Amicus Curiae Brief — Jefferson Standard Life Insurance v. United States

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SUPREME COURT. U. & ; | :

| -| guy 10 1969

d | F. DAVIS, CLERK

“IN THE

Supreme Court of the Nuited States

Ocroser TERM, 9 ) 76 G

No. NE 2.20

THE JEFFERSON STANDARD LirE INSURANCE COMPANY, ~

’ Petitioner, w.

_. V.

~UNItTeD States oF AMERICA, Kespondgnt.

-

mS. BRIEF AMICI CURIAE OF AMERICAN LIFE CONVENTION

AND LIFE INSURANCE ASSOCIATION OF AMERICA ~

IN SUPPORT OF PETITION FOR WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS FOR

THE FOURTH CIRCUIT

Wu.1uM B. Harman, JR.

' KENNETH L. KIMBLE

Wiu1aMm T. Grips

1701 K Street, N.W.

Washington, D. C. 20006

Attorneys for

' fae Amici Curiae

June 1969

ee

Press or Brron S. Apams Parvrine, Inc., Wasuincron, D.C.

INDEX

| . Page

Interest of the nS Ge eoeree SUELO: ie

Opinions Below, J urisdiction and the Statutes Involved 3

Questions Presented poceead SL oa ace ala bea wc eee 3

Statement » VL eNE Se WEE vb EMG SEMEN odes CEN RRL owe 4

Reasons Why the Writ Should Be Granted ........ 9

\ EE Ges TP ee en Ok 11

> | TABLE OF AUTHORITIES

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989 (i969) piece Keer: Ce ee ae 3

2)

Nocieidieiss

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

1964 ed.): .

oun a Pv SOPS SS Nadav ee Fas 00 iaee he beeneue o

Life Insurance Company Income Tax¢ Act of 1959,

| Pub.L. No. 86-69, 73 cicnip ng MELEE CE TOOT 2

MISCELLANEOUS:

Brief for the United States in Opposition to Certiorari

in the Franklin MT GE os os eee ek 10 -

po

IN THE

Supreme Court of the United States

, OCTOBER TERM, 1968

No.

THE JEFFERSON STANDARD TAFE TNSURANCE Company,

Petitioner,

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UNITED STATES OF AMERICA, Respondent.

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BRIEF AMICI CURIAE OF AMERICAN LIFE CONVENTION

AND LIFE INSURANCE ASSOCIATION OF AMERICA

IN SUPPORT OF PETITION FOR WRIT OF CERTIORARI

' TO THE UNITED STATES COURT OF APPEALS F _

THE FOURTH CIRCUIT /

INTEREST OF AMIG] CURIAE

The Asmarieain Life Convention and the Life Insur-

ance Association of America are nonprofit voluntary

trade associations, both organized in 1906. Their com-

bined membership totals 355 legal reserve life insur-

ance companies located in 46 States, the District of

Columbia and three provinces of Canada.» These com-

panies account for about 92 percent of the.légal reserve

life insurance in force in the United States and Canada.

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‘This case involves the construction of the Internal

Revenue Code, as amended by the Life Insurance Com-

pany Income Tax Act o& 1959 (Pub. L. No. 86-69, 73

Stat. 112; Sections 801-820, Internal Revenue Code of

~ 1954, as amended), hereinafter referred to as the 1959

Act. That Act adopts a wholly new approach to the>—.

taxation of life insurance companies and, for the first .

time since 1921, taxes such eompanies on the basis of = +

an annual determination of income from all .sourees.

The case presents a number of important i issues under

the new 1959*Act. The amici address themselves here

“only to those which have industry-wide application. Of

these, one Or more affect significantly the Federal in-

come tax computation of almost every life insurance ;

company and their nonresolution has prevented a final/

determination of the tax liability of man¥ companies *

for any year since 1957. This is contrary to.an orderly

and. efficient administration of the tax laws which is

best served by devoting both Government and private

resources to current years and closing out. old years

as quickly as possible.

In the aggregate, millions of dollars of tax liability ‘\

are involved in the issues in this ease. It can be ex-

~ pected, therefore, that the present differences between

the Government and the life insurance company tax-

payers on these niany issues will remain unresolved,

and, consequently, the tax liabilities unsettled, until

this Court decides the substantive questions involved.

