest, but it must invest; and it must return to the

reserve a large portion of its investment income’”’

(emphasis in original).”

There is accordingly a direct relationship between

the payment of premiums by the policyholder and

the company’s establishment of reserves. Without the

payment of premiums by the policyholder in exchange

for the company’s assumption of the risk, there is no

occasion for the company to establish a reserve. As a

leading text has succinctly stated, the reserve is “buiit

up out of past premium payments and interest to

meet * * * [future policy obligations] determined

mathematically.” Magee, Life Insurance 560 (3d ea.

1958).”

*° While the reserves for most forms of life insurance are com-

puted on the assumption of investment of the net valuation premi-

ums, reserves for short-term casualty insurance are computed

solely on the basis of the pro rata unearned gross premium with-

out any investment element. See Treasury Regulations, Section

1.801-3(e). This latter type of reserve is involved in United States

v. Consumer Life Insurance Co., No. 75-1221; First Railroad &

Banking Co. of Georgia v. United States, No. 75-1260; and United

States v. Penn Security Life Insurance Co., No. 75-1285, argued

December 6, 1976.

* In stating that there is a direct relationship between the pay-

ment of premiums and the establishment of policy reserves, we

assume that the premium charged by the company is sufficient to

meet state statutory minimum reserve requirements. However, if

competitive conditions cause the company to assume a risk and

charge a gross premium that is less than the net valuation premi-

um on the expectation that it will meet its policyholder obligations

from sources other than premiums, the company is required to

establish a supplemental reserve known as a “deficiency reserve.”

This deficiency reserve reflects the excess of the present value of

required future net premiums over the present value of future

actual premiums. See Huebner and Black, Life /nsurance 289

(9th ed. 1976). However, Section 801(b) (4) of the Code excludes

such deficiency reserves from the definition of “life insurance

reserves.”

Life insurance reserves are sometimes described as

“funds” held for the benefit of policyholders, How-

ever, a life insurance company does not actually seg-

regate or set aside any portion of its assets in a

varticular reserve fund, All of an insurance company’s

assets are subject to policy claims when they mature.

Thus, the reserve is not an asset or a fund of any kind.

It is simply a calculation of projected liabilities estab-

lished as a measuring device in order to determine the

assets that the company must maintain in order to

meet its future commitments under the policies it has

issued, Greider and Beadles, Principles of Life In

surance 68-69 (Rev. ed. 1972).

‘While the reserve is ‘represented by assets which

the company invests * * * [it] is, in fact, a company

liability.” Magee, supra, at 560. If the net assets of

the company fall below the reserves so computed, the

company is deemed insolvent and may no longer

engage in business.

Finally, a life insurance reserve may be defined

either prospectively or retrospectively, yielding the

same mathematical result. McGill, Life Insurance 219

(Rev. ed. 1967) ; Magee, supra, p. 560. When a policy

is issued, the discounted or present value of the future

benefits is exactly equal to the present value of all of

the net valuation premiums to be paid. However, at

any given time after the date of issue, the present

value of the benefits to be paid under the policy will

increase because the date of payment of the policy

benefits has drawn closer. Viewed prospectively, the

reserve is equal to the difference between the present

value of the benefits and the present value of the fu-

ture net premiums.” Viewed retrospectively, the re-

serve is equal to the amount of net valuation pre-

miums, plus interest at the assumed rate, less assumed

death claims. See MacLean, Life Insurance 111-115

(9th ed. 1962); Huebner and Black, Life Insurance

278-285 (9th ed. 1976). Thus, at any give time, the

amount of a company’s reserves can be expressed

either in terms of the premiums it already has

received or the premiums it expects to receive.

2. In view of the direct relationship between the

policyholders’ payment of premiums and the com-

pany’s establishment of reserves, the treatment of

deferred and uncollected premiums would seem to be

a relatively simple matter. The policyholders have

not paid such premiums and are not subject to any

legal obligation to pay them. Moreover, the company

has not assumed any liability for periods of unpaid

coverage.” In the absence of payment, the policy

lapses. Likewise, until premiums are paid, the com-

** State statutes generally employ the prospective definition of

reserve. Thus, the Oklahoma Standard Valuation Law (36 Okla.

Stat. Ann., Sec. 1510(E) (2) (1958)), to which respondent was

subject, states—

“* * * Reserves for the life insurance and endowment benefits

of policies providing for a uniform amount of insurance and

requiring the payment of uniform premiums shall be the excess,

if any, of the present value, at the date of valuation, of such

future guaranteed benefits provided for by such policies, over the

then present value of any future modified net premiums therefor.”

* If a policyholder dies during the 31-day grace period when

the policy is still in force, the state statutes permit the company to

deduct the uncollected premium from the policy proceeds. See,

¢.g-, 36 Okla. Stat, Ann., Sec, 4008 (1958). This withholding

procedure enables the company to recover the unpaid premium.

pany will not be required to set aside any portion of

such premiums for the payment of future benefits.

Logic would appear to dictate that deferred and

uncollected premiums not be taken into account for

any of the federal tax computations of “reserves,”

‘‘assets,’’ or ‘“‘gross amount of premiums.” But the

inclusion of deferred and uncollected premiums for

purposes of all of the computations of “reserves,’’

“assets,” and “gross amount of premiums,” as pro-

vided by the primary position of the Treasury Regu-

lations, is grounded upon its own internal logic.

Moreover, it is traceable to the historical practice of

the life insurance industry to include the net valua-

tion portion of such premiums for financial report-

ing purposes when computing its reserves.

Pursuant to the practice adopted by the First Ses-

sion of the National Insurance Convention in 1871,”

life insurance companies have computed their aggre-

gate reserves as stated on their financial statements on

the assumption that the full annual premiums on all

outstanding policies have been paid on the policy an-

niversary dates. See Offictal Report of the Proceed-

ings of the National Insurance Convention of the

United States 68-70 (1871). The 1871 Report acknowl-

** The National Insurance Convention is the predecessor organ- —

ization of the National Association of Insurance Commissioners

(NAIC). It is “a purely voluntary association without any legal

status or authority. Because, however, every State Insurance

Commissioner has recognized its value and has, at all times, given

to it unstinted cooperation, the Association has, to a broad extent,

heen able to secure much uniformity in the regulation of insurance

matters throughout the United States.” Wightman, Life /neur-

ance Statements and Accounts 27 (1952 ed.).

edged that this assumption results in an overstate-

ment of the company’s reserves to the extent of the

net valuation portion of the deferred and uncollected

premiums. The Report submitted to the Convention

therefore recognized that “it is very clear that * * *

[the company] should have a corresponding credit

given for the portion of the premium remaining un-

paid’’ (id. at 69).

The Report first considered the practicability of

“taking the whole item of ‘deferred premiums’ out of

the list of ‘assets’ and correspondingly reducing the

policy liability [i.e., the reserve]” (ibid.). After con-

cluding that the actuarial work involved in such a

method would be burdensome, the Convention’s Report

prescribed “a substitute bringing us to substantially

the same result,” viz., creating a ‘‘deferred premiums”

asset “to the same extent as that liability [reserve]

has been thereby increased, but no farther’’ (ibid.).

However, the Report further explained that the

proper amount of the credit to the asset account was

not the entire amount of the deferred premium, but

the deferred premium offset by the loading element,

1.¢., the net valuation portion of the premium.”

The Report made it clear that the “deferred pre-

mium” asset had no intrinsic value as an asset; it

** The Insurance Convention adopted the assumption of full

premium payment in order to avoid the burdensome actuarial work

involved in computing the total reserves on a policy-by-policy

basis by taking into account only premiums actually paid. Since

the annual premiums on most policies were paid in full at the time,

it was easier to adopt the assumption of full premium payment for

all policies and to correct the resulting overstatement of reserves

by the creation of an offsetting asset.

was included on the company’s statement “for the sole

purpose of cancelling an equal amount of the liability

[reserve] with which the company is charged in the

policy valuation [reserve computation]” (id. at 70).

By creating a “quasi-asset” (ibid.) consisting of the

net deferred and uncollected premiums to offset the

overstatement of the reserves, the solution devised by

the Convention baieneed the company’s annual state-

ment. It further r * the company of the necessity

of covering the © “rent of its reserves with

actual assets, and © us avoided impairment of the

comany’s surplus.

