Petition for Writ of Certiorari — Western & Southern Life Insurance v. Commissioner

Supreme Court brief1972

Ask Donna

What actually matters in this document.

Text

RES nmin 1

‘

INDEX

Page

Opinions ie a ee ]

eet er tee eee ee Tee eee eee 2

ee ran cca wane hacen kere en ds 2

Statutory Provisions Involved ................... 2

OE OW OE ND go en Soe eee wcesnens 3

Reasons for Granting the Writ .................. 6

ERIE RA IGS SE eh eee ea . 10

Appendix A — Proceedings in the Court of Appeals

EES ee a 13

EE hae ewe cat hushed oe «oe ee ns ice ae

(3) Petition for Rehearing en banc ............ 25

(4) Order Denying Petition for Rehearing en banc 34

Appendix B — Proceedings in the United States Tax

Court

ae evans spss ks dG ok eee 35

ETI C5 hae ee 51

Appendix C — Statutes Involved .................. 53

- ee |

II.

AUTHORITIES

Cases: Page

Franklin Life Insurance Company v. United States,

67-2 USTC § 9515 (S.D. Ill. 1967), rev’d, 399 F.2d

757 (7th Cir. 1968), cert. denied, 393 U.S. 1118

FE hbo Oi eG iy seated es Phasewk waked bax eds 7

General American Life Insurance Co. v. United

States, Civil No. 72-C-374(3) (ED Mo., filed June

SN 9 Cie va be ook aes eee bees ll

Jefferson Standard Life Insurance Co. v. United

States, 272 F. Supp. 97 (M.D.N.C. 1967), aff'd, 408

F.2d 842 (4th Cir.), cert. denied, 396 U.S. 828

POPP sos GN eee h oe ka Wonca shee varercic. 7

Liberty National Life Insurance Company v. United

States, No. 71-2776 (5th Cir., July 12, 1972), 72-2

ee | eee 8, 11

United Life and Accident Insurance Co. v. United

States of America, 329 F. Supp. 765 (D.N.H.1971) . 11

Western National Life Insurance Company of Texas

v. Commissioner, 50 T.C. 285 (1968), modified,

51 T.C. 824 (1969), rev'd, 432 F.2d 289 (5th

ee NED 6 vk doh c ben veane x eaiae hyenas veuteuel

Statutes:

we EGE. SRUOIE) 5 oon n aces cnsuscsiwcescaseees

Internal Revenue Code of 1954:

S$ BO] Cf SOq. . 2... eee e cece eee reece necens

| BPPereerrerrrr etter ree te te ree eee

(eer rrr rrr rere ere tere eT.

Eo). C) i nc 2,

| Pepererrerrc er eee re rs eer Tere

(jeer rere rr errr er re

fo pweerrrrrre rrr rrr ee ete.

[| Peererrer errr reer reer re ee

Other:

Petition for Certiorari, Franklin Life Insurance

Company v. United States, cert. denied, 393 U.S.

1 i Peererrrrerrrrrrrr rr treet

PRADA ST PANE? TR he SY

Ts tat eee eae sa PILLAR EN LIA BIA I PT AOI OAEE He PB D+ 18RD RP IMS

ears

BEEMAN

In The

SUPREME COURT OF THE UNITED STATES |

No.

THE WESTERN AND SOUTHERN LIFE

INSURANCE COMPANY,

Petitioner,

VS.

COMMISSIONER OF INTERNAL REVENUE

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

Petitioner, The Western and Southern Life Insurance

Company, respectfully prays that a writ of certiorari issue

to review the judgment and opinion of the United States

Court of Appeals for the Sixth Circuit, entered in this

proceeding on May 12, 1972, petition for rehearing en banc

denied on July 12, 1972.

OPINIONS BELOW

The opinion of the Court of Appeals for the Sixth Cir-

cuit (Appendix A, infra pp. 13-23) is reported at 460

F.2d 8. The opinion of the United States Tax Court

(Appendix B, infra, pp. 35-50) is reported at 55 T.C. 1036.

JURISDICTION

The judgment of the Court of Appeals (Appendix A,

infra, p. 24) was entered on May 12, 1972. A timely

petition for rehearing en banc was denied on July 12, 1972

(Appendix A, infra, p. 36). The jurisdiction of this

Court is invoked under 28 U.S.C. § 1254 (1).

QUESTIONS PRESENTED

1. Whether the Court of Appeals incorrectly held that

in valuing the assets of the petitioner as defined in § 805 (b)

(4) of the Internal Revenue Code for purposes of applying

the statutory formula to determine its taxable investment

income there should be included the “loading” portion

of premiums on outstanding insurance policies not paid at

the end of the taxable year.

2. Whether the Court of Appeals incorrectly held that

the petitioner was not entitled to exclude or offset from its

gain from operations, as determined under § 809 (b) of the

Internal Revenue Code, the amount of the increase in

“loading” on premiums not paid at the end of the taxable

year.

STATUTORY PROVISIONS INVOLVED

This case involves portions of § 2 of the Life Insurance

Company Income Tax Act of 1959, 73 Stat. 112-141,

specifically 26 U.S.C. §§ 802 (b) , 804, 805, 809 and 818 (a).

These are reprinted in pertinent part in Appendix C, infra,

pp. 53-74).

RL LET. AREAS RAE BARE I tye. GOP ANE

STATEMENT OF THE CASE

Petitioner is a mutual life insurance company and as such

is subject to the Life Insurance Company Income Tax Act

of 1959, $§ 801 et seq. of the Internal Revenue Code (R. p.

156). In essence that Act levies a tax on what is computed

to be the company’s (rather than :ie policyholders’) share

of investment income (the Phase I Tax) and a tax on what

is computed to be the overall gain from operations (the

Phase II Tax) (R. p. 162). In computing its federal

income tax liability for the years 1958 to 1962, inclusive,

petitioner did not include in its assets unpaid premiums on

policies in force at the end of its taxable year (R. p. 160).

Petitioner also excluded from its gain from operations the

amount of the increase in “loading’’ on such premiums for

each year (R. pp. 160-61).

At the end of any taxable year, petitioner has life in-

surance policies in force, the premiums on which for the full

current policy year have not been paid, either because

premiums are being paid in less than annual installments,

because the grace period allowed for payment has not

expired, or because the policyholder has decided not to

pay the premium (R. p. 157; Appendix A, infra, p. 15).

Petitioner has no legal right to collect such unpaid prem-

iums. However, state law requires petitioner to provide

reserves to meet the potential .liability on such policies in

the event of death while the policy is still in force, which

reserves are treated as liabilities under state law (R. p. 158)

The amount which goes into the reserve for each policy

is the “net valuation premium’’—that actuarily determined

amount of money which, using the mortality table and 1in-

terest rate assumed for the policy, will be exactly sufhcient

to provide the benefits of the policy (R. p. 156) . The excess

of the contract premium (the amount charged the policy-

Se ee OOO ee re f

holder) over the net valuation premium is called “loading”,

and is an amount determined by independent judgment of

the insurer to cover estimated management and operating

expenses, commissions, contingencies, profit in the case of

capital stock companies, and dividends in the case of mutual

companies such as petitioner (R. p. 157). “Loading”

is never considered by the petitioner's actuaries in determin-

ing the net valuation premium of a particular policy or

class of policies and bears no fixed relationship to the net

valuation premium (R. pp. 27-28, pp. 156-57). The issues

in this case involve the loading on premiums not paid at

the end of the year.

The Commissioner of Internal Revenue assessed income

tax deficiencies against petitioner for all of the years in

question (R. pp. 15-24), contending that petitioner had

treated the unpaid premiums erroneously, for both the

Phase 1 and Phase II tax computations prescribed by the

Life Insurance Company Income Tax Act. The Commis-

sioner asserted that petitioner was required to include in its

assets for Phase I computations the gross amount of prem-

iums unpaid at the end of each taxable year (Appendix B,

infra, p. 42) and also to include the gross amount of such

premiums in its income for the purpose of determining

the Phase II tax on gain from operations (Appendix B,

infra, p. 47) .

Petitioner filed a timely Petition in the United States

Tax Court (R. pp. 3-14). In the Tax Court, petitioner

conceded that an amount equal to the “net valuation

premium” should be included in its assets for purposes of

the Phase I tax, and that the same amount should be in-

cluded in the gross premiums received for purposes of the

Phase II tax (R. pp. 160-61). This concession conforms

to the life insurance industry position advanced by amici

curiae in this case and is consistent with the position of the

National Association of Insurance Commissioners, the

group composed of state insurance commissioners prescrib-

ing the form of annual statement required by § 818 (a) of

the Internal Revenue Code (R. pp. 159-60; Appendix A,

infra, p. 39) .

Section 802 (b) of the Internal Revenue Code provides

a three-phase method of computing a life insurance com-

pany’s taxable income. It is only the first two phases of that

computation and the validity of the Treasury Regulations

interpreting the applicable sections of the Internal Revenue

Code which are involved in this case.

Phase I Issue

In computing the first segment of the taxable income of

a life insurance company, its taxable investment income,

a portion of the company’s investment income, designated

as the policyholders’ share of investment yield, is excluded.

An important factor in making the allocation between

taxable investment income and the policyholders’ share of

investment yield is a fraction, the numerator of which

includes life insurance reserves, and the denominator of

which includes the assets of the company. Naturally, the

smaller the denominator, the larger the fraction, and under

the statutory formula provided in § 804, the smaller the

Phase I tax. Thus, if the value of the assets of the company

is increased, the tax liability is also increased. The Com-

missioner asserts that because in such computation peti-

tioner includes in its reserves an amount for policies the

premiums on which have not been paid, it must also in-

clude in its assets an amount equal to the gross premium

on such policies, including loading (R. pp. 164-65) .

Phase II Issue

The second step in the computation of the taxable in-

come of a life insurance company involves the calculation

of gain from operations under § 809(b). Under § 809 (c)

(1), gain from operations includes the gross amount of

premiums received by the company. Petitioner excluded

from the gross amount of premiums the amount which

represented the increase in loading on unpaid premiums.

The Commissioner asserts that because § 809(d) provides

for a deduction for increases in reserves in computing gain

from operations, the increase in loading on unpaid prem-

iums must be included in gross premiums received by the

company (R. pp. 170-71).

The Tax Court held that in computing the assets of

petitioner under § 805(b) (4) there should be excluded

the loading portion of unpaid premiums (R. pp. 169-70;

Appendix B, infra, p. 46), and that petitioner is en-

titled to exclude from gain from operations, as deter-

mined under § 809 (b) , the amount of the increase in load-

ing on unpaid premiums (R. p. 172; Appendix B, infra, p.

48). The Court of Appeals for the Sixth Circuit reversed

(Appendix A, infra, p. 24). A timely petition for rehearing

en banc was filed (Appendix A, infra, pp. 25-33) and

denied on July 12, 1972 (Appendix A, infra, p. 34).

REASONS FOR GRANTING THE WRIT

1. The decision of the Court of Appeals in this case is

in direct conflict with several decisions of the United States

Tax Court, which has remained steadfast in its judg-

ment despite adverse decisions in the Courts of Appeal

and, as will be pointed out below, it appears to be in con-

flict with the most recent pronouncement of the Court of

Appeals for the Fifth Circuit.

In Western National Life Insurance Company of Texas

v. Commissioner, 50 T.C. 285 (1968), modified, 51 T.C.

824 (1969) , rev'd, 432 F.2d 289 (5th Cir. 1970), the Tax

Court first held that neither the unpaid premiums nor the

Franklin Life Insurance Company v. United States, 399

F.2d 757 (7th Cir. 1968) , rev’g 67-2 US.T.C. 99515 (S.D.

