# Amicus Brief — Commissioner v. Standard Life & Accident Insurance

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Amicus Brief
- **Published:** January 1, 1977
- **Citation:** 433 U.S. 148

## Text

No. 75-1771

In Tue

Supreme Court of the United States

Octroser Term, 1976

COMMISSIONER OF INTERNAL REVENUE,
Petitioner,
v.

STANDARD LIFE & ACCIDENT INSURANCE
COMPANY,
Respondent.

On Wait or CertTiornari To THE Untrep States
Court or APPEALS FOR THE TENTH CIRCUIT

BRIEF AS AMICUS CURIAE OF

1730 Pennsylvania Avenue, N.W.
Washington, D.C. 20006

Franois A. GoopHus, JR.

Dewey, Batiantine, Bussey,
Patmer & Woop

Martruew J. Zinn

Sreproz: & Jonnson

Of Counsel

INDEX

Interest of the Amicus Curiae _._.._______________

Ee Gee, Se nn ai

Statement A 5 eee ge ey NS

I. Since 1909, Life Insurance Reserves ‘‘ Required
by Law’’ for Purposes of Federal Income
Taxation Have Been the Reserves Certified To
by the State Regulatory Authorities Without
Reduction on Account of Deferred and Un-

collected Premiums ____._______

A. Tax recognition of life insurance reserves

B.

based on state requirements _____________

Prudential v. Herold—Life insurance re-
serves and deferred and uncollected pre-

. From 1921 through 1957, life insurance

companies were taxed on their investment
income with an allowance for interest on
reserves required by law, without reduc-
tion on account of deferred and uncollected

The 1959 Act: The changes that Congress
made and those it did not make __________

10

10

10

12

13

II. Congress Intended Life Insurance Companies
to Account for Deferred and Uncollected Pre-
miums in Determining Their Assets and In-
come Under the 1959 Act in the Same Manner
as Those Items Are Accounted For in the
NAIC Annual Statement _______

D. The Government’s Principal Position Pro-
duces Anomalous and Inconsistent Results

FREE PSE MeN FE RET Ae) Se,

CrraTIons

CaSsEs:

Bankers Ltfe Co. v. United States, 412 F.Supp. 62
(i tone

Bankers Union Life Ins. Co., 62 T.C. 661 (1974) __
Brown v. Helvering, 291 U.S. 193 (1934) ________

Commissioner v. Court Holding Co., 324 U.S. 331
ST SEE ET Sat ee Re ee

Commissioner v. Idaho Power Co., 418 U.S. 1
) | Se

Connecticut General Life Ins. Co. v. Eaton, 218
Me , ieeeeeaee

Federal Life Ins. Co. v United States, 527 F.2d
RR ee ne

Franklin Life Ins. Co. v. United States, 399 F.2d
757 (7th Cir. 1968), rev’g 19 AF TR 2d 1734, 67-2
U.S.T.C. 7 9515 (S.D. ILL 1967), cert. denied, 393
eS Ree eran

Great Commonwealth Life Ins. Co. v. United
States, 491 F.2d 109 (5th Cir. 1974) ___________

PAGE

21
21

32

2,3

Ree PO a

Helvering v. New Haven & Shore Line Ry. Co.,
Inc., 121 F.2d 985 (2d Cir. 1941), cert. denied,
I I IID no cccrsenscheniorlic Sianesdiantbiiaioemenienedey

Jefferson Standard Life Ins. Co. v. United States,
408 F.2d 842 (4th Cir. 1969), aff’g im part, rev’g
in part, 272 F.Supp. 97 (D. N.C. 1967), cert.
denied, 396 U.S. 828 (1969) ~._--_-___________

Lincoln Nat’l Life Ins. Co. v. United States, 38
AFTR 2d 76-6126, 76-2 U.S.T.C. § 9772 (Ct. Cl.
EES SS aE ae eer Seats ee ee

Maryland Casualty Co. v. United States, 251 U.S.
SE SD ncietiiiniinetics oe

McCoach v. Ins. Co. of North America, 244 U.S.
IEE ibicih tdcnten in cicinetaiaimeebihatianiniaibtindmatin

Midland Nat’! Life Ins. Co. v. Commissioner, 66
A GED cide tirwcidcncaii

Monumental Life Ins. Co. v. United States, 39
AFTR 2d 77-306, 76-2 U.S.T.C. 9 9787 (Ct. Cl.
Se sien 7

Mutual Benefit Life Ins. Co. v. Herold, 198 F. 199
7 06 a oo

North American Life & Casualty Co. v. Commis-
sioner, 533 F.2d 1046 (8th Cir. 1976), aff’g 63
- i 2 | Serre

Prudential Ins. Co. of America v. Herold, 247
i EE, Se dele NE: chcntinenhabiiiieemen

Republic Nat’l Life Ins. Co. v. United States, 77-1
U.S.T.C. J 9133 (N.D. Tex. 1976) _-_-_.._-____-