This financial reporting method for deferred and

uncollected premiums developed more than a century

ago by the National Insurance Convention is still em-

ployed today. Thus, on its annual statements, respond-

ent con:puted its reserves on the majority of its policies

on the assumption that the annual premiums were

paid in full as of the policies’ anniversary dates, even

though this was not in fact the case (Pet. App. B

lla). (See also Pet. App. A 3a; Stip. par. 11, A 17.)

Respondent offset the resulting overstatement of its

reserves by entering the same amount (t+ net valua-

tion portion of the deferred and uncw ected pre-

miums) in an asset account entitled “Li’e insurance

premiums and annuity considerations deferred and

uncollected” (Exs. E, F, H, A. 60, 75, 90).

*° Respondent made a similar adjustment on the “Summary of

Operations” part of its annual financial statements designed to

offset the overstatement of its reserves by the net valuation portion

of its deferred and uncollected premiums. It included the gross

deferred and uncollected premiums as part of its “Premiums and

But this accounting treatment is nothing more than

a device to permit the assumption of full premium

payment and the concomitant overstatement of re-

serves without distorting the picture of the company’s

solvency projected by the annual financial report. As

one authoritative insurance text states, ‘“‘In order to

offset the overstatement of the aggregate reserves be-

cause of the failure of the assumption upon which

they were computed to conform with the actual facts

in all cases, a company was and is still permitted to

include in its assets the entire amount of all * * *

[deferred and uncollected] net premiums computed

as of the year-end. Obviously this is merely a correc-

tive adjustment of the assets to offset an overstate-

ment of the liabilities.” Wightman, Life Insurance

Statements and Accounts 43-44 (1952 ed.).” See also

id. at 155, 545; MacLean, supra, at 318-319; Ernst &

Ernst, GAAP [Generally Accepted Accounting Prin-

ciples]-Stock Life Companies 449-450 (1974) ; Beards-

ley, Life Company Annual Statement Handbook I1I-

15 (1962).

3. The history of the life insurance industry’s finan-

cial reporting treatment of deferred and uncollected

Annuity Considerations” and offset the remaining loading element

by a deduction for “Increase in loading on and cost of collection

in excess of loading on deferred and uncollected premiums” (see

Pet. App. A 5a; Exs. E, F, H, A. 62,77, 92).

** Wightman characterizes the device of overstating reserves

and assets in equal amounts as “unnecessarily clumsy.” In his view,

a much simpler method would be to deduct the overstatement of

the reserves from the aggregate reserves before entering the

reserve liability on the annual statement. See Wightman, supra,

at 454’.

premiums shows that the inclusion of the net valua-

tion portion of deferred and uncollected premiums in

reserves does not reflect an actual liability of the com-

pany but is in fact an overstatement that must be off-

set by an artificial asset. As a matter of absolute logic

deferred and uncollected premiums should therefore

be excluded altogether from the federal tax computa-

tions of ‘‘assets,” ‘“‘gross amount of premiums,” and

‘“‘reserves.” That is the alternative approach pre-

scribed by Section 1.801-4(f) of the Treasury

Regulations.

However, the primary portion of the Regulations

does not require total exclusion of the deferred and

uncollected premiums. Instead, it prescribes the in-

clusion of the gross amount of deferred and uncol-

lected premiums in “assets” and “gross amount of

premiums.” In so providing, Sections 1.805-5(a) (4)

and 1.809-4(a)(1) of the Regulations accept the in-

dustry’s convention of overstating the reserves by the

amount of the net valuation portion of the deferred

and uncollected premiums. But since that overstate-

ment rests upon the assumption that all premiums are

paid as of the anniversary dates of the policies in

force, the full amount of the deferred and uncollected

premiums must likewise be included in “assets” and

“gross amount of premiums”’ by virtue of the selfsame

assumption. We turn now to a detailed analysis of

the impact of deferred and uncollected premiums

upon the prescribed federal tax computations of “as-

sets” and “gross amount of premiums.”

C. A LIFE INSURANCE COMPANY THAT INCREASES ITS “RESERVES” BY

THE NET VALUATION PORTION OF ITS DEFERRED AND UNCOLLECTED

PREMIUMS MUST INCLUDE THE GROSS AMOUNT OF SUCH PREMIUMS

IN ITS COMPUTATION OF “ASSETS” UNDER SECTION 805(b) (4)

1. As we have described supra, pp. 5-7, the Phase I

computation of a life insurance company’s taxable

investment income involves a division of the com-

pany’s investment income into two parts—the tax-free

policyholders’ share and the taxable company’s share.

See United States v. Atlas Life Ins. Co., supra, 381

U.S. at 236-237. The Act accomplishes this allocation

by dividing the company’s “investment yield’ (Sec-

tion 804(c)) by its total ‘‘assets’”’ (Section 805(b) (4) )

to derive the company’s actual earnings rate. This rate,

after adjustment,” is then multiplied by the company’s

adjusted life insurance reserves.” The resulting figure

is the ‘‘policy and other contract liability require-

ments”? (Sections 804(a)(1) and 805(a)), the term

employed by the Act to describe the total amount of

28 Section 805(b) provides that adjusted earnings rate (called

the “adjusted reserves rate”) is the lower of the current earnings

rate or the average of the current earnings rate and those for the

preceding four years (see p. 5, n. 5, supra).

2° Pursuant to Section 805(c)(1), the reserves are adjusted

under the “Menge Formula,” named after its principal industry

proponent. This formula provides that the company’s reserves wil!

be reduced 10 percent for each percentage point that its “adjusted

reserves rate” exceeds the assumed rate of interest used by the

company in setting up and calculating its reserve. Conversely, if

the company’s assumed rate of interest exceeds its adjusted earn-

ings rate, the company’s reserve will be increased 10 percent for

each percentage point of the excess. See H.R. Rep. No. 34, supra,

at 11; S. Rep. No. 291, supra, at 15-16. See also McGill, supra,

at 915-916.

investment income that is excluded from the com-

pany’s tax base.”

The statutory Phase I computation can be expressed

by the following formulae:

Investment Yield

(1) pm = Earnings Rate

(Section 805(b) )

(2) Earnings RatexReserves=Tax Exclusion

(Section 805(a) )

(3) investment Yield X Reserves = Tax Exclusion

ssets

(Section 805 (a) and (b))

Investment Yield x Reserves = Tax Exclusion

ssets

Thus, the computation of a life insurance company’s

taxable investment income depends upon the propor-

tionate relationship between assets and reserves. The

Act therefore “allocates investment income between

[the company’s] life insurance reserves and [the com-

pany’s] surplus, according to the total amount of

each.” H.R. Rep. No. 34, supra, at 10. As the foregoing

* The statutory exclusion for “policy and other contract liability

requirements” also includes amounts necessary to meet the com-

pany’s pension plan reserves and to cover interest paid. See Sec-

tion $05(a). The amount of the exclusion is then determined on an

item-by-item basis by multiplying each item of investment in-

come, including tax-exempt interest, by a fraction equal to the

total exclusion divided by total investment yield. See Section 804

(a)(1); United States y. Atlas Life Ins. Co., supra, 381, U.S.

at 249,

formulae demonstrate, the company’s tax exclusion is

directly proportional to its “reserves” and inversely

proportional to its “assets.”

2. If a company makes the traditional assumption

of the life insurance industry that the full premiums

on all of its outstanding policies have been paid and

computes its reserves—the numerator of the frac-

tion—for purposes of the formula on the basis of that

assumption, it would seriously distort the formula if

it did not make the identical assumption in computing

its assets—the denominator of the same fraction. Like

all mathematical formulae, the Phase I computation

can only produce an accurate result if each of its ele-

ments is computed in accordance with a consistent set

of assumptions.

It is therefore hardly surprising that four courts of

appeals have rejected the mathematical imbalance ap-

proved by the decision below. Those courts have uni-

formly held that if a life insurance company assumes

that its premiums are fully paid and thereby over-

states its reserves in its Phase I tax computations,

it must likewise assume that the premiums are part of

its “assets” in that computation. As the Seventh Cir-

cuit first stated in Franklin Life Insurance Co. v.

Uited States, 399 F, 2d 757, 761 (C.A. 7), certiorari

denied, 393 U.S. 1118, the inclusion of deferred and

uncollected premiums in ‘‘reserves” but not in ‘“as-

sets” “would attribute to Congress an intention that in

the same statutory equations, exclusions and deduc-

tions attributable to reserves are to be based on the

assumption that the annual premium is fully paid up

4°

and yet the amounts in the same equation from which

these figures are to be subtracted are to be deter-

mined on the assumption that the annual premium is

not fully paid up. * * * We perceive nothing from

which intent to impose such a dual standard of tax

accounting can be presumed.” Accord: Jefferson

Standard Life Insurance Co. v. United States, 408 F.