Ill. 1967) . Upon such reconsideration and after oral argu-

ment by the parties and the appearance as amicus curiae

of the two national associations of life insurance companies

xho also appeared as amicus curiae in this case below, the

Tax Court modified its earlier decision, adopted the indus-

try position and held that the net valuation premiums

should be included in assets, refusing to follow the decision

of the Seventh Circuit that loading was also an asset (51

T.C. 824).

The present case was originally decided by the Tax

Court in 1971 after the above cited cases, and after a similar

decision of another United States Court of Appeals, J er-

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

842 (4th Cir. 1969). Thus, in the face of the Fifth Circuit's

reversal of the Tax Court's Western National decision, and

adverse decisions in the Fourth and Seventh Circuits, the

Tax Court in this case below still adhered to its decision

that loading is not an asset and that petitioner is entitled

to exclude it in computing gain from operations. The

entire panel of the Tax Coert remained firm in their in-

terpretation of the law: every judge agreed with the post-

tion taken by petitioner. The Tax Court, which has

considered the question three times, is made up of experts

in the field of federal taxation and is not lacking in respect

for the Courts of Appeal. Yet, to a man, the judges com-

prising that Court remained convinced of the rectitude of

their decision.

Furthermore, the United States Court of Appeals for the

16 RGD pH

Fifth Circuit, upon whose decision in Western National,

supra, the Court of Appeals below has so heavily relied, it-

self has indicated by analogy that despite its own earlier deci-

sion to the contrary, loading on unpaid premiums is not part

of a life insurance company’s assets under Internal Revenue

Code § 805 (b) (4). In Liberty National Life Insurance

Company v. United States, No. 71-2776 (5th Cir., July 12,

1972), 72-2 U.S.T.C. © 9551, the Court held that escrow

mortgage funds were not § 805 (b) (4) assets to be used in

computing a life insurance company’s taxable investment

income because they were trust funds held for the use of

mortgagors and could not be used by Liberty National for

investment. The Court cited with approval the language of

the Tax Court in the first Western National Life Insurance

Company case (50 T.C. 285, 298) dealing with unpaid

premiums:

They do not currently yield any income. ‘They cannot

and are not used to produce investment income; and

. Should not be included in the formula used to

determine the rate of return on the company’s invest-

ment assets. /d.

The court after quoting the foregoing language said:

We are in accord with that philosophy . . . . To say that

section 805(b) (4) encompasses only assets of the

company is but another way of saying that to be

deemed an asset an item must be both available for

and capable of investment. 72-2 U.S.T.C. $9551.

The Court stated that the government had urged that

such a decision would be inconsistent with the earlier

appellate court decisions, including that of the Fifth Circuit

itself, involving unpaid premiums. Nevertheless, the Court

embraced the language of the Tax Court's earlier decision

in Western National. In attempting to differentiate the

unpaid premiums decisions, the Court used an example

(id., footnote 9) of the asset and reserve computation for

unpaid premiums that offset the reserve with an equal

amount of unpaid premiums — which constitutes the net

valuation premium and excludes loading.

We urge therefore, that although there exists no conflict

in decisions in the Circuits directly involving the issue of

loading on unpaid premiums, there does exist not only an

ongoing controversy between the Tax Court and several of

the Courts of Appeal, but also a conflict between the

Courts of Appeal for the various circuits, since the most

recent decision of the Fifth Circuit conflicts with the de-

cision here under review. Such conflicts will undoubtedly

continue until the question is finally put to rest by this

Court.

2. The questions presented are of importance to the

administration of the federal tax law. They are universal

in the life insurance industry. Every life insurance com-

pany is subject to The Life Insurance Company Income

Tax Act of 1959, and every life insurance company has

in force at the end of its taxable year existing policies on

which the premiums are unpaid. Thus, this is not an

isolated occurrence in the taxation of life insurance com-

panies. It takes place every year for every life insurance

company in the country.

In addition to this case, there are others in various

stages, either in the courts or in some preliminary stage,

pending a final disposition of the issues involved. Because

of the number of companies subject to the Act, vast sums

of money are involved throughout all of the Circuits’ and it

1The increase in loading for the years 1964 through 1966 alone

was estimated to be in excess of $213 million. See Petition for Certi-

orari at 20, Franklin Life Insurance Company V. United States, cert.

denied, 393 U.S. 1118 (1969).

SA ET ANY OT BEET OTE PEINE ov

is imperative that the controversy be settled by this Court in

order that much needless litigation be eliminated.

3. With all due respect to the members of the United

States Court of Appeals for the Sixth Circuit, a reading

of its opinion in this case reveals that it is based purely on

the prior cited decisions in the Fourth, Fifth and Seventh

Circuits, with no independent consideration of the basis of

the lower court's rationale, and no consideration of the

arguments in the petitioner’s brief showing the error of the

earlier Circuit Courts’ decisions. Even worse, it is apparent

that the decision is based on a statement of fact erroneously

deduced by the Court of Appeals in direct contradiction to

the stipulation of the parties and the evidence in the record,

namely, that in computing its reserves as required in the

annual N.A.I.C. statement and its tax returns, the petitioner

assumes the collection of the gross amount of unpaid prem-

iums (Appendix A, infra, p. 15). Not only is there no

such evidence in the record, the evidence presented in

Court and the stipulation executed by the petitioner and

by the government through their respective counsel clearly

establishes exactly the contrary (R. pp. 27-28, 156-57; Ap-

pendix B, infra, p. 37) .

CONCLUSION

Life insurance companies in those Circuits which have

not ruled on the issues involved will undoubtedly continue

to contest in the Tax Court the treatment of loading on

unpaid premiums, in light of the conviction of the members

of that Court expressed in their decision below. In addition

the issues will be litigated in the United States District

Courts in those circuits. Within one month of the publica-

tion of the Decision rendered by the Sixth Circuit in this

case, litigation involving similar issues was commenced in

one of the United States District Courts within the Eighth

Circuit. General American Life Insurance Co. v. United

States, Civil No. 72-C-874(3) (ED. Mo., filed June 15,

1972) ; see also United Life and Accident Insurance Co. v.

United States of America, 329 F. Supp. 765 (D.N.H.

1971). The issue will also be litigated in the Fifth

Circuit in view of its decision in the Liberty National

case, supra. Thus, the issues will continue to be raised in

the Circuits, one at a time, unless this Court now resolves

any and all conflicts. That needless litigation can be '

eliminated by action by this Court in the present case, and

the conflict in the Fifth Circuit and the errors by the

Fourth, Sixth and Seventh Circuits can be corrected once .

and for all.

Therefore, it is urged that this petition for a writ of

certiorari should be granted.

Respectfully ry ie

ALAN R. € Gagtn 7

1313 Provident Tower

Cincinnati, Ohio 45202 ‘

Counsel for Petitioner

OF COUNSEL:

GERALD L. BALDWIN

Kyte, Conlan, Wulsin & Vogeler

1313 Provident Tower

Cincinnati, Ohio 45202

ARTHUR K. MASON

1225 19th St. N.W.

Washington, D.C. 20036

October ©, 1972.

PE) POLED RE ICC YORI MN ALAN ESE OT Oo

CERTIFICATE OF SERVICE

It is hereby certified that service of the foregoing Peti-

tion for certiorari has been made pursuant to paragraphs

1 and 2 of Rule 33 of the Revised Rules of the Supreme

Court of the United States by mailing three copies thereof

on this. 2 ns .. day of October, 1972, in an envelope with

air mail postage prepaid, properly addressed to the Solicitor

General, Department of Justice, Washington, D. C. 20530,

and Mr. Fred B. Ugast, Acting Assistant Attorney General,

Tax Division, Department of Justice, Washington, D. C.

20530, Counsel for Respondent, and Messrs. William B.

Harman, Kenneth L. Kimble and William T. Gibb, 1701

K Street, N.W., Washington, D. C. 20006, Counsel for

ALAN R. VOGE

Counsel for Petitioner

es +e+ee

APPENDIX A

No. 71-1605

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

WESTERN AND SOUTHERN LIFE INSURANCE

COMPANY,

Petitioner-A ppellee,

COMMISSIONER OF INTERNAL REVENUE,

Respondent-A ppellant.

Petition to review a decision of the Tax Court.

Decided and Filed May 12, 1972.

Before: CELEBREzzE and Kent, Circuit Judges, and Kin-

nEARY*, District Judge.

Kent, Circuit Judge. This is an appeal from a decision

of the Tax Court. 55 T.C. 1036. The appeal raises issues

requiring the interpretation and application of the Life In-

surance Company Income Tax Act of 1959, Sections 801

et seq., Internal Revenue Code, 1954. 26 U.S.C. § 801 et

seq. The Commissioner of Internal Revenue appeals from

the decision of the Tax Court. which held that the appellee,

* Honorable Joseph P. Kinneary, United States District Court, South-

em District of Ohio, sitting by designation.

SAE URN SVO POR, RPA URL PD AR A EEE HOLLER

Western and Southern Life Insurance Company (Insurance

Company) , in computing its taxable income under the Act,

could offset the net valuation premiums on deferred and

uncollected premiums and due and uncollected premiums

against the reserves required by the laws of the State of

Ohio to be created on the anniversary date of every policy

regardless of whether premiums had been collected or not.

The Tax Court held that the Insurance Company could

accrue the net valuation premium (that allocated to re-

serve) but was not required to accrue the “loading” portion

of deferred and uncollected premiums and -due and un-

collected premuims The conclusion of the Tax Court re-

sulted in a substantial reduction of the taxable income of

the Insurance Company under the provisions of the Act.'

The basic facts are not in dispute. The taxpayer is a

mutual life insurance company incorporated in Ohio. The

premium paid by an insured is termed a gross premium, the

sum of a net valuation premium to which is added a loading

factor. The net valuation premium is that amount which,

using the mortality table and interest rate assumed for

the policy, will be sufficient to provide a reserve which will

guarantee the Insurance Company's ability to pay the

benefits provided by the policy. The loading factor is an

amount, determined by an independent judgment of the

1 The Commissioner determined the following deficiencies in tax-

payer's income taxes.

Taxable year ended Deficiency

December 31, 1958 $ 78,486.51

December 31, 1959 143,266.71

December 31, 1960 219,300.21

December 31, 1961 476,421.04

December 31, 1962 659,724.36

Total $1,577,198.83

insurance company, which is designed to cover estimated

operating, administrative and sales expenses and profits in

the case of capital stock companies and dividends in case

of mutual companies. The gross premium is that annual

amount which provides coverage under the policy for one

year from the anniversary of the date of issuance. At the

end of any taxable year there will be outstanding policies

upon which the premiums have not been paid although

the anniversary date will have occurred. Deferred and un-

paid premiums are portions of the annual premium by con-

tract payable in installments with installments not yet due

at the end of the taxable year. Due and uncollected

premiums are premiums which were due on or before the

end of the taxable year but were not yet paid and the

insurance remained in force because of the 31-day grace

period for the payment of premiums required by statute

to be provided in the policies.

Under the laws of the State of Ohio (and most other

states) , and pursuant to the requirements of the National

Association of Insurance Commissioners (NAIC) an in-

surance company is obligated to establish and maintain

reserves for its potential liability under all policies in force.

The amount of the reserve, as required by Ohio law and the

NAIC, is computed on the assumption that all gross

premiums are paid on the anniversary date of the policy

regardless of whether the premiums have in fact been paid.

The reserves are reflected as a liability. The problem arises

from the fact that the NAIC annual statement requires the

taxpayer insurance company to show under assets only an

amount equal to the net valuation portion of due and

deferred uncollected premiums. The insurance company

in turn reflects this amount in the computation of assets

under Section 805 of the Act in order to arrive at taxable

investment income as provided in Section 804 of the Act.

oe tO Ce Rr: Le

“need

PE CE SOE TH

The net result of such procedure (reflection of assets at a

net valuation premium value rather than a gross premium

value) is to decrease the denominator of a fraction which

has as a numerator the reserves and which renders the

quotient to be taxed smaller.”

