Policyholder Dividends Deductible Under Recurring Item Exception

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