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

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition for Writ of Certiorari
- **Published:** January 1, 1972
- **Citation:** 409 U.S. 1063

## Text

RES nmin 1
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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.
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(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.

2

9
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

4

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

5

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

8

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

9

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

10

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

11

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

12

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

13

APPENDIX A

No. 71-1605

UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT

WESTERN AND SOUTHERN LIFE INSURANCE
COMPANY,
Petitioner-A ppellee,
v.

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

14

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

15

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

17

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,
or

(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

19

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

20

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

99

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

24

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

25
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

26
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

27

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

28

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

29

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

30

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

33

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

36

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
(c) (1). or deductible from such income under section
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.

37

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

38

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.

39

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

40

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.

41

(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

42

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

43

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.
or

(2) tothe extent permitted under regulations
prescribed by the Secretary or his delegate, under
a combination of an accrual method of account-

et tee

44

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-

a

45

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.

— —

47

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
(c) (1)? in determining gain from operations for purposes
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

is

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-

49

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,

50

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,
v.
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

52

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.

53
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

55

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

(C) any amount of dividends received which
under sections 243, 244, and 245 (as modified by
paragraph (5)) is allowable as a deduction,

56

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

(C) the alteration or termination of any instru-
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.

57

.

(c) Investment yield defined.—For purposes of this part,
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

(C) whichever of the following is the greater:

(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

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58

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-

59

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.

(C) The deduction for net operating losses pro-
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.

(c) Adjusted life insurance reserves.—

(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:

(C) provided for employees of the life msur-
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):

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

64

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-

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-

65

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

(C) the sum of the items referred to in subsec-
tion (c).

(2) Loss from operations defined.—For purposes of
this part. the term “loss from operations” means the

eee eo ewer ew OL

66

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

(C) the sum of the items referred to in subsec-
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

(C) any amount of dividends received which
under sections 243, 244, and 245 (as modified by
subsection (d) (8) (B)) is allowable as a deduction,

adjustment shall be made to the extent necessary to
prevent such imposition.

(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 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-

68

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

69

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

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70

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

_

71

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.

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

72

(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.—

73

(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

74
(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.

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385606_1511%3A1. Public record. Not legal advice.