Opposition — Union Mutual Life Insurance v. United States

Supreme Court brief1978

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INDEX

Page

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nt a NRE AAS ERR DO TS |

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SE I iti cnn sclieniliitidnadanisniinsininianesdesicitivdoninvess 2

Eee Sa a SS Oe 4

1. Unearned premiums reserve i sue .................... 4

2. Policy loan interest issue ...... Aarne 6

PRD Uilndcndbadtnddindbctccncsevinstinseviesnvesesevndeteennsceseenses 8

|. Unearned premiums reserve issue .................... 8

2. PORSY TORR TACTOTE ESTE ...0ccccccecccccccccccescccesss 12

LE A ao ee 17

CITATIONS

Cases:

American Automobile Association vy. United

EI Ga MIT cdicccscssesconsensesescccesceccsovcens 14

Artnell Co. v. Commissioner, 400

iia, TI -2aostecteeiehniglenubvesnenleniniinimiebduneres 14, 15

Automobile Club of Michigan v. Commis-

Ts BI WL, TID cecccceecccsecvviivecccsecoscvcccesees 14

Bankers Union Life Ins. Co. v. Commis-

Se es Cicer TIE -cececsnvesenannewreqeneiqnseevaceenseces 16

Boise Cascade Corp. v. United States, 530

2 ERE SERN Se eernene ane ree 14, 15

Brown v. Helvering, 291 U.S. 193 ........ccc cece 14

Page

Cases—continued:

Central National Life Insurance Co. v.

United States, Ct. Cl., No. 194-70,

decided April 19, 1978 ..........ccccceeceeeeeeeeeeeeeeeees 12

Commissioner v. Monarch Life Ins. Co., 114

F, BO BOD: cccestssntocsncsisilddiisila ma cidtpiniensniiain 9

Commissioner v. Standard Life & Accident

Insurance Co., 433 U.S. 148 ............. 9, 15, 16

Franklin Life Insurance Co. v. United

States, 399 F. 2d 757, certiorari denied,

ok Ee ee nen 8, 13, 17

Hagen Advertising Displays, Inc. v.

Commissioner, 407 F. 2d VlOS 2.0.0.0... eeeeeee 14

Jefferson Standard Life Insurance Co. v.

United States, 408 F. 2d 842, certiorari

Gomied, S50 GB.. GP ccentsanstioniadsitienm 8, 13

Mooney Aircraft, Inc. v. United States, 420

F. 2B GED ccssviistnonnticaniltainbeeniainiaiacinione 14

New England Tank Industries, Inc. vy. Commis-

sioner, 50 T.C. 771, affirmed, 413

FF, BB CRD sccharovecnnssiossineisissliaiiiaccicihltindaniniamnieabaisaddinns 14

Schlude v. Commissioner, 372 U.S. 128 ..... 13, 14

Southwestern Life Insurance Co. v. United

States, 560 F. 2d 627, certiorari denied,

April 24, 1978 (No. 77-1124) wo..cccceeeeeeees 8, 13

Spring City © +» Commissioner, 292

Th Peete a st ee 13

United States v. Consumer Life Ins.

Ca.. GD Ga Fae cctvciniaeetenaltnnicibendtdinincion 15

United States v. Williams, 395 F. 2d 508 ......... 15

Page

Statutes and regulations:

Internal Revenue Code of 1939 (26

U.S.C. 1952 ed.):

SETS Te oe a

RE a )

Internal Revenue Code of 1954 (26

U.S.C):

EE ee 12

a 10

| 5, 8, 10, 11, 12

Section B80I1(bK 1) ..............00..2.. siabadaniaiin 8. Il

I sions nnsrnaneiasouaiscenee 11

ET 2

Ee 9

ESI 5. 9

er a 3

eee ee 3

Ee 5.9

NE a 5

EE ES 3

I es 3

Life Insurance Company Income Tax Act

I ccnesensone 9

Revenue Act of 1942, Section 163, |

a eestiasions 9

Page

Statutes and regulation—continued:

Treasury Regulations on Income Tax

(1954 Code) (26 C.F.R.):

SOCTIB EEG MEME ..ccccccccocccccccccccccccccccoscces 13

I 13

I rt 4

M iscellaneous:

H.R. Rep. No. 2333, 77th Cong., 2d Sess.