2d 842, 854-856 (C.A. 4), certiorari denied, 396 U.S.

828; Western National Life Insurance Co. of Texas v.

Commissioner, 432 F. 2d 298, 301-302 (C.A. 5); West-

ern and Southern Life Insurance Co. v. Commissioner,

460 F. 2d 8, 10-14 (C.A. 6), certiorari denied, 409 U.S.

1063. See also Bankers Union Life Insurance Co. v.

Commissioner, 62 T.C. 661; United Life and Accident

Insurance Co. v. United States, 329 F. Supp. 765

(D. N.H.); Union Mutual Life Insurance Co. v.

United States, No. 74-112 8.D., decided September 14,

1976 (D. Me.) (38 A.F.T.R. 2d 76-5802) ; Midland Na-

tional Life Insurance Co. v. Commissioner, 66 T.C. 550.

Like the prior appellate decisions, the court of ap-

peals in this case correctly recognized that the as-

sumption of full premium payment is a fiction, since

life insurance companies do not in fact receive annual

premiums in full as of the end of the taxable year

(see Pet. App. B 15a). But the court thereupon er-

roneously characterized the prior decisions themselves

as “predicated on a fiction and a desire to achieve

accounting uniformity” (Pet. App. B 16a). In so hold-

ing, the court overlooked the critical fact that the as-

sumption of full premium payment results in an

equally fictional overstatement of reserves. It is this

overstatement of reserves that requires the inclusion

of the full premium in “assets,” not simply as a mat-

ter of accounting uniformity, but to preserve the in-

tegrity of the Phase I formula.

As the Fourth Circuit suecinetly put it in Jefferson

Standard Life Insurance Co. vy. United States, supra,

408 F. 2d at 856, ‘‘If the full annual net valuation

premium is treated as a reserve liability under § 804,

the corresponding asset should be the gross annual

premium * * *; else the formula is unbalanced to

the unwarranted benefit of taxpayer.” In sum, if the

assumption of full premium payment is accepted at

all, a company must apply that assumption in com-

puting its ‘‘assets” «= well as its “reserves.” If that

were not the case, the Phase I formula would not

accurately reflect the true proportional relationship

between reserves and assets.

The decision below attempted to refute the analyses

of the four circuits that have upheld the Commis-

sioner’s position on the ground that respondent was

required by Oklahoma law to establish reserves for

each of its policies on the assumption of full premium

payment as of the end of the year. From this premise,

the court concluded that while ‘‘the reserves actually

exist as a liability, the unpaid premiums do not exist

until actually paid” (Pet. App. B 14a). In its view,

the net valuation portions of the deferred and uncol-

lected premiums were therefore required to be in-

cluded in respondent’s reserves while such premiums

could not be included in its ‘‘assets.”

Contrary to the reasoning of the court of appeals,

the reserves of a life insurance company are not book-

226-549—77——-4

keeping entries made in a vacuum apart from the

company’s premiums and assets. As we have pointed

out in Part B, supra, pp. 29-33, reserves represent

the company’s liabilities to the policyholders only to

the extent that the policyholders pay premiums which

the company can use to cover its reserves. See, ¢.g.,

New York Life Ins. Co. v. Edwards, supra, 271 U.S.

at 119. Moreover, it is universally recognized that the

inclusion of deferred and uncollected premiums in

the amount of the reserves shown on a company’s

annual statement does not reflect an actual liability

that impairs the company’s surplus (see pp. 36-37,

supra). Thus, even accepting the court of appeals’

assumption that state law required respondent to in-

clude the net valuation portion of its deferred and

uncollected premiums in the computation of its re-

serves," the Commissioner’s Regulations require a

consistent application of the selfsame assumption

upon which that computational requirement is based,

viz., that all of the premiums have been paid as of

the policy anniversary dates.

In sum, there is no justification for the imbalance

created by the contradictory set of assumptions upon

" But cf. Ernst & Ernst, GAA/?—Stock Life Companies, supra,

which states (p. 450) :

“There is no statutory requirement to compute mean reserves,

ie. reserves which assume the receipt of an annual net premium.

But companics continue to do so, primarily for ordinary insur-

ance, in part because this approach is traditional, in part because

published tables of reserve factors use the mean reserve approach,

and in part because the volume of reserve factors which recognize

mode and paid-to date would be so great as to constitute an admin-

istrative problem of monstrous proportions.”

which the decision below rests. If the net valuation

portions of the deferred and uncollected premiums

are included in a company’s reserves in the Phase I

computation in accordance with the traditional insur-

ance industry convention, those premiums must be

deemed to have been paid and to be part of the com-

pany’s assets in that computation. Treasury Regula-

tions, Section 1.805-5(a) (4) (ii), Ex. (1).

3. a. The error of the decision below is underlined

by the fact that the life insurance industry itself has

never taken the extreme position of the court of ap-

peals. In all of the appellate litigation to date under

the Life Insurance Company Income Tax Act of

1959, the industry has not contended that deferred

and uncollected premiums could be excluded in their

entirety from “assets” under Section 805(b) (4)

in the Phase I computation. To the contrary, the in-

dustry has acknowledged that deferred and uncollected

premiums are includable in “assets,’”’ at least to the

extent of the net valuation portion of those premiums.

The industry’s position is shown by the sequence of

events in Western National Life Insurance Co. of

Texas v. Commissioner, supra. There, the Tax Court

originally held, in conformity with the decision below

in this case (50 T.C. 285, 297-300), that all deferred

and uncollected premiums were excludable from

“assets.’’ However, on the Commissioner’s motion for

reconsideration, the Tax Court modified its decisign

and adopted the position of the Life Insurers Con-

ference, the American Life Convention, and the Life

Insurance Association of America as amici curiae

that deferred and uncollected premiums were includ-

able in “assets’’ only to the extent of the net valua-

tion portion of those premiums (51 T.C, 824). The

Fifth Cireuit reversed the Tax Court and upheld the

Commissioner’s position that the full amount of the

deferred and uncollected premiums was includable

in “assets.” In so holding, it noted that the Tax

Court’s decision was in conformity with the industry’s

views (see 432 I’, 2d at 301).”

The Life Insurance Council of America intends to

file an amicus brief in this case. It has advised us that

it will likewise contend that deferred and uncollected

premiums be included in “assets’’ only to the extent

of the net valuation portion of such premiums. In the

industry’s view, as expressed in its briefs in the prior

cases, the net valuation portion of the deferred and

uncollected premiums should be included in ‘‘assets”’

to offset the reserves that are determined on a net

valuation annual premium basis, but the loading ele-

ment of those premiums should be excluded from

‘‘assets.”” In support of this treatment, the industry

has relied upon the annual statement form approved

by the National Association of Insurance Commis-

" After four circuits had rejected the approach of its modified

decisiofPin Western National Life Insurance Co. (51 T.C, 824),

the Tax Court s ibsequently upheld the Commissioner's position

in Bankers Union Life Insurance Co. v. Commissioner, 62 T.C. 661.

Its holding here was on the authority of that latter decision (Pet.

App. A 7a-8a).

“The American Life Convention and the Life Insurance Asso-

ciation of America have merged. The successor organization is the

Life Insurance Council of America.

sioners and employed by the insurance departments of

most States (see Exs. KE, F, H, A. 60-61, 75-76, °°-91).

Pursuant to the NAIC form, an insurance company

offsets the overstatement of its reserves in the amount

of the net valuation portion of the deferred and wn-

collected premiums by creating an asset equal in

amount called “Life insurance premiums and an-

nuity considerations deferred and uncollected.” This

asset is the gross amount of these premiums minus the

loading element. However, as we pointed out in our

discussion of the origins of this accounting convention

(see pp. 34-37, supra), the sole consideration underly-

ing the NAIC form is to provide an accurate picture

of the company’s solvency. Thus, if the company as-

sumes receipt of the full annual premium and thereby

overstates its reserves by the net valuation portion of

those premiums, the solution devised by the NAIC

form is to establish an asset to offset the overstate-

ment of the reserves. The net effect of such offsetting

entries is the same as if the deferred and uncollected

premiums were disregarded for all purposes on the

company’s annual statement. See Wightman, supra,

at 373-375.