Robertson v. California, 328 U.S. 440 (1946) ____-

United Life & Accident Ins. Co. v. Commissioner,
329 F.Supp. 765 (D. N.H. 1971) ~--..--------

United States v. Atlas Life Ins. Co., 381 U.S. 233
Er

PAGE

11, 24

13

iv

PAGE

Western and Southern Life Ins. Co. v. Commis-
sioner, 460 F.2d 8 (6th Cir. 1972), rev’g 55 T.C.
1036 (1971), cert. denied, 409 U.S. 1063 (1972) _. 2,3

Western Nat'l Life Ins. Co. v. Commissioner, 432
F.2d 298 (5th Cir. 1970), rev’g 51 T.C. 824
(1969), modifying 50 T.C, 285 (1968) _.....-_. 2, 3, 23

Sratures AND ReeguLaTiIons:

Administrative Procedure Act, Section 3(b), 5

U.S.C. Section 668(b) ....................-...- 19
Corporation Excise Tax of 1909, ch. 6, Section 38,

EE as Rn ee 12
Income Tax Act of 1913, ch. 16 I1(G)(b), 38 Stat.

Tl. .cuhoesntnietninamie sinalonehinbanentnnaanedaiiinia 12

Internal Revenue Code of 1939, section 201(¢c)(2) 17
Internal Revenue Code of 1954:

I 24
TREE TEED Annictcraiestesdbiiannsntatreptemnniiitutinmbinbtasteiies 4
a es 17, 21
a | a ee 15
Uy Ge dlacieciniteentnttaiminitnnateintintnibittiintens 18
I TD tpsicntecicinicietecnaidiiatiaidinienmigititntuitin 7,11
IED cccnsaetnsntcinintncsntnaniaialaiiein 81
Section 805(b)(4) ~...------------ 19, 20, 21, 25, 26
EE Se RSE Yo wee 16
RCS an aioe Nene ees 16
I ica 16
5 one 7
SE I - i acinenisintdaciicient linda demidaicatinetaiaie 21, 28
ED ciecinc cccntictteessintitteeldaaitcdentinaahiecichiion 28
I SE cecrericieptnccheritesdeeidetecaedieneteteeete 30
YL CS a ee eee 11
I SD A ndincnisisnsiniidnismectiohin 16

RCE Ea Re: ES! 18

v
PAGE
TN RESTON SS Pay Cer eee ae 22, 27
RE CI i denpthitbocdeocdnentakpannits 4, 9, 24, 25, 28
Section 818(¢c) ~....- SR: Re ee ee 16
gS TS eR ae 20
McCarran-Ferguson Act, 15 U.S.C. Sections 1011-
SUTIIIIITIIIT everteripsteinietheniaumalteninainintintamiamnaalenbene 10
‘Revenue Act of 1921, ch. 136, Section 245(a) (2),
gp SRE MR SS ll 12
Revenue Act of 1942, ch. 619, Section 163(a), 56
EE eel FT Set «SER ST We 17

Treasury Regulations No. 62, Art. 681 (1921) .... 18
Treasury Regulations on Income Tax (26 C.F.R.) :

GD 6 cncnnnencanmemnenniinnen 27
Section 1.451-1 —...... sisi Deindioniaiiahiaiineieee 26
CE EE Sn 20
Se Sr 18
EE EE a Oe oe a 18
Section 1.805-5(a) (4) (ii) .....-.-----------.. 26
CEE ee 21
EEN eee ee ee 11
ee ee 18, 25
MISCELLANEOUS:
105 Cong. Rec. 2569, 2576-77 (1959) _....------ 17

Hearings before the Subcommittee on Internal
Revenue Taxation of the Committee on Ways

and Means, 85th Cong., 2d Sess. (1958) ~....-. 15, 28
Hearings before the Committee on Finance, 86th
en 15, 28
H.R. Rep. No. 2833, 77th Cong., 1st Sess. 109
(1942), 1942-2 Cum. Bull. 372, 454 _....------. 17
H.R. Rep. No. 34, 86th Cong., Ist Sess. (1959),
1959-2 Cum. Bull. 736 e#, seqg........-.-..----. 16,17

PAGE
Report on The Taxation of Life Insurance Com-
panies, Subcommittee on Internal Revenue Tax-
ation, House Committee on Ways and Means
[URED Se) GENE cennusancuncesmineitboes 14
S. Rep. No, 1631, 77th Cong., 2d Sess. 145 (1942),
1942-2 Cum. Bull. 504, 612 _...............__. 17
S. Rep. No. 291, 86th Cong., 1st Sess. (1959),
1959-2 Cum. Bull. 770 et. seg, .........---. 6, 16, 17
Treasury Dept., Bureau of Internal Revenue, Bul-
letin H, Income Tax Rulings Peculiar to Life
Insurance Companies (1921) —___. SEI ch 13, 18

In Ten

Supreme Court of the United States

Ocroszr Term, 1976

No, 75-1771

ComMIssioner oF InTreRNAL Revenue,
: Petitioner,

v.

