1. Reenactment of a provision of a revenue act
held a
legislative adoption of the construction that had been placed upon
it in administration by the Treasury Department. P.
288 U. S.
273.
2. Section 245(8) of the Revenue Act of 1926, applicable to Life
Insurance Companies (which make their returns only on the cash
basis) permits deduction from gross income of "[a]ll interest paid
or accrued within the taxable year" on a company's indebtedness,
with a certain exception.
Held that interest accrued on
dividends held for policyholders, but unpaid, is not deductible.
Pp.
288 U. S. 271,
288 U. S. 275.
3. The general rule against accounting for and reporting income
partly on the accrual and partly on the cash basis should apply to
insurance companies; being required to treat interest received on
the cash basis, they ought not to have the privilege of treating on
the other basis the interest that they owe. P.
288 U. S.
273.
75 Ct.Cls. 117, 59 F.2d 116, affirmed.
Certiorari, 287 U.S. 591, to review a judgment rejecting a claim
to recover money paid as income taxes.
MR. JUSTICE ROBERTS delivered the opinion of the Court.
The question in this case is whether the petitioner, a
Massachusetts life insurance company operating on the mutual level
premium plan, is entitled, under § 245 of
Page 288 U. S. 270
the Revenue Act of 1926, [
Footnote 1] to deduct from its gross income, as interest
paid, the amount of interest credited to its policyholders during
the taxable year but not withdrawn by them.
Petitioner agrees to repay a portion of its receipts to
policyholders in the form of dividends. The policies provide that
these dividends, when declared, may at the option of the insured by
withdrawn in cash, applied as premium payments, or allowed to
remain on deposit with the company at interest. If the last
alternative be chosen, the dividends and interest accumulate,
interest being added to the accumulated sum at the end of each
policy year. The dividends and all accrued interest thereon may be
withdrawn at any time on demand. Of the total which became due
policyholders in 1926 as interest on sums so left with the company,
$544,964.40, the portion not withdrawn, was credited in appropriate
amounts to the individual accounts of the policyholders during that
year. In its tax return, the petitioner deducted as interest paid
the amount so credited. Interest actually withdrawn during 1926
totaled $248,405.97, some of which was credited to the
policyholders in that year, but the greater portion of which had
accrued prior to 1926, and had been credited in the respective
years of accrual. No deduction was taken for this sum. The
Commissioner disallowed the claimed deduction, and allowed in lieu
thereof the amount of interest actually withdrawn in 1926. The
resulting additional tax was paid under protest, a claim for refund
filed, and, the Commissioner having failed to act upon the claim,
suit was brought in the Court of Claims to recover the amount. That
court dismissed the petition, [
Footnote 2] and we brought the case here by
certiorari.
The earlier Revenue Acts made no distinction, in the method of
computing the tax, between insurance companies
Page 288 U. S. 271
and other corporations. The Act of 1921 and those subsequently
adopted embodied special and separate provisions respecting such
companies. [
Footnote 3] In the
Act of 1926, with which we are here concerned, the applicable
sections are 242 to 247, inclusive, the first four dealing with
life companies. Section 244 defines gross income as the amount
received during the taxable year from interest, dividends, and
rents. Section 245 defines net income as the gross income, less
certain enumerated deductions. Paragraph (8), permits deduction
of:
"All interest paid or accrued within the taxable year on its
indebtedness, except on indebtedness incurred or continued to
purchase or carry obligations or securities . . . the interest upon
which is wholly exempt from taxation under this title."
The language of paragraph (8) with respect to interest paid or
accrued on indebtedness is precisely the same as the employed with
respect to deductions allowed to individuals by § 214(a)(2)
[
Footnote 4] and to
corporations by § 234(a)(2). [
Footnote 5] Section 200(d) [
Footnote 6] enacts that
"the terms 'paid or incurred' and 'paid or accrued' shall be
construed according to the method of accounting upon the basis of
which the net income is computed under § 953 or 984 (212 or 232). .
. ."
The sections mentioned are those applicable to individuals and
to corporations generally; neither deals with insurance companies,
which, as above said, are treated exclusively in §§ 242 to 247,
inclusive.
In the light of these provisions, the petitioner insists that
insurance companies are forbidden by the terms of the statute to
keep their accounts and make their returns by the accrual method,
but must report on the cash basis.
Page 288 U. S. 272
Hence, it is claimed the words "paid or accrued," as applied to
interest, cannot grant an option in the matter of returns,
depending upon whether the insurance company keeps its accounts on
a cash basis or on an accrual basis, as in the case of other
taxpayers, since the company has no choice in this respect; that
the word "accrued" cannot be read out of the statute or left
without meaning or effect, and that the phrase is employed to
describe and allow deduction of interest accrued on dividends left
with the company.
The government replies that, prior to 1921, there was no
statutory direction as to how insurance companies' returns should
be made; a regulation required them to be upon the cash basis; when
new sections were inserted in the Act of 1921 as to insurance
companies, the phraseology with respect to interest deductions of
individuals and corporations generally was lifted bodily out of the
sections applicable to individuals and corporations and inserted in
these new sections; as the Act does not permit insurance companies
to account on the accrual basis, only interest paid is deductible,
and the term "accrued" has no application. It further points to a
regulation adopted immediately upon the passage of the Act of 1921
and carried forward in the regulations under the Acts of 1924 and
1926. This regulation is: [
Footnote
7]
"The deduction allowed by § 245(a)(8) for interest on
indebtedness is the same as that allowed other corporations by §
234(a)(2) (
see Arts. 561 and 121), but this deduction
includes item 18 of the disbursement page of the annual statement
of life companies to the extent that interest on dividends held on
deposit and surrendered during the taxable year is included
therein."