But the NAIC goal of achieving an accurate report

of a company’s solvency is entirely unrelated to the

purpose of the Phase I tax computation, which is

designed to measure the proportional relationship of

the company’s assets and reserves. As this Court

stated in McCoach v. Insurance Company of North

America, 244 U.S. 585, 589: “The act of Congress, on

the other hand, deals with reserves not particularly in

their bearing upon the solvency of the company, but

as they aid in determining what part of the gross in-

come ought to be treated as net income for purposes

of taxation.”

If a life insurance company assumes that the de-

ferred and uncollected premiums on all of its policies

have been paid as of their anniversary dates and in-

creases its reserves for tax purposes by the net valua-

tion portion of such premiums, that assumption

necessarily stands on the hypothesis that the company

has received the full amount of those premiums and

hot some lesser amount. Put another way, since the

policyholder pays the gross amount of the premium

and not the net valuation portion, it is the gross

premium that must be ineluded in the company’s

‘‘assets,’”*

b. Nor does Section 818(a) of the Code, upon which

the industry has relied in the prior cases, support a

different result, that statute provides that life insur-

ance companies must make all tax computations

“under an acerual method of accounting.” The last

sentence of Section 818(a) states: “Except as pro-

“ The NAIC financial reporting method is basically incompat-

ible with the Phase I formula. The NAIC inclusion of equal net

valuation amounts in both “reserves” and “assets” for deferred and

uncollected premiums would distort the proportional relationship

of reserves to assets by erroneously assuming that these two ele-

ments increase in numerically equivalent amounts. This contrary-

to-fact assumption would in turn distort the Phase I formula by

Reserves ' ,

— See Franklin Life Insurance Co.

v. United States, supra, 399 ¥. 2d at 760. The result would allocate

a greater portion of investment income to the policyholder reserves

and a lesser amount to the company’s surplus than is justified by

the actual facts.

increasing the fraction

vided in the preceding sentence, all such computations

shall be made in a manner consistent with the manner

required for purposes of the annual statement approved

by the National Associatien of Insurance Com-

missioners.” The industry has contended that this

reference to the NAIC. annual statement + provides

statutory authority for the adoption of the NAIC’s

treatment of deferred and uncollected premiums for

tax purposes. tthe | |

But the language of the statute makes clear that

the NAIC treatment of a particular item is only

to be aceepted when it is consistent with an acerual

method of accounting. See H.R. Rep. No. 34, supra,

at 42; S. Rep. No. 291, supra, at 72-73. The NAIC

treatment, however, is not an accrual method of

accounting within the accepted meaning of that term.

It assumes receipt of the gross deferred and un-

collected premiums only for purposes of the reserve

liabilities, but does not correspondingly treat the full

amount of those premiums as receivables on the assets

side of the balance sheet. As the Fifth Cireuit cor-

rectly observed, ‘‘In point of fact, the N....1.C. method

is a hybrid method and not strictly an accrual method.”

Western National Life Insurance Co. of Texas v.

Commissioner, supra, 432 F. 2d at 301. Without the

assumption of full premium payment, deferred and

uncollected premiums would not be properly accruable

under an accrual method of accounting. But once the

assumption of full premium payment is 1ade, an

accrual method of accounting requires that these pre-

miums be taken into account consistently for assets as

well as liabilities.

The courts of appeals have therefore correctly re-

jected the insurance industry’s attempt to impose the

NAIC method of accounting upon the Internal Rey-

enue Code. As the Seventh Circuit observed in Frank-

lin Life Insurance Co. v. United States, supra, 399

F. 2d at 760, “The careful and detailed attention given

by Congress throughout Sections 801 through 820 to

definition of the particular items utilized as factors

in the tax formula and in specifying and enumerating

the permissible ueductions and exclusions negates the

existence of any intent on the part of Congress to

relegate the substantive matter of offsetting or ex-

cluding loading on deferred and uncollected pre-

miums, with its concomitant impact on the resulting

tax, to the NAIC.” * Accord: Jefferson Standard Life

Insurance Co. v. United States, supra, 408 F. 2d at

** The limited role of the NAIC method of financial reporting

is confirmed by the position the insurance industry took during

the hearings cu the 1959 Act. At that time, the industry stressed

that the NAIC annual statement and the annua] statement’s Sum-

mary of Operations were “intended only for use * * * as a meas-

ure of solvency and not for use as a year-to-year measure of

earned income for tax purposes.” See Hearings on H.R. 4245 (Tax

Formula for Life Insurance Companies) before the Senate Com-

mittee on Finance, 86th Cong., Ist Sess. 302 (1959) (Statement

of Francis V. Keesling, Jr.). Likewise, Claris Adams, who was

General Counsel of the American Life Convention, stated during

the House hearings (Hearings on the Taxation of Income of Life

Insurance Companies before the Subcommittee on Internal Rev-

enue Taxation of the House Committee on Ways and Means, 85th

Cong., 2d Sess. 56 (1958) :

“Tt follows that the results in any given year, as shown by a life

insurance company’s annual statement, are so much of the product

of estimates of future liabilities based on probabilities that the re-

sults themselves are essentially estimates instead of actualities.

“As a matter of fact, the annual statement of life insurance

companies as designed by the National Association of Insurance

849-850, 856; Western National Life Insurance Co. of

Texas v. Commissioner, supra, 432 F. 2d at 301-302;

Western and Southern Life Insurance Co. v. Com-

missioner, supra, 460 F. 2d at 12-14.

D. A LIFE INSURANCE COMPANY THAT INCLUDES THE NET VALUATION

PORTION OF DEFERRED AND UNCOLLECTED PREMIUMS IN “RESERVES”

MUST INCLUDE THE GROSS AMOUNT OF SUCH PREMIUMS IN ITS COM-

PUTATION OF “GROSS AMOUNT OF PREMIUMS” UNDER SECTION

809(C) (1) a3

1. The necessity for consistency of assumptions ap-

plies with equal force to the Phase II computation of

a life insurance company’s “‘gain from operations’’

under Section 809. As we have pointed out supra, pp.

7-8, the company’s “gain from operations” includes

its income from all sources less certain specified de-

ductions. Since “gain from operations” includes an

element of investment income (see Section 809(b)

(1)(A)), the further computation of “gain from op-

erations” is directed toward taking into account in-

come from other sources, principally underwriting

income. A company has underwriting gains when the

premiums it charges for policies are in excess of its

costs in providing the coverage.

The Section 809 computation of ‘‘gain from opera-

tions’? involves totalling the company’s income

items and offsetting that amount by its deductions i:

essentially the same manner as any other computation

of net income. In addition to the company’s share of

Commissioners does not show, and never was intended to show,

yearly profit and loss on company operations, but has only been

constructed to reflect an overall standard of probable solvency.

It cannot be too strongly emphasized that the annual statement of

life insurance companies «S not a profit-and-loss statement.”

226-549—77—__5

investment income, the income items include ‘gross

amount of premiums,”’ net decreases in reserves, and

other amounts (Section 809(c)). The specified deduc-

tions include non-investment expenses, such as under-

writing expenses, salaries, and general overhead, and

claims paid (Section 809(d)). In aecord with the con-

gressiona! decision to exclude from the tax base that

portion of premiums necessary to meet future claims,

Section 809(d)(2) permits a deduction for increases

in reserves that are attributable to premiums included

in income under Section 809(c) (1). After subtracting

the various deductions from the company’s gross

income from all sources, the resulting figure is its

‘gain from operations.”’

The court of appeals’ holding that respondent was

not required to include any part of the deferred and

uncollected premiums in ‘“‘gross amount of premiums”

under Section 809(c)(1) suffers from the same in-

firmity as its exclusion of those premiums from ‘‘as-

sets” under Section 805(b)(4). As the mechanics of

the Phase II computation demonstrate, Section 809

(d)(2) allows a deduction for increases to reserves.

Thus, if an insurance company computes its reserves

on the traditional assumption of full premium pay-

ment and claims a Section 809(d)(2) deduction for

those reserves, it must likewise apply that assump-

tion to the income side of the tax computation and

include the full amount of the deferred and uncol-

lected premiums in “gross amount of premiums” un-

der Section 809(c)(1). Treasury Regulations, Section

1.809-4(a); Franklin Life Insurance Co. v. United

States, supra, 399 F. 2d at 760-761; Jefferson Stand-

ard Life Insurance Co. v. United States, supra, 408

F, 2d at 855-856; Western National Life Insurance

Co. of Texas v. Commissioner, supra, 432 F. 2d at

301-302; Western and Southern Life Insurance Co. v.

