P.M. BRIEFING : Insurance Firms Dealt Tax Setback

The Supreme Court today resolved a tax dispute between the insurance industry and the Internal Revenue Service in a decision dealing a significant financial setback to many insurance companies.

The justices in a 6-3 vote ruled that the “ceding commissions” a life insurance company pays when reinsuring another firm’s policies may not be claimed as deductions for the year they are paid. Instead, the court ruled that any tax deductions for those commission payments must be spread out over the anticipated life of the policy.

The IRS refused to let Colonial American Life Insurance Co., a Louisiana-based corporation, claim about $1.5 million in such deductions for 1975 and 1976. The U.S. 5th Circuit Court of Appeals upheld the tax agency’s refusal, but other federal appeals courts had allowed such deductions and the Colonial case ended up in the high court.