SUTIN: <ilihiiissnhiniesbiispetenrsiicetsasiplieepbiaididsciMabBiNa tne 10, 11

Noback, Life Insurance & Accounting

RR enc es LSE eon Se OE CE 8

Rev. Proc. 71-21, 1971-2 Cum. Buil.

SUN islslesdnitslsbulitiialaseitietmanaidilinieia cadet scatitisiemntmamannans 14

S. Rep. No. 1631, 77th Cong., 2d Sess.

SRE nN Pree Fa) I Act EL 10

In the Supreme Court of the United States

OcTOBER TERM, 1977

No. 77-1559

UNION MUTUAL LIFE INSURANCE COMPANY, PETITIONER

Vv.

UNITED STATES OF AMERICA

ON PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS FOR

THE FIRST CIRCUIT

BRIEF FOR THE UNITED STATES

IN OPPOSITION

OPINIONS BELOW

The opinion of the district court (Pet. App. A, pp. 1-66)

is reported at 420 F. Supp. 1181. The opinion of the court

of appeals (Pet. App. B, pp. 74-108) is reported at 570 F.

2d 382.

JURISDICTION

The judgment of the court of appeais was entered on

February |, 1978. The petition for a writ of certiorari was

filed on May 1, 1978. The jurisdiction of this Court ts

invoked under 28 U.S.C. 12541).

QUESTIONS PRESENTED

|. Whether a life insurance company’s reserves for

“unearned premiums” on noncancellable health and

(1)

accident insurance policies are includable in its “life

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

Revenue Code of 1954.

2. Whether annual interest that is payable in advance

on life insurance policy loans is includable in a life

insurance company’s “gross investment income” under

Section 804(b)(1) of the Internal Revenue Code of 1954 at

the time it is due and the company either receives the

interest or adds it to the principal balance of the loan.

STATUTES INVOLVED

Internai Revenue Code of 1954 (26 U.S.C.):

Section 801 [as added and amended by Section 2(a),

Life Insurance Company Income Tax Act of 1959,

Pub. L. 86-69, 73 Stat. 112]. DEFINITION OF LIFE

INSURANCE COMPANY.

* * * * *

(b) Life Insurance Reserves Defined.—

(1) Jn 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 morbidity

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 in-

surance, annuity, and noncancellable health

and accident insurance contracts (including

life insurance or annuity contracts combined

with noncancellable health and accident in-

surance) involving, at the time with respect to

which the reserve is computed, life, health, or

accident contingencies.

* * * * *

Section 804 [as added and amended by Section 2(a),

Life Insurance Company Income Tax Act of 1959,

supra). TAXABLE INVESTMENT INCOME.

* * * * *

(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 income

from—

(A) interest, dividends, rents, and

royalties,

* a * * *

Section 818 [as added and amended by Section 2(a),

Life Insurance Company Income Tax Act of 1959,

supra|. ACCOUNTING PROVISIONS.

(a) Method of Accounting.—All computations

entering into the determination of the taxes im-

posed by this part shall be made—

(1) under an accrual method of accounting,

(2) to the extent permitted under regulations

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 cash receipts and disbursements

method).

Except as provided in the precedirg 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 Association of

Insurance Commissioners.

* * * * *

STATEMENT

|. Unearned premiums reserve issue.

Petitioner is a mutual life insurance company which

issues various types of insurance, including “non-

cancellable” health and accident insurance policies. Unlike

“cancellable” health and accident policies, “non-

cancellable” policies may not be cancelled by the company

as long as the policy holder pays the required annual

premiums.' These annual premiums remain level over the

stated life of the policy (Pet. App. A, pp. 1, 50).