Sranparo Lire & Accipent Insurance Company,
| Respondent.

ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF
APPEALS FOR THE TENTH CIRCUIT

BRIEF AS AMICUS CURIAE OF
AMERICAN COUNCIL OF LIFE INSURANCE

This brief is submitted with the written consent of coun-
sel to both parties filed with the Clerk of the Court.

Interest of the Amicus Curiae

The American Council of Life Insurance is a trade asso-
ciation with a membership of 444 companies engaged in the

life insurance business.' These companies account for 92
percent of the legal reserve life insurance in force in the
United States. |

The issue here involves the treatment of deferred and
uncollected premiums under the Life Insurance Company
Income Tax Act of 1959 (sections 801-820 of the Internal
Revenue Code of 1954, as amended)? (the ‘1959 Act’’). This
is a question of major importance affecting the federal in-
come taxation of every life insurance company.

Lower Court Decisions

No fewer than five different results have been reached
in seeking to resolve the issue presented here. For the
convenience of the Court, we describe them:

(1) The first result, that reached by the Tenth Circuit
in this case and advocated by the taxpayer, would include
no portion of deferred and uncollected premiums in either
assets or income,

(2) The second result, that favored by the Tax Court,
reached by one district court and advocated by the amicus,
would include no more than net deferred and uncollected
premiums in both assets and income.’

(3) The third result, that reached initially by the Fourth,
Fifth, Sixth and Seventh Circuits and advocated by the gov-

' The American Council of Life Insurance came into being through
merger in 1976 of the American Life Insurance Association (suc-
cessor to the American Life Convention and the Life Insurance Asso-
ciation of America) and the Institute of Life Insurance.

2 Unless otherwise indicated, section references are to the Internal
Revenue Code of 1954 (the “Code”’),

3 Vestern Nat'l Life Ins. Co., 50 T.C, 285 (1968), mod., 51 T.C.
824 (1969), rev'd, 432 F.2d 298 (Sth Cir. 1970); Western and
Southern Life Ins., Co., 55 T.C. 1036 (1971), rev'd, 460 F.2d 8 (6th
Cir. 1972), cert. denied, 409 U.S, 1063 (1972) ; cf. Bunkers Union Life
Ins. Co., 62 T.C. 661 (1974); Franklin Life Ins. Co. v. U.S., 19
AFTR2d 1734, 67-2 U.S.T.C. 9 9515 (S.D. Ill. 1967), rev'd, 399 F.2d
757 (7th Cir. 1968), cert. denied, 393 U.>. 1118 (1969),

3

ernment as its ‘‘primary position’’, would include gross de-
ferred and uncollected premiums in both assets and income.‘

(4) The fourth result, that reached more recently by a
number of lower court (including the Fifth and Seventh

' Cireuits) would include gross deferred and uncollected pre-

miums in income’ and assets®, but would allow a reduction
for expenses associated with their collection,

(5) The fifth result, that recommended by one trial
judge in the Court of Claims and advocated by the govern-
ment as its “alternative position’’, would include no por-
tion of deferred and uncollected premiums in either assets
or income but would reduce reser’ es by amounts equal to
the net valuation portion of such premiums.’

4 Franklin Life Ins. Co. v. U.S., 399 F.2d 757 (7th Cir. 1968),
rev'g 19 AFTR2d 1734, 67-2 U.S.T.C. 9515 (S.D, Ill. 1967), cert.
enied, 393 U.S, 1118 (1969) ; Jefferson Standard Life Ins. Co. v.
‘S., 408 F.2d 842 (4th Cir, 1969), aff'g in part, rev'g in part, 272
F.Supp. 97 (D. N.C, 1967), cert. denied, 396 U.S. 828 vail,
Western Nat'l Life Ins. Co. v. Commissioner, 432 F.2d 298 (Sth Cir.
1970), rev'g 51 T.C. 824 (1969), modifying 50 T.C, 285 (1968) ;
Western and Southern Life Ins. Co. v. Commissioner, 460 F.2d 8
(6th Cir, 1972), rev’'g 55 T.C. 1036 (1971), cert. denied, 409 U.S.
1063 (1972).

5Great Commonwealth Life Ins. Co. v. U.S., 491 F.2d 109

a Cir, 1974) ; Federal of Ins. Co. v. U.S., 527 F.2d 1096 (7th

ir, 1975) ; North American Life & Casualty Co. vy. Commissioner, 533
F.2d 1046 (8th Cir. 1976), aff’g 63 T.C. (1974) ; accord, United
Life & Accident Ins, Co. v. Commissioner, 329 F.Supp. 765 (D. N.H.
19785 Midland Nat'l Life Ins. Co. v. Commissioner, 66 T.C. 550
(

®In Bankers Life Co. v. U.S., 412 F.Supp. 62 (S.D. Iowa, 1976),
the excess of gross over net deferred and uncollected premiums
(i.¢., the loading) was held to have been excludable from assets on the

round that such excess constituted an asset used in ¢n insurance
siness. But see Republic Nat'l Life Ins. Co. v. U.S., 77-1 U.S.T.C,
| 9133 (N.D, Tex. 1976).