Commissioner, supra, 460 F. 2d at 11-14. If the de-

ferred and uncollected premiums are not included in

income, there is no warrant for the deduction for re-

serves attributable to such premiums. The integrity

of a computati 1 of net income requires that uniform

assumptions be made with respect to both income and

deduction items.

2. Thus, the decision of the court of appeals cannot

be justified on any rational basis. But the insurance

industry has contended in the prior cases, and pre-

sumably the amicus Life Insurance Council will like-

wise urge here, that it is entitled to a deduction or

offset for loading on deferred and uncollected pre-

miums so that such premiums are included in income

in the Phase II computation only to the extent of the

net valuation portion. In support of this approach,

the industry again invokes the authority of the NAIC

method of financial reporting.

As we have shown with respect to the Phase I com-

putation (see pp. 34-37, 47, supra), the sole concern of

the NAIC method is to project an accurate report of the

company’s solvency. Thus, on the NAIC form entitled

“Summary of Operations,” the company includes its

gross deferred and uncollected premiums in “Pre-

miums and annuity considerations” (line 1.1) and de-

ducts: (1) the net valuation portion in “Increase in

aggregate reserve for policies and contracts with life

contingencies” (line 17) ; and (2) the loading element

in ‘‘Increase in loading on * * * deferred and uncol-

lected premiums” (line 25) (see Ex. F, A. 77). The

net effect of these computations is to cancel out any

impact of deferred and uncollected premiums on the

company’s income statement because the additions on

the income side exactly equal the subtractions on the

deductions side.

The courts of appeals have properly rejected, as

inconsistent with the language of the statute, the in-

dustry’s position that only the net valuation portion of

the deferred and uncollected premiums be included in

income. Section 809(c) (1) requires the inclusion in in-

come of the “gross amount of premiums’ and not any

lesser amount. Moreover, the NAIC deduction for the

company’s increase in loading on deferred and uncol-

lected premiums is not one of the deductible items

specified in Section 809(d). Since “a taxpayer seek-

ing a deduction must be able to point to an applicable

statute and show that he comes within its terms”

(New Colonial Co. v. Helvering, 292 U.S. 435, 440),”

there is no basis for the industry’s claim to a non-

statutory tax deduction for theffet increase in loading.

E. ALTERNATIVELY, IF DEFERRED AND UNCOLLECTED PREMIUMS ARE

NOT INCLUDED IN “ASSETS” AND “GROSS AMOUNT OF PREMIUMS,”

THE NET VALUATION PORTION OF THOSE PREMIUMS MUST LIKEWISE

BE EXCLUDED FROM “RESERVES”

The core of our submission in this case is that a life

insurance company must treat its deferred and uncol-

%6 The Court has likewise invoked the principle that deductions

must be supported by a particular statute in connection with the

taxation of life insurance companies. See Helvering v. Independent

Life Ins. Co., 292 U.S. 371, 381.

lected premiums for federal tax purposes in accord-

ance with a consistent set of assumptions. Recognizing

the industry-wide assumption that premiums have

been paid in full as of the anniversary dates of the

policies and that the computation of reserves will be

made in accordance with that assumption, the perti-

nent Treasury Regulations (Sections 1.805-5(a) (4)

(ii) and 1.809-4(a)) likewise properly require that

deferred and uncollected premiums be included in ‘‘as-

sets” and “gross amount of premiums.” In this man-

ner, the assumption of full premium payment will be

given effect for all of the elements of the federal tax

computations.

As noted (pp. 34-37, supra), the asumption of full

premium payment is a financial reporting convention

adopted by the life insurance industry to simplify the

actuarial determinations of its year-end reserves. To

the extent that the reserves reflect the net valuation

portion of the deferred and uncollected premiums,

they: are overstated and represent no actual liability

of the company. The company is only liable to pay the

benefits for periods with respect to which the pre-

miums have actually been paid. Indeed, the NAIC ac-

counting device of creating a “quasi-asset’’ equal to

the net valuation portion of the deferred and uncol-

lected premiums to offset the overstatement of the

reserves convincingly demonstrates that the overstate-

ment of the reserves does not encumber any real assets

of the company.

If the industry-wide assumption of full. premium

payment were disregarded for purposes of the federal .

tax computation, consistency could neyertheless be

achieved by excluding deferred and uncollected pre-

miums from ‘‘reserves,” “assets,” and “gross amount

of premiums.” This alternative approach is set forth

in Treasury Regulations, Section 1.801-4(f), which

provides that if it is determined that deferred and

uncollected premiums are not properly includable in

‘‘oross amount of premiums” and ‘‘assets,” then “ap-

porpriate reduction shall be made in the life insurance

reserves.”

In prescribing this alternative method, the Regula-

tions make certain that if deferred and uncollected

premiums are not to be included in “assets” and

“gross amount of premiums,” as the decision below

has held, the net valuation portion of those premiums

cannot be included in ‘‘reserves.’’ Thus, the alterna-

tive approach would continue to guarantee the in-

tegrity of the tax computations.

The exclusion of deferred and uncollected premiums

altogether from “assets,” “gross amount of pre-

miums,” and “reserves” is arguably more consistent

with the decisions of the Court recognizing that a

life insurance reserve arises only upon the payment

of premiums (see pp. 29-31, supra). Since the policy-

holder has not paid the deferred and uncollected

premiums and has no legal obligation to do so, there

are in fact no premiums to be included in “assets”

or “gross amount of premiums.” Likewise there are

no amounts which are “set aside” (Section 801(b) (1)

(B)) or “reserved from premiums” that would sup-

port the existence of a reserve. See New York Life

Ins. Co. v. Edwards, supra, 271 U.S. at 119.

Thus, the exclusion of deferred and uncollected pre-

miums from these three elements in the tax computa-

tions has much to commend it as a matter of absolute

logic. Moreover, the seminal opinion of the Seventh

Circuit in Franklin Life Insurance Co. v. United

States, supra, 399 F. 2d at 761, acknowledged that

“Ti]f the fictional assumption were not indulged and only

those reserves were accrued as were attributable to

paid up portions of annual premiums, then the prob-

lem from an accrual standpoint would be simpler.”

On this dual rationale of logic and simplicity, a

trial judge of the Court of Claims has recently held

that deferred and uncollected premiums are not in-

cludable in “assets,” “gross amount of premiums,”

or “reserves,” in accord with .... alternative approach

of Treasury Regulations, Section 1.801-4(f). See

Monumental Life Insurance Co. v. United States,

No. 71-73, decided November 19, 1976 (Ct. Cl.) (76-2

U.S.T.C. { 9787). But despite the logic and simplicity of

total exclusion of deferred and uncollected premiums,

the Commissioner is willing to accept the life in-

surance industry’s fictional assumption of full pre-

mium payment and consequent overstatement of re-

serves as long as the same assumption is consistently

applied in computing the other elements of the tax

formula.

Hence, our primary posticu, as set forth in Trea-

sury Regulations, Sections 1.805-5(a)(4)(ii) and

1,809-4(a)(1), is that gross deferred and uncollected

premiums must be included in “assets” and “gross

amount of premiums” if the net valuation por-

tion of such premiums is to be included in “re-

serves.” However, if the Court disagrees with our

submission that the full amount of deferred and un-

collected premiums be included in “assets’’ and “gross

amount of premiums,” the proper disposition of this

case would be to exclude such premiums entirely from

the tax compviations, in accordance with Treasury

Regulations Section 1.801-4(f).

CONCLUSION

For the reasons stated, the judgment of the court

of appeals should be reversed.

Respectfully submitted.

Rosert H. Bork,

Solicitor General.

Myron C. Baum,

Acting Assistant Attorney General.

Stuart A. SMITH,

Assistant to the Solicitor General.

Gary R. ALLEN,

STEPHEN M. GELBER,

Attorneys.

JEANNE L. Dopres,

Attorney,

Internal Revenue Service.

JANUARY 1977.

APPENDIX

Internal Revenue Code of 1954 (26 U.S.C. (1958

ed., Supp. IT)):

Sec. 801 [as added by Sec. 2(a), Life Insurance

Company Income Tax Act of 1959, P.L. 86-69, 73

Stat. 112]. DEFINITION OF LIFE INSURANCE

COMPANY.

