dissenting: The majority allow a mutual casualty insurance company to deduct the amounts by which it overestimated its losses (as of Dec. 31, 1962), the deductions being allowed when the actual losses were specifically determined. I would not allow these deductions, and so I respectfully dissent.
The deductions are not provided for in the statute. See New
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Colonial Ice Co. v. Helvering, 292 U.S. 435 (1934). The legislative history does not indicate a congressional intent to provide such deductions. The deductions are not provided for in regulations.
The statutory provision for calculation of the losses incurred deduction of mutual insurance companies had been enacted 42 years before it was first applied to mutual companies.1 The provision initially applied to stock companies. There is no evidence that this provision was applied to stock companies with respect to December 31,1921, estimates in the manner in which the majority now seek to apply it to mutual companies with respect to their December 31,1962, estimates.
Would the majority require that a company which had ■underestimated its losses take into income the amount by which the losses are finally determined to exceed the original estimates? I find no authority for any such income inclusion, yet such an inclusion appears to be the necessary logical consequence to the majority’s holding in the instant case.
The majority note that failure to grant the relief requested will result in petitioner never being able to compensate for its original overestimation. This same point was dismissed in Pacific Mutual Life Insurance Co. v. Commissioner, 48 T.C. 118 (1967), revd. on other grounds 413 F.2d 55 (9th Cir. 1969), as follows (48 T.C. at 127):
Petitioner contends that because of special circumstances existing at the end of 1957, it overestimated the beginning 1958 reserves in question, causing a corresponding increase in its 1958 taxable income. Petitioner argues from this that if the alleged overstatements are not corrected for 1958, its income tax liability will not only be erroneous for that year but, because of the nature of the tax computation required under the 1959 Act, it will never be corrected in any later year. Assuming, arguendo, that the 1959 Act would have such an irreparable effect on petitioner’s tax liability, petitioner’s argument, as stated, is a plea for equitable relief. Such an argument cannot be considered by this Court since we lack equity jurisdiction. Commissioner v. Gooch Co., 320 U.S. 418 (1943); Lorain Avenue Clinic, 31 T.C. 141 (1958); Edward P. Clay, 46 T.C. 505 (1966).
In Pacific Mutual Life, 48 T.C. at 129, this Court stated that the general rule is that reserves, in absence of legislative exception, may not be retroactively adjusted for purposes of correcting errors of judgment in the original estimate. Also see Rio Grande Building & Loan Association v. Commissioner, 36 T.C. 657, 664 (1961). This rule should be applied to the instant case since there is no indication of congressional intent to the contrary.
The majority distinguish Pacific Mutual as involving “actuarial hindsight” whereas the instant case involves “actuality hindsight.” But-in Pacific Mutual this Court stated:.
Thus, even if we were of the view that Congress had expressed an intent to permit retroactive adjustment to beginning 1958 reserves, which we are not, we would still be required to hold against petitioner for failure to prove any overstatement in such reserves. [48 T.C. at 131. Emphasis supplied.]
Thus, in Pacific Mutual we did not say that if petitioner could prove the overstatement by actual experience, then it would be able to make retroactive adjustment. A necessary prerequisite is congressional intent to permit retroactive adjustment. The majority in the instant case admit they cannot find such an. intent.2
It is not at all clear what would have been done if the Congress had focused on this question when the statute was extended to apply to mutual insurance companies. On the one hand, the equities presented in the majority’s opinion would have argued for allowing the deduction. On the other hand, the Congress would have had to make a conscious decision to provide either (1) a “one-way-street” or (2) an inclusion, of income for those companies that had underestimated their losses as of December 31, 1962. The Congress also would have had to recognize that the law would be more complicated, if it provided for these adjusting deductions and inclusions, than it would be under a “quick-and-dirty” approach. Since it is by no means clear to me that the Congress would have chosen to fine-tune the statute by requiring adjustments in all cases or by requiring only those adjustments that result in a lesser tax, I cannot with confidence say how the Congress would have acted. I would prefer to apply the statute as the Congress enacted it.
For the foregoing reasons, I would not allow the deductions sought in this case.
Sec. 246(a)(6), Revenue Act of 1921, Pub. L. 67-98.
The majority point to respondent’s published position in a 1958 ruling. That ruling has been explained (Rev. Rul. 73-273,1973-1 C.B. 79) as follows:
“Rev. Rul. 58-126,1958-1 C.B. 13, holds that a transfer in 1957 by a savings and loan association to its undivided profits of an amount from its reserve for losses that was set up from undivided profits during years prior to 1952, when such association was not subject to Federal income tax, did not result in gross income for Federal income tax purposes in the year of transfer. Similarly, in the instant case, the valuation reserve accumulated in years prior to the taxpayer’s becoming subject to Federal income tax also represents undivided profits (accumulated earnings and profits) during years when it was not subject to Federal income tax and is not relevant in determining gross income or deductions of any year during which the taxpayer is subject to suck tax. [Emphasis supplied.]”
Although the approach of the 1958 ruling may have been appropriate in the savings and loan association bad debt reserve area, it does not seem to be appropriate to extend that possible executive largesse.
The majority concede that, under sec. 832(b)(5), the amount of the unpaid losses at the end of 1962 are indeed relevant in determining the loss incurred deduction for any year the petitioner is subject to tax. The real issue in the instant case is whether that admittedly relevant loss reserve can be retroactively adjusted and in the face of our statements in Pacific Mutual Life Insurance Co. v. Commissioner, 48 T.C. 118(1967), the answer must be no.