7 Monumental Life Ins. Co. v. U.S., 39 AFTR2d §] 77-306, 76-2
U.S.T.C, §] 9787 (Ct. Cl. 1976). On the other hand, a week earlier,
another trial judge of the Court of Claims recommended that gross
deferred and uncollected premiums be included in income, that a
deduction be allowed for estimated expenses of collection and that,
absent a statutory change, reserves could not be reduced, Lincoln
Nat'l Life les, Co, v. U.S., 38 AFTR2d 76-6126, 76-2 U.S.T.C.
| 9772 (Ct.Cl. 1976). The Court of Claims itself has not passed on
any aspect of the question.

4

Thus, no court has allowed the government to make any
reduction in reserves. Rather, the differences of opinion
that have arisen have largely been with respect to the treat-
ment of deferred and uncollected premiums in calculating
assets and income.

Position of the Amicus Curiae

First and foremost, it is our position that Congress
meant to afford full tax recognition to aggregate life insur-
ance reserves as certified by the various state regulatory
authorities and that, apart from certain exceptions speci-
fied in the statute, it meant no change in this regard from
prior law. Regardless of how deferred and uncollected
premiums are treated for asset and income purposes,
whether includible in full, in part, or not at all, reserves
as defined in section 801 of the Code should not be reduced
on account of deferred and uncollected premiums,

Beyond this, whether Congress intended to include de-
ferred and uncollected premiums in ‘‘assets’’ and ‘‘income”’
turns on whether it contemplated the application of normal
tax rules and meanings to them, or whether it intended a
special accounting treatment of these items because of their
uniqueness to life insurance companies. If it intended that,
in the computation of ‘‘taxable investment income’’ and
‘‘vain from operations’’, ‘‘assets’’ and ‘‘ineome’’ are to
retain their normal tax meanings, the conclusic« is inescap-
able that deferred and uncollected premiums are neither
assets nor income and the decision below should be affirmed.

On the other hand, if Congie «* meant to supersede those
meanings, the statutory reference 4 section 818(a) to ‘‘com-
putations ... in a manner consistent with the manner
required for purposes of the annual statement approved
by the National Association of Insurance Commissioners’’
(hereinafter ‘‘NAIC’’) should control, since it is the only
statutory provision sanctioning a departure from normal
tax rules. The Annual Statement, a mandatory and uni-
form accounting system for life insurance companies, has

5

for over 100 years required the inclusion of net (as opposed
to gross as contended for by the government) deferred and
uncollected premiums in assets. It follows that if Congress
meant to depart from normal tax principles and require
the inclusion of deferred and uncollected premiums in
assets and income, it meant to adopt the Annual Statement
treatment pursuant to which only net deferred and unco!-
lected premiums are included ia assets and income.

It is, and consistently has been, the position of the amicus
and its predecessors that Congress intended that the NAIC
treatment be followed. While the position of the amicus
constitutes the position of the industry organization as a
whole, not all companies subscribe to the view that we urge
here. Some companies (including, of course, the taxpayer)
believe that there are strong legal arguments to support the
result reached by the court below.

Because we continue to believe that the correct result
under the statute is that net deferred and uncollected pre-
miums should be included in assets and income, our argu-
ments here are directed to this point. Should this Court
not agree, we respectfully suggest that the most appropriate
result is the one reached by the Tenth Circuit below.

Statement

The applicable Code provisions and the facts of this case
are recited in the government’s brief. (P. Br. 3-15).* The
amicus submits, however, that the government’s statement
is misleading in at least three significant respects.

First, the government suggests that the amount of a life
insurance company’s reserve is dependent on the amount
of premiums actually received. The fact is that life insur-
ance reserves are required to be computed with respect to
all policies in force at the end of the year on the basis of
the net premiums that are assumed to have been received,

8 References herein to “P. Br.” are to the government’s brief.

irrespective of what gross premiums may have in fact been
paid by the policyholders. It is stipulated that the taxpayer
in this case was ‘‘required . . . to compute its reserves...
on the assumption that premiums were paid up one year in
advance on each anniversary date . . . of the policy, even
though premiums were not usually paid in this manner.’’
(Stip. par. 11,-p. 17; Pet. App. A 3a, App. B lla).’ The
reserves so computed are the required reserves both for
purposes of Oklahoma law and for purposes of the Code.

Second, the government states that the insurer has no
obligation to continue the insurance coverage beyond the
period for which premiums have been paid. This ignores
the fact that whether the insurance will be continued is a
matter wholly beyond the control of the company. Accord-
ingly, so long as a policy is in force, the company’s con-
' tingent liability (‘‘risk’’) is for the entire life of the
insured."®

Third, the government wrongly states that the com-
putation of taxable investment income is controlled by the
ratio of reserves to assets." The government goes on
to argue that it is justified in adding loading to the net
deferred and uncollected premiums shown in assets on
the balance sheet by the necessity of maintaining its
erroneous ratio in the computation of taxable investment
income. This is a complete non sequitur because there is
no correlation whatever between the ratio of net to gross
premiums and the ratio of reserves to assets.