The premiums on noncancellable health and accident

policies are generally payable annually and in advance of

the period of coverage to which they apply. These

premiums are treated as earned ratably over the period of

coverage. Thus, at any particular time, the pro rata

portion of the gross annual premium received by the

company that is attributable to the unexpired portion of

the policy year is considered to be “unearned.” The

aggregate amount of “unearned” premiums as of the end

of the calendar year is reflected as a reserve for “unearned

premiums” on the company’s annual statement. That

statement must be filed, in accordance with procedures

established by the National Association of Insurance

Commissioners (N.A.1.C.), with the insurance

departments of the various states in which the company

does business (Pet. App. A, p. 50).

‘Under Treasury Regulations on Income Tax (1954 Code), Section

1.801-c) (26 C.F.R.). a health and accident policy will qualify as a

“noncancellable” policy for federal income tax purposes only if the

company is obligated to continue or to renew the policy at specified

premiums at least until the policyholder attains the age 60.

The reserve for “unearned premiums” is determined and

maintained in essentially the same manner for both non-

cancellable policies and cancellable policies. However,

an additional reserve must be maintained and separately

stated on the N.A.1I.C. annual statement with respect to

noncanceliable health and accident policies representing

the company’s obligation to provide continued insurance

coverage Wh future policy years at the same level annual

premium, even though the risk of morbidity increases as

the policyholder grows older. The actuarially determined

amount that the company must hold, at the end of the

policy year, to meet these increased insurance costs in

excess of premiums in subsequent policy years is called

the “terminal” reserve. The terminal reserve represents the

excess of the present value of projected future benefits

over the present value of future premiums. The addi-

tional reserve on the N.A.I.C. annual statement for

noncancellable health and accident policies as of the end

of the calendar year reflects the average of the terminal

reserve for the current policy year and the terminal

reserve for the prior policy year. It is therefore called the

“mid-terminal” reserve (Pet. App. A, p. 50).

Net additions to both the reserve for “unearned

premiums” and the mid-terminal reserve are deductible

by the company in the computation of its “gain from

operations” under Section 809d)(2) of the Internal

Revenue Code of 1954 (26 U.S.C.). The mid-terminal

reserve also qualifies for inclusion in the company’s total

“life imsurance reserves” under Section 801(b) and is

therefore taken into account in the determination of the

exclusion of the “policyholders’ share of investment yield”

in the computation of the company’s “taxable investment

income” under Sections 804 and 805 of the Code.

On its income tax returns for 1958-1968, petitioner in-

cluded a portion of its “unearned premiums” in its “life

insurance reserves,” thereby increasing the amount of the

tax exclusion for the policyholders’ share of its investment

yield.2 On audit, the Commissioner eliminated petitioner's

“unearned premiums” from its “life insurance reserves,”

which resulted in an increase in petitioner's “taxable

investment income” (Pet. App. A, p. 51).

After paying the additional taxes assessed, petitioner

brought this refund suit in the United States District

Court for the District of Maine. The district court upheld

the Commissioner. After examining the pertinent legisla-

tive history, it concluded that Congress intended that

only the mid-terminal reserve on noncancellable health

and accident policies would be includable in “life

insurance reeserves” for income tax purposes (Pet. App.

A, pp. 51-59). The court of appeals affirmed (Pet. App. B,

pp. 83-88).

2. Policy loan interest issue.

Petitioner also issues conventional life insurance pol-

icies under which the policyholder has the right to bor-

row against the cash value of the policy. Under the terms

of the policies, interest at a specified annual rate for the

remaining portion of the policy year is payable in advance

at the time the policy loan is made. Thereafter, interest

for each policy year is payable in advance on each suc-

ceeding policy anniversary date as long as the loan re-

mains outstanding. Petitioner bills the policyholder for

2As we have noted (p. 4, supra), the reserve for “unearned pre-

miums” as shown on the N.A.I.C. annual statement reflects the pro

rata portion of the gross annual premiums that is attributable to

the remaining periods of unexpired coverage as of the end of the

calendar year. On its tax returns, petitioner reduced these reserves for

gross unearned premiums to amounts based on “net” unearned

premiums— i.¢., gross annual premiums reduced by the “loading”

element covering administrative expenses, commissions, unforeseen

contingencies and profit.

the advance interest, and, if the policyholder fails to pay it

in cash on the due date, petitioner adds the interest to the

principal balance of the loan. Generally, the advance

interest for the first partial year of the loan is not paid in

cash, but is charged against the cash value of the policy.

