T.C. Memo. 2000-134
UNITED STATES TAX COURT
BEST LIFE ASSURANCE COMPANY OF CALIFORNIA, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 11579-96. Filed April 12, 2000.
Held: Accrued unpaid losses on cancelable
accident and health insurance policies are not to be
treated as part of total reserves in the life insurance
company qualifying fraction, and petitioner therefore
qualifies as a “life insurance company” under sec.
816(a), I.R.C. Statements made in United States v.
Occidental Life Ins. Co., 385 F.2d 1 (9th Cir. 1967)
(the Court of Appeals to which an appeal herein would
lie), do not control our holding herein.
Michael R. Schlessinger and Michael A. Clark, for
petitioner.
Milton J. Carter, Jr., Gregory M. Hahn, and Keith G. Medleau,
for respondent.
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MEMORANDUM OPINION
SWIFT, Judge: For 1991 and 1992, respondent determined
deficiencies in petitioner's Federal income taxes of $369,255 and
$242,132, respectively.
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
After settlement of some issues, the issue for decision is
whether petitioner (Best Life), in computing under section 816(a)
the qualifying fraction for life insurance company tax treatment,
should treat accrued unpaid losses on cancelable accident and
health (CA&H) insurance policies as part of its total reserves.
Background
This case was submitted fully stipulated under Rule 122, and
the facts are not in dispute.
During the years in issue, Best Life operated as an
insurance company with its principal place of business located in
Irvine, California. Best Life insured the following types of
insurance risks: Individual ordinary life, cancelable group-term
life, and CA&H.
Insurance companies are required by insurance regulators to
maintain certain reserves to assure payment of future claims.
All 50 States have adopted model regulations and utilize annual
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statement forms (Annual Statements) promulgated by the National
Association of Insurance Commissioners (NAIC) to calculate the
amount and to report minimum reserves that insurance companies
are required to maintain with respect to their outstanding
individual and group health insurance policies. See, e.g., Cal.
Code Regs. tit. 10, secs. 2311-2315 (1999).
Since the 1930's, on December 31 of each year (the valuation
date), life and accident and health (LA&H) insurance companies
have been required under the above NAIC regulations to report on
the Annual Statements the amount of their particular obligations
either as “liabilities” or as “reserves”.
Liabilities, as reflected on Exhibit 11 of the Annual
Statements, correspond to claims for which the insurance
companies are currently liable including estimates of claims that
as of the valuation date have accrued but that have not yet been
reported to the companies.
Reserves, as reflected on Exhibits 8 and 9 of the Annual
Statements, correspond to claims (computed using recognized
mortality and morbidity tables) for which the insurance companies
as of the valuation date are expected to become liable some time
in the future. On the Annual Statements, liabilities correspond
to accrued claims, and reserves correspond to unaccrued claims.
For the years in issue, the following schedule reflects, as
indicated on its Annual Statements, the computation by Best Life
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of its accrued liabilities and of its unaccrued reserves for 1991
and 1992:
Reported on Annual Statements 1991 1992
Accrued liabilities
Exhibit 11, CA&H/Medical $2,666,371 $2,494,121
========== ==========
Unaccrued reserves
Exhibit 8, Ordinary & Group-Term Life 1,669,727 2,089,797
Exhibit 9, CA&H/Disability 419,786 442,261
Total unaccrued reserves 2,089,513 2,532,058
========== ==========
Discussion
Since 1921, Congress has enacted separate rules of taxation
for life insurance companies and nonlife insurance companies.
Compare sections 801 through 818 with sections 831 through 835.
Generally, insurance companies qualify as life insurance
companies and are entitled to the related special tax treatment
if more than 50 percent of their total reserves represent life
insurance company reserves as defined in section 816(a). Section
816, in pertinent part below, provides the following description
of the elements of the life insurance company qualifying 50-
percent fraction and of life insurance total reserves.
