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Dividends to Insurance Policyholders were Properly Deducted in Year Guaranteed.

(Parker Tax Publishing May 4, 2015)

The Court of Appeals for the Federal Circuit held that an accrual basis insurance company properly deducted dividends in the year its board of directors calculated and guaranteed the amount to a class of policyholders, rather than in the year the dividends were paid. The court found the practice satisfied the "all events" test. Mass. Mutual Life Insurance Co. v. U.S., 2015 PTC 112 (Fed. Cir. 2015).

Background

Massachusetts Mutual Life Insurance Company ("MassMutual") is an accrual basis taxpayer taxed under Subchapter L. In 1995, MassMutual implemented a policy of guaranteeing a minimum amount of dividends ("guaranteed dividends") it would pay the following year to a defined class of eligible policyholders. Under this policy, MassMutual would deduct for the current year the portion of the guaranteed dividends that would be paid the following year.

OBSERVATION: Although corporate dividends are not normally deductible, insurance companies may deduct policyholder dividends under Code Sec. 808(c).

The IRS argued that the company could not deduct the guaranteed dividends in the year they were calculated, but instead had to wait until they were actually paid, because the liability had not satisfied the "all events" test. Accordingly, the IRS proposed adjustments to MassMutual's returns, which the company paid under protest. In 2007, MassMutual filed an action in the Court of Federal Claims to recover overpaid income taxes for 1995, 1996, and 1997. The court found that the company's liabilities were fixed in the year the dividends were determined, holding that MassMutual was entitled to a refund for its overpayments of taxes and the IRS appealed.

Analysis

Taxpayers using the accrual method can deduct expenses in the year in which the liability is incurred, as opposed to the year in which it is paid. A liability accrues during the year in which it satisfies the "all events" test under Reg. Sec. 1.461-1(a)(2) and if economic performance or payment of the liability has occurred. The liability satisfies the "all events" test when all events have occurred which determine the fact of liability and the amount of such liability can be determined with reasonable accuracy (Code Sec. 461(h)(4)).

On appeal, the IRS argued that because it was unknown whether a policyholder would surrender his or her policy before its anniversary date, the obligation to pay the dividend was contingent upon an event that would not occur until the next year, and was therefore not fixed under the "all events" test.

The Court of Appeals for the Federal Circuit disagreed, noting that because MassMutual promised dividends to a class of policyholders, an individual policyholder's decision to surrender his or her policy would not affect the obligation to pay the remaining policyholders. The court determined that the liability became fixed in the year the board of directors calculated and approved a minimum amount of guaranteed dividends. Finding the guaranteed dividends thus satisfied the "all-events" test, the appeals court affirmed the lower court's decision, holding MassMutual properly deducted the guaranteed dividends and was entitled to a refund for overpayments of taxes.

For a discussion of the "all events" test, see Parker Tax ¶ 241,520.30[a]. (Staff Editor Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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