Life Insurance Company Disputes Denial of Deductions for Policyholder Dividends

SBLIM asserts that its policyholders never held an equity ownership interest in the former life insurance departments, and the payments were not made in exchange for the transfer of any ownership rights in the former life insurance departments by the policyholders. SBLIM further insists that the distributions fall completely within the definition of "policyholder dividend" under section 808.

PETITION

The Savings Bank Life Insurance Company of Massachusetts ("Petitioner"), by and through its undersigned counsel, hereby petitions for a redetermination of the deficiencies set forth by the Commissioner of Internal Revenue ("Commissioner") in the Commissioner's Notice of Deficiency, dated July 24, 2000, and as the basis for Petitioner's case states as follows:

1. Petitioner is a state created corporation organized under the laws of the Commonwealth of Massachusetts, with its principal place of business and mailing address at One Linscott Road, Woburn, Massachusetts 01801. The taxable years ended December 31, 1996, December 31, 1997, and December 31, 1998 are at issue in the case. Petitioner, whose taxpayer identification number is [TIN omitted], filed the returns for the taxable years ended December 31, 1996, December 31, 1997, and December 31, 1998. In each case, the returns were filed with the Department of the Treasury, Internal Revenue Service, Andover, Massachusetts.

2. The Notice of Deficiency (a copy of which notice, including all exhibits, is attached hereto as Exhibit A), dated July 24, 2000, was mailed to Petitioner on or after that date by Stephen L. Daige, District Director, Department of the Treasury, Internal Revenue Service, P.O. Box 9112, Stop 41125, Boston, MA, 0223.

3. The deficiencies as determined by the Commissioner are in income taxes for the taxable years ended December 31, 1996, December 31, 1997, and December 31, 1998. The following deficiencies are in dispute:

TAXABLE YEAR ENDED  DEDUCTIBLE POLICYHOLDER DIVIDENDS    DEFICIENCY

(a) The Commissioner erred in determining that Petitioner's taxable income is increased $8,337,941.00, $8,496,351.00, $8,707,568.00 for the taxable years ended December 31, 1996, December 31, 1997, and December 31, 1998, respectively. The Commissioner's determination was based on his conclusion that Petitioner was not entitled to an ordinary deduction of the aforementioned amounts, because the Commissioner believed those amounts, which were distributed to qualifying policyholders when Petitioner assumed the business assets and liabilities of former life insurance departments of Massachusetts savings banks, were nondeductible payments rather than policyholder dividends.

(b) The Commissioner erred in determining that deductions for the policyholder dividends as set forth in paragraph 3 were not allowable under section 808 of the Internal Revenue Code. The Commissioner's determination was based on the incorrect assertion that Petitioner's distribution of additional dividends to its policyholders represented a liquidation of the policyholders' equity interest in the life insurance departments of Massachusetts savings banks and were therefore not deductible policyholder dividends.

5. The facts upon which Petitioner relies as the basis of its case are as follows:

(a) Effective March 31, 1991, Petitioner was created by the laws of the Commonwealth of Massachusetts, Chapter 499 of the Acts of 1990, which converted the life insurance departments of savings banks into a single domestic stock life insurance company specially chartered by the Commonwealth of Massachusetts. This legislation required Petitioner to assume the ownership and operation of each life insurance department of a Massachusetts savings bank. As a part of this consolidation, Massachusetts General Laws Chapter 178A required Petitioner to pay additional policyholder dividends to existing qualifying policyholders.

(b) Pursuant to Mass. Gen. L. chapter 178A and the Plan of Assumption approved by the Division of Insurance of the Commonwealth of Massachusetts, Petitioner was to pay additional policyholder dividends over a period of twelve years. Petitioner took an ordinary deduction for the additional amounts it distributed each year to the policyholders. Petitioner claimed this distribution as deductible policyholder dividends in accordance with Section 805(a)(3) of the Internal Revenue Code, which provides a deduction for all life insurance companies for policyholder dividends as determined under Section 808(c). Section 808(c)(1) describes the amount of the allowable policyholder dividend deduction for any taxable year as an "amount equal to the policyholder dividends paid or accrued during the taxable year."

(c) The Commissioner determined Petitioner's payments to policyholders were capital transactions in which the policyholders exchanged their ownership interests in the original life insurance departments for the distribution of the surplus. The Commissioner erred in this finding because Petitioner's policyholders never held an equity ownership interest in the former life insurance departments, and the payments were not made in exchange for the transfer of any ownership rights in the former life insurance departments by the policyholders.

(d) Moreover, the Commissioner erred because the additional distributions fall completely within the definition of "policyholder dividend" defined in Sections 808(a)-(b) of the Internal Revenue Code. The distributions made by Petitioner were paid to the policyholders "in their capacity as such," were not fixed in the contract, and were based upon the experience of the company. Thus, the additional dividends paid to the qualifying policyholders are deductible policyholder dividends. As such, Petitioner is entitled to deduct these dividends and no deficiencies of tax should be due the Internal Revenue Service.

WHEREFORE, Petitioner prays that this Court hear this case and (1) determine there are no deficiencies of tax due from Petitioner for the taxable years set forth in paragraph 3; and (2) grant Petitioner such other and further relief to which it may be entitled.

Dated: September 5, 2000

[Editor's Note: The attachment has been omitted. However, this document in its entirety can be obtained through our Tax Analysts' Access Service as Doc 2000-24107 (12 pages).]