The Commissioner takes the position that life insurance

companies, in making the computation to which reference

has been made, should include as assets the gross premiums

for all policies for which reserves are created. The Insur-

ance Company, following the rules of the NAIC, included

only the net valuation premiums. The Tax Court held

contrary to the Commissioner’s position as it has in other

similar cases. Western National Life Insurance Company

of Texas v. C.I.R., 50 T.C. 285 (1968), modified 51 T.C.

824 (1969) , reversed 432 F.2d 298 (5th Cir. 1970). The

other Courts of Appeals which have considered the problem

have also rejected the Tax Court’s approach. Jefferson Stan-

dard Life Insurance Company v. United States, 408 F.2d

842 (4th Cir. 1969) , cert. den. 396 U.S. 828 (1969) ; Frank-

lin Life Insurance Company v. United States, 399 F.2d

757 (7th Cir. 1968) , cert. den. 393 U.S. 1118 (1969).

Simply stated, it is the Commissioner's position that if the

taxpayer is to be permitted to utilize an accrual method of

accounting for one purpose (determining reserve liability)

then it should be required to use the accrual method con-

sistently throughout all other income tax computations

relating to the same policies and the same premium income

(actual or anticipated). It is the Commissioner's position

that only in this manner will the return properly reflect

the insurance company’s profitability.

It is the position of the Insurance Company that there

2For an excellent discussion of the computation stages and the

taxable phases of this issue see Jefferson Standard Life Insurance Com-

pany v. United Staies, 408 F.2d 842, 844, 845 (4th Cir. 1969).

GLEE LATE EE EN AIARO ES a TREN LRT A RL RAY TT EIS DES

is no obligation on the part of the policyholders to pay any

premiums, that it cannot be required to accrue the loading

factor of premiums which the policyholder has no legal

obligation to pay and the Insurance Company has no

legal right to collect.

The position taken by the Commissioner is supported by

the relevant Code provision, the regulations, and, as stated,

the opinions of all-other Circuits which have considered

these issues.

With respect to the computation of taxes, Section 818 (a)

of the Act provides for an accrual method of accounting:

$818. Accounting provisions

(a) Method of accounting.—All computations en-

tering into the determination of the taxes imposed by

this part shall be made—

(1) under an accrual method of acc: ing,

(2) tothe extent permitted under regulations

prescribed by the Secretary or his delegate, under

4 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 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 Association of

Insurance Commissioners.

Thus, if potential liability is to be accrued we conclude

that potential profitability must also be accrued. Consider-

ing Section 818 (a) the Court of Appeals for the Fifth Cir-

cuit stated in Western National Life Insurance Company of

Texas v. C.LR., 432 F.2d 298, 30], 302 (1970) :

TPS ea A te Ce a ce a al Od SRR TAT RES ATR TE

“We also agree with the decision in these two cases

to the effect that the Congress did not adopt the

N.A.LC. form of statement for its accounting method

as to determining the tax base for insurance companies.

As will appear from the statute itself, the N_AIC.

annual statement was referred to as being the proper

standard ‘except as provided in the preceding sen.

tence, the preceding sentence providing that all com-

putations should be under an accrual method of ac-

counting. In point of fact, the N.A.LC. method is a

hybrid met and not strictly an accrual method.

[3] To paraphrase what is so well stated by the

Court of Appeals for the Fourth Circuit: An accrual

method of accounting would not require the inclusion

of any part of these deferred and uncollected prem-

iums. However, when the taxpayer does accrue them,

we are of the view that they must be accrued in full,

even though advantage of only a part of them can be

used by the taxpayer in the formula that is used for

determining the base of taxation. See 408 F.2d 849.

856." (Emphasis added) .

The Commissioner's position is also supported by Federal

Tax Regulation 1.805-5 (a) (4) (ii) Example (1) which

provides as follows:

“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:

furniture and equipment owned by the company and

used in the home office and branch office buildings oc-

cupied by the company: agents’ debit balances:

premiums deferred and uncollected 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 subparagraph,

the home office and branch office buildings owned and

wholly occupied by the company, and the furniture and

equipment owned by the company and used by it in

connection with the operations conducted in the home

office and branch office buildings occupied by the com-

pany, 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 business.

Accordingly, since bonds, stocks, mortgages, agents’

debit balances. premiums deferred and uncollected and

premiums due and unpaid, bank deposits (including

time deposits) , and share accounts in savings and loan

associations are not considered as being used by P in

carrying on an insurance trade or business, they are in-

cluded within the term “assets” and, therefore, shall

be taken into account by P in determining its current

earnings rate.” (Emphasis added) .

It also appears that in computing gain under Section 809

of the Act the inclusion of loading is clearly required by

the express words of the statute:

“(c) Gross amount.—For purposes of subsection

(b) (1) and (2). the following items shall be taken

into account:

(1) Premiums.—The gross amount of prem-

iums and other consideration (including advance

premiums, deposits, fees, assessments, and consid-

eration 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 considcration arising out of

reinsurance ceded. “Except in the case of amounts

of premiums or other consideration returned to

another life insurance company in respect of re-

insurance ceded, amounts returned where the

amount is not fixed in the contract but

on the experience of the company or the discre-

tion of the management shall not be included in

return premiums.” (Emphasis added.)

The Regulation adopted pursuant to that section of the

statute provides:

SE ee a ee De

Reguation 1.809-4 (a) (1) (i):

“(1) Premiums. (i) The gross amount of all

premiums and other consideration on insurance and

annuity contracts (including contracts supplementary

thereto); less return premiums and premiums and

other consideration arising out of reinsurance ceded.

The term ‘gross amount of all premiums’ means the

premiums and other consideration provided in the in-

surance 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 commis-

sions, return premiums, reinsurance, dividents [sic] to

policyholders, dividends left on deposit with the com-

pany, discounts on premiums paid in advance, interest

applied in reduction of premiums (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 of assuming liabilities under contracts

not issued by the taxpayer (such as a payment or trans-

fer of p y in an assumption reinsurance transac-

tion as defined in paragraph (a) (7) (ii) of § 1.809—

5.” (Emphasis added.)

Because the statutory provision and the regulation require

the inclusion of loading in computing gain the Tax Court

was in error in its conclusion.

In addition, as stated by the Court of Appeals for the

Seventh Circuit in Franklin Life Insurance Company v.

United States, 399 F 2d 757, 760 (1968) :

“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 form-

ula and in specifying and enumerating the permissible

deductions and exclusions negates the existence of any

deferred and uncollected premiums, with its concomi

tant impact on the resulting tax, to the NAIC.”

In concluding that loading was includable as an asset in

computing investment income pursuant to Section 804, and

that the insurance company was not entitled to a deduction

for an increase in loading under the provisions of Section

809, the Court said in Franklin Life Insurance Company V.

United States, 399 F.2d 757, 760, 761, in regard to the in-

dusion of loading as an asset:

“Taxpayer seeks to justify the District Court's ex-

clusion of loading on deferred and uncollected prem-

iums from assets in the computation of “investment in-

come” pursuant to Section 804 on the basis of tax-

payer's obligations to policyholders, 1. €., reserves. But

taxpayer in computing its reserves for tax purposes did

so on the assumption that on cach policy anniversary

the full annual premium has been received. . - .

‘The assumption that the annual premium has been

received in full is, of course, a fiction, since annual

premiums on all policies have not been received as

of the end of the taxable year: rather, a portion thereof

remains deferred and uncollected. The use of the

fiction results in a bigger reserve liability figure and

consequently bigger reserve liability deductions and

exclusions than if reserves were computed on the basis

of only those premiums actually received. If the fic-

tional assumption were not indulged and only those

reserves were accrued as were attributable to paid up

portions of annual premiums, then the problem from

an accrual standpoint would be simpler. But, Cong-

ress, apparently cognizant of the assumption upon

which taxpayer and other life insurance companies

compute reserves for annual statement purposes be-

cause of state statutory requirements chose to recog-

nize such assumption in the tax formula it prescribed

and to base an accrual reporting requirement on that

assumption. And. the application of accrual principles

i oa © Or f -

A ge SE OE. te FOP RTE OS SE

after that assumption has been made, will not permit

of accrual of the entire annual reserve on one hand

without incident accrual of the full annual premium.

The District Court would permit the taxpayer to ac-

crue a full year's liability without a corresponding

accrual of the related year’s asset in point of time.

Such a result would attribute to Congress an intention

that in the same statutory equations, exclusions and

deductions attributable to reserves are to be based

on the assumption that the annual premium is fully

paid up and yet the amounts in the same equation

from which these figures are to be subtracted are

to be determined on the assumption that the annual

premium is not fully paid up. ‘This is, in effect, saying

that Congress, when it specified accrual accounting,

must have meant one rule to apply to reserve deduc-

tions and exclusions and another different accrual rule

to apply to determining the amount from which the

former are to be subtracted. We perceive nothing

from which intent to impose such a dual standard of

tax accounting can be presumed.

That the NAIC is willing to allow an admittedly

overstated reserve while at the same time allowing

an accounting entry with respect to assets which, while

compensating numerically for the overstatement, does

not fully account for the related asset, is of no aid to

the taxpayer here. The acceptance of such an adjust-

ment as being in accord with conservative and stringent

solvency requirements does not permit of the utiliza-

tion of such an approach to alter or modify the sub-

stantive provisions of a tax formula concerned with

the proportionate relationship between assets and re-

serves. The gearing of the tax statute to an annual

reserve requires recognition of no less than the annual

premium.”

And further said in regard to gain at page 760:

“Section 809 (c) (1) specifically, requires the inclu-

sion of ‘the gross amount of premiums’ for the purpose

of determining ‘gain from operations’ as defined in

23 :

Section 809(b) (1). ‘Taxpayer concedes that the in-

tent and purpose of the Act require that the deferred

and uncollected premiums be included in income on a

gross basis (which includes loading) . In our view that

concession leaves no basis for further controversy. This

is especially so in view of the fact that Congress has

provided twelve specific deductions in Section 809 but

makes no provision for an offset or deduction for ‘in-

crease in loading’. And, the burden is on the taxpayer

to show the express statutory authority for a deduction

claimed. Equitable Life Insurance Co. of lowa v.

United States, 8 Cir., 340 F.2d 9.”

We agree with and again quote the statement of the

Court in Western National Life Insurance Company of

Texas v. C.LR., 432 F.2d 298, 301, 302 (5th Cir. 1970) :

“We also agree with the decisions in these two cases

to the effect that the Congress did not adopt the

N.A.LC. form of statement for its accounting method

as to determining the tax base for insurance companies.

As will appear from the statute itself, the N.A.LC.

annual statement was referred to as being the proper

standard ‘except as provided in the preceding sen-

tence,’ the preceding sentence providing that all com-

putations should be under an accrual method of ac-

counting. In point of fact, the N.A.LC. method is a

hybrid method and not strictly an accrual method.

‘To paraphrase what is so well stated by the Court of

Appeals for the Fourth Circuit: An accrual method of

accounting would not require the inclusion of any part

of these deferred and uncollected premiums. However,

when the taxpayer does accrue them, we are of the view

that they must be accrued in full, even though ad-

vantage of only a part of them can be used by the tax-

payer in the formula that is used for determining the

base of taxation. See 408 F.2d 842, 856.”

For the reasons herein stated the judgment of the Tax

Court is reversed and the case is remanded to that Court

for further proceedings not inconsistent with this decision.

PART SS te BELA IRL LE LOE ENTE LE LONI D LAE LL LEIS LO IO SIE LES a |

ee _ {20.2

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

No. 71-1605

THE WESTERN AND SOUTHERN LIFE INSUR-

ANCE COMPANY,

Petitioner-Appellee,

vs.

COMMISSIONER OF INTERNAL REVENUE,

Respondent-Appellant.

