The deductions allowed by Section 208 of the Act of 1932 and Section 207 of the Act of 1934, are, first, the net addition required by law to be made to reserve funds "(including in the case of assessment insurance companies the actual deposit of sums with State or Territorial officers pursuant to law * * *)"; second, the sums other than dividends paid in policy and annuity contracts, and third, "the amount of premium deposits returned to their policyholders, and the amount of premium deposits retained for the payment of losses, expenses, and reinsurance reserves".
The wording of the sections seems to make it plain that the insurance company contemplated is one required by law to make additions to a reserve fund, and which returns to policy holders the assessed amount not required to meet losses. Judged by the standards of the statute, the Complainant cannot come under its provision. It maintains no reserve pursuant to law, nor is it required to make returns of excess of premium to policy holders, short of liquidation, when the return is not of excess of premiums paid by present members. It is not a life insurance company as defined by statute, nor an insurance company other than life, as so defined.
We come then to the third position of Complainant. It asserts that the dues paid in by its members are capital contributions, not income.The Complainant is a beneficial insurance company, out of which no man makes one cent. Judged by ordinary standards, it is a mutual insurance association and a mutual life insurance association, but not such an association as contemplated either by Sections 201-203 of the Revenue Acts of 1932 and 1934, or by Section 208 of the Act of 1932 or Section 207 of the Act of 1934. It is viewed by the said Revenue Acts under Section 103 of the Act of 1932 and Section 101 of the Act of 1934, 26 U.S.C.A. Int.Rev.Acts pages 506 and 688. Those sections are identical in wording and read as follows:
"Exemptions from Tax on Corporations
"The following organizations shall be exempt from taxation under this title --
* * *
"(10) Benevolent life insurance associations of a purely local character, mutual ditch or irrigation companies, mutual or cooperative telephone companies, or like organizations; but only if 85 per centum or more of the income consists of amounts collected from members for the sole purpose of meeting losses and expenses."
By the Revenue Act of 1913, 38 Stat. 173, mutual insurance associations were not exempted from tax, but subsequent Acts prior to the Act of 1924 exempted them and they were required to make returns. By the Act of 1924 and subsequent Acts they were exempt, but only if 85 per centum or more of their income for the year came from collections from members. It is plain from the legislative history of Sections 103 and 101 of the Acts of 1932 and 1934, respectively, that the Congress intended to tax mutual associations such as the Complainant if less that 85 per centum of income came from premiums; and this fact must be kept in mind in the consideration of Complainant's contention that members' dues are to be considered as capital contributions and not as income. If the Congress had any such proposition in mind, why the 85 per centum phase? If the dues were not to be part of the income, then the mutual associations would be exempt unless their incomes other than from dues amounted to more than their losses and expenses. No such provision or limitation appears in the Acts although it would be almost certain to be in them if such had been the intention of the Congress. The line of demarcation between exempt and non-exempt beneficial associations is fixed at 85 per centum of the income derived from premiums, not upon excess of other income over losses and expenses.
Complainant's capital contribution theory is based upon Duffy v. Mutual Benefit Life Ins. Co., 272 U.S. 613, 47 S. Ct. 205, 207, 71 L. Ed. 439. The Mutual Benefit Company was an Insurance Association under the supervision of the State and required by law to maintain a certain reserve. The Commissioner had assessed an additional excess profits tax against it, based upon his finding that its legal reserve was not a part of its capital. The tax in question was under the Act of 1917. The Supreme Court held that the legal reserve was to be considered a part of the Company's invested capital. In part it said:
"To the extent of $70,000,000 the legal reserve consisted of 'actual cash paid in' by the members. These payments were intended for investment, and were invested, to increase the resources of the company and thereby reduce the cost of the insurance; and it requires no stretch of the realities to say that, within the meaning of subdivisions (1) and (2), section 207 (a), the fund which they created is invested capital."
It will be noticed that the matter in issue in this case is not the same as that in Duffy v. Mutual Benefit Life Insurance Company, nor are the essential facts the same. In the present matter no member contributed to a legal reserve, and had the status similar to that of a stockholder in a partnership prior to the maturity of his policy, when he became a creditor. His payment was made without any contemplation of a reserve whereby he might secure a later reduction in the cost of insurance. No return of redundancy in the present matter, was to be made to a member other than at the maturity of his policy or at liquidation of the association. It will be noted, also, that in the Duffy case, the court considered as capital only that part of the premium which had been added to the legal reserve, not the whole premium. In the instant matter, no legal reserve being maintained, no distinction can exist between the part going into present insurance and the part in excess of the actual cost of it. All of these differences are to be considered in addition to the evident intent of the Congress to impose a tax on mutual associations operating without State control and without maintenance of a legal reserve, Sections 103 and 101, respectively, of the Acts of 1932 and 1934.
It may seem, upon casual consideration, that there is some inequity in taxing upon its entire income, a non-profit mutual beneficial association such as the Complainant, and allowing an association for profit to be taxed only upon its returns from interest, dividends and rents. It may seem particularly so in the case of the present Complainant. If so, the inequity is chargeable to the Congress. However it must be remembered that the legislation does not relate to a single association, and it well may be that all associations unregulated by the State and without requirement of a legal reserve are not so immaculate as Complainant, and that a discrimination in favor of the insurance association operating and controlled by State law may not be unwise. The capital-contribution theory of Complainant has been discussed generally. It was not advanced, and cannot be considered, in the claim for refund for the year 1933.
In view of the foregoing it would seem that further discussion of the Complainant's claims was unnecessary. However, it will be noted that the claim for refund for the year 1932 was made in time only as to the payment after December 12, 1934, and the claim for 1933 is timely only as to the payments made on and after September 15, 1934.
Judgment will be entered in favor of defendant.
Let an order be presented in accordance with the foregoing opinion.
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