Item 18 of the disbursement page of the annual statement of
insurance companies includes the amount of interest
Page 288 U. S. 273
actually paid policyholders, whereas accrued interest credited
and not withdrawn is shown in item 22 on page 5 of the standard
form of report. Insurance companies have without exception complied
with the regulation and taken a deduction only for interest paid.
The right to deduct interest credited to policyholders but not
withdrawn is now asserted for the first time.
The Congress, in the Revenue Acts of 1928 and 1932, reenacted §
245 without alteration. [
Footnote
8] This action was taken with knowledge of the construction
placed upon the section by the official charged with its
administration. If the legislative body had considered the Treasury
interpretation erroneous, it would have amended the section. Its
failure so to do requires the conclusion that the regulation was
not inconsistent with the intent of the statute (
National Lead
Co. v. United States, 252 U. S. 140,
252 U. S. 146;
Poe v. Seaborn, 282 U. S. 101,
282 U. S. 116;
McCaughn v. Hershey Chocolate Co., 283 U.
S. 488,
283 U. S. 492;
Costanzo v. Tillinghast, 287 U. S. 341),
unless, perhaps, the language of the act is unambiguous and the
regulation clearly inconsistent with it.
Compare Louisville
& N. R. Co. v. United States, 282 U.
S. 740,
282 U. S.
757-758. The petitioner insists that the statute needs
no interpretation, and its plain mandate should be enforced. But,
on examination, the proper application of the section is not so
clear as is claimed.
The regulations of the Treasury under all the Revenue Acts since
1916 have required taxpayers to report on the cash or accrual
basis, depending on which method was pursued in their accounting.
[
Footnote 9] Since the adoption
of the Revenue Act of 1921, the requirement has been statutory. It
is settled beyond cavil that taxpayers other than insurance
companies may not accrue receipts and treat
Page 288 U. S. 274
expenditures on a cash basis, or vice versa. Nor may they accrue
a portion of income and deal with the remainder on a cash basis,
nor take deductions partly on one and partly on the other basis.
Congress, we think, did not intend to make an exception of
insurance companies. If they are not allowed to account on an
accrual basis for interest owed them, there is no reason for
permitting them to treat interest owed by them on any different
basis. The very paragraph (8) on which petitioner relies as
defining interest credited but not paid, by the use of the word
"accrued," recognizes that insurance companies may have
indebtedness of other sorts, such as that arising from borrowings
to carry securities. Since the company is required to treat
interest received on a cash basis, it ought not have the privilege
of accruing interest owed. That privilege must be accorded, if
petitioner is right. We think the result would be unreasonable, and
is not intended by the act.
We are referred to a regulation which provides:
"Income which is credited to the account of or set apart for a
taxpayer and which may be drawn upon by him at any time is subject
to tax for the year during which so credited or set apart, although
not then actually reduced to possession. [
Footnote 10]"
It is argued that the regulation requires the policyholder to
report interest credited to him as received in the year of credit.
The conclusion drawn is that, if the credit is income to the
insured, it must constitute a "constructive payment" by the
company. In this view, the transaction is said to come within the
term "paid," and we may disregard the word "accrued." This
regulation has, however, not been applied in any case where income
has been credited to another by a taxpayer employing the cash
receipts and disbursements method of accounting, and specifically
it has not been invoked to require policyholders to report as
income the dividends or interest credited to them in cases such as
this. No tax is demanded
Page 288 U. S. 275
of them until actual receipt of the money. The constructive
payment theory is, we think, untenable.
We conclude Congress did not intend, by the use of the word
"accrued" in § 245(a)(8), to permit the deduction of interest on
policy dividends credited but not paid during the taxable year.
The judgment of the Court of Claims is
Affirmed.
[
Footnote 1]
44 Stat. 9, 47.
[
Footnote 2]
75 Ct.Cls. 117, 59 F.2d 116.
[
Footnote 3]
Rev.Act 1921, §§ 242-247, 42 Stat. 261; Rev. Act 1924, §§
242-247, 43 Stat. 288 and Rev.Act 1926, §§ 242-247, 44 Stat. 47;
Rev.Act.1928, §§ 201-205, 45 Stat. 842; Rev.Act 1932, §§ 201-205,
47 Stat. 223.
[
Footnote 4]
44 Stat. 26.
[
Footnote 5]
Ibid., 41.
[
Footnote 6]
Ibid., 10.
[
Footnote 7]
Treasury Regulations 62, art. 685(3).
See Regulations
65, Art. 685(3); Regulations 69, Art. 685(3).
[
Footnote 8]
See note 3
supra.
[
Footnote 9]
Regulations 33 (1918 ed.) Arts. 126, 180; Regulations 45, Arts.
23, 1533.
[
Footnote 10]
Regulations 69, Art. 51.