9 References herein to “Pet.” are to the petition for a writ of
certiorari.

10 Moreover, if a premium is not paid, under the non-forfeiture
provisions the company may remain liable for the full coverage for
an extended period of time without receiving any future premiums
at all.

11 While it is true that an increase in reserves decreases the tax
and an increase in assets increases the tax, the faulty algebra used
by the government to derive its erroneous ratio (P> Br. 6, 40) is
apparent if one follows the statutory provisions which it more ac-
curately describes in n. 6 (P. Br. 6). gre also the example set forth
in S. Rep. No. 291, 86th Cong., Ist sess. 18 (1959), 1959-2 Cum.
Bull. 770, 783. —

7

The government argues that if it does not prev iil
on its primary position, then alternatively the reserves
required by state law should be reduced on account of de-
ferred and uncollected premiums. There is no basis for that
extreme position, and, in the amicus’ view, it should be
rejected out of hand.” But since the government has
seen fit to inject it into the case, the amicus has no choice
but to respond. We do so not only because the government’s
alternative would unsettle what has been settled since the
very beginnings of the income tax, but also because it would
have a most serious financial impact on the entire life
insurance industry. Accordingly, the amicus addresses the
government’s alternative position first. Thereafter, we
address those issues that are genuinely in controversy, i.e.,
the proper treatment of deferred and uncollected premiums
in calculating assets and income.

Summary of Argument
I

In 1909, Congress provided a deduction for federal ex-
cise tax purposes based on reserves of a life insurance
company required by state law. It adopted the same ap-
proach in the first income tax act, that of 1913, and in every
successive income tax statute, including the Life Insurance
Company Income Tax Act of 1959. Among the reserves
required by state law are reserves for all policies in force,
including those on which premiums are deferred or uncol-
lected. Thus, as to such policies, it was stipulated here that
state law requires reserves to be computed on the assump-
tion that all premiums are paid on the anniversary date of
a policy, regardless of when premiums have actually been
received.

121It was stipulated that taxpayer’s “reserves [computed on the
assumption that premiums were paid annually in advance] were re-
flected as a liability of [ yer] and, as required by the [Code],
were taken into account in the computations required under sections
805 and 809 on the . . . tax returns”. Stip. par. 11, p. 17, supra.

There can be no doubt at this late date that, in keeping
with Congress’ overall approach to reserves that the fed-
eral tax law is to follow state law, reserves for tax purposes
are not to be reduced on account of deferred and un.

15

D. The 1959 Act: The changes that Congress made and those
it did not make

The provisions of the 1959 Act as well as the exhaustive
studies, hearings and reports accompanying it give no hint
of any departure frcm the established pattern of accepting
state certified life insurance reserves without any reduction
on account of net deferred and uncollected premiums. This
is important because in responding to Congressional re-
quests for a more permanent basis for taxing life insurance
companies, the Secretary of the Treasury, after specifically
commenting on two possible adjustments to reserves, said:

‘*At this time we have no recommendations for or
against other specific reserve adjustments. .. . How-
ever, every departure from the allowance for policy re-
serves used in determining the net gain from opera-
tions reported in the annual statement to the State
insurance departments would represent a complication
which could be justified only by persuasive equity and
technical considerations.’’°

On this record, without more, the only reasonable con-
clusion is that Congress, in enacting the 1959 Act, intended
that life insurance reserves not be reduced on account of
deferred and uncollected premiums in determining life
insurance company taxable income.

This conclusion is reinforced by the fact that Congress,
in the 1959 Act, provided for five adjustments to life in-
surance company reserves as determined for state regu-
latory purposes?! It did so only after the most careful

20 Hearings before the Subcommittee on Internal Revenue Taxa-
tion of the Committee on Ways and Means, 85th Cong., 2d Sess., 5,
November 17-20, 1958; Hearings before the Committee on Finance,
86th Cong., Ist Sess., 513, March 3-5, 17-19, 1959,

21 Four of these adjustments are mandatory: the elimination of
deficiency reserves by section 801(b)(4); the “10 for 1” rule set

(footnote continued )

16

consideration and the reasons for each of these changes
are fully documented in the reports of the tax-writing
committees,”

Thus, although Congress in 1959 comprehensively ex-
amined the functions and purposes of life insurance re-
serves for tax purposes, it did not provide for any adjust-
ment to reserves required by law on account of deferred
and uncollected premiums.

