*234 Decisions will be entered under Rule 50.
Petitioners, three affiliated casualty insurance companies, transferred their insurance businesses as going concerns to Buckeye Union Insurance Co., a newly formed corporation and wholly owned subsidiary of the Continental Insurance Co. The transfer was effected through two related agreements entitled "Reinsurance and Assumption Agreement" and "Supplemental Agreement" and resulted in an increase of $ 16,376,071.52 in the petitioners' net worth. This increase consisted of $ 5,700,000 paid to petitioners for goodwill under the supplemental agreement and $ 10,676,071.52 retained by the petitioners pursuant to the reinsurance and assumption agreement. The latter agreement provided for the assumption by Buckeye Union Insurance Co. of all the petitioners' debts and obligations, including policy obligations, in return for certain of the petitioners' net assets. Held, the income of $ 10,676,071.52 realized under the reinsurance and assumption agreement did not arise from a "sale or exchange of property" within the meaning of sec. 337, I.R.C. 1954.
*14 The Commissioner determined deficiencies of $ 4,231,648.22 and $ 4,467,007.93 1 for the taxable year 1965 of the Buckeye Union Casualty Co. and its subsidiary and the Buckeye Union Fire Insurance Co., respectively. The cases were consolidated for purposes of trial.
*236 Due to certain concessions made by the parties, the sole issue remaining for decision is whether the gain realized by petitioners for which the deficiencies are asserted was from the sale or exchange of property within the meaning of section 337, I.R.C. 1954, and therefore, entitled to nonrecognition.
FINDINGS OF FACT
Some of the facts are stipulated and are found accordingly.
The Buckeye Union Casualty Co. (Casualty) and its subsidiary, the Mayflower Insurance Co. (Mayflower), petitioners in docket No. 4997-67, were insurance companies organized under the laws of the State of Ohio and filed a consolidated Federal income tax return for the taxable year 1965 with the district director of internal revenue, Cincinnati, Ohio.
The Buckeye Union Fire Insurance Co. (Fire), petitioner in docket No. 4998-67, was an insurance company organized under the laws of the State of Ohio and filed its Federal income tax return for the taxable year 1965 with the district director of internal revenue, Cincinnati, Ohio.
Casualty, Mayflower, and Fire (sometimes hereinafter referred to *15 collectively as the companies or petitioners) were affiliated companies, 2 each engaged in the fire and casualty*237 insurance business in Ohio and other States.
On January 19, 1965, the board of directors of each of the companies adopted a plan of dissolution and liquidation providing for the complete liquidation and dissolution of each of the companies. Thereafter, meetings of the stockholders of each of the companies were duly called and held on February 15, 1965, at which meetings the shareholders ratified and approved the plans of dissolution and liquidation earlier adopted by the directors.
On February 18, 1965, each of the companies filed a Form 966 with the district director of internal revenue and on February 26, 1965, the companies collectively filed an application with the Ohio Department of Insurance advising the department of the adoption of the plans of dissolution and liquidation and of the existence of negotiations with the Continental Insurance Co. (Continental) for the disposition of the businesses of the*238 companies.
During the course of the negotiations between the companies and Continental, a sale of petitioners' stock was considered but was not acceptable to Continental. Instead, on April 2, 1965, the companies entered into two related agreements with the Buckeye Union Insurance Co. (hereinafter referred to as Continental Buckeye), a newly formed Ohio corporation and wholly owned subsidiary of Continental. The agreements, entitled "Reinsurance and Assumption Agreement" and "Supplemental Agreement," provided, in effect, for the acquisition by Continental Buckeye of the insurance businesses of the companies as going concerns, including the assets and properties used therein, and for the assumption by Continental Buckeye of all insurance obligations and liabilities of the companies.
The reinsurance and assumption agreement provided in pertinent part:
ARTICLE I
The Ceding Insurer [the Companies] agrees to and does hereby cede and transfer to the Assuming Insurer [Continental Buckeye] and the Assuming Insurer agrees to and does hereby reinsure and assume from the Ceding Insurer:
(a) All of the policy liability 3 of the Ceding Insurer on all insurance risks of every nature whatsoever*239 written by the Ceding Insurer and recorded and in force as of 12:01 A.M. S.T. January 1, 1965, at the place where liability attaches.
