Policyholder dividends deductible under recurring item exception

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In Massachusetts Mutual Life Insurance Co. v. U.S, 2015 U.S. App. LEXIS 57 (Fed. Cir. 2015), the U.S. Court of Appeals for the Federal Court affirmed the deductibility of policyholder dividends under the recurring item exception. The court reasoned that the policyholder dividends were fixed in the year the dividends were announced, the dividends were premium adjustments and the premium adjustments were rebates.  

The taxpayer, a mutual life insurance company, offered a participating policy to its policyholders. This type of policy provided for eligible policyholders — those with policies paid through the anniversary date of the policy — to receive a portion of any distribution of the company’s yearly surplus. The taxpayer implemented a policy of guaranteeing a minimum amount of dividends (guaranteed dividends) for a defined class of eligible policyholders. Each year, the taxpayer’s board of directors determined the guaranteed dividend and passed a resolution memorializing the amount. The payment was guaranteed to an entire class of policyholders on a pro rata basis, and if an individual member of the class terminated his or her policy, the guaranteed dividend was distributed in full to the remaining members.

Based on its policy, the taxpayer deducted a portion of the guaranteed divided that would be paid by Sept. 15 of the next year under the recurring item exception. The Court of Federal Claims determined that the taxpayer’s deductions met the recurring item exception because they were fixed in the year the dividends were determined and the guaranteed dividends were rebates.

On appeal, the government challenged the timing of the deductions, claiming that the guaranteed dividends weren’t true obligations, the guaranteed dividends weren’t fixed in the year the dividends were set by the board and the payments weren’t rebates.

In determining that the guaranteed dividends were actual obligations, the appeals court noted that the taxpayer’s policy stated that the taxpayer would pay dividends to eligible policyholders and that state regulators were authorized to enforce the taxpayer’s guarantees. The court also concluded that the payments were fixed in the year in which the board of directors adopted the guaranteed dividend resolutions because there was a group of policyholders with paid-up premiums who would ultimately receive the payments. Further, the court reasoned that the plain and ordinary meaning of the terms “rebate” and “refund” included premium adjustments distributed to the policyholder in the form of dividends. Accordingly, the Federal Circuit affirmed the Court of Federal Claims’ finding that the taxpayer may deduct amounts for its guaranteed dividends under the recurring item exception.

Sharon Kay
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Ellen Martin
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