Pilot Life Ins. Co. v. Commissioner , 9 B.T.A. 980 ( 1927 )

PILOT LIFE INSURANCE CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Pilot Life Ins. Co. v. Commissioner

Docket No. 10297.

United States Board of Tax Appeals

9 B.T.A. 980; 1927 BTA LEXIS 2472;

December 29, 1927, Promulgated

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The petitioner is not entitled to the deduction claimed on account of net additions to reserve funds required by law.

John E. Walker, Esq., and J. Gilmer Korner, Jr., Esq., for the petitioner.

M. N. Fisher, Esq., for the respondent.

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TRAMMELL

This is a proceeding for the redetermination of a deficiency in uncome and profits taxes for 1919 in the amount of $26,369.63. The deficiency arises on account of the action of the respondent in disallowing as a deduction an amount claimed by the petitioner to be a net addition to a reserve fund required by law.

FINDINGS OF FACT.

The petitioner is a North Carolina stock corporation with its principal office at Greensboro. It was engaged in the business of insuring lives and did not operate as a mutual company. It carried a reserve for "deferred dividend policies." During the year ended December 31, 1918, the payment of death claims under policy contracts resulted in the petitioner's books of account showing it to be technically insolvent by $98,815.56. The fact that the company would be technically insolvent, considering all of its reserves as liabilities, was recognized during the month of December, 1918, and the matter was taken up with the Insurance Commissioner for the State of North Carolina. The exact amount of the technical insolvency was not known until some time in the taxable year 1919. The situation presented to the Insurance Commissioner was the fact that a preliminary calculation of the liabilities of the company had been made and that this disclosed that the company did not have assets to meet the liabilities including the dividend funds. The question arose in connection with the making of the report to the Insurance Commissioner. It was desired that this report should not show a condition of insolvency in order to permit the company to continue its business. The Insurance Commissioner verbally authorized the company to release sufficient amounts of the reserve indicated in item 37 of the report to him or, in other words, what would normally appear in item 37 of the regular report form to the extent of the book deficit whenever that deficit was ascertained.

During the month of January, 1919, the exact figures were obtainable and it was then ascertained that it would require $98,815.56 to be transferred from the reserve for deferred dividends or that that amount be released from that reserve for the purposes of the report to theCommissioner in order that the report might show the assets and liabilities to be equal. No book entries of any kind were made with respect to the release or transfer of any amount from the reserve fund. The only entries which were made with respect thereto were contained in the report to the Insurance Commissioner. This report was filed in the month of February, 1919. It showed in item 37 under the heading "Amounts set apart, apportioned, provisionally ascertained, calculated, declared or held awaiting apportionment upon deferred dividend policies, not included in item 36," $59,391.98. This was the amount remaining in its reserve fund as shown by the report after the amount of $98,815.56 had been deducted therefrom in order to balance the liabilities on account of the unusual number of death claims caused by an epidemic of influenza.

In its income-tax return for 1919 the petitioner, in addition to the amount which would ordinarily have constituted an addition to the reserve fund for deferred dividend policies, that is, the amount of $22,399.19, claimed a deduction in the amount of $98,815.56, which it set aside in order to restore that amount which it had, by the permission of the Insurance Commissioner, taken from its reserve for deferred dividend policies in the previous year in the report to that officer.

OPINION.

TRAMMELL: No question is presented in this proceeding as to whether the reserve fund for deferred dividend policies was a reserve fund required by law, it being conceded in the respondent's answer that it was such a reserve fund.

The petitioner contends that the amount of $98,815.56 was released from the reserve fund required by law in 1918, and under the decision of the Supreme Court in the case of , the amount became taxable income in that year. It is then argued that since the amount was released from the reserve fund during 1918, when the amount was replaced in the reserve fund this constituted an addition to the reserve fund required by law.

We do not agree with the petitioner that the amount was released and became free assets in accordance with the decision in the case of In that case the court held that if the decrease in the reserves was due to an overestimate of reserves for the preceding year, with a resulting excessive deduction from income for such year, and the excess was released to the general uses of the company and increased its free assets in the succeeding year, then it might be treated as income to the extent of the amount released. The court used the following language:

But such deductions can be restored to income again only where it is clearly shown that subsequent business conditions have released the amount of them to the free beneficial use of the company in a real, and not a mere bookkeeping sense.

There is here no evidence that the reserve computed for 1918 was excessive. On the other hand, there is evidence that the amount of the particular reserve in question was correct. The Insurance Commissioner did not authorize the reduction upon the ground that it was unnecessarily large or excessive in amount or that it was not needed or required by law or the regulations of the Insurance Commissioner then in effect. It is shown that the only purpose of reducing this reserve was for the purposes of the report to the Insurance Commissioner and it was only in that respect, by the verbal permission of the Insurance Commissioner, that it was reduced. We are convinced that the reserve was not released to become free assets in any substantial sense of the word. The transaction merely amounted at most to a transfer from one reserve fund to another for temporary purposes or the temporary use for other purposes than those for which it was set aside, with the understanding and legal obligation that it was to be replaced, and the so-called release was not even a book entry. The only place the release appears of record was in the report to the Insurance Commissioner. Upon the books of the company it would appear that it was not necessary to set aside in 1919 the amount which was taken from the reserve merely for the purposes of the report to the Commissioner in 1918, because upon the books of the company the amount of $98,815.56 remained in the reserve fund and no addition thereto of that amount, it seems, could have been made upon the books or was in fact so made. The deduction on account of the addition to the reserve fund in the amount of $98,815.56 in 1919 was predicated upon the claim that the reserve to that extent had been released in 1918. We do not think it was released in 1918 as contemplated by law. The reserve was not used for the purpose for which it was created or set aside but was still required for that purpose for which it was created or set aside but was still required for that purpose. The fact that the Insurance Commissioner verbally permitted a report to be filed which did not correctly reflect the books or the actual facts respecting the reserve theretofore required does not alter the tax liability.

On the other hand, if it was an actual release of the reserve fund when the report to the Insurance Commissioner for 1918 showed the release of such fund, this report was not completed or made until February, 1919. Since it was released at no other place, it would seem to follow that it was not released until 1919, if at all. Conceding, however, for the purpose of argument, that it was released in accordance with law, then it is only the net additions to the reserve fund, that is, the additions in excess of the reductions, which are permitted to be taken as deductions in determining net income. Both of these transactions having occurred in 1919, the only net addition would be the $22,399.19 which was allowed by the respondent.

In view of the foregoing, it is our opinion that the petitioner is not entitled to the deduction claimed as a net addition to the reserve fund required by law.

Reviewed by the Board.

Judgment will be entered on 15 days' notice, under Rule 50.