(b) All of the policy liability 3 of the Ceding Insurer on all risks recorded after 12:01 A.M. S.T. January 1, 1965, including that part of the installment business *16 the premiums for which are recorded after such time, at the place where liability attaches.
(c) All of the gross liability of the Ceding Insurer for unpaid losses (reported) as well as incurred but not reported), unpaid loss adjustment expenses, 4 incurred on or before 12:01 A.M. S.T. January 1, 1965, at the place where liability attaches * * *
*240 * * * *
ARTICLE II
As consideration for the liabilities assumed by the Assuming Insurer as set forth in Article I hereunder:
(a) The Ceding Insurer hereby agrees to pay to the Assuming Insurer Forty-One Million, One Hundred Thirty-Eight Thousand, Two Hundred Ninety-Five and 12/100 Dollars ($ 41,138,295.12), subject to verification upon audit as provided in Article III hereof, consisting of the following balance sheet items, as of 12:01 A.M. January 1, 1965:
(1) The unearned premium reserve for the gross policy liability assumed by the Assuming Insurer under Article I (a) hereof, less the unearned premium reserve for in force ceded reinsurance as of 12:01 A.M. S.T. January 1, 1965, the amount to be paid to be computed at sixty-five percent of such net unearned premium reserve. * * *
(2) The reserves carried by the Ceding Insurer for losses, loss adjustment expenses (allocated and unallocated), funds held under reinsurance treaties, and underwriting expenses (other than reserves for Federal income taxes) for liability assumed under Article I (c) hereof as of 12:01 A.M. S.T. January 1, 1965.
(3) Agents' balances (both current and over 90 days due) and uncollected premiums, the amounts*241 of which to be paid to be computed at ninety-nine percent of such items * * * contingent commissions on reinsurance ceded * * * bills receivable * * * reinsurance recoverable; and similar miscellaneous insurance and underwriting accounts, and so far as may be transferable, deposits * * * with and equity in underwriting associations and assuming reinsurers' deposits. The Assuming Insurer hereby assumes the accounts aforesaid at the values assigned thereto as of 12:01 A.M. January 1, 1965.
(4) The entire insurance plant of the Ceding Insurer pertaining to the business reinsured (exclusive of airplane, automobiles, furniture and fixtures, office equipment, print shop inventory, title to and leases of real estate) as constituted as of 12:01 A.M. S.T. January 1, 1965, including all records and supplies, pertaining to the business reinsured hereunder, and all of its rights in and to said insurance plant * * *
(b) The Ceding Insurer hereby transfers and assigns all of the premiums received by or for the account of the Ceding Insurer for business ceded to the Assuming Insurer under Article I (b) hereof and the Assuming Insurer shall pay the underwriting expenses incurred in relation thereto.
*242 * * * *
ARTICLE IV
The parties further mutually agree:
* * * *
(c) That to facilitate the servicing of the business hereby assumed and reinsured, the Ceding Insurer will permit the use of its corporate name in the business *17 transferred to the extent necessary to accomplish the orderly transfer of such business.
(d) That the Ceding Insurer (either directly or indirectly by way of reinsurance, the use of a subsidiary or affiliated corporation, or otherwise) further undertakes:
(1) Not to solicit the business hereby transferred or any renewal thereof, and
(2) For a period of five (5) years ending December 31, 1961, not to compete with the Assuming Insurer or any associated or subsidiary company thereof with respect to the kinds of insurance transferred pursuant to this Agreement.
