
    MASSACHUSETTS MUTUAL LIFE INSURANCE CO. v. THE UNITED STATES
    [No. K-323.
    Decided May 31, 1932]
    
      
      Mr. Guy Patten for the plaintiff. Messrs. A. B. Serven and Johm, W. Smith were on the briefs.
    
      Mr. Assistant Attorney General Charles B. Bugg for the defendant. Messrs. Lisle A. Smith and Edvoaird H. Horton were on the brief.
   Littleton, Judge,

delivered the opinion :

The plaintiff, a life insurance company, was required by the revenue statute and the regulations of the Treasury Department in force during 1926 to determine its income and deductions, and compute its tax on the basis of receipts and disbursements as distinguished from an accrual basis.

The question in this case is whether the plaintiff is entitled to deduct from gross income for 1926, as interest paid, the amount of such interest credited to its policyholders during the year 1926. The policyholders were notified during the year of the amount of interest so credited and that it would be paid upon demand or handled in accordance with the terms of the policy contract, upon receipt of notice of the desire of the policyholder. The policy contract, under which the plaintiff became liable for the interest so credited, provided that it was “ subject to withdrawal on demand.” If a policyholder did not withdraw the interest or - surrender it for application'by the- company in reduction of premiums or to purchase participating paid-up additions, it was allowed to accumulate and interest on such accumulations was thereafter credited to the policyholders. In these circumstances the plaintiff contends that interest in the amount of $544,964.40 credited to the policyholder was constructively paid by it and was a proper and legal deduction from gross income for the year in which credited.

The defendant insists that the interest item of $544,964.40 is purely an accrued item which, under the law and the regulations, is not an allowable deduction on the cash receipts and disbursements basis of accounting, which method of accounting the plaintiff was required to and did employ; that article 51 of Treasury Regulations 69, and prior regulations under prior revenue acts provide that “ 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. To constitute receipt in such a case the income must be credited to the taxpayer without any substantial limitation or restriction as to the time or manner of payment or condition upon which payment is to be made. * * * If the income is not credited, but is set apart, such income must be unqualifiedly subject to the demand of the taxpayer, * * * ” applies solely to the recipients of a credit when, according to the method of accounting employed by the taxpayer making the credit, there is a payment for income-tax purposes; that the regulation therefore can have no application to a credit by a taxpayer employing the cash receipts and disbursements method of accounting.

The plaintiff relies upon Corliss v. Bowers, 281 U. S. 316; Commissioner v. Bingham, 35 Fed. (2d) 503; Hadley v. Commissioner, 36 Fed. (2d) 543; Chicago, R. I. & P. Ry. Co. v. Commissioner, 47 Fed. (2d) 990; Charleston & W. C. Ry. Co. v. Burnet, 50 Fed. (2d) 342; John A. Brander, 3 B. T. A. 231; Chipley v. Commissioner, 25 B. T. A. 1103. These cases are not applicable to the question here involved. The OorUss case, involved income-from a revocable trust-and the Bingham and Radley cases involved the question whether dividends declared and made unqualifiedly subject to thé demand of-the stockholders were income in the year in which declared and set apart. When a dividend is declared and set apart to the stockhdlders the amount thereof is separated from the invested capital of the corporation and the provisions of the above-quoted regulation have been consistently applied. Section 201 (e) of the revenue act1 of-1921 specifically provided that such dividends constitute income to the stockholders. The two railroad cases involved the question whether the amounts accrued and deducted by the corporations from gross income in the years credited but not paid constituted income to the corporations in subsequent years when the credits were charged to profit and loss. The Brander and Chipi ey cases -involved the question whether a salary credited to an officer of a corporation employing the accrual method of accounting and available for withdrawal by him, constituted income, and the rule announced in the regulation quoted was applied. It will be seen, therefore, that in the ordinary case the question of constructive receipt of income arises where the taxpayer making -the credit employs the accrual method of accounting. In such cases the credit constitutes a payment for tax purposes, and it has been consistently held that the person to whom the - amount is credited and made unqualifiedly subject to his demand may not escape taxation thereon by failing to withdraw it.

Other than in the administration of estates or trusts, as to which the statute specifically provides for a deduction of credits under certain circumstances, we'know of no instance, and none has been called to our attention, in which it has been held that an amount credited but not paid by a taxpayer employing the cash receipts and disbursements method of accounting constitutes income to the person to whom credited. It is not claimed that the interest credited by the plaintiff to its policyholders during 1926 was taxed as income to them in that year by the commissioner.. To hold that an amount credited by a taxpayer employing a cash receipts and disbursements method of-accounting constitutes a payment, and is, therefore, deductible from gross’ income in the year in which credited, would destroy the distinction between the accrual and the receipts and disbursements methods of accounting which is recognized and made controlling by the revenue statutes. United States v. Anderson, 269 U. S. 422; United States v. Mitchell, 271 U. S. 9, 12. It follows therefore that plaintiff is not entitled to a deduction of the interest credited to its policyholders during 1926 on the ground that there was a constructive payment thereof in that year.

It is also urged by the plaintiff that section 245 (a) (8) of the revenue act of 1926 authorizes a deduction by insurance companies of interest paid or accrued, within the taxable year on its indebtedness. The language of this subsection is the same as section 234 (a) (2) relating to deductions by ordinary corporations, and section 214 (a) (2) relating to deductions by individuals, and .in our opinion, the term “ paid or accrued ” must be construed according to the method of accounting employed as provided in section 200 . (d) of the revenue act of 1926. We think that in the enactment of subdivision. (8) of sectipn 245 (a), of the revenue act of 1926, Congress did not intend to make an exception in favor of insurance companies to the recognized rule that deductions from gross income should be determined in accordance with- the method of accounting employed.

The petition is dismissed. It is so ordered.

Whaley, Judge; Williams, Judge; GreeN, Judge; and Booth, Chief Justice, concur.  