The desirablity of final resolution of these issues by

this Court, and even a reference to this case as a possi-

ble appropriate vehicle for their resolution, has al-

ready been acknowledged by the Government in its

brief opposing a Petition for a Writ of Certiorari in.

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a prior, case (Franklin Life Insurance Company v.

United Stutes, 399 F. 2d 757° (7th Cir. 1968), cert.

denied 89 S. Ct. 989 (1969)).. That case involved

' some of the same issues as this case. . This case, how-

ever, involves a considerably larger number of im-

portant issués of first impression under the new 1959

Act. The aici, accordingly, file this brief in support

of the Petition. for a Writ of Certiorari. S

The consent of the parties to the filing of this brief

amici curiae has been filed with the Clerk of the Court.

OPINIONS BELOW, JURISDICTION AND THE: STATUTES

i‘ INVOLVED t :

‘The amici respectfully refer the Court to the Peti-

tion for the statement of the Opinions Below, Juris-

diction, and Statutes Involved.

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QUESTIONS. PRESENTED

1. Whether the loading element included in ‘premi-

ums which are deferred and uncollected at the end of

a tax year must be reported by a life insurance com-

pany for the purpose of oe its gain or Joss

from operations for that year?

2. Whether the Poading element included in pre-

‘miums which are deferred and uncollected at-the end

of a tax year must be included as an asset for purposes

’ of determining the Pita ae Ee taxable’ investment’ in-

come for that year? ;

3. Whether unearned interest on polgey loan§ as of

the end of.a tax year mustbe reported as income for

that year merely becagise it was received or added to

the loan principal during the year?

4. Whether amounts advanced to agents against

future commissions are assets which must be included -

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in determining the compan taxable investment in-

come # _ 2 ;

2. "Whether reserves set up by a life insurance com- -

pany for its own retirement plan qualify as life in-

surance reserves as defined in section 801(b) of the

Internal Revenue Code?

6. Whether an allocable portion’ of a life insurance,

company’s charitable contributions may be deducted in |

determining its taxable investment income?

STATEMENT

”

The amici eepeettully refer the Court to. the Peti-

tion for a full statement of the: facts, and ‘here indi-. .

eate only sufficient detail for an: understanding of ‘the

~ basic questions involved.

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1, Premiums Deferred and Uncollected ( aipstions

1 ayd 2 2)—Under the 1959 Act, life insurance com-.

panies are taxed ona calendar year basis: On the

other hand, life insuratice premiums and the related

reserves are calculated on a ‘policy-year basis beginning

on each anniversary of the policy. In practically all

~ eases, the tax year aud the policy year do not coincide.

Moreover, premiums are charged to policy owners in

mawy cases on a quarterly or more frequent basis. At.

the end $f each taxable year, a life insurance company

will, therefore, have in foree insurance policies with

fractional .premiums which are not ‘‘due’’ until the

subsequent year, as well as policies. with premiums

. “due” and unpaid but within the grace period. These

two classes ‘of pr emiums constitute - premiums de-

-ferred and .uncollected.’’” All such prenriums are pay-

able at the election of policyholders and the insurance

company has no right to have them paid. If the policy-

holders do not pay these premiums in accordance with

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the pr -ovisions of the policies, the policies are cancelled

after. the grace period and eo adjustments +.

.are made to the reserves.

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‘Gross premiums are the agreed prices, stated in the

life insurance contract. © That part of: ‘the’ premium |

intended to meet the cost of insurance, both current

and future, is\called the net premium (or net valua-

tion gr emium). In-addition, there is a loading on the

premium, which is .a:sum added.to the net premium

to cover sales. commissions, administration,, manage-

ment and operating expenses, as well as contingencies,

and in some’.cases profits. «The gross premium is a

combination of the net premium and the. Idading.