* * * *
ARTICLE V
The net amount to be paid by Ceding Insurer as herein provided shall be paid to the Assuming Insurer by the Ceding Insurer on or before April 16, 1965, in securities in the investment portfolio of the Ceding Insurer mutually agreed upon by the parties hereto, to the fullest extent practicable, and cash as necessary for balancing purposes to facilitate closing * * *
The supplemental *243 agreement provided in pertinent part:
ARTICLE I
All persons in the employ of any of the Buckeye Union Group [the Companies] as of 12:01 A.M. E.S.T. on January 1, 1965, will be offered employment by either The Continental Insurance Company or The Buckeye Union Insurance Company [Continental Buckeye] (the employer company being hereinafter referred to as "Continental") * * *
It is understood and agreed that, as a condition of employment by Continental, the following officers of companies of the Buckeye Union Group: Frederick E. Jones, John A. Dodd, Donal R. Haverick, Charles M. Hebble, Walter E. Roudabush, T. Fred Smith, Bruce C. Yorke, S. W. Schellenger and William T. Cuddy shall execute, in form satisfactory to Continental, their covenants not to compete for a period of five years from the date of such covenants with Continental and its subsidiary and associated companies in the property and casualty insurance business in the territory in which the Buckeye Union Group has been operating * * *
* * * *
ARTICLE II
The Buckeye Union Insurance Company will purchase the airplane, all automobiles, furniture, furnishings and fixtures, office equipment * * * print shop inventory and group insurance*244 deposits belonging to the Buckeye Union Group and which are used in relation to the business being reinsured by the Reinsurance and Assumption Agreement of even date; and The Buckeye Union Insurance Company will assume the following liabilities of the Buckeye Union Group (other than federal taxes) not assumed under said Reinsurance and Assumption Agreement, namely, investment expenses, taxes, licenses and fees * * * amounts withheld or retained for the account of others and outstanding checks charged off. As consideration for said assets transferred less liabilities assumed, The Buckeye Union Insurance Company shall pay Buckeye Union Group the sum of Five Hundred Thirteen Thousand, Fifty-Four and 69/100 Dollars ($ 513,054.69) which is equal to the net of the amortized value of such property and other items as *18 carried on the books of the Buckeye Union Group for federal income tax purposes as of December 31, 1964.
ARTICLE III
Each member of the Buckeye Union Group agrees, to the extent permitted, to assign to The Buckeye Union Insurance Company all of its right, title and interest in leases in force on December 31, 1964 on all office space, property and equipment in use and*245 related to the business being reinsured and transferred hereunder and under said Reinsurance and Assumption Agreement * * *
ARTICLE IV
The Buckeye Union Insurance Company will purchase (1) the office building located at 1111 East Broad Street, Columbus, Ohio 43216, for the sum of Two Million Eight Hundred Thirty-Two Thousand Eight Hundred Thirty Dollars and Forty-Eight Cents ($ 2,832,830.48) which is equal to the amortized value thereof as carried on the books of the Buckeye Union Group for federal income tax purposes as of December 31, 1964 * * * and (2) house and lot located on the north side of Madison Avenue, approximately 40 feet west of Ohio Avenue, at cost ($ 15,900) to Buckeye Union Group * * *
ARTICLE V
The Buckeye Union Group hereby agrees to sell, transfer and assign to The Buckeye Union Insurance Company and The Buckeye Union Insurance Company hereby agrees to purchase the good will of the Buckeye Union Group as hereinafter defined, subject to the terms and conditions herein set forth, for the aggregate cash purchase price of Five Million Seven Hundred Thousand Dollars ($ 5,700,000), which shall be allocated among the Buckeye Union Group as follows:
| The Buckeye Union Casualty Co | $ 3,723,300 |
| The Buckeye Union Fire Insurance Co | 1,391,100 |
| The Mayflower Insurance Co | 585,600 |
*246 The good will of the Buckeye Union Group is defined as the business each has developed with general and local agents through operations in the various states. Good will shall also include all the physical records, books, punch cards, tapes, programs, daily reports, policy registers, contracts of insurance ceded, and all other documents and agreements pertaining to the business reinsured and assumed by The Buckeye Union Insurance Company hereunder * * *
ARTICLE VI
In summary and confirmation of the sale and transfer of certain assets and the insurance business of the Buckeye Union Group to The Buckeye Union Insurance Company as of 12:01 A.M. E.S.T. January 1, 1965 and of the conduct of such business from and after such time and date for the benefit and account of The Buckeye Union Insurance Company, as provided herein and in the Reinsurance and Assumption Agreement of even date, the Buckeye Union Group shall retain cash and demand deposits, time deposits, securities and other assets, not specifically required to be transferred and conveyed, in the aggregate amount of $ 45,534,157.11 based on values thereof (with securities valued at convention market value) on December 31, 1964 * *247 * *
*31 Except for the assets to be retained as aforesaid, all remaining assets of the Buckeye Union Group are to be transferred to The Buckeye Union Insurance Company.