Filed May 12, 1972.

Before: Cerresrezze and Kent, Circuit Judges and Kiv-

NEARY, District Judge.

On appeal from the Tax Court of the United States.

This cause came on to be heard on the transcript of

record from the Tax Court of the United States, and was

argued by counsel.

On consideration whereof, It is now here ordered and

adjudged by this court that the decision of the said Tax

Court in this cause be and the same is hereby reversed

and the case remanded for further proceedings consistent

with the opinion.

It is further ordered that Respondent-Appellant recover

from Petitioner-Appellee the costs on appeal as itemized

below.

Entered by order of the Court.

JAMES A. HIGGINS,

Clerk

COSTS: ‘To be recovered by Appellant

ike raaialic S$ 25.00

EE 5 Whe oe ey sy $229.10

Total $254.10

IN THE

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

No. 71-1605

ANCE COMPANY,

Appellee,

vs.

COMMISSIONER OF INTERNAL REVENUE,

Appellant.

PETITION FOR REHEARING

EN BANC

Filed May 25, 1972.

Alan R. Vogeler

1313 Provident Tower

Cincinnati, Ohio 45202

Arthur K. Mason

1225 - 19th Street, N.W.

Washington, D. C. 20036

Attorney for Appellee

Of Counsel

KYTE. CONLAN, WULSIN & VOGELER

1313 Provident Tower

Cincinnati, Ohio 45202

THE WESTERN AND SOUTHERN LIFE INSUR-

error, a |

SOP LR NN 9 Bg EDS an Ni IST I NE LE ATEN

INTRODUCTION

The Appellee above named respectfully petitions this

Honorable Court for a rehearing en banc of the appeal in

the above-entitled cause, and in support of this petition

represents to the Court as follows:

Appellee reserves its position as to each of the points

raised by the appeal, but in this petition addresses itself

solely to those aspects of the decision wherein it believes

the Court may be convinced that its result was based upon

the application of incorrect assumptions of fact and legal

principles.

Appellee bases this petition upon four grounds: the

Court (1) predicated its decisicn on an assumption of fact

which is clearly erroneous: (2) failed to consider the vali-

dity of the applicable Internal Revenue Regulations; (3)

did not give adequate consideration to the opinion of the

Tax Court which it reversed; and (4) was unduly in-

fluenced in its decision upon similar cases decided by the

Courts of Appeals for other circuits.

I. The Court Predicated Its Decision Upon an

Erroneous Assumption of Fact.

At the outset of its decision, the Court states that “[t}he

amount of the reserve, as required by Ohio law and the

NAIC, is computed on the assumption that all gross prem-

iums are paid on the anniversary date of the policy regard-

less of whether the premiums have in fact been paid.” The

record and decision of the Tax Court clearly establish that

this statement is erroneous. In actuality, the reserve bears

no relationship to the gross premium. It was proved by

uncontroverted testimony that the reserve set up for each

policy is computed totally without any reference to the

gross premium due on that policy and that Western and

Southern never assumed the receipt of the gross premium.

ober 2 ee HEY SN TE

The reserve is that amount actuarially required to provide

funds sufficient to pay the company’s liability on the policy

should the insured die. The State of Ohio, in which Ap-

llee is resident, has established interest rates and mor-

tality tables which all Ohio insurance companies must use

in computing the reserve. The reserve thus computed

must be carried on books of the company as a liability.

The gross premium is the sum of two items: the “net

valuation premium” and “loading.” (R. 156-57) .* The

“net valuation premium” is an amount equal to the reserve.

“Loading,” as defined by this court, “is an amount de-

termined by an independent judgment of the insurance

company, which is designed to cover estimated operating,

administrative and sales expenses and profits in the case of

capital stock companies and dividends in the case of mutual

companies.” Western and Southern Life Insurance Com-

pany v. Commissioner of Internal Revenue, No. 71-1605, at

p. 2 (6th Cir. 1972) (Emphasis added) . The Tax Court

in its Findings of Fact specifically found that “[t]he amount

of ‘loading’ results from an independent judgment of each

particular company and may vary from company to com-

pany.” (R. 157). Thus, the amount of the gross premium

can bear no certain relationship to the reserve; rather, the

reserve is first computed independently and to it some un-

certain, varying amount is added to arrive at the gross

premium. To say that the amount of the gross premium

received by the company has any effect on the amount of the

reserve which is established on that policy is clearly in error.

Having made the assumption, contrary to fact, that the

gross premium bears some relation to the reserve, the Court

agreed with the Appellant's argument that the “symmetry”

of the balance sheet of the company required the inclusion

*“R” as used hereinafter means the Record Appendix.

Bee ela

of the gross premium (the item erroneously thought to

give rise to the reserve) in the assets of the company.

Appellee does not contend that the asset side of the com-

pany’s balance sheet should reflect no addition to compen-

sate for the inclusion of the reserve as a liability. But

it is the position of Appellee that the item which prop-

erly offsets the reserve is the net valuation premium, not

the gross premium. To understand why the net valuation

premiuin is the proper offset, one must first understand

why some type of offset is required. If insurance com-

panies used an accounting method similar to other busi-

nesses, there would be no problem; assets and liabilities

both would be accurately stated. However, state laws re-

quire companies to carry on their books as a liability a

reserve (computed on the basis of standard mortality and

interest tables as described above) for policies on which

the company has no actual liability at the end of the year.

Thus, there is a fictitiously created liability for which some

fictitious offset, a non-existent asset, must be created. The

National Association of Insurance Commissioners (NAIC)

has determined that the logical amount to include is the net

valuation premium, that portion of the premium which is

determined by reference to the reserve. The effect is to

arrive at a balance sheet which is nearly identical to a

standard accrual method balance sheet, the only difference

being the existence of a liability (the reserve) and an

asset (net valuation premium) which numerically negate

each other. But this Court would have the company in-

clude the gross premium in its assets. The result is to

create an asset for the purpose of offsetting the reserve,

which more than offsets the reserve.

The reserve represents only the possible liability of the

company to pay the benefits under the policy should the

insured die having paid the premium. It does not reflect in

— eT MERA

any manner the potential liability for administrative and

other expenses which will be incurred by the company

should the premium be paid. It is those liabilities for

which “loading” compensates. Since those liabilities are

not included in the reserve, “loading” should not be in-

cluded in the offsetting asset. If state law required the in-

clusion in the reserve of an amount to reflect the possible

liability for administrative and selling expenses (those

items for which “loading” compensates), then it would

be logical to include “loading” as an asset. Those items

bear some relationship to each other, they are equal. The

“loading” portion of the gross premium which Appellant

would include as an asset has no corresponding fictitious

liability set up on the balance sheet. Thus inclusion of

“loading” destroys the “symmetry” of the balance sheet

which Appellant contends provides the basis for its in-

clusion.

II. The Court Failed to Consider the Validity of

the Regulations Interpreting Section 805(a)(4)

of the Internal Revenue Code.

Section 805 (a) (4) defines the term “assets.” That sec-

tion is completely silent with respect to the treatment of

due and deferred premiums. Because the company has no

enforceable right to collect the premiums on its policies,

such premiums obviously are not within the ordinary de-

finition of the term. Appellant attempts to support the

Regulations by resort to Section 818 of the Code. That

section provides that all computations will be made (1)

on the accrual basis, or (2) under a combination of the

accrual and another suitable method. Also, where it is

consistent with the above alternatives, a company shall

employ the NAIC method.

Preliminarily, Appellee does use the accrual method.

NE Bd os i ha aca

- Sg eee -

PT oe

POS PRET EA DOS LAL REDE IML ESS IRL ERLE MT ME om |

* ry nea oe Sh ee Le ee hes D

De RNa ty el ee Mee ek ot kad We FOR gh HOLE ’ hag

However, under such a method, no liability would be

accrued to reflect the reserve required under state law, since

no true liability exists until the premium is paid by the

policyholder. Thus, the existence of the liability is not

the result of the use of the accrual method of accounting

required by Section 818. Sections 805 and 809 specifically

require the company to include the reserve as a liability. If

it were not for the existence of Sections 805 and 809, the

company would not be permitted to predicate any of its

fecreral income tax computations upon the existence of such

lialulity. The statute does not expressly require that any

corresponding increase be made to the assets of the com-

pany, but it is conceded that some addition must be made

in order to prevent a distortion of the balance sheet. The

Court adopts the Appellant’s position that the required

adjustment to assets is an amount equal to the gross prem-

ium, because (1) the gross premium is the determinative

factor in the computation of the reserve and (2) the ac-

crual method of accounting requires the addition of the

item which gives rise to the fictitious liability. The first

aspect of this reasoning has been discussed above and it is

clear that the reserve bears absolutely no relationship to

the gross premium and its receipt has not been assumed

by Appellee. The latter portion of Appellant’s reasoning

adopted by the Court is equally faulty. It assumes that the

accrual method of accounting requires the inclusion of

the reserve among the liabilities of the company. As point-

ed out above, it is not the method of accounting employed

by Appellee which results in the inclusion of the reserve,

but rather Section 805 and 809. The reason for the ex-

istence of an offsetting asset is to avoid a totally distorted

balance sheet. Therefore, the amount of the offset should

be that amount which eliminates the distortion: the net

valuation premium. Since there is no basis either in the

31]

statute or in logic for the position taken by the Appellant

in the Regulations under Section 805, such a position is in-

valid and that portion of the Regulations is not entitled to

the weight given it by the Court.

Il]. The Court Failed to Give Adequate Consid-

eration to the Opinion of the Tax Court and

Was Unduly Influenced by Similar Cases

Decided by the Courts of Appeals for Other

Circuits.

The final two grounds upon which this Petition for Re-

hearing is based are discussed together because of their

inter-relationship. The Tax Court had upon two oc-

casions prior to the instant case considered the issues in-

volved herein. At the time the opinion of the Tax Court

was rendered, the Court of Appeals for the Fourth, Fifth

and Seventh Circuits had also ruled on the same issues,

twice reversing the Tax Court’s previous decisions. In

spite of this history of adverse reaction by the Courts of

Appeals, the entire panel of the Tax Court remained

firm in their interpretation of the law; every judge agrees

with the position taken by Appellee in this appeal. The

Tax Court, which has considered the question three times,

is made up of experts in the field of federal taxation and

is not lacking in respect for the Courts of Appeals. Yet,

to a man, the judges comprising that Court remain con-

vinced of the rectitude of their decision.

This Court, however, in its decision failed to discuss

the opinion of the Tax Court. It chose rather to rely com-

pletely upon the decisions of the Fourth, Fifth and Seventh

Circuits. As pointed out in Appellee’s Brief and in the

opinion of the Tax Court, the opinions rendered by those

courts indicate a definite lack of understanding of the is-

sues. A careful, independent, step-by-step analysis is vital

to a correct comprehension of the problem. Without such

an analysis, it is dificult to see the error in those decisions.

By relying so heavily on the other circuits, this Court failed

to exercise the requisite independent judgment.

The issues presented herein are universal to the life

insurance industry. They require a final solution by the

Supreme Court of the United States, rather than the piece.

meal treatment to which they are presently subjected. But

unless one of the Courts of Appeals rules in favor of the

position urged by Appelice, it is unlikely that the issues

will ever reach the Supreme Court. The offhand decision

rendered by this Court decreases that likelihood even fur-

ther. By becoming the fourth circuit to affirm the posi-

tion taken by Appellant, the Court has seriously diminished

the chance that another circuit will accept the position

supported by Appellee. By affirming the decision of the

Tax Court, a decision clearly supported by the law, this

Court can speed the dispute to a final decision.

CONCLUSION

For the foregoing reasons, Appellee requests an oppor-

tunity for a rehearing on these points Because of the

importance of the questions presented, it is requested that

the rehearing be before the entire Court, en banc.