The annual advance interest charges for subsequent years

are paid in cash by the policyholders in about half of the

loans. Otherwise, petitioner adds the interest charges to

the principal loan balances (Pet. App. A, pp. 14-15).

Some of petitioner's policies also provide for the

payment of annual premiums as they fall due through the

use of “automatic premium loans” against the cash value

of the policy. The interest on these premium loans is aiso

payabie annually and in advance, and, like the premiums

themselves, is automatically added to the balance of the

policy loan (Pet. App. A, pp. 14-15). In the event a policy

loan of either type is not repaid, the amount of the loan 1s

deducted from any benefits paid or from the cash value if

the policy is surrendered. If the policy is surrendered or

matures during a period for which interest has been paid

in advance or charged against the cash value, the

policyholder or beneficiary is given credit for that portion

of the interest that is allocable to the remainder of the

policy year (Pet. App. A, pp. 15-16).

On its annual statements, petitioner reflected the

advance interest allocable to periods after the end of the

calendar year as “unearned” income. It therefore included

the advance interest in the assets (whether received in cash

or added to the principal balances of the policy loans),

and recognized an offsetting liability in the amount of the

interest allocable to periods after the end of the calendar

year. Similarly, in its computation of “gross investment

income,” petitioner reduced the interest “collected during

the year” by the ainount of “unearned” interest income

(Pet. App. A, p. 16; R. 174-175, 179). See Noback, Life

Insurance & Accounting 214, 227, 319 (1969).

On its income tax returns for the years in question,

petitioner excluded the advance interest allocable to the

remainder of the policy year from its “gross investment

income” under Section 804(b)(1) of the Code. On audit,

the Commissioner included all policy loan interest

received or charged against the cash value of the policies

in petitioner's “gross investment income.” The district

court upheld the Commissioner’s determination. It ruled,

in accord with Franklin Life Insurance Co. v. United

States, 399 F. 2d 757, 761-763 (C.A. 7), certiorari denied,

393 U.S. 1118, and Jefferson Standard Life Insurance Co.

v. United States, 408 F. 2d 842, 856-857 (C.A. 4),

certiorari denied, 396 U.S. 828, that interest payable in

advance on policy loans is fully includable in gross

investment income (Pet. App. A, pp. 17-23). The court of

appeals affirmed. Like the district court, it followed the

decisions of the Seventh and Fourth Circuits, and further

observed that the subsequent opinion of the Fifth Circuit

in Southwestern Life Insurance Co. v. United States, 560

F. 2d 627, certiorari denied, April 24, 1978 (No. 77-1124),

was to the same effect (Pet. App. B, pp. 78-83).

ARGUMENT

1. Unearned premiums reserve issue.

a. The decision below correctly held with respect to this

question of first impression that “unearned premiums” on

noncancellable health and accident insurance may not be

included in a life insurance company’s “life insurance

reserves” under Section 801(b) of the Code.

“R.” refers to the three-volume record appendix filed in the court

of appeals.

Under the Life Insurance Company Income Tax Act of

1959, 73 Stat. 112, one of the components of a company’s

taxable income is its “taxable investment income.” See

Sections 802(b) and 804 of the Code. A company’s total

investment income is regarded as including a share for the

company, which 5 taxable, and a “policyholders’ share,”

which is excluded from the tax base. The policyholders’

share is determined by the ratio of the company’s life

insurance reserves to its assets so that an increase in life

insurance reserves will reduce the company’s taxable

investment income. See Commissioner v. Standard Life &

Accident Insurance Co., 433 U.S. 148, 155-156; Sections

804 and 805.