Concurrently with the foregoing, The Buckeye Union Insurance Company shall assume the liabilities of the Buckeye Union Group as expressly provided for hereunder and under the Reinsurance and Assumption Agreement * * *
* * * *
ARTICLE IX
This Agreement is subject to and conditioned upon the concurrent execution by the respective parties hereto of the Reinsurance and Assumption Agreement of even date; and consummation of this Supplemental Agreement is subject to the concurrent consummation of said Reinsurance and Assumption Agreement.
The $ 41,138,295.12 the companies agreed to transfer to Continental Buckeye pursuant to Article II of the reinsurance and assumption agreement consisted of the net assets as of January 1, 1965, shown below:
| 65 percent of unearned premium reserves | ||
| ($ 30,503,061.49) | $ 19,826,989.97 | |
| Reserve for losses | 23,903,381.04 | |
| Reserve for loss ajustment expenses | 5,176,811.04 | |
| Contingent commissions | 276,000.00 | |
| Underwriting expenses | 30,543.60 | |
| Underwriting taxes, licenses, and fees | 606,639.65 | |
| Funds held under reinsurance treaties | 219,864.10 | $ 50,040,229.40 |
| Less: | ||
| Agents' balances | (8,340,472.17) | |
| Reinsurance recoverable | ( 528,539.45) | |
| Agents' balances over 3 months due | ( 28,773.41) | |
| Bills receivable | ( 3,274.25) | |
| Lloyds of London deposit | ( 875.00) | 8,901,934.28 |
| 41,138,295.12 |
*248 The final payment and settlement were made on the basis of an audit of these accounts.
Pursuant to Article V of the supplemental agreement, the companies collectively received $ 5,700,000 in cash from Continental Buckeye as payment for goodwill.
In 1963 and 1964, the 2 years previous to the year in issue, the gross premiums on reinsurance ceded by petitioners collectively amounted to $ 10,875,476.50 and $ 7,201,759.03, respectively, and the commissions received thereon were $ 3,828,161.33 (35.2 percent of gross premiums) and $ 2,523,058.86 (35.03 percent of gross premiums), respectively. The petitioners received so high a percentage commission because they were among the most profitable insurance companies in the Middle West.
*20 On April 2, 1965, the nine principal shareholders of the companies, who were active in the management of the companies and who were to become employees of Continental Buckeye, executed and delivered a 5-year noncompetition agreement to Continental Buckeye.
On April 26, 1965, the Ohio Department of Insurance issued its order approving the transaction between the companies and Continental Buckeye. Thereafter, on the same date, the transaction called*249 for by the agreement between the companies and Continental Buckeye was consummated and acquisition by Continental Buckeye was closed, effective as of 12:01 a.m. e.s.t., January 1, 1965, by the execution and delivery of the various closing documents. At the closing, the companies transferred their businesses as "going concerns," including all of their insurance assets and properties, to Continental Buckeye which assumed all of the companies' debts and obligations, including policy liability. The operations of the companies as going concerns were never interrupted.
