United States v. Atlas Life Ins. Company

PETITIONER: United States
RESPONDENT: Atlas Life Ins. Company
LOCATION: Longshore and Warehouse Union

DECIDED BY: Warren Court (1962-1965)
LOWER COURT: United States Court of Appeals for the Tenth Circuit

CITATION: 381 US 233 (1965)
ARGUED: Mar 31, 1965
DECIDED: May 17, 1965

Facts of the case


Media for United States v. Atlas Life Ins. Company

Audio Transcription for Oral Argument - March 31, 1965 in United States v. Atlas Life Ins. Company

Earl Warren:

Number 489, United States, Petitioner, versus Atlas Life Insurance Company.

Mr. Solicitor General.

Archibald Cox:

Mr. Chief Justice Warren, and may it please the Court.

This is a tax case here on certiorari to the Tenth Circuit which has very great, indeed enormous financial implications for both the government and the life insurance industry.

Now, the potential claims for refund according to our estimates run to $400,000,000 and the annual revenue that they have to pay and we would receive we estimate as about $77,000,000.

One can get at the issues in the case best I think by beginning a little way of talk.

Under state law, life insurance companies are required to maintain a reserve for policyholders.

The amount of the reserve is required to be that sum which with annual additions at an assumed rate of interest, the same rate used in calculating premiums plus future accruing premiums will be sufficient to pay the policyholders' claims as they mature according to actuarial competitions.

This means that in each year, the company must add to its reserve an addition a sum made up by applying the accrued -- the assumed rate of interest to its -- to the reserve.

We've shown this in an example that I shall refer to very frequently on a chart in the very back of our brief.

You will note there that we have assumed a company with a total investment yield of a million dollars and it is required to set aside out of that million dollars a total of $800,000 as the annual addition to the policyholders' reserve.

That is -- no, the first element of this problem is that Congress has since 1921 taken the view that the addition to the policyholders reserve should be allowed as a deduction in computing a company's net income tax.

And that's the first element in the problem, the annual addition to the policyholders' reserve.

The second element in the problem is the interest received by a life insurance company from state, county or municipal bonds, I shall call them all-state bonds for convenience.

In our example, we assume that the 10% of the total investment yield or $100,000 which is shown on the left of our chart as the cross attached area.

I -- as a matter of legislative policy backed perhaps by constitutional necessity, Congress does not tax the income from state bonds.

Now the problem --

Potter Stewart:

Where is your chart up here?

Archibald Cox:

The very back of our brief.

It's a (Inaudilbe).

Potter Stewart:

All the way at back, I see.

Archibald Cox:

Yes, the very back.

Potter Stewart:

Thank you.

Archibald Cox:

And I shall refer to it to take simplified figures quite frequently.

Now the problem revolves around at least two factors.

The annual addition of the policyholders' reserve and the income from state bonds and what it is, is simply this.

In computing a net income tax, what relationship -- what should be the proper relationship between the dollars that the company receives in state bond interest, $100,000 in our example and the dollars that flow into the annual addition for the policyholders' reserve, the gray area or $800,000 in our example, should it be assumed that all the state bond interest, the whole $100,000 went to make up part of the annual addition to the policyholders' reserve?

Should it be assumed that none of the state bond interest went to make up the annual addition to the policyholders' reserve, or should the answer be in between that part of the tax-exempt dollars went to make up to the policyholders' reserve and part of the tax-exempt dollars were left to the company or to the shareholders as their profit.

In the Revenue Act of 1921, Congress took what was in effect the first view.

It allowed a deduction for the addition to the policyholders' --