The statutory provisions defining life insurance reserves

have their origin in the Revenue Act of 1942, 56 Stat. 798.

At that time, Congress adopted a special definition of the

term “life insurance reserves” for purposes of computing

the exclusion for the policyholders’ share of investment

income. While Section 163 of the Revenue Act of 1942

retained the “required by law” standard of prior law, it

narrowed the definition of reserves to those “amounts

which are computed or estimated on the basis of

recognized mortality or morbidity tables and assumed

rates of interest, and 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

***™ See Section 201(cX2) of the Internal Revenue

Code of 1939 (26 U.S.C. 1952 ed.), as amended by Section

163 of the Revenue Act of 1942.4

‘Prior to the 1942 amendment, the statute permitted a deduction

from investment income equal to a specified percentage of “reserve

funds required by law.” See Section 203(a)(2) of the 1939 Code. Since

the statute did not distinguish between “life insurance reserves” and

other “reserve funds required by law.” both the “unearned

premiums” and the additional mid-terminal reserve with respect to

noncancellable accident and health insurance were held to qualify for

the percentage reduction from gross investment income. Com-

missioner v. Monarch Life Ins. Co., 114 F. 2d 314 (C.A. 1).

The committee reports accompanying the 1942 legisla-

tion show that Congress was willing to permit certain

non-life insurance reserves to be added to life insurance

reserves for purposes of determining whether the

company qualified as a life insurance company under the

50-percent reserve ratio test. See United States v.

Consumer Life Ins. Co., 430 U.S. 725; Section 801(a).

However, the legislative history further shows that

Congress simultaneously intended to establish a more

stringent test for determining whether a reseive qualified

for computation of the exclusion for the policyholders’

share of income. Thus, the House Committee observed

that while the “pro rata unearned premiums * * * on

noncancelable [sic] health and accident policies are added

to life insurance reserves in determining whether a

company is to be considered a life insurance company,”

the life insurance reserves themselves would include, in

the case of noncancellable health and accident policies,

only “those amounts which must be reserved, in addition

to pro rata unearned premiums, to provide for the

additional cost of carrying such policies in later years

when the insured will be older and subject to greater risk

and when the cost of carrying the risk will be greater than

the premiums then being received.” H.R. Rep. No. 2333,

77th Cong., 2d Sess. 109 (1942). The Senate Report

likewise states that the “unearned premiums” with respect

to noncancellable health and accident policies will be

taken into account under the amended provisions “for

purposes of the definition of a life insurance company

only.” S. Rep. No. 1631, 77th Cong., 2d Sess. 144 (1942).

In light of the legislative history, the decision below

properly concluded that the 1942 amendments were

intended to qualify only the additional mid-terminal

reserve on noncancellable health and accident policies as

“life insurance reserves” for purposes of Section 801(b).

Indeed, as both courts below suggested (Pet. App. A, p.

58; Pet. App. B, p. 87), there would have been no reason

for Congress to distinguish between pro rata unearned

premiums on cancellable policies and those of non-

cancellable policies. The only characteristic of non-

cancellable health and accident insurance that made it

appropriate to bring such policies within the scope of the

life insurance provisions was that noncancellable policies,

like ordinary level premium life insurance policies,

“require the accumulation of substantial reserves against

increased future risks” (H.R. Rep. No. 2333, supra, at

109). Since it is only the additional, mid-terminal reserve,

and not the reserve for pro rata unearned premiums, that

serves to measure the funds that will be required to cover

the “increased future risks” to be incurred when projected

benefits will be greater than the level premiums, only the

mid-terminal reserve can qualify as a “life insurance

reserve” under Section 801(b).

b. Moreover, the language of Section 801(b\(1)

precludes the unearned premium reserve from qualifying

as “life insurance reserves” for purposes of computing the

exclusion for the policyholders’ share of investment

income. Under Section 801(b, 1A), a life insurance

reserve must be based on “recognized mortality or

morbidity tables and assumed rates of interests.” But the

reserve for “unearned premiums” is computed simply on

the basis of the pro rata portion of the gross annual policy

premium that is allocable to the remaining period of

unexpired coverage. It bears no relation to recognized

mortality or morbidity tables.