Respectfully submitted.

/s/ ALAN R. VOGELER

1313 Provident Tower

Cincinnati, Ohio 45202

Arthur K. Mason

1225 19th Street, N.W.

Washington, D. C. 20036

Ot Counsel

KYTE, CONLAN, WULSIN & VOGELER

1313 Provident Tower

Cincinnati, Ohio 45202

CERTIFICATE OF SERVICE

It is hereby certified that service of the foregoing Pe

tition for Rehearing en banc has been made by mailing

two copies thereof on this 25th day of May, 1972 in an

cavelope with postage prepaid, properly addressed to Mr.

Fred B. Ugast, Acting Assistant Attorney General, Tax Di-

vision, Department of Justice, Washington, D.C. 20530,

counsel for the Appellant and Messrs. William B. Harman,

Jr. Kenneth L. Kimble and William T. Gibb, 1701 K

Street, N.W., Washington, D.C. 20006, counsel for Amici

Curiae.

/s/ ALAN R. VOGELER

Counsel for Appelice

me ————S

— es eS eo

No. 71-1605

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT _

WESTERN AND SOUTHERN LIFE INSURANCE

COMPANY.

Appellee.

vs.

COMMISSIONER OF INTERNAL REVENUE,

Appellant.

ORDER

Filed July 12, 1972.

Before: Cecesnezze and Kent, Circuit Judges, and Kiw-

weany®. District Judge.

Appelice’s petition for rehearing having come on to be

considered and of the Judges of this Court who are in

regular active service less than a majority having favored

ordering consideration en banc.

IT IS ORDERED that the petition be and it is hereby

denied.

ENTERED BY ORDER OF THE COURT

JAMES A. HIGGINS, Clerk

* Honorable Joseph P. Kinneary, United States District Court, South

ern District of Ohio. sitting by designati-n.

—— a

55 T. C. No. 96

UNITED STATES TAX COURT

WESTERN AND SOUTHERN LIFE INSURANCE

COMPANY, Petitioner v. COMMISSIONER OF

INTERNAL REVENUE, Respondent

Docket No. 4223-69. Filed March 23. 1971.

Petitioner, a life insurance company, is entitled to

exclude the loading portion of “deferred and uncol-

lected premiums” and “due and unpaid premiums”

in computing “assets” under sec. 805 (b) (4). LR-C.

1954, and “gross amount of premiums” for the pur-

poses of sec. 809 (c) (1). LR.C. 1954.

Lawrence H. Kyte, Alan R. Vogeler, and Arthur K.

Mason, for the petitioner.

Rodney G. Haworth, for the respondent.

TANNENWALD, Judge: Respondent determined the

following deficiencies in petitioner's income taxes:

Taxable year ended Deficiency

December 31, 1958 - S$ 7848651

December 31. 1959 143,266.71

December 31, 1960 219,300.21

December 31. 1961 476,421.04

December 31. 1962 659,724.36

Total $1,577,198.83

The issues involved in this case are:

(1) Whether the loading portion of “premiums, de-

ferred and uncollected” and “premiums, due and unpaid”

is excludable from assets within the meaning of section

805 (b) (4), LR.C. 1954;" and

(2) Whether the increase in loading on “premiums, de-

ferred and uncollected” and “premiums, due and unpaid”

is excludable from premium income under section 809

809 (d) .

FINDINGS OF FACT

Some of the facts have been stipulated The stipulations,

together with the exhibits attached thereto, are nee sae

herein by this reference.

Petitioner is an Ohio corporation having its principal of-

fice in Cincinnati, Ohio, at the time it filed its petition

herein. Its Federal income tax returns for the years 1958

to 1962, inclusive, were filed with the district director of

internal revenue, Cincinnati, Ohio.

Petitioner is a mutual life insurance company organized

and existing under the laws of the State of Ohio. Its op-

erations and accounts are subject to the supervision and ap-

proval of the superintendent of Insurance for the State

of Ohio and, because it does business in numerous states,

it is subject to periodic audit of its accounts by the Na-

tional Association of Insurance Commissioners (“NAIC”),

which acts on behalf of the insurance departments of the

various states.

The tax returns filed in the years here involved were

1 All references, unless otherwise specified. are to the Internal Revenue

Code of 1954.

prepared on the same basis as was used on the annual state-

ment required of life insurance companies by the NAIC,

with some adjustments.

In life insurance, premiums are the agreed price for

assuming and carrying the risk. Gross premium is the

amount actually charged the insured and is composed of

the net valuation premium and “loading.” The net valu-

ation premium on a particular policy is that amount of

money which, using the mortality table and interest rate as-

sumed for the policy, will be exactly sufficient to provide

the benefits of the policy and is required by state law to

be added to the policy reserve each year. “Loading” refers

to an amount added to the net valuation premium for esti-

mated administration, management, and operating ex-

penses, contingencies, profits in the case of capital stock

companies, and dividends in the case of mutual com-

panies. The amount of “loading” results from an inde-

pendent judgment of each particular company and may

vary from company to company. Policyholders may pay

premiums in semi-annual, quarterly, monthly, or weekly

installments. An additional amount is added when an in-

stallment method of paying the premium is elected.

“Deferred and uncollected premiums” are the premiums

on policies with premiums payable more often than an-

nually which become due after December 31 of the calen-

dar year and before the next policy anniversary date.

“Due and unpaid premiums” are premiums which: are

due to be paid before the end of the year, but which

have not been paid by December 31. As required by law,

all policies provide for a 31-day grace period for the pay-

ment of premiums after their due date, during which

period the policy is carried in full force and effect.

“Deferred and uncollected premiums” and “due and

PELE SEEN FEL ESS PI, FI mire erp r en

unpaid premiums” are hereinafter sometimes referred to as

due and deferred premiums.”

There is no obligation, legal or otherwise, on an insured

to pay to the insurer due and deferred premiums. If

the policyholder does not pay the premium in conformity

with the provisions of the policy, the policy is lapsed after

the grace period and appropriate adjustments are made.

Petitioner was required by the State of Ohio and by

the NAIC to compute its reserves on the great majority

of its life insurance policies on the assumption that premi-

ums were paid up one year in advance on each anniversary

date commencing with the issuance date of the policy,

even though premiums were not usually paid in this man-

ner. The reserves so computed were reflected as a lia-

bility of petitioner and, as required by the Internal Reve-

nue Code of 1954, as amended by the Life Insurance Com-

pany Income Tax Act of 1959,3 were taken into account

in the computations required under sections 805 and 809

on the Federal income tax returns filed by petitioner for

the taxable years 1958 to 1962, inclusive.

The NAIC annual statement treats deferred and uncol-

lected premiums on a net basis. Item 17, on the assets

page of the balance sheet, calls for the statement of “Life

insurance premiums and annuity considerations deferred

and uncollected” on a net premium basis. Exhibit 13 of

the annual statement, which gives the detail of the assets,

sets forth deferred and uncollected premiums on a net

basis. It provides for a memorandum account to show the

amount of loading excluded from the deferred and uncol-

2The parties have stipulated that “due and deferred premiums”

should be the shorthand designation employed, but we note that the

cases and the NAIC apparently refer to “deferred and uncollected

premiums” as encompassing both classes of premiums.

326 U.S.C. sec. 801 et seq., effective for taxable years beginning

after December 31, 1957.

lected premiums. Item 16 of the liabilities page of the

balance sheet calls for a statement of the “ ‘Cost of collec-

tion’ on premiums and annuity considerations deferred and

uncollected in excess of total loading thereon.” As required

by the NAIC annual statement, petitioner's annual state-

ments showed net premiums deferred and uncollected as

an asset. Also in conformity with the form, petitioner's

annual statement did not show loading as an asset.

In the summary of operations contained in the NAIC

annual statements, line 1.1, “Premiums and annuity con-

siderations,” includes deferred and uncollected premiums

on a gross basis. It (line 1.1) provides for the inclusion

of such premiums at gross to be added to gross premiums

collected during the year less deferred and uncollected

premiums at gross as of the end of the previous year. Line

17, which is the “Increase in aggregate reserve for policies

and contracts with life contingencies,” removes from in-

come the net portion of the deferred and uncollected premi-

ums. Line 25 provides for the deduction of the increase

in loading on deferred and uncollected premiums and

also for the deduction of cost of collection of premiums

in excess of loading on deferred and uncollected premiums.

In determining net gain from operations, lines 8 through

26A of the Summary of Operations list various allowable

deductions, including the deduction in line 25 for in-

crease in loading on deferfed and uncollected premiums.

This deduction was claimed by petitioner on its Federal

income tax returns in determining its net gain from op-

erations. Exclusive of increases in loading. the petitioner

deducted all expenses actually paid or incurred each year

on its NAIC annual statements and Federal income tax

returns.

In its income tax returns for the years involved, peti-

tioner did not include any due and deferred premiums as

POT NIN Pe, VT

RE AN LIS TE BR ENS ES NT

an asset, but it now concedes that they should be so in-

cluded in an amount equal to the net valuation premiums.

In these returns, petitioner did include, as an income item,

an amount of due and deferred premiums equal to the

deductions for increase in loading and increase in reserves.

OPINION

This case presents two issues relating to the interpretation

and application of the Life Insurance Company Income

Tax Act of 1959. 26 U.S.C. sec. 801 et seq. The Act was

-a comprehensive revision of the prior schemes for taxing

the incomes of life insurance companies. See H. Rept. No.

34, 86th Cong., Ist Sess., (1959) pp. 1-8; S. Rept. No.

291, 86th Cong., Ist Sess., (1959) pp. 1-12.

Section 802(b) sets out a three-phase approach which

is to be followed in computing a life insurance company’s

taxable income In arriving at taxable investment in-

come and gain from operations, the 1959 Act recognizes

that life insurance companies are legally obligated to keep

policyholder reserves in order to meet future claims, that

they normally add a significant portion of their investment

income to these reserves, and that these annual reserve

increments should not be subjected to tax. United States

v. Atlas Life Insurance Company, 381 U.S. 233, 235-236

4 SEC. 802. TAX IMPOSED.

(b) Life Insurance Company Taxable Income Defined. — For pur-

poses of this part, the term “life insurance 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 policyholders surplus ac-

count for the taxable year, as determined under section 815.

(1965) . The Act thus attempts to tax only those portions of

investment income and premium income which represent

profit to the company, legally available for distribution

to policyholders or stockholders as dividends, as distin-

guished from those gains which, under state law, must be

set aside to meet the company’s future contractual obliga-

tions. Jefferson Standard Life Insurance Co. v. United

States, 408 F. 2d 842, 844 (C.A. 4, 1969).

We note at the outset that we do not approach this

case with a tabula rasa. ‘Three Courts of Appeals, as well

as this Court on two occasions, have decided similar cases

involving one or both of the issues involved herein. Frank-

lin Life Insurance Company v. United States, 399 F. 2d 757

(C.A. 7, 1968) ; Jefferson Standard Life Insurance Co. v.

United States, supra; Western National Life Insurance

Company of Texas v. Commissioner, 432 F. 2d 298 (C.A. 5,

1970), reversing and remanding 50 T.C. 285 (1968) as

modified by 51 T.C. 824 (1969). In view of the detailed

analysis contained in the various opinions in these cases,

we are relieved of the necessity of exposition beyond what

is essential to the articulation of our position herein.

The two issues requiring decision stem from certain

propositions which are not in dispute: (1) that

life insurance reserves are properly taken into account in

computing the numerator of a fraction utilized in de-

termining the amount to be eliminated from “investment

income,” subject to the so-called Phase I tax; (2) that the

annual increase in such reserves is a proper deduction in

determining gain from operations, which is subject to

the so-called Phase II tax; (3) that such reserves include

a purported liability in an amount computed on the as-

sumption that premiums are paid up one year in advance

on each anniversary date commencing with the issuance

date of the policy; and (4) that, to the extent of such

amount, a liability is recognized which does not reflect

the normal requirements of accrual accounting.