SEC. 816(a). Life Insurance Company Defined.-– For
purposes of this subtitle, the term “life insurance
company” means an insurance company which is engaged in
the business of issuing life insurance and annuity
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contracts (either separately or combined with accident
and health insurance), or noncancellable contracts of
health and accident insurance, if–-
(1) its life insurance reserves * * *, plus
(2) unearned premiums, and unpaid losses
(whether or not ascertained), on noncancellable
life, accident, or health policies not included in
life insurance reserves,
comprise more than 50 percent of its total reserves (as
defined in subsection (c)). * * *
* * * * * * *
(c) Total Reserves Defined.–-For purposes of
subsection (a), the term “total reserves” means–-
(1) life insurance reserves,
(2) unearned premiums, and unpaid losses
(whether or not ascertained), not included in life
insurance reserves, and
(3) all other insurance reserves required by
law.
The equation below summarizes the statutory elements of
the section 816(a) life insurance company qualifying fraction:
Numerator Denominator Ratio
Life insurance reserves + Life insurance reserves + Percentage
Unpaid losses on noncancelable life, ÷ Unpaid losses + = of life
health, and accident claims All other reserves insurance reserves
In their computations of total life insurance company
reserves, the parties agree that the only dispute herein involves
whether the term “unpaid losses” in the denominator of the life
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insurance company qualifying fraction includes accrued unpaid
losses on CA&H insurance policies.1
Best Life argues that the term “unpaid losses” in section
816(c)(2) refers only to unaccrued unpaid losses corresponding to
the amounts reflected on Exhibits 8 and 9 of its Annual
Statements. Best Life argues that accrued unpaid losses reflect
current liabilities, not reserves in the NAIC Annual Statement
sense, and that they should not be included in the denominator of
the qualifying fraction as part of an insurance company's total
reserves. Accordingly, for 1991 and 1992, Best Life calculated
that it qualified as a life insurance company under section 816
and timely filed U.S. Life Insurance Company income tax returns
claiming life insurance company treatment and deductions under
section 806 in the amounts of $615,971 and $712,152,
respectively.
On audit, respondent treated the accrued amounts (shown on
Exhibit 11 of Best Life's Annual Statements) as unpaid losses in
1
The following schedule reflects the parties' conflicting
computations herein of Best Life's life insurance company
qualifying fraction under section 816:
For 1991:
Best Life: $1,669,727 ÷ 2,089,513 = 79.9% Life Reserves
Respondent: $1,669,727 ÷ 4,755,844 = 35.1% Life Reserves
For 1992:
Best Life: $2,089,797 ÷ 2,532,058 = 82.5% Life Reserves
Respondent: $2,089,797 ÷ 5,026,179 = 41.6% Life Reserves
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the denominator of Best Life's life insurance company qualifying
fraction. Based thereon, respondent determined that Best Life
did not qualify as a life insurance company as defined under
section 816(a). Accordingly, respondent disallowed the claimed
life insurance company deductions under section 806.
We recently decided this same issue in favor of another
insurance company in Central Reserve Life Corp. & Subs. v.
Commissioner, 113 T.C. 231 (1999), which followed the Court of
Appeals for the Seventh Circuit's 1992 opinion and analysis in
Harco Holdings, Inc. v. United States, 977 F.2d 1027, 1029 (7th
Cir. 1992), revg. 754 F. Supp. 130 (N.D. Ill. 1990). We follow
the holdings and the analyses set forth in those two opinions.
Therein, it is recognized that Congress promulgated sections
801 through 818 using the specialized language of the insurance
industry and that Congress generally intended the language of
sections 801 through 818 to be given the technical meaning used
by the insurance industry. See Harco Holdings, Inc. v. United
States, 977 F.2d at 1030; Central Natl. Life Ins. Co. v. United
States, 216 Ct. Cl. 290, 574 F.2d 1067, 1074 (1978) (“the
definitions combine the 'labyrinthine composition' of the tax law
with the 'mystic processes' in life insurance reserves; they were
not 'written for ordinary folk.'”)(fn. ref. omitted); Alinco Life
Ins. Co. v. United States, 178 Ct. Cl. 813, 373 F.2d 336, 352-353
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(1967); Central Reserve Life Corp. & Subs. v. Commissioner, supra
at 244.