Given these circumstances, it seems clear that if Con-
gress had intended such an adjustment it would have said
so. This is underscored by the realization that any reduc-
tion of reserves on account of deferred and uncollected
premiums would have had a very substantial tax impact.
The proponents of the 1959 Act repeatedly emphasized
that, except for the changes specified, the Act was not
intended to disturb the traditional assumptions underlying
reserve valuations. Thus, the Chairman of the House Ways
and Means Committee, in introducing the legislation to
the full House, stated:

‘*(T]he committee has no intention of placing jurisdic-
tion of the management of insurance company reserves
within the hands or powers of the Commissioner of
Internal Revenue.* * *

‘‘We are trying to preserve as best we can in this
bill the management of this industry in the hands of

(footnote continued)

forth in section 805(c); the adjustments for certain transfers of

liabilities in section (a); and the treatment of changes of basis

in computing reserves set forth in sections 806(b) and 810(d). The

other adjustment, which is optional, is set forth in section 818(c),

and permits a life insurance company computing its reserves on a

— term basis to revalue such reserves on a net level premium
is,

22 H.R. Rep. No. 34, 86th Cong., Ist Sess. 11, 17-19, 22, 26-27,
29, 32, 42 (1959), 1959-2 Cum. Bull. 736 et seq.; S. Rep. No, 291,
86th Cong., Ist Sess. 15, 19, 30-31, 34, 42, 49, 51-52, 57, 73 (1959),
1959-2 Cum. Bull. 770 et seq.

17

the State regulatory agencies and not to change in
any way that situation so as to turn over to the Com-
missioner of Internal Revenue, the Secretary of the
Treasury, or anyone else in Washington the regula-
tory authority.

‘*. . . We are not saying that a company may not
accumulate reserves if the state regulatory body tells
it to accumulate reserves. We are not levying a tax
on the accumulation of those reserves.’’ 105 Cong.
Rec, 2569, 2476-77 (1959).

The Senate report accompanying the new law confirms
that, except for the changes specified, the definition of
life insurance reserves (section 801(b) of the Code, as
amended) ‘‘is the same as that contained in... existing
law.’ Prior to the 1959 Act, the definition of life insur-
ance reserves derived from section 201(c)(2) of the 1939
Code, added by the Revenue Act of 1942. The committee
reports accompanying the 1942 Act both state that the
statutory definition ‘‘is substantially that contained for
many years in the regulations.’ Accordingly, there is
no indication of a shift in congressional policy with respect
to these reserves, and there is strong evidence that no
shift was intended.

The 1959 Act Regulations continue to use language com-
parable to that contained in regulations going back through
the Revenue Act of 1921 to the effect that:

‘*In determining total reserves, a company is permitted
to make use of the highest aggregate reserve required
by any State or Territory or the District of Columbia
in which it transacts business, but the reserve must

= S. Rep. No. 291, supra, at 42; see also H.R. Rep. No. 34, supra,
at
the amount attributable to—
(A) real property and stock shall be the fair market value
thereof, and
(B) any other asset shall be the adjusted basis of such asset for
purposes of determining gain on sale or other disposition.”

26

appear as assets on the balance sheet and are not assets
in the ordinary sense of the word, to be substituted for
net deferred and uncollected premiums that are shown as
assets in the balance sheet.

The government’s position that gross deferred and un-
collected premiums should be included in assets is, more-
over, contrary to its own regulations. They contemplate
the inclusion in assets of the net deferred and uncollected
premiums shown on the balance sheet. In Example (1) set
forth in Treas, Reg. § 1.805-5(a) (4) (ii) it is said:

**Included in the statement of assets of P, a life in-
surance company, are the following items: . . . pre-
miums deferred and uncollected.... Accordingly, since
..+ premiums deferred and uncollected . .. are not con-
sidered as being used by P in carrying on an insurance
trade or business, they are included within the term
‘assets’ and, therefore, shall be taken into account by

P in determining its current earnings rate.’’ [Em-
phasis added. ]

This could refer to no ‘‘statement of assets’’ of a life
insurance company other than the one prescribed by the
NAIC, In that statement the ‘‘deferred and uncollected
premiums’’ that are included have always been net de-
ferred and uncollected premiums and nothing else. If the
Treasury Department, in giving this example, had had
any idea that section 805(b)(4) required a life insurance
company to take into account any amount of deferred and
uncollected premiums other than the amount of di ferred
and uncollected premiums ‘‘included in the statement of
assets’’, it presumably would have said so.

C. Income

The general rule for the inclusion of items of income
by accrual basis taxpayers is set forth in Treas. Reg.
§ 1.451-1 as follows:

‘*Under an accrual method of accounting, income is
includible in gross income when all the events have

27

occurred which fix the right to receive such income and
the amount thereof can be determined with reasonable
accuracy.’’

If this rule is applicable, the result reached by the court
below in this case would, as in the case of assets, clearly
be correct. However, another general rule of tax accounting
is set forth in Treas. Reg. § 1.446-1(a)(2), which provides
as follows:

‘*A method of accounting which reflects the consistent
application of generally accepted accounting principles
in a particular trade or business in accordance with
accepted conditions or practices in that trade or busi-
ness will ordinarily be regarded as clearly reflecting
income, provided all items of gross income and expenses
are treated consistently from year to year.’’