- Life insurance companies are required by state law

ip maintain reserves for their life insurance policies. :

These reservés are computed on the assumption that

all premiums—includ Lys deferred and ‘uncollected

premiums—have been’ collected in advance at the be-

. ginning. of -eaclt ‘policy year. Under the accounting

methods ‘prescribed by the National Association of

_- Insurance C lissioners and required -by the states,

the net portion of. deferred and uncollected premiums

is reflected - as. an asset of the company to offset the

reserve ‘liability which i is also Set up on a net og emium

basis. . ,

Within the context of these special accounting pro-

cedures, two income tax questions arise. First, while ~

. it is granted’by all parties that the net portion of de--

ferred' and uncollected premiums should be included

as premium income: to balance the deduction allowable

. for the addition of this amount to reserves, the Goverfi- _

- ment, aJso contends that the loading element in these -

deferred and uncollected premiums must be treated as -

- an item of premium income. The Government take:

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a similar position requiring the loading elenrent in these

premiums to be treated as an asset of the company

for purposes of pees its, taxable investment in-

come.*

On both these issues, the District Court sibel the

. Government and the Court of Appeals a the

District Court.

2. Unearned: Interest—Life insurance nae wr in

making loans based on the cash value of policies, may

receive each year’s interest in adva (1.e., at the-be-

gikning of the policy year) or, it hot paid in cash,

the‘company may add the interest ‘for the year td the

principal of the loan as of t

year. If a policyholder rep

of the Molicy: year, the life Jj nce company credits

him with a pro rata share ofthe interest representing

the unearned amount. When the ‘end of the life insur-

ance company’s tax year falls in the middle of a policy

year in such a situation, the issue arises as to whether

the portion of thé interest attributable to a period

after the close of the tax year must nevertheless, be

included as income for that tax year even though it

has not as yet been.earned and will have to be repaid

if the loan is paid off before the end of the ‘policy year.

The Government contends that it ~— be so included.

beginning of the policy

a loan before the end

, ’ ; °

_ *t is important in applying the 1959 Act formula that items

not be iricluded in assets unless they are in fact assets within the

meaning of section 805(b)(4).. The policyholders’ share of in--

vestment income, which is excluded from tax, is determined by

multiplying the company’s earnings rate against the adjusted life

insuraneé reserves. The earnings rate is based on the ratio of in-

vestment income to assets. Thus, if the assets figure is improperly

.* inereased, tlie. earnings rate will be lower, the exclusiop for the

' policyholders’ sHare will be decreased, and the company’s taxable

tn , income will be increased.

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The,District Court upheld the Government and the

Court of Appeals affirmed the District Court.

3. A gents’ Debit Balances—Agents’ debit balange:

represent a life insurance company ’s advances to its

salesmen for living and: operating expenses. They are

chargeable against future commissions., The issue is

whether these balances; which are not interest bearing,

must be included as an ‘‘asset’’ for purposes of de-

termining the company’s taxable investment income or

whether they are excluded therefrom as assets used in

carrying on an insurance trade or business (section

805(b) (4) of the Internal Revenue Code). Since these

balances earn no ‘interest, their inclusion in ‘‘assets”’

will, under the framework of the 1959 Act, lower the

overall earnings rate of the petitioner and, conse- —

quently, lower the deduction it may claim tor additions

to its reserves out of investment income.*

The Court of Appeals affirmed the District Court’s

decision that these debit balances must be included as

‘‘assets”’ in applying the investment income formula.

4. Branch Office Managers Retirement Plan—Peti-

tioner establishéd a supplemental retirement plan for

its Branch Office managers and maintained reserves for

this plan as required by State law. Benefits under the

plan were forfeitable under certain situations. More-

over, the plan did not meet the special tax qualification

provisions of section 401 of the Internal Revenue Code

—which provisions do not require complete nonfor-

feitability. The issue involved is whether the reserves

underlying this retirement plan qualify as life insur-

ance reserves, as defined in section 801(b) of the In-

* See footnote on page 6 for a more magi explanation of

the importance of nof including an’ item in ‘‘assets’’ unless it is

- in fact an asset within the meaning of section 805(b) (4).

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ternal Revenue Code, so as to allow the taxpayer a .-.

deduction for additions it makes thereto.

The .Court of Dieinite (in affirming the District

Court) held that the reserves did not qualify as life

insurance reserves, despite the fact that they clearly

met all the requirements set forth in section 801(b),

including the one which provides that “they be required

by law. . The Court came to this conclusion even though

it acknowledged that, had the plan met the section 401

tests, the reserves would have qualified as ‘‘pension

plan rves’’—eligible for a special deduction for ad-

ditions thereto under section 805(a)(2). Under the

definition of ‘‘pension plan reserves’’ contained in sec-

tion 805(d), a reserve must first qualify as a life in-

surance reserve.

