The U.S. Court of Appeals for the Federal Circuit today affirmed a decision of the Court of Federal Claims holding in favor of the taxpayer insurance companies and finding that the taxpayers were “legally authorized” to deduct policyholder dividends from their 1995, 1996, and 1997 tax returns in the year before the dividends were actually paid.
The case is: Massachusetts Mutual Life Ins. Co. v. United States, 2014-5019 (Fed. Cir. April 9, 2015).
Read today’s decision [PDF 193 KB] from the Federal Circuit.
At issue was whether the taxpayers insurance companies could take the deductions in the year when they guaranteed the dividends, or only in the following year, when the dividends were actually distributed to the policyholders.
The government claimed that because the liability to pay the dividends was contingent on other events (such as a policyholder’s decision to maintain his or her policy through the policy’s anniversary date), the liability was not established in the year the dividends were guaranteed in the aggregate. Because a liability must be fixed before it can be deducted, the government argued that the taxpayer insurance companies could not deduct their obligations until the following year.
Alternatively, the government asserted that even if the liability were fixed, these payments still could not have been deducted until the year they were actually paid because the dividends did not qualify as rebates or refunds that would meet the recurring item exception to the requirement that economic performance or payment occur before a deduction may be taken.
The Federal Circuit today held that the policyholder dividends were fixed in the year the dividends were announced. The appeals court further held that the dividends were premium adjustments, and as such, qualified as rebates, thereby satisfying the recurring item exception.
The Federal Circuit distinguished the facts in the instant case from those in New York Life Ins. Co. v. United States, 724 F.3d 256 (2d Cir. 2013).
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