This Court in Commissioner v. Idaho Power Company,
418 U.S. 1, 15 (1974), said:

‘‘where a taxpayer’s generally accepted method of ac-
counting is made compulsory by the regulatory agency
and that method clearly reflects income, it is almost
presumptively controlling of federal income tax con-
sequences, ’’

The amicus submits that the argument in favor of following
the Annual Statement treatment of deferred and uncol-
lected preiuiums in computing gain from operations is even
stronger than was the government’s argument in the Jdaho
Power case. Here, the method of accounting has not only
been prescribed ‘‘by the regulatory agency’’, but it has
also been prescribed by section 818 of the Code.

Moreover, just as there is evidence in the statutory
definition of assets that Congress intended the NAIC An-
nual Statement to be the starting point for computing
‘Cassets’’, so there is evidence that the Statement is the
starting point for computing ‘‘gain from operations’’.
‘‘Gain from operations’’ is a term of art which appears

outside the statute only in NAIC accounting and is clearly
derived from page 4 of the Annual Statement.”

The government has argued on numerous occasions that
gross deferred and uncollected premiums must be included
in income because section 809(c)(1) requires the inclusion
of gross premiums in income and no deduction is authorized
under any paragraph of section 809(d) for the increase
in loading. Section 809(c)(1), however, does not specifi-
cally mention deferred and uncollected premiums, and only
reference to the NAIC accounting treatment justifies the
accrual of anything at all on account of deferred and un-
collected premiums.” If the last sentence of section 818(a),

4 On this the Secretary of the Treasury wrote Congress ;

“We suggest that the — for measuring the net
earnings should be the figure for “Net gain from operations after
dividends to policyholders’ which appears in each company’s
annual statement to the State insurance departments and which
summarizes the operating results for the year. This figure is
based on carefully developed life insurance accounting practices
which have general acceptance in the industry.” Hearings be-
fore the Subcommittee on Internal Revenue Taxation of the
Committee on Ways and Means, 85th Cong., 2nd Sess., 4, Novem-
ber 17-20, 1958; Hearings before the Committee on Finance,
86th Cong., 1st Sess., 512, March 3-5, 17-19, 1959.

Comments of witnesses quoted by the government (P. Br. 50, n. 35)
on the significance of the Summary of ne gree were made in
the course of vehement opposition to a total income approach, The
final form of the statute, of course, reflects a number of substantial
and specific modifications of gain from operations shown on the
NAIC statement, designed to meet some of the objections of the
industry witnesses. Inclusion of loading in assets and premium
income was not among these modifications.

As the government recognizes (P. Br, 12-13 and n. 13),
elimination of adler from gain from operations is not a deduction,
but merely a means of limiting premium income ‘o the increase in
net deferred and uncollected premiums. The lower courts that con-
cluded that Congress could not have intended “to relegate the sub-
stantive matter of offsetting or excluding loading” to the NAIC have
missed the point. Congress did not delegate discretion to the NAIC.
It has incorporated the NAIC method of computation in the tax law
where the statute does not specifically provide otherwise.

which contains the reference to the NAIC Annual Statement,
was not intended to resolve issues such as those presented
here, it is hard to see why Congress included it in the
statute.

D. The Government’s Principal Position Produces Anomalous
and Inconsistent Results

Because premium taxes, commissions and other ex-
penses must be paid when premiums are received, the
government’s contention that gross deferred and uncol-
lected premiums must be included in assets and gain from
operations (without reduction for the increase in loading)
would produce the anomalous result that a company that
has not collected all of its premiums will have greater
ass¢is and income than one that has. This anomaly was
recognized by the Fifth, Seventh and Eighth Circuits in the
Great Commonwealth, Federal, and North American cases
and by the district court in Bankers Life® They attempted
to rectify it by permitting reductions in income or assets
for estimated expenses that would be incurred in the pro-
cess of collecting deferred and uncollected premiums, The
amicus would agree that if there were any basis for includ-
ing the gross amount of deferred and uncollected premiums
in assets and income, there would be equal justification for
reducing both assets and income by the amount of related
expenses. We see no necessity, however, for adopting this
approach when assets and income are already clearly re-
flected by the NAIC method.

To support its claim that the gross amount of deferred
and uncollected premiums should be included in assets
and income, the government reiterates the proposition that,

% See n. 5 and 6, supra. Reductions in assets were not claimed
by the taxpayers in the Great Commonwealth, Federal, and North
merican cases.

30

because a life insurance company ccmputes its reserves
by assuming collection of net valuation premiums annually
in advance, it must include in assets and accrue as premium
income the gross amount of deferred and uncollected
premiums.”’