The first issue to be resolved is the extent to which due

and deferred premiums should be taken into account in

computing the amount of “assets” as defined in section

805 (b) (4) 5 am amount which is in the denominator of a

fraction whose numerator includes “‘life insurance reserves.”

The fraction is a key element in determining the policy-

holders’ share of investment income which is to be excluded

from taxable investment income and consequently not sub-

ject to the so-called Phase I tax. Obviously, the smaller the

denominator, the larger the fraction and therefore the

greater the amount to be excluded and the smaller the

amount subject to tax. Respondent argues that the word

“assets” should include the gross amount of due and de-

ferred premiums. He bases his contention on the following

syllogism: (1) Life insurance reserves are included in the

numerator of the fraction; (2) those reserves include an

amount attributable to due and deferred premiums com-

puted, as previously indicated, on the assumption that

premiums are paid one year in advance; (3) such an as-

sumption having furnished the underpinning for the com-

putation of an element in the numerator of the fraction,

the same assumption should control the determination of

the denominator of the fraction. Or, to put it another way,

respondent contends that, since the liability represented

5 (4) Assets. — For purposes of this part, the term “assets” means

all assets of the company (including non-admitted assets), other than

real and personal property (excluding money) used by it in carrying on

an insurance 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 adjusted basis (determined with-

out regard to fair market value on December 31, 1958) of such

asset for purposes of determining gain on sale or other disposition.

PEE SD LN ae leg OP RRO, eR TRITON CH Mea AOI REIS al ae

by life insurance reserves is based on the premise that the

item giving rise to such liability has been received, the

same premise must be utilized in computing the assets

which are subject to such liability.

We think respondent's syllogism proves too much. In-

itially, we point out that the assumption upon which re-

spondent relies so heavily has its roots in the procedures

of the NAIC and presumably the requirements of state

law with respect to the necessity of establishing reserves.

There is no indication in the statute itself or the legisla-

tive history that such an assumption was the foundation for

the statutory provision permitting the liability, represented

by reserves allocated to due and deferred premiums, to be

taken into account. See H. Rept. No. 34, supra; S. Rept.

No. 291, supra; H. Rept. No. 520, 86th Cong., Ist Sess.

(1959): but see Franklin Life Insurance Company v.

United States, supra, 399 F. 2d at 761. Only if we were

te adopt an osmotic view of legislative intent could we

say that the assumption in question was the foundation for

legislative action and, even in such a circumstance, we

would have to extend the process of osmosis from a deter-

mination of the composition of life insurance reserves to

a determination of the meaning of the word “‘assets.” This

we are not prepared to do.

Section 818 (a) specifically provides:

SEC. 818. ACCOUNTING PROVISIONS.

(a) Method of Accounting.—All computations en-

tering into the determination of the taxes imposed by

this part shall be made —

(1) under an accrual method of accounting.

(2) tothe extent permitted under regulations

prescribed by the Secretary or his delegate, under

a combination of an accrual method of account-

et tee

ing with any other method permitted by this

chapter (other than the cash receipts and dis-

bursements method) .

Except as provided 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 Association of In-

surance Commissioners.

It seems to us that, by virtue of this provision, Congress

clearly specified that, except to the extent otherwise pro-

vided, the accrual method of accounting was to control;

indeed, it emphasized its mandate in this regard by limiting

the broad delegation of power to prescribe regulations to

‘a combination of an accrual method of accounting with

any other method permitted by this chapter (other than the

cash receipts and disbursements method) .”” (Emphasis add-

ed.) Neither party herein disputes the proposition that,

since petitioner had no legal right to collect due and de-

ferred premiums, they would not normally be includable

under an accrual method of accounting. Indeed, were it

not for the specific provisions in section 805, permitting life

insurance reserves to be taken into account, the portion

of those reserves attributable to the liability, which would

have come into existence if and when the due and deferred

premiums had been paid, would also not be recognized

under the accrual method of accounting.

In view of the foregoing, we are of the opinion that the

fact that Congress injected a limited modification of the

normal rules of accrual accounting with respect to life in-

surance reserves does not justify an expansive interpreta-

tion of the word “assets” in section 805 (b) (4). To hold

otherwise would in effect result in the creation for tax

purposes of an otherwise nonexistent asset. In an analogous

situation, we have only recently reaffirmed our refusal to

permit respondent to utilize section 482 to allocate non-

existent income. Huber Homes, Inc., 55 T.C. —— (Jan. 6,

1971). Nor are we impressed with respondent's argument

that adoption of his position is necessary to prevent distor-

tion. In point of fact, whenever amounts are added to both

a numerator and denominator, the fraction is distorted from

what it would have been without the additions unless

the amounts so added are in the same proportion as the

other amounts utilized in determining the fraction. The

siren song of symmetry which underlies respondent's argu-

ment regarding distortion is beside the point. Symmetry

between income and deductions is not a necessary touch-

stone for determining the incidence of Federal income tax-

ation, even where such symmetry is consistent with sound

accounting practice. Cf. Schlude v. Commissioner, 372

U.S. 128 (1963); American Automobile Assn. v. United

States, 367 U.S. 687, 692 (1961).

Perhaps there would be less distortion under respon-

dent’s method. Cf. our supplemental opinion in Western

National Life Insurance Company of Texas, 51 T.C. 824

at 826-827 (1969). But this may not necessarily be so and,

in any event, we are not disposed to create an accruable

asset simply because the statute specifically permits an

otherwise non-accruable liability to be taken into account.

We so conclude, not because we consider the NAIC treat-

ment binding upon us or respondent, but because, given

the clear indication that the normal rules of accrual ac-

counting should be applied to the taxation of life insurance

companies, except as modified by statute, and the fact that

the Life Insurance Company Income Tax Act of 1959 rep-

resents a carefully drawn, detailed framework of taxation in

an unusually complicated area, we think that the word

“assets” — a word of ordinary usage — should be given its

accepted meaning. Cf. Commissioner v. Brown, 380 U.S.

563 (1965): Hanover Bank v. Commissioner, 369 U-‘S.

WEARER EE REINS ES OTS Soae end EF wae

672 (1962); Unwernsty Hill Foundation, 51 T.C. 548

(1969). on appeal (C.A. 9, July 14, 1969). In so con-

cluding, we recognize that the three Circuit Courts of

Appeals have reached a contrary decision (Franklin Life

Insurance Company v. United States, supra; Jefferson

Standard Life Insurance Co. v. United States, supra; West-

ern National Life Insurance Company of Texas v. Com-

missioner, supra), but, after careful consideration, we re-

spectiully decline to adopt their point of view. We also

recogni.e that the logic of our rationale 1s more consistent

with our original decision in Western National Life In-

surance Co. of Texas, 50 T.C. 285 (1968). However, in

view of the fact that petitioner herein has conceded that

due and deferred premiums should be included in “assets”

to the extent of the net valuation premiums, ic., with only

the amount represented by loading excluded, we need now

do no more than adhere to our supplemental decision in

that case (51 T.C. 824) that the loading portion of due

and deferred premiums should be excluded from “assets”

as that term is used in section 805 (b) (4) and we expressly

leave open the question of reconsidering a return to our

original position in that case. Moreover, in view of our

rationale, we need not specifically address ourselves to the

further argument made by petitioner that due and deferred

premiums are assets, at least to the extent represented by

loading, “used by it in carrying on an insurance trade

or business” and/or have a zero basis so that they would,

$ The three circuits which have passed on this issue are the Seventh,

Fourth, and Fifth. Any appeal in the instant case would normally lie

to the Court of Appeals for the Sixth Circuit (section 7482), thus makin

our recent decision in Jack E. Golven, 54 TC. 742 (1970), on

(CA. 10, May 4, 1970), inapplicable. We are not convinced that thea

cases are distinguishable on the ground urged by petitioner, namely.

that it used a system of determining net net valuation premiums diferent

from that which the Courts of Appeals assumed was being used by the

taxpayers involved therein.

— —

in any event, not be recognized as “assets” within the mean-

ing of section 805 (b) (4) .

The second issue involved herein is whether the gross

amount of due and deferred premiums should be included

in “gross premiums” within the meaning of section 809

of the so-called Phase II tax. Starting from the premise

accepted by the partics that section 809(d) specifically

permits a deduction, in determining gain or loss from op-

crations, for the net increase in life imsurance reserves,

respondent advances the same syllogism to support his po-

sition that the entire amount of due and deferred prem

ums is encompassed by the phrase “gross premiums.” This

Court has not yet ruled on this issue (see our supplemental

inion in Western National Lije Insurance Co. of Texas,

supra, 51 T.C. at 830) but one Circuit Court of Appeals

has accepted respondent's position (Jefferson Standard Life

Insurance Co. v. United States, supra) and another has in-

dicated its agreement with this view although the particu-

lar issue was not before it and the taxpayer therein had

conceded such an interpretation of the statute (sce Frank-

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

F. 2d at 760). Our reasoning with respect to the includa-

bility of due and deferred premiums in “assets” for pur-

poses of section 805 (b) (4) applics with equal force to

the interpretation of section 809 (c) (1). By the same

token, we note that we need not now decide whether that

reasoning should be applied. in its full sweep, to the in-

? (c) Gross Amount. — For purposes of subsections (b)(1) and (2).

the following items shall be taken into account:

(1) Premiums. — The gross amount of and other

(including advance premiums, fees, assess-

ments, and consideration in respect of assuming liabilities under

contracts not issued by the taxpayer) on insurance and annuity

supplementary

terpretation of “gross premiums”; petitioner has conceded

that, to the extent that the deduction with respect to life

imsurance reserves represents the net valuation portion of

due and deferred premiums, an equal amount should be

included in “gross premiums” for the purpose of deter-

mining gain from operations subject to the so-called Phase

Il tax. Accordingly, we now do no more than hold that

the loading portion of due and deferred premiums should

be excluded from “gross premiums” as that term is used

in section 809 (c) (1).

Reviewed by the Court.

Decision will be entered under Rule 50.

SIMPSON, j., dissenting: In my judgment, | would

reach a different conclusion than the majority in this case,

although I do not disagree with it in principle.

In his second opinion in the Western National case (51

T.C. 824 (1969)), Judge Drennen decided to construe

the term “assets,” as used in section 805, in the light of

the industry practice; in doing so, he recognized that he

was not adopting the common usage of that term and that

he was not applying the traditional concepts of accrual

accounting. The life insurance business involves many

concepts and practices which are peculiar to that business,

and the income which should be subject to taxation can-

not be determined without taking into consideration those

peculiar concepts and practices. It is, morcover, a business

which is generally subject to regulation by the States, and

through the National Association of Insurance Commis-

sioners, uniform standards are established. Generally speak-

ing, Congress has laid down the rules for determining

the income of life insurance companies which is subject

to Federal taxation, but in many respects, such income

must be determined by reliance upon the industry prac-

tices established in accordance with the regulations of the

NAIC. In deciding to adopt the industry's concept of

what constitutes an asset for purposes of section 805, I be-

live Judge Drennen acted wisely.