As we understand the history behind the life insurance
company qualifying fraction and the terms “unpaid losses” and
“reserves” in the LA&H industry, Congress considered and intended
that total reserves under section 816 include only “future,
unaccrued, and contingent amounts”. Harco Holdings, Inc. v.
United States, supra at 1031; Alinco Life Ins. Co. v. United
States, supra at 347-349; Commissioner v. Monarch Life Ins. Co.,
114 F.2d 314, 325 (1st Cir. 1940), affg. 38 B.T.A. 716 (1938).
The Supreme Court has specifically held that, in the accident and
health insurance industry, unpaid losses constitute reserves only
as long as they are not accrued. See Helvering v. Oregon Mut.
Life Ins. Co., 311 U.S. 267, 271-272 (1940); Harco Holdings, Inc.
v. United States, supra.
Since the late 1930's, when NAIC first developed the
predecessors to current LA&H industry regulations and the Annual
Statement forms, the insurance industry and the Annual Statements
have consistently separated future policy claim reserves
(unaccrued unpaid losses on Exhibits 8 and 9) from accrued losses
(on Exhibit 11). Because the distinction between “reserves” and
“liabilities” has been present in LA&H accounting throughout the
relevant tax provisions, NAIC's treatment of accrued unpaid
losses on the Annual Statements represents an “authoritative
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interpretive guide” as to the item's treatment for Federal income
tax purposes. See Harco Holdings, Inc. v. United States, supra
at 1031; Central Reserve Life Corp. & Subs. v. Commissioner,
supra at 242. As explained in Harco Holdings, Inc. v. United
States, supra at 1033:
We do not accept the NAIC's treatment of unpaid losses
as the definitive answer to the question before us.
Nevertheless, absent indications to the contrary, we
think it likely that Congress meant to enact a taxation
scheme that defines reserves and treats unpaid losses
as the NAIC does. The Annual Statement may not be
definitive, but it is an authoritative interpretive
guide to the meaning of the statute. [Fn. ref.
omitted.]
Congress also has mandated some measure of deference to NAIC
accounting principles by stating in section 811(a) that all
computations with regard to methods of accounting “shall be made
in a manner consistent with the manner required for purposes of
the annual statement approved by the [NAIC].” See also Harco
Holdings, Inc. v. United States, supra.
We conclude that the term “unpaid losses” has acquired a
specialized meaning in the LA&H industry that includes only those
unpaid losses that represent actual reserves in the NAIC sense;
i.e., unaccrued unpaid losses. Accrued unpaid losses reflect
liabilities and are not to be included in the denominator of the
life insurance company qualifying fraction under section 816.
See Harco Holdings, Inc. v. United States, supra; Central Natl.
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Life Ins. Co. v. Unites States, supra; Alinco Life Ins. Co. v.
United States, supra; Central Reserve Life Corp. & Subs. v.
Commissioner, supra. But see Prudential Ins. Co. v. United
States, 162 Ct. Cl. 55, 319 F.2d 161, 165-166 (1963).
Respondent argues that since Congress did not expressly
distinguish between accrued and unaccrued unpaid losses, the
plain language of section 816 requires that all unpaid losses on
CA&H insurance policies (whether accrued or unaccrued) should be
included in the denominator of the life insurance company
qualifying fraction. Use by Congress of the word “unaccrued” in
section 816(b)(1)(B) does suggest that Congress knew how to
distinguish between accrued and unaccrued losses when it wanted
to, and, while respondent's plain meaning argument has some
appeal, we nevertheless recognize the historical context and the
specialized meaning in the LA&H industry of the terms “unpaid
losses” and “reserves”.
