Colonial American Life Ins. Company v. Commissioner of Internal Revenue

PETITIONER: Colonial American Life Ins. Company
RESPONDENT: Commissioner of Internal Revenue
LOCATION: Sable Communications of California

DOCKET NO.: 88-396
DECIDED BY: Rehnquist Court (1988-1990)
LOWER COURT: United States Court of Appeals for the Fifth Circuit

CITATION: 491 US 244 (1989)
ARGUED: Apr 18, 1989
DECIDED: Jun 15, 1989

ADVOCATES:
Carolyn P. Chiechi - on behalf of Petitioner
Michael R. Dreeben - on behalf of Respondent

Facts of the case

Question

Media for Colonial American Life Ins. Company v. Commissioner of Internal Revenue

Audio Transcription for Oral Argument - April 18, 1989 in Colonial American Life Ins. Company v. Commissioner of Internal Revenue

William H. Rehnquist:

We'll hear argument next in No. 88-396, Colonial American Life Insurance Company v. Commissioner of Internal Revenue.

Ms. Chiechi, you may begin whenever you're ready.

Carolyn P. Chiechi:

Thank you, Chief Justice Rehnquist, and may it please the Court:

This case involves insurance, the type of insurance that is issued by one insurance company to another, and that is known as indemnity reinsurance.

Just as an insurance company normally incurs substantial expenses when it issues insurance to members of the general public, such as you and me, an insurance company also normally incurs substantial expenses when it issues indemnity reinsurance.

It is undisputed that the expenses of issuing directly written insurance are to be deducted currently.

The issue that this Court must resolve is whether the expenses of issuing the type of insurance known as indemnity reinsurance are also to be deducted currently.

It is the position of the Petitioner Colonial American Life Insurance Company that just as the expenses of issuing directly written insurance are to be deducted currently, so are the expenses of issuing indemnity reinsurance.

Section--

John Paul Stevens:

Well, one could phrase it differently.

One could really ask whether this is an expense of... when one pays the seller of the insurance what would normally be a commission if paid to a third party, whether that's an expense or not.

Carolyn P. Chiechi:

--That is one way to phrase it, Justice Stevens.

John Paul Stevens:

Because it's clear if it is an expense, it's deductible currently.

There is no quarrel about that.

Carolyn P. Chiechi:

No, Justice Stevens.

But there is a specific provision that Congress provided in Part I of Subchapter L of the Code to deal with the ceding commission expense that is involved in indemnity reinsurance.

Although you are right, Justice Stevens, that you also could have a deduction just as you have for directly written insurance under Sections 809(d)(12) and 162.

Antonin Scalia:

Ms. Chiechi--

Carolyn P. Chiechi:

Yes, Justice Scalia.

Antonin Scalia:

--Do I say your name right?

Carolyn P. Chiechi:

Yes, Justice Scalia.

Antonin Scalia:

What... what does an insurance company do by way of the expenses of an agent?

It was my impression that an agent who writes a policy gets commissions over the term of the policy.

As the policyholder pays the commission to the company, the company will reimburse the agent annually for... you know, on the basis of the money received in the future.

It's not my impression that the insurance company would immediately seek to take a write-off of future... in a way, that is all expenditure that is incurred at the time that he brings the policyholder to the company, isn't it?

Carolyn P. Chiechi:

In the year that a directly written insurance policy is issued, an insurance company, in connection with what it would pay the sales agents incurs the sales agent's expense, sometimes in the range of about 60 percent of the initial premium on ordinary whole life insurance.

Thereafter, each year there is what's known as a renewal premium which is a much less percentage, which is paid only if the insurance is continued in force.

In the case of indemnity reinsurance and the particular insurance involved in this case, there was the initial ceding commission paid in a fixed amount and thereafter there was a requirement that the reinsurer, Colonial, pay a specified percentage of premiums thereafter.

I believe it was about five percent in each of the agreements.

Antonin Scalia:

Oh, there was.