Nonetheless, I now believe that the time has come for

us to abandon our own view of how the statute should be

interpreted and to accept the views of the three Courts of

Appeals. Western National Life Insurance Company of

Texas v. Commissioner, 432 F. 2d 298 (C.A. 5, 1970),

revg. and remg. 50 TC. 285 (1968), as modified by 51

T.C. 824 (1969): Jefferson Standard Life Insurance Co.

y. United States, 408 F. 2d 842, 844 (C.A. 4, 1969) ; Frank-

lin Life Insurance Company v. United States, 399 F. 2d

757 (C.A. 7, 1968). Generally, it is our duty to decide

a question in accordance with our best judgment. It

would be irresponsible, in my opinion, for us to abrogate

our own power to decide an issue and to accept the

decision of another court merely because one other court

had passed upon the question. Yet, we are not wholly free

to expound the law as we may sce it. Of course, we are

constrained to give effect to our own precedents and to

follow the decision of a circuit when the law has been

established by decision of the Court of Appeals for that

circuit. Jack E. Golsen, 54 TC. 7? (1970), on appeal

(CA. 10, May 4, 1970). Even when the Court of Ap-

peals has not spoken for the circuit in which the case

arises, we do give serious consideration to the views of

other circuits. At times, we may decide to continue to

adhere to our view even though a Court of Appeals im

a different circuit takes a different position. However. if

many of the circuit courts adopt a position contrary to

ours, there must come a time when we accede to their

views. however much we may be convinced of the correct-

ness of our view.

ase oe

OT CP EE PO EE OE,

There is no magic in the number of three — there is no

number of contrary decisions by the circuit courts which, in

my view, should automatically cause us to accede to their

views. When to abandon our view must depend upon the

issue in controversy and other related circumstances. In

this case, the issue is complex, and although I believe Judge

Drennen’s opinion was sound, I must recognize that it is

difficult to make an overpowering argument for it. Under

such circumstances, I believe that we should reconsider

our position and accept the views of the circuits.

No one can predict with certainty how the Sixth Circuit

will decide the issue, but we can be sure that they will

give great weight to the views of the other Circuit Courts

of Appeals. Western National Life Insurance Company of

Texas v. Commissioner, supra; Goodenow v. Commissioner,

238 F. 2d 20 (C.A. 8, 1956). In view of the nature

of the issue in controversy, it is difficult to demonstrate that

those circuits were clearly erroneous, and it is difficult

to give cogent reasons why the Sixth Circuit should not

follow them. It is most unlikely that the Sixth Circuit

will not adopt the same position as the other circuits.

For us to persist in our view under such circumstances

forces a party to further litigation, when it should not be

necessary. In this case the burden will be placed upon the

Government, but in tomorrow's case, it might fall on the

the taxpayer.

QUEALY, J., agrees with this dissent.

51y

UNITED STATES TAX COURT

Docket No. 4223-69

‘THE WESTERN AND SOUTHERN

LIFE INSURANCE COMPANY.

Petitioner,

COMMISSIONER OF INTERNAL REVENUE,

Respondent.

DECISION

Pursuant to the opinion of the Court filed March 23,

1971, and the agreed computation of the tax liabilities filed

by the parties, and incorporating herein the facts recited

in the computation as the findings of the Court, it is

ORDERED and DECIDED: That there are deficien-

cies in income taxes due from the petitioner for the taxable

years 1958, 1959, 1960, 1961, and 1962, in the amounts

of $49.789.29, $136,028.86, $112,464.94, $154,489.58 and

$513.776.04, respectively.

(Signed) THEODORE TANNENWALD, JR.

Judge.

Entered: April 15, 1971.

It is hereby stipulated that the foregoing decision is in

accordance with the opinion of the Court and the agreed

computation of the parties, and that the Court may enter

this decision, without prejudice to the right of either

party to contest the correctness of the decision entered

herein, pursuant to the statute in such cases made and

provided.

(Signed) K. MARTIN WORTHY,

Chief Counsel,

Internal Revenue Service.

/s/ ALAN R. VOGELER

Counsel for Petitioner.

APPENDIX C

$802. Tax imposed

(b) Life insurance company taxable income defined.—

For purposes of this part, the term “life insurance 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 tax-

able investment income, an amount equal to 50 per-

cent of such excess, plus

(3) the amount subtracted from the policyholders

surplus account for the taxable year, as determined

under section 815.

§804 Taxable investment income

(a) In general.—

(1) Exclusion of policyholders’ share of investment

yield.—The policyholders’ share of each and every item

of investment yield (including tax-exempt interest, par-

tially tax-exempt interest, and dividends received) of

any life insurance company shall not be included in

taxable investment income. For purposes of the pre-

ceding sentence, the policyholders’ share of any item

shall be that percentage obtained by dividing the poli-

cy and other contract liability requirements by the in-

vestment yield; except that if the policy and other con-

tract liability requirements exceed the investment

yield. then the policyholders’ share of any item shall

be 100 percent.

(2) Taxable investment income defined.—For pur-

poses of this part, the taxable investment income for

any taxable year shall be an amount (not less than

zero) equal to the amount (if any) by which the net

long-term capital gain exceeds the net short-term capi-

tal loss plus the sum of the life insurance company’s

share of each and every item of investment yield (in-

cluding tax-exempt interest, partially tax-exempt in-

terest, 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

lterest provided by section 242 (as modified

by paragraph (3)), computed with respect to

the life insurance company’s share of such in-

terest, and

(ili) the deductions for dividends received

provided by sections 243, 244, and 245 (as

modified by paragraph (5)) computed with

respect to the life insurance company’s share

of the dividends received; and

(B) the small business deduction provided by

paragraph (4).

For purposes of the preceding sentence, the life in-

surance company’s share of any item shall be that per-

centage which, when added to the percentage obtained

under the second sentence of paragraph (1), equals 100

percent.

(3) Partially tax-exempt interest.—For purposes of

this part, the deduction allowed by section 242 shall

be an amount which bears the same ratio to the amount

determined under such section without regard to this

paragraph as (A) the normal tax rate for the taxable

year prescribed by section 11, bears to (B) the sum of

the normal tax rate and the surtax rate for the taxable

year prescribed by section 11.

(4) Small business deduction.—For purposes of this

part, the small business deduction is an amount equal

to 10 percent of the investment yield for the taxable

year. The deduction under this paragraph shall not

exceed $25,000.

(5) Application of section 246(b).—In applying sec-

tion 246 (b) (relating to limitation on aggregate

amount of deductions for dividends received) for pur-

poses of this subsection, the limit on the aggregate

amount of the deductions allowed by sections 243(a)

(1), 244(a), and 245 shall be 85 percent of the taxable

investment income computed without regard to the de-

ductions allowed by such sections.

(6) Exception.—If it is established in any case that

the application of the definition of taxable investment

income contained in paragraph (2) results in the im-

position of tax on—

(A) any interest which under section 103 is ex-

cluded from gross income,

(B) any amount of interest which under section

242 (as modified by paragraph (3)) is allowable

as a deduction, or

under sections 243, 244, and 245 (as modified by

paragraph (5)) is allowable as a deduction,

adjustment shall be made to the extent necessary to

prevent such imposition.

(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,

(B) the entering into of any lease, mortgage, or

other instrument or agreement from which the

life insurance company derives interest, rents, or

royalties, and

ment or agreement desribed 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 ex-

ceeds the net long-term capital loss.

(3) Trade or business income.—The gross income

from any trade or business (other than an insurance

business) carried on by the life insurance company, or

by a partnership of which the life insurance company

is a partner. In computing gross income under this

paragraph, there shall be excluded any item described

in paragraph (1).

Except as provided in paragraph (2), in computing gross

investment income under this subsection, there shall be ex-

cluded 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.

the term “investment yield” means the gross investment

income less the following deductions—

(1) Investment expenses.—Investment expenses for

the taxable year. If any general expenses are in part

assigned to or included in the investment expenses, the

total deduction under this paragraph shall not exceed

the sum of—

(A) one-fourth of one percent of the mean of

the assets (as defined in section 805(b) (4)) held at

the beginning and end of the taxable year,

(B) the amount of the mortgage service fees

for the taxable year, plus

(i) one-fourth of the amount by which the

investment yield (computed without any de-

duction for investment 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 be-

ginning and end of the taxable 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

DERE YI cS sia pat aR GIR IEE YE PEI ES ERT PEE IE EER a |

FG Nig PRR LIC BLL Cent IRN AIT EEE IRB TRATES BE ODT NA SERA LORE LOE wens Toe ae

PEFR ATU TT Re

allowed under this paragraph for any amount paid

out for new buildings, or for permanent improvements

or betterments made to increase the value of any

property.

(3) Depreciation.—The deduction allowed by sec-

tion 167. The deduction under this paragraph and

paragraph (2) on account of any real estate owned

and occupied for insurance purposes in whole or in

part by a life insurance company shall be limited to

an amount which bears the same ratio to such deduc-

tion (computed without regard to this sentence) as

the rental value of the space not so occupied 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 deductions

allowed by this subtitle (without regard to this part)

which are attributable to any trade or business (other

than an insurance business) carried on by the life in-

surance company, or by a partnership of which the

life insurance company is a partner; except that in com-

puting 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 business (as defined in

section 1231(b)), and

(iii) from the compulsory or involuntary

conversion (as a result of destruction, in

whole or in part, theft or seizure, or an exer-

cise of the power of requisition or condem-

nation or the threat or imminence thereof)

of property used in the trade or business (as

so defined).

(B) Any item, to the extent attributable to the

carrying on of the insurance business, shall not

be taken into account.

vided in section 172, and the special deductions

for corporations provided in part VIII of sub-

chapter B, shall not be allowed.

$805. Policy and other contract liability requirements

(a) In general—For purposes of this part, the term

“policy and other contract liability requirements” means.

for any taxable year, the sum of—

(1) the adjusted life insurance reserves, multiplied

by the adjusted reserves rate,

(2) the mean of the pension plan reserves at the be-

ginning and end of the taxable year, multipled 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 be-

ginning and end of the taxable year.

(3) Average earnings rate.—

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

average carnings rate for any taxable ycar is the

average of the current carnings rates for such tax-

able year and for cach 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 insurance company).

(B) Special rules—For purposes of subpara-

graph (A)—

(i) the current carnings rate for any tax-

able year beginning before January 1, 1958,

shall be determined as if this part (as in ef-

fect for 1958) and section 381(c) (22) applied

to such taxable year, and

(ii) the current carnings rate for any tax-

able 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 “as

sets” means all assets of the company (including non-

admitted assets), other than real and personal property

(excluding money) used by it in carrying on an in-

surance trade or business. For purposes of this para-

gtaph, 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

(determined without regard to fair market valuc

on December 31, 1958), of such asset for pur-

poses of determining gain on sale or other dispo-

sition.

(1) Adjusted life insurance reserves defined. —For

purposes of this part, the term “adjusted life insurance

reserves” mcans—

(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—

(i) increased by that percentage which is

10 times the average rate of interest assumed

by the taxpayer in calculating such reserves,

and

(ii) reduced by that percentage which is 10

times the adjusted reserves rate.

(2) Average interest rate assumed.—For purposes of

this part, the average rate of interest assumed in cal-

culating reserves shall be computed—

(A) by multiplying cach assumed rate of inter-

est 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 as

certained under subparagraph (A), by (ii) the

mean of the total of such reserves at the beginning

and end of the taxable year.

(d) Pension plan reserves.—

(1) Pension plan reserves defined. —For purposes of

this part. the term “pension plan reserves” means that

portion of the life msurance reserves which is allocable

to contracts—

(A) purchased under contracts entered inte

with trusts which (as of the time the contracts

were entered into) were deemed to be (i) truss

described im section 401(a) and exempt from tax

under section 501(a). or (ii) trusts exempt from

tax under section 165 of the Internal Revenue

Code of 1939 of the corresponding provisions of

prior revenue laws:

(B) purchased under contracts entered into un-

der plans which as of the time the contracts were

entered into) were deemed to be plans described

in section 4a). or plans meeting the require-

ments of section 165 a) (3), (4). (5). and (6) of the

Internal Revenue Code of 1939:

ance company under a plan which. for the taxable

year, mects the requirements of section 401 (a) (5).