The transactions called for by the reinsurance and assumption agreement and the supplemental agreement resulted in an increase of $ 16,376,071.52 in the companies' net worth. This increase consisted of $ 5,700,000 paid to the companies for goodwill under the supplemental agreement and $ 10,676,071.52 retained by the companies pursuant to the reinsurance and assumption agreement, representing 35 percent of the companies' unearned premium reserve. 5
*250 Following consummation of the transactions between the companies and Continental Buckeye on April 26, 1965, the companies had no insurance assets or liabilities. They had only cash and marketable securities which were sold prior to final liquidation and dissolution on December 30, 1965.
Subsequent to the closing on April 26, 1965, the activities of the companies were limited to the winding up of their affairs. Liquidating distributions were made to shareholders during the course of 1965 with the final distribution being made on December 30, 1965, in complete cancellation of all of the outstanding stock of the companies. On December 30, 1965, certificates of dissolution were filed in the office of the secretary of state of Ohio, and on January 18, 1966, final Federal income tax returns were filed.
Continental reported the transactions with the companies in its financial statement for 1965 as if the capital stock of the companies had been acquired. However, for Federal income tax purposes, Continental Buckeye took a deduction in the amount of $ 10,676,071.52 *21 (i.e., 35 percent of the unearned premium reserve of the companies).
The companies on their final Federal income *251 tax returns did not include in income any of the $ 16,376,071.52 increase in net worth per books.
ULTIMATE FINDING
The retention of unearned premium reserves by the companies in the amount of $ 10,676,071.52 did not constitute a sale or exchange of property.
OPINION
This case presents for the first time the issue of the application of section 3376 to the liquidation of an insurance corporation. Section 337 was enacted to eliminate the uncertainties attendant upon the Supreme Court decisions in Commissioner v. Court Holding Co., 324 U.S. 331 (1945), and United States v. Cumberland Pub. Serv. Co., 338 U.S. 451 (1950), in regard to the question of whether a sale of assets prior to a corporate liquidation was accomplished by the corporation or its shareholders. Frank W. Verito, 43 T.C. 429 (1965). The statutory solution embodied in section 337 was to eliminate the recognition of gain or loss to the corporation from the sale or exchange of its property during the 12-month period following the adoption of a plan of complete liquidation, if within that period the corporation distributes*252 its assets in complete liquidation.
In the instant case, petitioners adopted plans of complete liquidation and within 12 months thereafter disposed of their insurance businesses to Continental Buckeye and distributed their assets in complete liquidation. Petitioners contend that the gain realized by them, pursuant to their transaction with Continental Buckeye, is shielded from recognition by section 337. Respondent, *253 on the other hand, contends the $ 10,676,071.52 gain realized under the reinsurance and assumption agreement is not subject to section 337 because it did not arise from the "sale or exchange of property." 7 Respondent characterizes the transaction as a reinsurance arrangement with the amount *22 equal to 35 percent of the unearned premium reserve being either underwriting income under section 832 8 or income from the release of reserves to the free and beneficial use of the companies. Union Underwriters of New York, et al., 4 B.T.A. 472 (1926); Massachusetts Fire & Marine Insurance Co., 16 B.T.A. 625 (1929); and Central National Fire Insurance Co., 22 B.T.A. 1054 (1931).
*254 We agree with respondent's contention. As consideration for reinsuring its policy risks, petitioners transferred to Continental $ 19,826,989.97, which was an amount equivalent to 65 percent of their unearned premium reserves. Also, as consideration for Continental's assumption of petitioners' liability for unpaid losses, unpaid loss adjustment expenses, and underwriting expenses, petitioners transferred an amount equivalent to the full amount of the reserves for unpaid losses, loss adjustment expenses, and underwriting expenses. As a result of these transactions, petitioners were relieved from liabilities and policy risks for $ 10,676,071.52 (which was an amount equivalent to 35 percent of the unearned premium reserve) less than they had reserved therefor. Thus a net amount of $ 10,676,071.52 was released to the free beneficial use of the companies. That this amount represents income is clear from section 832(b) 9 as well as being a long-established principle. See Union Underwriters of New York, et al., supra;Massachusetts Fire & Marine Insurance Co., supra, appeal dismissed 42 F. 2d 189 (C.A. *255 2, 1930); Central National Fire Insurance Co., supra.Therefore, unless *23 this income is shielded from recognition under the provisions of section 337, as petitioners contend, respondent's determination is correct.