* * . ” *

(b) Life Insurance Reserves Defined.—

(1) In general.—For purposes of this part, the

term “life insurance reserves’’ means amounts—

(A) which are computed or estimated on

the basis of recognized mortality or mor-

bidity tables.and assumed rates of interest,

and

(B) which are set aside to mature or

liquidate, either by payment or reinsurance,

future unaccrued claims arising from life

insurance, annuity, and noncancellable health

and accident insurance contracts (including

life insurance or annuity contracts combined

with noneancellable health and accident in-

surance) involving, at the time with respect

to which the reserve is computed, life, health,

or accident contingencies.

(2) Reserves must be required by law.—

Except—

(A) in the case of policies covering life,

health, and accident insurance combined in

one policy issued on the weekly premium

(1a)

226-549-776

payment plan, continuing for life and not

subject to cancellation,

(B) in the ease of policies issued by an

organization which meets the requirements

of section 501(c)(9) other than the require-

ment of subparagraph (B) thereof, and

in addition to the requirements set forth in para-

graph (1), life insurance reserves must be re-

quired by law.

* * * * *

Sec. 802 [as added by Sec. 2(a), Life Insurance

Company Income Tax Act of 1959 supra.] TAX

IMPOSED.

(a) Tax Imposed.—

(1) In General.—A tax is hereby imposed for

each taxable year beginning after December 31,

1957, on the life insurance company taxable in-

come of every life insurance company. Such tax

shall consist of—

(A) a normal tax on such income com-

puted at the rate provided by section 11

(b), and

(B) a surtax, on so much of such in-

come as exceeds $25,000, computed at the

rate provided by section 11(c).

* * * * *

(b) Life Insurance Company Taxable Income De-

fined.—For purposes of this part, the term “life in-

surance company taxable income’”’ means the sum of—

(1) the taxable investment income (as

defined in section 804) or, if smaller, the gain

from operations (as defined in section 809),

(2) if the gain from operations exceeds

the taxable investment income, an amount

equal to 50 percent of such excess, plus

(3) the amount subtracted from the policy-

holders surplus account for the taxable year,

as determined under section 815.

Sec. 804 [as added by See 2(a), Life Insurance

Company Income Tax Act of 1959, supra]. TAX-

ABLE INVESTMENT INCOME.

(a) In General.—

(1) Exclusion of policyholders’ share of invest-

ment yield.—The policyholders’ share of each and

every item of investment yield (including tax-

exempt interest, partially tax-exempt interest, and

dividends received) of any life insurance com-

pany shall not be included in taxable investment

income. For purposes of the preceding sentence,

the policyholders’ share of any item shall be that

percentage obtained by dividing the policy and

other contract liability requirements by the in-

vestment yield; except that if the policy and

other contract liability requirements exceed the

investment yield, then the policyholders’ share

of any item shall be 100 percent.

(2) Taxable investment income defined.—For

purposes of this part, the taxable investment in-

come for any taxable year shall be an amount

(not less than zero) equal to the sum of the life

insurance company’s share of each and every item

of investment yield (including tax-exempt inter-

est, partially tax-exempt interest, and dividends

received), reduced by—

(A) the sum of—

(i) the life insurance company’s share

of interest which under section 103 is

excluded from gross income,

(ii) the deduction for partially tax-

exempt interest provided by section 242

(as modified by paragraph (3)) com-

puted with respect to the life insurance

company’s share of such interest, and

(iii) the deductions for dividends re-

ceived provided by sections 243, 244, and

245 (as modified by paragraph (5)) com-

puted with respect to the life insurance

company’s share of the dividends re-

ceived; and

(B) the small business deduction provided

by paragraph (4).

For purposes of the preceding sentence, the life

insurance company’s share of any item shall be

that percentage which, when added to the percent-

age obtained under the second sentence of para-

graph (1), equals 100 percent.

(b) Gross Investment Income.—For purposes

of this part, the term “gross investment income”

means the sum of the following:

(1) Interest, etc-—The gross amount of in-

come from—

(A) interest, dividends, rents, and:

royalities,

(B) the entering into of any lease,

mortgage, or other instrument or agree-

ment from which the life insurance com-

pany derives interest, rents, or royalties,

and

any instrument or agreement described

in subparagraph (B).

(2) Short-term capital gain.—In the case

of a taxable year beginning after December

31, 1958, the amount (if any) by which the

net short-term capital gain exceeds the net

long-term capital loss.

(3) Trade or business tncome.—The gross

income from any trade or business (other

than an insurance business) carried on by

the insurance company, or by a partnership

of which the life insurance company is a part-

ner. In computing gross income under this

paragraph, there shall be excluded any item

described in paragraph (1).

Except as provided in paragraph (2), in comput-

ing gross investment income under this subsection,

there shall be excluded any gain from the sale or

exchange of a capital asset, and any gain con-

sidered as gain from the sale or exchange of a

capital asset.

(ec) Investment Yield Defined—For purposes

of this part, the term “investment yield” means

the gross investment income less the following

deductions— ‘*

(1) Investment expenses.—liuvestment

expenses for the taxable year. If any gen-

eral expenses are in part assigned to or in-

cluded in the investment expenses, the total

deduction under this paragraph shall not

exceed the sum of—

(A) one-fourth of one pereent of

the mean of the assets (as defined in

section 805(b)(4)) held at the begin-

ing and end of the taxable year,

(B) the amount of the mortgage

service fees for the taxable year, plus

the greater:

(i) one-fourth of the amount by

which the investment yield (com-

puted without any deduction for in-

vestment expenses allowed by this

paragraph) exceeds 334 percent of

the mean of the assets (as defined

in section 805(b)(4)) held at the

beginning and end of the taxable

year, reduced by the amount de-

scribed in subparagraph (B), or

(ii) one-fourth of one percent of

the mean of the value of mortgages

held at the beginning and end ef the

taxabie year for which there are no

mortgage service fees for the taxable

year.

(2) Real estate expenses.—The amount of

taxes (as provided in section 164), and other

expenses, for the taxable year exclusively on

or with respect to the real estate owned by

the company. No deduction shall be allowed

under this paragraph for any amount paid

out for new buildings, or for permanent im-

provements or betterments made to increase

the value of any property.

(3) Depreciation.—The deduction allowed

by section 167. The deduction under this para-

graph and paragraph (2) on account of any

real estate owned and occupied for insurance

purposes in whole or in part by a life insur-

ance company shall be limited to an amount

which bears the same ratio to such deduction

(computed without regard to this sentence)

as the rental valve of the space not so oc-

cupied bears to the rental value of the entire

property.

(4) Depletion—-The deduction allowed by

section 611 (relating to depletion). —

(5) Trade or business deductions.—The de- -

ductions allowed by this subtitle (without

regard to this part) which are attributable

to any trade or business (other than an in-

surance business) carried on by the life in-

surance company, or by a partnership of

which the life insurance company is a part-

ner; except that in computing the deduction

under this paragraph— :

(A) There shall be excluded losses—

(i) from (or considered as from)

sales or exchanges of capital assets,

(ii) from sales or exchanges of

property used in the trade or busi-

ness (as defined in section 1231(b)),

and

(iii) from the compulsory or in-.

voluntary conversion (as a result of

destruction, in whole or in part, theft

or seizure, or an exercise of the

power of requisition or condemnation

or the threat or imminence thereof)

of property used in the trade or

business (as so defined).

(B) Any item, to the extent attrib-

utable to the carrying on of the insur-

ance business, shall not be taken into

account.

losses provided in section 172, and the

special deductions for corporations pro-

vided in part VIII of subchapter B, shall

not be allowed.

Src. 805 [as added by Sec. 2(a), Life Insurance

Company Income Tax Act of 1959, supra]. POLICY

AND OTHER CONTRACT LIABILITY RE-

QUIREMENTS.

(a) In General——For purposes of this part,

the term “‘policy and other contract liability re-

quirements’” means, for any taxable year, the

sum of—

(1) the adjusted life imsurance reserves,

multiplied by the adjusted reserves rate,

(2) the mean of the pension plan reserves

at the beginning and end of the taxable year,

multiplied by the current earnings rate, and

(3) the interest paid.

(b) Adjusted Reserves Rate and Earnings

Rates.—

(1) Adjusted reserves rate-—For purposes

of this part, the adjusted reserves rate for

any taxable year is the average earnings rate

or, if lower, the current earnings rate.

(2) Current earnings rate-—For purposes

of this part, the current earnings rate for

any taxable year is the amount determined

by dividing—

(A) the taxpayer’s investment yield

for such taxable year, by

(B) the mean of the taxpayer's assets

at the beginning and end of the taxable

year.