Given the clear statutory language, petitioner has never

directly contended that the unearned premium reserve

as reflected in its annual statements would satisfy the

requirements of Section 291(b).5 However, in order to

circumvent the statutory requirement that a life insurance

reserve be computed on the basis of recognized mortality

or morbidity tables and assumed rates of interest,

petitioner has computed an amount which, given an

assumed interest rate, would be required to pay its

actuarially projected claims for the remainder of the

policy year. In petitioner's view (Pet. I1), this self-

designated reserve for unearned “net” premiums qualifies

as part of its “life insurance reserves” because it is

determined on the basis of an assumed rate of interest.

But in providing for computation on the basis of

“recognized” mortality or morbidity tables, Section 801

and its statutory predecessors premise qualification upon

compliance with established practices in the computation

of reserves for annual statement purposes. The decision

below therefore properly rejected petitioner's abstract

hybrid computation.°®

2. Policy loan interest issue.

a. The decision below also correctly held that the

interest petitioner charges in advance on policy loans

must be included in its income at the time i: is due and

°Cf. Central National Life Insurance Co. vy. United States, Ct. Cl..

No. 194-70, decided April 19, 1978. There, it was found that the

taxpayer had established that a reserve for unearned premiums on

credit life insurance reasonably approximated the amount that would

have been computed on a strictly tabular basis and that would have

qualified for inclusion in “life insurance reserves” under the statute.

*Petitioner further argues (Pet. 12) that the question whether

unearned premium reserves for noncancellable health and accident

insurance qualify as life insurance reserves is important to the entire

life insurance industry. But this the only case in which the issue has

been litigated since the current statutory provisions were enacted in

1942.

petitioner either receives it in cash or charges it against

the cash value of the policy. In so holding, the decision is

in accord with those of three other circuits that have

rejected the claim that such interest can be deferred for

tax purposes until the expiration of the period for which

the interest is charged (Pet. App. B, pp. 79-81). Franklin

Life Insurance Co. v. United States, 399 F. 2d 757, 760-

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

Standard Life Insurance Co. v. United States, 408 F. 2d

842, 856-857 (C.A. 4), certiorari denied, 396 U.S. 828;

Southwestern Life Insurance Co. v. United States, 56Q F.

2d 627, 641-642 (C.A. 5), certiorari denied, April 24, 1978

(No. 77-1124).’

As accrual basis taxpayers (see Section 818(a) of the

Code), life insurance companies are subject to the

controlling principle that income must be reported

“[w]hen the right to receive an amount becomes fixed”

(Spring City Co. v. Commissioner, 292 U.S. 182, 184),

i.e., when the item becomes “due and payable” ( Schlude v.

Commissioner, 372 U.S. 128, 137). See also Treasury

Regulations on Income Tax (1954 Code), Sections |.446-

I(cMii) and 1.451-l(a) (26 C.F.R.).

Here, the terms of petitioner's policies provided that the

interest on policy loans is due and payable in advance. If

the policyholder failed to pay the interest as due, it was

charged directly against the cash surrender value of the

policy, i.e., the fund invested and held by petitioner for

the benefit of the policyholder. In these circumstances, the

decision below properly concluded that petitioner was

required to accrue the advance interest at the time it was

due and either collected in cash or charged against the

cash value of the policy. While petitioner complains (Pet.

The petition for a writ of certiorari in Southwestern Life did not

seek review of the ruling on the advance interest issue. The question

was presented, however, by the petitions filed in Franklin Life and

Jefferson Standard Life.

