1926 BTA LEXIS 2277 | B.T.A. | 1926
Lead Opinion
: It is stipulated that the taxpayer associations are subject to income and profits taxes for 1919 as corporations.
The policies written by the taxpayers expired at various times. Premiums received covered insurance protection for a period subsequent to the calendar year in' which payment was made. Under these circumstances the law permitted the taxpayers to set up reserves for the premiums paid to them but not earned during the taxable year. Any increase in the reserve was alloAvable as a deduction in computing net income. In this manner the insurance companies returned premiums as income, in the year in which the premium was earned; not the year in which the premium became due or was paid.
The unearned premium reserves of these taxpayers as of January 1, 1919, represented the amounts of premiums already received, but to be earned in the future by the performance of the contract of insurance over such future period of time. ; During the year 1919 the taxpayers retired from the insurance business and reinsured the outstanding liability upon their policies. For such reinsurance the taxpayers paid amounts equal to the unearned premium reserve at the time of such insurance and these payments have been allowed as deductions by the Commissioner. The taxpayers accept the allowance of these deductions but protest the action of the Commissioner in making corresponding increases in income. , .
The transactions are susceptible of two methods of treatment, either of which leads to the same result. If the reinsurance of the risks took such a form that it is to be considered to result in a novation of contract, the insured releasing the original insurer and accepting a new insurer, we must hold that the unearned premium reserves were then earned by the taxpayers and are to be included in gross income.
If, on the other hand, the taxpayers still remain liable on their contracts of insurance, and the payments which they made are to be construed as consideration for a collateral agreement to indemnify them against loss, then we are of the opinion that a capital asset was purchased and that the Commissioner erred in allowing the deduction of that part of the payment which purchased reinsurance for any period beyond the taxable year. On that basis the taxpayers would be entitled to deduct only payments for reinsurance to be performed within the year, and would be required to include in net income premiums earned during the entire year.
In the present instance the amounts paid for reinsurance equal the reserves for unearned premiums at the time the reinsurance was written. Whatever theory be followed, the net result must be that these taxpayers are required-to return as income the actual amounts
The taxpayer relies upon that portion of the decision of the Supreme Court in Maryland Casualty Co. v. United States, 251 U. S. 342; 40 Sup. Ct. 155; 3 Am. Fed. Tax Rep. 3010, which holds that the amount deducted as a reserve “ 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 in a mere bookkeeping sense;” In that case the court had under discussion other reserves as well as those for unearned premiums, but, if we consider this language applicable to the present case, the test has been met. As we have pointed out, the net result of the Commissioner’s action is to include in income only premiums earned during the year. Certainly these funds, whether received in cash or released from reserve, are available for the free beneficial use of the company, even to the payment of dividends therefrom. The result reached being correct, we need not determine whether the theory followed by the Commissioner was correct.
The deficiencies for 1919 are determined to be as follows: Union Underwriters of New York $7,4-13.67; Underwriters at Great Western Lloyds, $7,644.27; National Underwriters of America, $2,393.28. Orders of redetermination will be entered accordingly.