(4). (5). (6). (7). and (8): or

(D) purchased to provide retirement annuities

for its employees by an organization which (as of

the time the contracts were purchased) was an or-

ganization described in section 501(c) (3) which

was exempt from tax under section 501(a) or was

an organization exempt from tax under section

101(6) of the Internal Revenue Code of 1939 or

the corresponding provisions of prior revenue

laws. or purchased to provide retirement annut-

ties for employees described in section 403(b) (1)

(A) (ii) by an employer which is a State, a political

subdivision of a State, or an agency or instrumen-

tality of any one or more of the foregoing.

(2) Special transitional rule—For purposes of this

part, the amount taken into account as pension plan

reserves shall be—

(A) im the case of a taxable year beginning af-

ter December $1, 1957. and before January |.

1959, zero.

(B) in the case of a taxable year beginning af-

ter December 31, 1958, and before January |}.

1960, 33 1/3 percent of the amount thereof (de-

termined without regard to this paragraph):

ter December 31. 1959, and before January |.

1961, 66 2/3 percent of the amount thereof (de-

termined without regard to this paragraph): and

(D) in the case of a taxable year beginning after

December 31. 1960, 100 percent of the amount

thereof.

(e) Interest paid.—For purposes of this part, the interest

paid for any taxable year is the sum of—

(1) Interest on indebtedness.—All interest for the

taxable year on indebtedness, except on indebtedness

incurred or continued to purchase or carry obligations

"wee ow - Me ye em F

the interest on which is wholly exempt from taxation

under this chapter.

(2) Amounts in the nature of interest.—All amounts

in the nature of interest, whether or not guaranteed,

for the taxable year on insurance or annuity con-

tracts (including contracts supplementary thereto)

which do not involve, at the time of accrual, life,

health, or accident contingencies.

(3) Discount on prepaid premiums.—All amounts

accrued for the taxable year for discounts in the nature

of interest, whether or not guaranteed, on premiums

or other consideration paid in advance on insurance or

annuity contracts.

(4) Interest on certain special contingency reserves.—

Interest for the taxable year on special contingency

reserves under contracts of group term life insurance

or group health and accident insurance which are ¢s-

tablished and maintained for the provision of insur-

ance on retired lives, for premium stabilization, or for

a combination thereof.

$809. 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, par-

tially tax-exempt interest, and dividends received) of

any life insurance company set aside for policyhold-

ers shall not be included in gain or loss from opera-

tions. For purposes of the preceding sentence, the

share of any item set aside for policyholders shall be

that percentage obtained by dividing the required in-

PELL LAA LEED ALLE AOL DBD we oe = hee nr sc cnmerpimng a yanmar cites

terest by the investment yield; except that if the re-

quired interest exceeds the investment 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 taxable year is the sum

of the products obtained by multiplying—

(A) each rate of interest required, or assumed

by the taxpayer, in calculating the reserves de-

scribed in section 810(c), by

(B) the means of the amount of such reserves

computed at that rate at the beginning and end

of the taxable year.

(b) Gain and loss from operations.—

(1) Gain from operations defined.—For purposes of

this part, the term “gain from operations” means the

amount by which the sum of the following exceeds

the deductions provided by subsection (d):

(A) the life insurance company’s share of each

and every item of investment yield (including

tax-exempt interest, partially tax-exempt interest,

and dividends received);

(B) the amount (if any) by which the net long-

term capital gain exceeds the net short-term capi-

tal loss; and

tion (c).

(2) Loss from operations defined.—For purposes of

this part. the term “loss from operations” means the

eee eo ewer ew OL

amount by which the sum of the deductions provided

by subsection (d) exceeds the sum of—

(A) the life insurance company's share of each

and every item of investment yield (including

tax-exempt interest, partially tax-exempt interest,

and dividends received);

(B) the amount (if any) by which the net long-

term capital gain exceeds the net short-term capi-

tal loss; and

tion (c).

(3) Life insurance company’s share.—For purposes

of this subpart, the life insurance company’s share of

any item shall be that percentage which, when added

to the percentage obtained under the second sentence

of subsection (a) (1). equals 100 percent.

(4) Exception.—If it is established in any case that

the application of the definition of gain from opera-

tions contained in paragraph (1) results in the impo-

sition of tax on—

(A) any interest which under section 103 is ex-

cluded from gross income,

(B) any amount of interest which under section

242 (as modified by section 804(a) (3)) is allow-

able as a deduction, or

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.

and (2). the following items shall be taken into account:

(1) Premiums.—The gross amount of premiums and

other consideration (including advance premiums, de-

posits, fees, assessments, and consideration in respect

of assuming liabilities under contracts not issued by

the taxpayer) on insurance and annuity contracts (in-

cluding contracts supplementary thereto); less return

premiums, and premiums and other consideration aris-

ing out of reinsurance ceded. Except in the case of

amounts of premiums or other consideration returned

to another life insurance company in respect of rein-

surance ceded, amounts returned where the amount is

not fixed in the contract but depends on the experi-

ence of the company or the discretion of the manage-

ment 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 para-

graph.

(3) Other amounts.—All amounts, not included in

computing investment yield and not includible under

paragraph (1) or (2), which under this subtitle are in-

cludible 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 following deductions:

(1) Death benefits, etc.—All claims and benefits ac-

crued, and all losses incurred (whether or not ascer-

tained), during the taxable year on insurance and an-

nuity contracts (including contracts supplementary

thereto).

(2) Increases in certain reserves.—The net increase

in reserves which is required by section 810 to be

taken into account for purposes of this paragraph.

(3) Dividends to policyholders.—The deduction for

dividends to policyholders (determined under section

811(b)).

(4) Operations loss deduction.—The operations loss.

deduction (determined under section 812).

(5) Certain nonparticipating contracts.—An amount

equal to 10 percent of the increase for the taxable

year in the reserves for nonparticipating contracts or

(if greater) an amount equal to 3 percent of the premi-

ums for the taxable year (excluding that portion of

the premiums which is allocable to annuity features)

attributable to nonparticipating contracts (other than

group contracts) which are issued or renewed for per-

iods of 5 years or more. For purposes of this para-

graph, the term “reserves for nonparticipating con-

tracts” means such part of the life insurance reserves

(excluding that portion of the reserves which is alloca-

ble to annuity features) as relates to nonparticipating

contracts (other than group contracts). For purposes

of this paragraph and paragraph (6), the term “premi-

ums” means the net amount of the premiums and other

consideration taken into account under subsection (c)

(1).

(6) Certain accident and health insurance and group

life insurance.—An amount equal to 2 percent of the

premiums for the taxable year attributable to accident

and health insurance contracts (other than those to

which paragraph (5) applies) and group life insurance

contracts. The deduction under this paragraph for the

taxable year and all preceding taxable years shall not

exceed an amount equal to 50 percent of the premiums

for the taxable year attributable to such contracts.

(7) Assumption by another person of liabilities un-

der insurance, etc., contracts.—The consideration

(other than consideration arising out of reinsurance

ceded) in respect of the assumption by another person

of liabilities under insurance and annuity contracts

(including contracts supplementary thereto).

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

(A) Life insurance company’s share.—Each of

the following items:

(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 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 subparagraph (B)) computed

with respect to the life insurance company’s

share of the dividends received.

(B) Application of section 246(b).—In applying

section 246(b) (relating to limitation on aggregate

SORE mm os

OR one a on ees

a sa —— - —_e stalin a

amount o! deductions for dividends received) for

purposes of subparagraph (A) (iii), the limit on

the aggregate amount of the deductions allowed

by sections 243(a) (1), 244(a), 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 provided

by section 812, and

(iii) the deductions allowed by sections

243(a)(1), 244(a), 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 deduction under section

804(c) (1) in computing investment yield, and the

amount (if any) by which the sum of the deductions

allowable under section 804(c) exceeds the gross in-

vestment income.

(10) Small business deduction.—A small business

deduction in an amount equal to the amount deter-

mined under section 804(a) (4).

(11) Certain mutualization distributions.—The

amount of distributions to shareholders made in 1958,

1959, 1960, 1961 and 1962 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 reductions allowed

under this subtitle for purposes of computing taxable

income to the extent not allowed as deductions in

computing investment yield.

Except as provided in paragraph (3), no amount shall be

allowed as a deduction under this subsection in respect of

dividends to policyholders.

(e) Modifications.—The modifications referred to in sub-

section (d) (12) are as follows:

(1) Interest.—In applying section 163 (relating to

deduction for interest), no deduction shall be allowed

for interest in respect of items described in section

810(c).

(2) Bad debts.—Section 166(c) (relating to reserve

for bad debts) shall not apply.

(3) Charitable, etc., contributions and gifts.—In

applying section 170—

(A) the limit on the total deductions under

such section provided by section 170(b) (2) shall

be 5 percent of the gain from operations com-

puted without regard to —

(i) the deduction provided by section 170,

(ii) the deductions provided by paragraphs

(3), (5), (6), and (8) of subsection (d), and

(iii) any operations loss carryback to the

taxable year under section 812; and

(B) under regulations prescribed by the Sec-

retary or his delegate, a rule similar to the rule

contained in section 170(d)(2) (B) shall be ap-

plied.

% Set.

BRS Spree nts sr arenes Sg PLINER GEREN

OLE MONI ALIS ATL ITAL TT EI LOE NP ET, AMG eS re

(4) Amortizable bond premium.—Section 171 shall

not apply.

(5) Net operating loss deduction.—Except as pro-

vided by section 844, the deduction for net operating

losses provided in section 172 shall not be allowed.

(6) Partially tax-exempt interest.—The deduction

for partially tax-exempt interest provided by section

242 shall not be allowed.

(7) Dividends received.—The deductions for divi-

dends received provided by sections 243, 244, and 245

shall not be allowed.

(f) Limitation on certain deductions.—

(1) In general.—The amount of the deductions un-

der paragraphs (3), (5), and (6) of subsection (d) shall

not exceed $250,000 plus the amount (if any) by

which—

year, computed without regard to such deduc-

(A) the gain from operations for the taxable

tions, exceeds :

(B) the taxable investment income for the tax-

able year.

(2) Application of limitation.—The limitation pro-

vided by paragraph (1) shall apply first to the amount

of the deduction under subsection (d) (3), then to the

amount of the deduction under subsection (d) (6), and

finally to the amount of the deduction under subsec-

tion (d) (5).

(g) Limitations on deduction for certain mutualization

distributions.—

(1) Deduction not to reduce taxable investment in-

come.—The amount of the deduction under subsection

(d) (11) shall not exceed the amount (if any) by which—

(A) the gain from operations for the taxable

year, computed without regard to such deduction

(but after the application of subsection (f)), ex-

ceeds

(B) the taxable investment income for the tax-

able year.

(2) Deduction not to reduce tax below 1957 law.—

‘The deduction under subsection (d) (11) for the tax-

able year shall be allowed only to the extent that such

deduction (after the application of all other deductions

provided by subsection (d)) does not reduce the

amount of the tax imposed by section 802 (a) (1) for

such taxable year below the amount of tax which

would have been imposed by section 802(a) as in ef-

fect for 1957, if this part, as in effect for 1957, applied

for such taxable year.

(3) Application of section 815.—That portion of any

distribution with respect to which a deduction is al-

lowed under subsection (d) (11) shall not be treated

as a distribution to shareholders for purposes of section

815; except that in the case of any distribution made

in 1959, 1960, 1961, or 1962, such portion shall be

treated as a distribution with respect to which a re-

duction is required under section 815(e) (2) (B).

§818. Accounting provisions

(a) Method of accounting.—All computations entering

into the determination of the taxes imposed by this part

shall be made—

RAT a OIL I NA A LTR” OD ta x AIBA A ONE ee RO ~ ae

(1) under an accrual method of accounting, or

(2) to the extent permitted under regulations pre-

scribed by the Secretary or his delegate, under a com-

bination 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 preceding sentence, all such com-

putations shall be made in a manner consistent with the

manner required for purposes of the annual statement ap

proved by the National Association of Insurance Commis.

sioners.

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.