The only dispute over the application of section 337 to the instant case is whether the transaction was a "sale or exchange of property" within the meaning of subsection (a) of that section. We find initially that the income in question did not arise from a "sale or exchange," but rather as a result of the elimination of the requirement of maintaining*256 the reserves, which in turn was caused by the reinsurance of policy risks and assumption of certain liabilities. When Continental Buckeye assumed petitioners' policy obligations, petitioners were no longer required to maintain the reserve for unearned premiums. Since petitioners transferred to Continental Buckeye an amount equivalent to only 65 percent of the unearned premium reserve, $ 10,676,071.52, or an amount equivalent to 35 percent of the reserve, was thereby released to the free beneficial use of petitioners. In our opinion, this income was realized from a reinsurance transaction rather than from a "sale or exchange" within the meaning of section 337.
Furthermore, petitioners have not met their burden of proving that the income in question arose as a result of the sale or exchange of "property" within the meaning of section 337. Petitioners contend that Continental Buckeye acquired both the expectation of profit from the policies in force and the renewal expirations 10 thereunder when it assumed the policy risks. However, we find that the renewal expirations were acquired as a part of the goodwill transferred pursuant to Article V of the supplemental agreement which *257 provided, in pertinent part, as follows:
The Buckeye Union Group [petitioners] hereby agrees to sell, transfer and assign to The Buckeye Union Insurance Company and The Buckeye Union Insurance Company hereby agrees to purchase the good will of The Buckeye Union Group as hereinafter defined * * *
The good will of The Buckeye Union Group is defined as the business each has developed with general and local agents through operations in the various states. Good will shall also include all the physical records, books, punch cards, tapes, programs, daily reports, policy registers, contracts of insurance ceded, and all other documents and agreements pertaining to the business reinsured and assumed by The Buckeye Union Insurance Company hereunder. * * * [Emphasis added.]
*24 In addition to conceding that the $ 5,700,000 received as consideration for the goodwill transferred pursuant to Article V of the supplemental agreement represents gain which is entitled to nonrecognition under section 337, respondent contends that petitioners sold all their goodwill under that provision.
*258 On the other hand, petitioners argue that the entire $ 16,376,071.52 increase in net worth was realized in return for goodwill transferred to Continental Buckeye. We disagree with petitioners because first, there is no evidence that the goodwill of petitioners was worth more than $ 5,700,000 and second, both parties bargained for and specified in their contract the amount to be paid for goodwill under Article V of the supplemental agreement, and for the reinsurance and assumption of liabilities under Article II of the reinsurance and assumption agreement. In our opinion, the $ 16,376,071.52 increase in net worth was realized from $ 5,700,000 received for goodwill, pursuant to Article V of the supplemental agreement, and $ 10,676,071.52, or 35 percent of the unearned premium reserves retained pursuant to the reinsurance of petitioners' policy risks under Article II of the reinsurance and assumption agreement.
Petitioners' reliance upon Calley v. United States, 220 F. Supp. 111 (S.D. W.Va. 1963), and Rev. Rul. 65-175, 1965-2 C.B. 41, which held renewal expirations were property in the nature of goodwill, *259 is therefore misplaced because in those instances the subject of the sale was limited to the sale of renewal expirations. Such authorities are of no weight in determining whether petitioners transferred property in return for Continental Buckeye's assumption of their policy risks because, as shown above, the renewal expirations were not transferred as part consideration for the assumption of the policy risks, but were transferred as part of the goodwill for which petitioners received $ 5,700,000. Since petitioners transferred all their goodwill under Article V of the supplemental agreement, and since petitioners did not transfer any other property from which the $ 10,676,071.52 gain was realized, it follows that the income of $ 10,676,071.52 did not arise from the sale or exchange of "property" within the meaning of section 337.