In the first place, the government has never adequately
explained how an assumption that is made with respect
to net premiums in the appraisal of a contingent liability
can cause inclusion of a larger amount in assets or income.
A company’s liability to its policyholders under policies
in force on the statement date is transformed from future
unaccrued contingent liabilities into a fixed liability by
state law. This liability is taken into account in caleu-
lating reserves pursuant to section 801(b). Deductions for
increases in the state statutory reserve liability are allowed
because section 809(d)(2) says they shall be. These pro-
visions do not create assets or income. Increases in assets
or income on account of deferred and uncollected premiums
occur, if at all, because section 818(#) requires that tax
computations be made in a manner consistent with the
NAIC Annual Statement.

The government asserts more than twenty times in its
brief that the assumption of full payment of annual pre-
miums on policy anniversary dates must be applied con-
sistently to assets and income, as well as to reserves. In
view of these repeated references to the need for consist-
ency, it would seem reasonable to expect that the govern-
ment itself would see fit to be consistent. But the govern-

7 Thus, the government tells this Court that (P. Br. 29) deferred
and uncollected “premiums must be consistently deemed to have
been paid for all purposes”; that (P. Br. 38) “the selfsame assump-
tion” must be made in calculating “gain from operations” and “assets”
as is used in calculating reserves; that (P. Br. 49) “these premiums
be taken into account consistently for assets as well as liabilities”;
that (P. Br. 53) “[t}he integrity of a computation of net income
requires that uniform assumptions be made with res to both
income and deduction items”; and that (P. Br. 18) “[s]ymmetry
would require . . . that both sides of the equation by which taxable
income is determined be treated alike.” See also P. Br. 13, 14, 19,
20, 25, 26-27, 28, 36, 37, 43, 44-45, 48, 51, 52; Pet. 18-19,

1 ee 6 ee

ee es

31

ment apparently adheres to this principle only up to a point.
It fails to recognize that when a life insure» ce company
receives premium income, it necessarily will pay deductible
expenses associated with the collection of that income, in-
cluding agents’ commissions, premium taxes and clerical
expenses. If it were to be assumed that gross premiums have
been received in cash—-as the government insists it must
be—it would be only fair and reasonable to assume also
that, by year-end,** concomitant expenses of collection would —
have been paid in cash, In short, even under the govern-
ment’s theory, both assets and income would be reduced by
expenses associated with the collection of deferred and
uncollected premiums,

The government’s primary position rests entirely on the
argument that (P. Br. 29) ‘‘[rJespondent cannot take those
premiums into account in its ‘reserves’ when it suits its
purposes of reducing its tax base but turn its back on them
when their inclusion in ‘assets’ and ‘gross amount of
premiums’ would increase its tax liability.’’ It is enough
to point out in response that it will not do for the govern-
ment to take those premiums into account when it suits its
purpose of increasing respondent’s tax base but turn its
back on related expenses when their payment would de-
crease respondent’s tax liability.”

From the standpoint of consistency, if the gross amount
of deferred and uncollected premiums were to be included

% The current earnings rate is computed with reference to the
mean of the taxpayer's assets at the beginning and end of the taxable
year. Section 8(b) (2) (B). Hence, what is important for asset

ses is not what is received during the year but what remains
at the end of the year.

% In other contexts, the courts have held that the substance of
a transaction must be determined Bagg each step of the trans-
action in relation to the whole. , €.g., Commissioner v. Court
Holding Co., 324 U.S. 331, 334 (1945). Just as a taxpayer may
not divide a single transaction into separate parts in order to minimize
tax, so the government should not be permitted to ignore integral

s of a single transaction in order to maximize tax, Helvering v.
New Haven & Shore Line wY, Inc., 121 F.2d 985, 988 (2d Cir.
1941), cert. denied, 315 U.S. 803 (1942).

32

in assets and income, it would be reasonable to allow a re-
duction of both for related expenses. However, such a solu-
tion does not have the express statutory authority that the
NAIC method does. It is, moreover, unnecessarily complex
and offers no demonstrable advantage over the NAIC
method that we urge should be followed here. Based on
the provisions of the 1959 Act, we submit that Congress
decided to leave undisturbed the NAIC treatment of de-
ferred and uncollected premiums. Congress did so, we
believe, not because of some recently conceived government
theory of symmetry, but because it clearly reflects income
and is consistent with what had always been—and remains
today—the practice and understanding of the life insurance
industry.

Conclusion

For the foregoing reasons, the case should be remanded
to the Tax Court with directions to enter judgment for the
taxpayer on the basis of the NAIC Annual Statement
computations with respect to deferred and uncollected
premiums. Alternatively the judgment of the Court of
Appeals should be affirmed,

Respectfully submitted,

Wri B. Harman, Jp.
WiuiuM P. Gres

Kennetu L. Kimaie

1730 Pennsylvania Avenue, N.W.
Washington, D.C. 20006

Francis A, Goopnur, Jr.

Dewey, BaLiantine, Busney,
Patmer & Woop

Matruew J. Zinn

Sreptor & Jounson
Of Counsel

February, 1977

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385004_0058%3A08. Public record. Not legal advice.