(2) Average earnings rate.—

(A) In general—For purposes of this

part, the average earnings rate for any

taxable year is the average of the cur-

rent earnings rates for such taxable year

and for each of the 4 taxable years im-

mediately preceding such taxable year

(excluding any of such 4 taxable years

for which the taxpayer was not an in-

surance company ).

(B) Special rules—For purposes of

subparagraph (A)—

(i) the current earnings rate for

any taxable year beginning before

January 1, 1958, shall be determined

as if this part (as in effect for 1958)

and section 381(c)(22) applied to

such taxable year, and

(ii) the current earnings rate for

any taxable year of any company

which, for such year, is an insurance

company (but not a life insurance

company) shall be determined as if

this part applied to such company

for such year.

(4) Assets.—For purposes of this part, the

term “assets” means all assets of the com-

pany (including nonadmitted assets), other

than real and personal property (excluding

money) used by it in carrying on an insur-

ance trade or business. For purposes of this

paragraph, the amount attributable to—

(A) real property and stock shall be

the fair market value thereof, and

(B) any other asset shall be the ad-

justed basis (determined without regard

to fair market value on December 31

1958) of such asset for purposes of y

10A

termining gain on sale or other disposi-

tion.

(1) Adjusted life insurance reserves de-

fined.—For purposes of this part, the term

“adjusted life insurance reserves” means—

(A) the mean of the life insurance

reserves (as defined in section 801(b)),

other than pension plan reserves, at the

beginning and end of the taxable year,

multiplied by

(B) that percentage which equals 100

percent—

(1) inereased by that percentage

which is 10 times the average rate

of interest assumed by the taxpayer

in caleulating such reserves, and

(11) reduced by that percentage

which is 10 times the adjusted re-

serves rate.

(2) Average interest rate assumed.—For

purposes of this part, the average rate of in-

terest assumed in calculating reserves shall

be computed—

(A) by multiplying each assumed rate

of interest by the means of the amounts

of such reserves computed at that rate at

the beginning and end of the taxable

year, and

(B) by dividing (i) the sum of the

products ascertained under subparagraph

(A), by (ii) the mean of the total of

such reserves at the beginning and end

of the taxable year.

11a

Sec. 809 [as added by See. 2(a), Life Insurance

Company Income Tax Act of 1959, supra]. IN

GENERAL.

(a) Exclusion of Share of Investment Yield

Set Aside for Policyholders—

| (1) Amount.—The share of each and

every item of investment yield (including

tax-exempt interest, partially tax-exempt

interest, and dividends received of any life

insurance company set aside for policy-

holders shall not be included in gain or loss

from operations. For purposes of the pre-

ceding sentence, the share of any item set

aside for policyholders shall be that percent-

age obtained by dividing the required in-

terest by the investment yield; except that

if the required interest exceeds the invest-

ment yield, then the share of any item set

aside for policyholders shall be 100 percent.

(2) Required interest—For purposes of

this part, the required interest for any tax-

able year is the sum of the products ob-

tained by multiplying—

(A) each rate of interest required,

or assumed by the taxpayer, in calcu-

lating the reserves described in section

810(c), by

(B) the means of the amount of such

reserves computed at that rate at the be-

ginning and end of the taxable year.

(b) Gain and Loss From Operations.—

(1) Gain from operations defined.—For pur-

poses of this part, the term “gain from opera-

tions’’ means the amount by which the sum of the

12a 134

following exceeds the deductions provided by sub- (B) any amount of interest which

section (d): under section 242 (as modified by sec-

(A) the life insurance company’s

share of each and every item of in-

vestment yield (including tax-exempt

interest, partially tax-exempt inter-

est, and dividends received) ; and

(B) the sum of the items referred

to in subsection (c).

(2) Loss from operations defined.—

tion 804(a)(3)) is allowable as a de-

duction, or

which under sections 243, 244, and 245

(as modified by subsection (d)(8)(B))

is allowable as a deduction,

adjustment shall be made to the extent

necessary to prevent such imposition.

For purposes of this part, the term “‘loss (ec) Gross Amount.—For purposes of sub-

from operations’? means the amount by aecti b)(1) and (2). the following items

which the sum of the deductions provided aii tin hs ste “ati pooh ced .

by subsection (d) exceeds the sum of—

(A) the life insurance company’s

share of each and every item of in-

vestment yield (including tax-ex-

empt interest, purtially tax-exempt

interest, and dividends received) ;

and

(B) the sum of the items referred

to in subsection (c).

(3) Life insurance company’s share.—

For purposes of this subpart, the life in-

surance company’s share of any item

shall be that percentage which, when

added to the percentage cbtained under

the second sentence of subsection (a) (1),

equals 100 percent.

(4) Eaception.—If it is established in

any case that the application of the defi-

nition of gain from operations contained

in paragraph (1) results in the imposi-

tion of tax on—

(A) any interest which under sec-

tion 103 is excluded from gross income,

(1) Premiums.—The gross amount of

premiums and other consideration (includ-

ing advance premiums, deposits, fees, as-

sessments, and consideration in respect of

assuming liabilities under contracts not

issued by the taxpayer) on insurance and

annuity contracts (including contracts sup-

plementary thereto); less return premiums,

and premiums and other consideration aris-

ing out of reinsurance ceded. Except in the

ease of amounts of premiums or other con-

sideration returned to another life insurance

company in respect ‘of reinsurance ceded,

amounts returned where the amount is not

fixed in the contract but depends on the

experience of the company or the discretion

of the management shall not be included

in return premiums.

(2) Decreases in certain reserves.—Each

net decrease in reserves which is required by

section 810 or 811(b)(2) to be taken into

account for purposes of this paragraph.

14a

(3) Other amounts.—All amounts, not

included in computing investment yield and

not includible under paragraph (1) or (2),

which under this subtitle are includible in

gross income.

Except as included in computing investment

yield, there shall be excluded any gain from the

sale or exchange of a capital asset, and any gain

considered as gain from the sale or exchange

of a capital asset.

(d) Deductions—For purposes of subsections

(b)(1) and (2), there shall be allowed the fol-

lowing deductions:

(1) Death benefits, etc—All claims and

benefits accrued, and all losses ineurred

(whether or not ascertained), during the

taxable year on insurance and annuity con-

tracts (including contracts supplementary

thereto).

(2) Inereases in certain reserves.—The

net inerease in reserves which is required

by section 810 to be taken into account for

purposes of this paragraph.

(3) Dividends to policyholders. _'The de-

duction for dividends to policyholders (de-

termined under section 811(b)).

(4) Operations loss deduction—The op-

erations loss deduction (determined under

section 812).

(5) Certain nonparticipating contracts.—

An amount equal to 10 pereent of the in-

erease for the taxable year in the reserves

for nonparticipating contracts or (if greater)

an amount equal to 3 percent of the premiums

for the taxable year (excluding that portion

of the premiums which is allocable to annuity

features) attributable to nonparticipating

15a

contracts (other than group contracts) which

are issued or renewed for periods of 5 years

or mor) Yor purposes of this paragraph, the

term “reserves for nonparticipating con-

tracts” means such part of the life insurance

reserves (excluding that portion of the re-

serves which is allocable to annuity features)

as relates to nonparticipating contracts (other

than group contracts). For purposes of this

paragraph and paragraph (6), the term “pre-

miums” means the net amount of the pre-

miums and other consideration taken into ac-

count under subsection (c)(1).

(6) Group life, accident and health insur-

ance.—An amount equal to 2 percent of the

premiums for the taxable year attributable

to group life insurance contracts and group

accident and hea!th insurance contracts. The

deduction under this paragraph for the tax-

able year and all preceding taxable years shall

not exceed an amount equal to 50 percent of

the premiums for the taxable year attribut-

able to such contracts.

(7) Assumption by another person of l-

abilities under insurance, etc., contracts.—

The consideration (other than consideration

arising out of reinsurance ceded) in respect

of the assumption by another person of li-

abilities under insurance and annuity con-

tracts (including contracts supplementary

thereto).

(8) Tax-exempt interest, dividends, etc——

(A) Lafe insurance company’s share.—

Kach of the following items:

(i) the life insurance company’s

share of interest which under section

164

103 is excluded from gross income,

(ii) the deduction for partially

tax-exempt interest provided by sec-

tion 242 (as modified by section 804

(a)(3)) computed with respect to

the life insurance company’s share

of such interest, and

(iii) the deductions for dividends

received provided by sections 243,

244, and 245 (as modified by sub-

paragraph (B)) computed with re-

spect to the life insurance company’s

share of the dividends received.