Since we have found no "sale or exchange of property" within the meaning of section 337, the nonrecognition provisions of that section are not applicable to the income of $ 10,676,071.52. It follows that such amount should have been included in petitioners' taxable income for 1965.
To reflect the conceded adjustments and the conclusions reached herein,
*260 Decisions will be entered under Rule 50.
Footnotes
1. The parties have mutually agreed to certain changes to correct mathematical errors in the computations of both deficiencies.↩
2. Casualty owned 99.9 percent of Mayflower's outstanding stock and 17.8 percent of Fire's outstanding stock.↩
3. Defined in the contract as "the gross direct liability and reinsurance assumed by the Ceding Insurer."↩
4. Defined in the contract as "all expenses contracted and incurred by the Ceding insurer in the underwriting and placing of insurance on its books."↩
5. The reserve for unearned premiums is the amount required by State statute that certain insurance companies hold in reserve representing the prorata portion of each premium in force which is applicable to the unexpired period of the policy term. The reserve was reported in each petitioner's financial statement as a liability.↩
6. All section references are to the Internal Revenue Code of 1954, as amended.
SEC. 337. GAIN OR LOSS ON SALES OR EXCHANGES IN CONNECTION WITH CERTAIN LIQUIDATIONS.
(a) General Rule. -- If --
(1) a corporation adopts a plan of complete liquidation on or after June 22, 1954, and
(2) with the 12-month period beginning on the date of the adoption of such plan, all of the assets of the corporation are distributed in complete liquidation, less assets retained to meet claims,↩
then no gain or loss shall be recognized to such corporation from the sale or exchange by it of property within such 12-month period.7. Respondent concedes that the $ 5,700,000 received by the petitioners for goodwill under the supplemental agreement represents the proceeds of the sale of an intangible asset entitled to nonrecognition under sec. 337↩.
8. SEC. 832. INSURANCE COMPANY TAXABLE INCOME.
(a) Definition of Taxable Income. -- In the case of an insurance company subject to the tax imposed by section 831, the term "taxable income" means the gross income as defined in subsection (b)(1) less the deductions allowed by subsection (c).
(b) Definitions. -- In the case of an insurance company subject to the tax imposed by section 831 --
(1) Gross income. -- The term "gross income" means the sum of --
(A) the combined gross amount earned during the taxable year, from investment income and from underwriting income as provided in this subsection, * * *
* * * *
(3) Underwriting income. -- The term "underwriting income" means the premiums earned on insurance contracts during the taxable year less losses incurred and expenses incurred.
(4) Premiums earned. -- The term "premiums earned on insurance contracts during the taxable year" means an amount computed as follows:
(A) From the amount of gross premiums written on insurance contracts during the taxable year, deduct return premiums and premiums paid for reinsurance.
(B) To the result so obtained, add unearned premiums on outstanding business at the end of the preceding taxable year and deduct unearned premiums on outstanding business at the end of the taxable year.↩
9. Respondent has computed underwriting income under section 832(b) as follows:
↩
Premiums earned: Gross premiums written during the year 0 Less: Return premiums 0 Premiums paid for reinsurance $ 19,826,989.97 ($ 19,826,989.97) Add: Premiums at Dec. 31, 1964 30,503,061.49 Deduct: Premiums at Dec. 31, 1965 0 Less: Losses incurred 0 Expenses incurred 0 0 Underwriting income 10,676,071.52 10. V. L. Phillips & Co. v. Pennsylvania Threshermen, etc., 199 F.2d 244, 246 (C.A. 4, 1952):
"'Expirations' in the insurance field has a definite and well recognized meaning; it embodies the records of an insurance agency by which the agent has available a copy of the policy issued to the insured or records containing the date of the insurance policy, the name of the insured, the date of its expiration, the amount of insurance, premiums, property covered and terms of insurance. This information enables the agent to contact the insured before the existing contract expires and arms him with the information essential to secure another policy and to present to the insured a solution for his insurance requirements. It has been determined that this information is of vital assistance to the agency in carrying on the insurance business and it has become, in the insurance field, recognized as a valuable asset in the nature of good will."↩