Denial of Rehearing in MassMutual Tees Up Government Decision on Seeking Supreme Court Review of All-Events Test Issue
June 29, 2015
Let me just begin with a brief apology to the regular readers of this blog for the infrequency of postings over the past several months. A variety of factors and the press of other matters have interfered with blogging, but we are resolved to get back up to speed in the upcoming months by providing some analysis of intervening developments and posts on some new pending cases.
As we previously reported here, the Second Circuit and the Court of Federal Claims reached different results in considering the application of the all-events test to annual policyholder dividends paid by mutual insurance companies. The Federal Circuit’s recent affirmance of the Court of Federal Claims in the MassMutual case, allowing the taxpayer to accrue those dividend payments in the year before the dividends were actually paid, thus raises the possibility that the Supreme Court will be asked to wade into this controversy. The Federal Circuit’s decision does not necessarily establish a square conflict in the circuits, because the respective courts of appeals viewed the dividend programs of New York Life and MassMutual, though similar, as having differences that warranted the disparate results. But there is sufficient tension between the two circuit court decisions to provide a basis for a credible petition for certiorari to resolve this issue should the government decide to seek Supreme Court review.
The Federal Circuit (Judges O’Malley, Lourie, and Moore) sided with the taxpayer on all issues. With respect to the threshold issue of the existence of an obligation, the court rejected the government’s argument that the facts were indistinguishable from those in the Second Circuit’s New York Life case. The Federal Circuit stated that, “[u]nlike New York Life, however, the policies at issue here stated that MassMutual . . . would pay dividends to eligible policyholders,” thus giving those policyholders “a contractual obligation . . . that they would receive a policyholder dividend.”
The court then distinguished the Second Circuit case again in addressing the key issue of whether the taxpayer’s liability was fixed by the close of the taxable year. The court held that MassMutual had “promised an entire class of policyholders that they would be entitled to the guarantee payments on a pro rata basis,” whereas “New York Life made such guarantees on an individual basis.” The court viewed this difference as a “significant” one that called for a different result. The court explained that an individual’s decision to terminate a MassMutual policy would affect only the amount of that company’s obligation to pay a dividend to the remaining members of the class, but the liability to the class would remain. Thus, the court concluded that “the only uncertainty at the end of the year in which the guarantees were determined was who would ultimately make up the group of policyholders—there was no question that MassMutual had passed an absolute resolution to pay the guaranteed dividend and that at least some policyholders were already qualified recipients of that guarantee.”
Finally, the court held that the dividend payments were “rebates” within the meaning of Treas. Reg. § 1.461-4(g)(3), thereby satisfying the recurring item exception of Code section 461(h).
The government’s response to the opinion was consistent with the approach it has previously taken of minimizing the factual differences between the two cases and presenting them as directly in conflict. The government sought rehearing by the panel, not rehearing en banc, limited to the question whether the liability was fixed at the close of the taxable year. It argued that the Federal Circuit had failed to appreciate that MassMutual would have no liability to pay dividends if the policyholder surrendered his or her policy before the dividend payment date. Accordingly, the government argued, the court erred in finding that “the insurance policies at issue here differed from those at issue in New York Life.” In neither case, the government maintained, did the payment of premiums necessarily entitle the policyholder to a dividend, and therefore the liability was not fixed until the following year when it became apparent that the policyholder was not surrendering the policy before the dividend payment date. The Federal Circuit, however, denied the rehearing petition without comment and without modifying its opinion, thus leaving in place the court’s distinction of its facts from those before the Second Circuit in New York Life.
The question remains whether the government will seek Supreme Court review. The government has preserved its ability to argue that the Federal Circuit and Second Circuit decisions are irreconcilable, which would be a key element in persuading the Supreme Court to hear the case. Specifically, in the petition for certiorari filed by New York Life, the taxpayer had pointed to a conflict between the Second Circuit’s decision and that of the Court of Federal Claims. Ordinarily, when opposing a petition for certiorari that raises a claim of conflicting circuit decisions, the Solicitor General will try to defuse the conflict contention by pointing to distinctions between the two cases if at all possible. In its New York Life brief, however, the SG did not embrace the Second Circuit’s suggested distinction of the two cases, but simply argued that it was premature for the Supreme Court to worry about the alleged conflict because the Court of Federal Claims decision might be reversed on appeal. Now that the Court of Federal Claims has been affirmed on appeal, the government is in a position to file its own petition for certiorari alleging a conflict. The Supreme Court, of course, may not be persuaded by that claim when both the Second Circuit (somewhat diffidently) and the Federal Circuit (more definitively) have stated that they do not see a conflict.
The government’s decision ultimately comes down to its assessment of the importance of this issue, weighed against the importance of other cases that it might choose to bring to the Court. (The Court decided fewer than 70 cases this past year, and not all of those are cases involving the federal government.) That MassMutual was decided by the Federal Circuit heightens the importance of Supreme Court review to some extent because any taxpayer can arrange to file a refund suit and have its case go to the Federal Circuit. Thus, in the future, mutual insurance companies could tweak their policyholder dividend programs to be indistinguishable from MassMutual’s and be guaranteed victory on this issue by bringing a refund suit in the Court of Federal Claims. And by the same token, the government will not be able to get much benefit from its victory in New York Life because savvy taxpayers will not risk litigating this issue in the Second Circuit (or any other circuit, for that matter). Despite these concerns, there is a good chance that the government will simply decide that the policyholder-dividend issue is not of sufficient moment to bring to the Court, and the government will learn to live with its defeat in MassMutual.
A petition for certiorari would be due on September 15.