Respondent also argues that under the Golsen rule we should
defer to a statement made in United States v. Occidental Life
Ins. Co., 385 F.2d 1, 6 (9th Cir. 1967), by the Court of Appeals
for the Ninth Circuit (to which an appeal herein would lie) to
the effect that the term “unpaid losses” under former section 806
includes accrued unpaid losses. See Golsen v. Commissioner, 54
T.C. 742, 757 (1970), affd. 445 F.2d 985 (10th Cir. 1971).
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The Golsen rule, however, applies only where the relevant
Court of Appeals' decision is “squarely in point”:
We shall remain able to foster uniformity by giving
effect to our own views in cases appealable to courts
whose views have not yet been expressed, and, even where
the relevant Court of Appeals has already made its views
known, by explaining why we agree or disagree with the
precedent that we feel constrained to follow. [Id.
at 757.]
The Golsen rule does not apply where the precedent from the Court
of Appeals constitutes dicta or contains distinguishable facts or
law. See, e.g., Hefti v. Commissioner, 97 T.C. 180, 187 (1991)
(dictum not controlling), affd. 983 F.2d 868 (8th Cir. 1993);
Metzger Trust v. Commissioner, 76 T.C. 42, 72-74 (1981) (factual
distinctions render Golsen rule not squarely on point), affd. 693
F.2d 459 (5th Cir. 1982); Kueneman v. Commissioner, 68 T.C. 609,
612 n.4 (1977) (distinct legal question not governed by the
Golsen rule), affd. 628 F.2d 1196 (9th Cir. 1980). As we stated
in Lardas v. Commissioner, 99 T.C. 490, 493-495 (1992), the
Golsen rule only applies where the “clearly established” position
of a Court of Appeals signals “inevitable” reversal upon appeal.
In United States v. Occidental Life Ins. Co., supra, the
Court of Appeals for the Ninth Circuit analyzed the meaning of
the term “unpaid losses” under former section 806(c), a tax
deduction provision repealed in 1959. In that case, the parties
stipulated that unpaid losses in section 801 (now section 816)
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had the same meaning as unpaid losses in former section 806. The
Court of Appeals for the Ninth Circuit reached its ultimate
conclusion on the meaning of unpaid losses under former section
806 and construed the language of section 801 merely as support.
Making clear its marginal reliance on its interpretation of the
language of section 801, the Court of Appeals for the Ninth
Circuit in Occidental Life Ins. Co. stated as follows:
Although an examination of section 801 along these
comparative lines is not required for a conclusion as
to the meaning of “unpaid losses” in section 806, our
interpretation of section 801 [now section 816] is
nevertheless persuasive in support of the result
which we reach. [United States v. Occidental Life
Ins. Co., supra at 5-6.]
The Court of Appeals for the Ninth Circuit has traditionally
accorded statements not necessary to its decision little
precedential weight. See, e.g., Export Group v. Reef Indus.,
Inc., 54 F.3d 1466, 1471-1472 (9th Cir. 1995) (“statements not
necessary to the decision” reflect dicta and not binding
precedent). The Court of Appeals for the Ninth Circuit's
statements and analysis in Occidental Life Ins. Co. do not
clearly establish a position on the meaning of the term “unpaid
losses” under current section 816 that signals to us an
inevitable reversal upon appeal. Therefore, the Golsen rule is
not applicable to our resolution of the issue in this case.
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We conclude that, for the years in issue, because its
accrued unpaid losses on CA&H insurance policies are not to be
included in total reserves under section 816(c)(2), Best Life
qualifies as a life insurance company under section 816(a) and is
to be allowed the claimed section 806 deductions. This reading
of section 816 conforms with the recent opinion of the Tax Court
and with the opinion of the Court of Appeals for the Seventh
Circuit that are directly on point and comports with the
insurance industry’s historical treatment of unpaid losses and
reserves.
To reflect the foregoing,
Decision will be entered
under Rule 155.