15) that the accrual of advance interest distorts its income,

the plain fact is that “[w]Jhen received, * * * [petitioner's]

right to * * * [the interest] was absolute. It was under no

restriction, contractual or otherwise, as to its disposition,

= or enjoyment.” Brown v. Helvering, 291 U.S. 193,

199.

b. Despite the uniform rejection of its position by the

four circuits that have considered the question, petitioner

urges (Pet. 16-17) that review by this Court is necessary in

order to clarify the “disagreeinent and uncertainty” caused

by the Court's decisions in Automobile Ciub of Michigan

v. Commissioner, 353 U.S. 180; American Automobile

Association v. United States, 367 U.S. 687; and Schlude

v. Commissioner, 372 U.S. 128. In each of those cases, the

Court refused to permit tax deferral of advance payments

in exchange for the performance of future services.

The lower courts have expressed various views as to the

extent to which this Court's decisions preclude deferral of

advance payments for services.* But that question is not

presented here since the advance payments in this case

were not tied to the performance of future services. To the

contrary, once petitioner loaned funds to a policyholder

on the security of the cash value of the policy, it was

under no obligation to perform any services or incur

additional expenses during the future period to which it

seeks to defer the advance interest charges. As the court

of appeals observed (Pet. App. B, p. 83 n. 2), the advance

“Compare New England Tank Industries, Inc. v. Commissioner, 50

T.C. 771, affirmed, 413 F. 2d 1038 (C.A. 1), Hagen Advertising

Displays, Inc. v. Commissioner, 407 F. 2d 1105 (C.A. 6), and

Mooney Aircraft, Inc. vy. United States, 420 F. 2d 400 (C.A. 5), with

Artnell Co. vy. Commissioner, 400 F. 2d 981 (C.A. 7), and Boise

Cascade Corp. vy. United States, 530 F. 2d 1367 (Ct. Cl.). discussed at

p. 15, n. 9, infra. See also Rev. Proc. 71-21, 1971-2 Cum. Bull. 549.

interest charges are analogous to prepaid rent, which has

been held to be accruable in the year of payment. United

States v. Williams, 395 F. 2d 508 (C.A. 5). Artnell Co. v.

Commissioner, 400 F. 2d 981 (C.A. 7), and Boise Cascade

Corp. v. United States, 530 F. 2d 1367 (Ct. Cl.), upon

which petitioner relies (Pet. 16-17), are therefore dis-

tinguishable. Those cases involved advance payments for

future services and turned on considerations of matching

related revenues and expenses.’

c. Petitioner further argues (Pet. 18-19) that the

decision below conflicts with Commissioner v. Standard

Life & Accident Insurance Co., supra. There, the Court

held that unpaid premiums must be reflected in the

computation of a life insurance tax liability “in a manner

consistent with the manner recuired for purposes of the

annual statement approved by the National Association

of Insurance Commissioners” (see Section 818(a); 433

U.S. 148). It therefore approved the inclusion of the net

valuation portion of unpaid premiums in reserves, assets,

and gross premium income. Since petitioner's deferral of

*Artnell arose in the context of a corporate reorganization

involving a professional baseball club. The question presented was

whether the liquidated corporation should have accrued the prepaid

revenues received with respect to future baseball games to be played

by the successor corporation. The Seventh Circuit concluded that the

Tax Court had erred in refusing to.consider the factual details of the

taxpayer's deferral method of reporting such income, and remanded

for the Tax Court to consider the merits of that method and to

determine whether the Commissioner had abused his discretion in

rejecting that method (see 400 F. 2d at 984-985).

Boise Cascade involved contracts for engineering, construction,

architectural and consulting services requiring, in certain instances,

payment to be made prior to the period in which the services were to

be performed. The court concluded that deferral was appropriate as a

means of “accurately matching costs and revenues” (530 F. 2d at

1377). In reaching this conclusion, however, the court stated that the

fact that a deferral method was in accord with generally accepted

accounting principles was not a controlling consideration for tax

purposes (see 530 F. 2d at 1372).

advance interest is consistent with N.A.I.C. annual

statement reporting, it urges that Section 818(a) requires a