5. Charitable Contributions—The issue is whether a

life insurance company may deduct an allocable part

of its charitable contributions against its investment

‘jncomé in compating the investment income portion of

its taxable income (Phase 1) or whether such contribu-

tions may only be deducted in computing the under-

writing portion of its taxable income (Phase II). Be-

cause of the structure of the 1959 Act in not currently

taxing underwriting gain as heavily as investment in-

come, or the possibility that a company may not have

any underwriting gain in a particular year, a company’s

tax liability will differ depending on whether a portion

of its charitable contributions may be gffset against

_investment income. ‘he Government’ contends that

charitable contributions are deductible only against

underwriting income. . °

The District Court ruled against the Government;

however, the @ourt of Appeals reversed the District.

Court.

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REASONS WHY THE WRIT SHOULD BE GRANTED |

As already indicated, this ease involves a large num-

_ ber of important issues under the 1959 Act which

have never been ruled upon by this Court. Many life

insurance companies are.confronted with these issues.

As a result; these many companies have been unable

to close out the audits for any tax year since 1957—i.e.,

’ the effective date of the 1959 Act. Such a situation is

clearly disruptive to the orderly application of the -

* tax laws. Moreover, the longer final resolution is de-

layed, the more years there will be in dispute. If.

any substantial progress is to be made in correcting '

- this situation, the issues in this case must be finally

resolved by this Court.: | ~

There is no reason to beliéve that these issttes will.

be settled short of Supreme Court review. The aggre-

gate tax liabilities are so large that the parties may

be expected to resort to litigation rather than reaching

agreement. This is evidenced by the results of the

questionnaire circulated by Petitioner and referred. to

in its Petition. Moreover, on the deferred and unco!-

lected premiums issues, there is disagreement among —

the lower Courts. While the Court of Appeals in the

Franklin Life case ruled for. the Government on those

two issues, as did the Court of Appeals here, the Tax

Court has held that the loading on deferred and uncol-

lected premiums should’ not be included in assets

(Western National Life Insurance Company v. Com-

missioner, 51 T.C. No. 81 (February 24, 1969) ).

The Government itself has admitted the desirability

_ of settling the income tax liabilities of life insurance

companies under the new 1959 Act by having the Su-

preme Court resolve the major issues outstanding.

While the Government successfully opposed certiorari

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in the Franklin Life case, its brief there indicated that .

review would be appropriate in a case such as the one

at bar where a large number of important issues under

- the new Act are involved. Speaking of the deferred

and uncollected premiums issues, the Government there

said:

‘Although ive believe that petitioner has grossly

exaggerated the revenue consequences of the de-

cision below, we agree that it is an industry-wide

issue and has significant monetary importance.

We would therefore not oppose certiorari even ine

the.absence of a conflict if it appeared that. present

review would facilitate the final settlement of. the

income tax liabilities of this and other life insur-

ance companies. But review would not dispose of

those cases, since they involve other important

questions of statutory construction—most of them

industry-wide issues involving substantial amounts |

—as well as the-deferred and uncollected premiums

issue. In addition, a grant of certiorari here well

might freeze those cases in their present status

and further postpone the date on which audits of

the life insurance companies may be closed.’ (See

pages 17-18 of Brief for the United States in

Opposition to Certiorari in the Franklin Life

Case.)

A footnote to the above-quoted statement specifically

refers to the Jefferson Standard case as one involving’

a significant number of issues. In fact, the Jefferson

Standard case involves seven industry issues—the six

referred to in this brief and one decided in favor of

the Petitioner by the Court of Appeals—while the

Franklin case involved only three of these issues.

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- CONCLUSION

For the foregoing reasons, the petition for a writ

of certiorari should be granted.

Respectfully submitted,

Wuu1amM B. HarMan, JR.

KENNETH L. KIMBLE

Se meee Wiu1aM T. Grips

took 1701 K Street, N.W. .

Washington, D. ©. 20006

Attorneys for

Amici Curiae

&

June 1969

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