(B) Application of Section 246(b).

—In applying section 246(b) (relat-

ing to limitation on aggregate amount

of deductions for dividends received)

for purposes of subparagraph (A) (iii),

the limit on the aggregate amourt of

the deductions allowed by sections 243

(a), 244, and 245 shall be 85 percent

of the gain from operations computed

without regard to—

(i) the deductions provided by

paragraphs (3), (5), and (6) of this

subsection,

(ii) the operations loss deduction

providid by section 812, and

(in) the deductions allowed by

sections 243(a), 244, and 245,

but such limit shall not apply for any

taxable year for which there is a loss

from operations.

(9) Investment expenses, etc_—Investment

expenses to the extent not allowed as a de-

17a

duction under section 804(c)(1) in comput-

ing investment yield, and the amount (if

any) by which the sum of the deductions

allowable under section 804(c) exceeds the

gross investment income.

(10) Small business deduction —A small

business deduction in an amount equal to

the amount determined under section 804

(a) (4).

(11) Certain mutualization distributions.—

The amount of distributions to shareholders

made in 1958 and 1959 in acquisition of stock

pursuant to a plan of mutualization adopted

before January 1, 1958.

(12) Other deductions—Subject to the

modifications provided by subsection (e),

all other deductions allowed under this sub-

_ title for purposes of computing taxable in-

come to the extent not allowed as deduc-

_ tions in computing investment yield.

* ‘ * * te *

Sec. 810. [as added by See. 2(a), Life Insurance

Company Income Tax Aet of 1959, supra]. RULES

FOR CERTAIN RESERVES.

(a) Adjustment for Decrease.—If the sum of

the items described in subsection (ce) as of the

beginning of the taxable year exceeds the sum

of such-items as of the close of the taxable year

(reduced by the amount of investment yield not

included in gain or loss from operations for the

taxable year by reason of section 809(a)(1)),

the excess shall be taken into account as a net

decrease referred to in section 809(c) (2).

(b) Adjustment for Increase,—If the sum of

the items described in subsection (c) as of the

184

close of the taxable year (reduced by the amount

of investment yield not included in gain or loss

from operations for the taxable year by reason

of section 809(a)(1)) exceeds the sum of such

items as of the beginning of the taxable year,

the excess shall be taken into account as a net

increase referred to in section 809(d) (2).

referred to in subsections (a) and (b) are as

follows:

(1) The life insurance reserves (as de-

fined in section 801(b) ).

(2) The unearned premiums and unpaid

losses included in total reserves under sec-

tion 801(¢c) (2).

(3) The amounts (discounted at the rates

of interest assumed by the company) nec-

essary to satisfy the obligations under in-

surance or annuity contracts (including

contracts supplementary thereto), but only if

such obligations do not involve (at the time

with respect to which the computation is

made under this paragraph) life, health, or

accident contingencies.

(4) Dividend accumulations, and other

amounts, held at interest in connection with

insurance or annuity contracts (including

contracts supplementary thereto).

(5) Premiums received in advance, and

liabilities for premium deposit funds.

19a

(a) Method of Accounting.—All computations

entering into the determination of the taxes

imposed by this part shall be made—

(1) under an accrual method of account-

ing, or

(2) to the extent permitted under reg-

ulations prescribed by the Secretary or his

delegate, under a combination of an accrual

method of accounting with any other method

permitted by this chapter (other than the

eash receipts and disbursements method).

Except as provided in the preceding sentence,

all such computations shall be made in a man-

ner consistent with the manner required for

purposes of the annual statement approved by

the National Association of Insurance Com-

missioners.

(f) Denial of Double Deductions.—Nothing in

this part shall permit the same item to be de-

ducted more than once under subpart B and once

under subpart C.

Treasury Regulations on Income Tax (1954 Code)

(26 C.F.R.) :

§ 1.8014. Life insurance reserves.

* * * * *

(f) Adjustments to life insurance reserves.

In the event it is determined on the basis of

the facts of a particular case that premiums de-

ferred and uncollected and premiums due and

Sec. 818 [as added by Sec. 2(a), Life Insurance

Company Income Trax Act of 1959, supra]. AC-

COUNTING PROVISIONS.

unpaid are not properly accruable for the tax-

able year under section 809 and, accordingly,

are not properly includible under assets (as de-

20A

fined in section 805(b)(4)) for the taxable year,

appropriate reduction shall be made in the life

insurance reserves. This reduction shall be made

when the insurance company has calculated life

insurance reserves on the assumption that the

premiums on all policies are paid annually or

that all premiums due on or prior to the date

of the annual statement have been paid.

$1.805-5 Adjustéd reserves rate and earnings

rates.

(a) In general. * * *

* * _ * *

(4) Assets—(i) Definition. Section 805(b)

(4) defines the term “assets” as meaning all

assets of the life insurance company (includ-

ing nonadmitted assets), other than real and

personal property (excluding money) used by

the life insurance company in carrying on an

insurance trade or business. For purposes of

the preceding sentence, the term “money” in-

cludes cash, currency, bank deposits (inelud-

ing time deposits) whether or not interest

bearing, share accounts in savings and loan

associations, checks (whether or not eerti-

fied), drafts, money orders, and any other

item of similar nature. * * * _

* * al * *

(ii) Illustration of principles. The provi-

sions of subdivision (i) of this subparagraph

may be illustrated by the following examples:

Example (1). Included in the statement of

assets of P, a life insurance company, are the

following items: Bonds, stocks, mortgages,

home office and branch office buildings owned

and wholly occupied by the company, fur-

21a

niture and equipment owned by the company

and used in the home office and branch office

buildings occupied by the company, agents’

debit balances, premiums deferred and un-

collected and premiums due and unpaid, bank

deposits (including time deposits), and share

accounts in savings and loan associations. For

purposes of section 805(b)(4) and this sub-

paragraph, the home office and branch office

buildings owned and wholly occupied by the

company, ard the furniture and equipment

owned by tae company and used by it in con-

nection with the operations conducted in the

home office and branch office buildings occu-

pied by the company, shall be excluded from

the term ‘‘assets” since such items are the

only ones considered as being used by P in

carrying on an insurance trade or busineess.

Accordingly, since bonds, stocks, mortgages,

agents’ debit balances, premiums deferred

and uncollected and premiums due and un-

paid, bank deposits (including time deposits),

and share accounts in savings and loan asso-

ciations are not considered as being used by

P in carrying on an insurance trade or busi-

ness, they are included within the term “as-

sets” and, therefore, shall be taken into ac-

count by P in determining its current

earnings rate.

* * & * *

§ 1809-4. Gross amount.

(a) Items taken inte account. For purposes

of determining gain or loss from operations un-

der section 809(b)(1) and (2), respectively,

section 809(c) specifies three categories of items

22a

which shall be taken into account. Such items

are in addition to the life insurance company’s

share of the investment yield (as determined

under section 809(a)(1) paragraph (ce) of

§ 1.809-2), * * *. The additional three categories

of items taken into account are:

(1) Premiums. (i) The gross amount of

all premiums and other consideration on

insurance and annuity contracts (including

contracts supplementary thereto); less re-

turn premiums and premiums and other

consideration arising out of reinsurance

ceded. The term ‘‘gross amount of all pre-

miums” means the premiums and other con-

sideration provided in the insurance or

annuity contract. Thus, the amount to be

taken into account shall be the total of the

premiums and other consideration provided

in the insurance or annuity contract without

any deduction for commissions, return pre-

miums, reinsurance, dividends to policy-

holders, dividends left on deposit with the

company, discounts on premiums paid in

advance, interest applied in reduction of pre-

miums (whether or not required to be

credited in reduction of premiums under the

terms of the contract), or any other

item of similar nature. Such term includes

advance premiums, premiums deferred and

uncollected and premiums due and unpaid,

deposits, fees, assessments, and considera-

tion in respect of assuming liabilities under

contracts not issued by the taxpayer (such

as a payment or transfer of property in an

23A

assumption reinsurance transaction as de-

fined in paragraph (a)(7)(ii) of § 1.809-5).

The term also includes amounts a life insur-

ance company charges itself representing

premiums with respect to liability for insur-

ance and annuity benefits for its employees

(including full-time life insurance salesmen

within the meaning of section 7701(a)(20)).

* * * * *

U.S. GOVERNMENT PRINTING OFFICE: 1977

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.