The opinion of the court was delivered by: KALODNER
The plaintiff seeks recovery of an alleged overpayment of its federal income taxes for the calendar year 1938. Two separate actions by the plaintiff have been consolidated. The recovery sought in the original action (No. 1478) is $4,758.73 and interest. The recovery sought in the second action (No. 2503) is $10,214.17 and interest, and it embraces the amount of recovery sought in the first action.
It may be stated at this point that the alleged overpayments consist of plaintiff's original tax as disclosed by its return, amounting to $4,040.78, and a deficiency tax of $5,620.93, together with interest paid in the sum of $552.46.
Three issues are involved here:
(1) Did the plaintiff operate as an insurance company during the year 1938, within the meaning of the Revenue Act of 1938?
(2) If the plaintiff did operate as an insurance company, is it exempt from income tax for the year 1938 by virtue of the provisions of section 101(11) of the Revenue Act of 1938, 26 U.S.C.A.Int.Rev.Code, § 101(11), on the ground that it was a mutual fire insurance company, the income of which was used or held for the purposes of paying losses or expenses.
(3). If plaintiff is not exempt from income tax under the provisions of Section 101(11), is it entitled to a deduction of $51,101.39 for the year 1938 under Section 207 (c) (3) of the Revenue Act of 1938, 26 U.S.C.A. Int.Rev.Code, § 207(c) (3), on the ground that this sum -- representing premiums earned during the entire calendar year -- was retained for the payment of losses, expenses and re-insurance reserves
The Commissioner rejected all of the claims of the taxpayer for refund, resulting in the institution of the instant suit.
A jury trial was waived, and the case was submitted to the court upon the pleadings, stipulation of facts, and additional testimony.
The stipulated statement of facts, which is hereby adopted as the findings of fact of this court, in part, is as follows:
1. Plaintiff is a corporation duly organized and existing under the laws of the Commonwealth of Pennsylvania with its principal office and place of business located at 5521 Germantown Avenue, Philadelphia, Pennsylvania. The plaintiff secured its original charter of incorporation by Special Acts of the General Assembly of the Commonwealth of Pennsylvania approved the 15th day of April, 1843, P.L. 266, and the 10th day of February, 1859, P.L. 45, as supplemented by a Special Act approved the 28th day of March, 1872, P.L. 608, a copy of said Act as amended and supplemented, together with the by-laws promulgated thereunder are attached hereto and made a part hereof, and marked Exhibit 1. It has, since the earliest date herein mentioned, up to and including the present time, been continuously engaged in business as a fire insurance company.
2. From the 15th day of April, 1843, to and including the 7th day of June, 1938, plaintiff continued to carry on its business under the charter originally granted to it by Special Act of the Commonwealth.
3. The plaintiff, as of May 25, 1938, at a special meeting of its policy holders called for said purpose, formally voted to accept the provisions of the Insurance Code of the Commonwealth of Pennsylvania. Such action was thereafter, on June 1, 1938, approved by the Attorney General's office and by the Governor's office, and on June 2, 1938, by the Secretary's office, all of which appears more fully in the "Certificate of Amendment of Charter by the Mutual Fire Insurance Company of Germantown and its Vicinity", together with related documents thereto attached, a copy of which is attached hereto and made a part hereof, and marked Exhibit 2. The company has operated as an insurance company from June 8, 1938, until the present time under the provisions of the charter as changed on June 8, 1938, as aforesaid.
4. The plaintiff adopted by-laws, effective June 8, 1938 pursuant to its revised charter. A copy of the by-laws is hereto attached and made a part hereof, and marked Exhibit 3.
5. On March 13, 1939, the plaintiff filed its income tax return for the calendar year 1938 on Form 1120 as a mutual insurance company, showing gross income of $159,664.14, deductions of $130,245.15, and a net taxable income of $25,884.52, upon which a tax was paid of $4,040.78 in four installments on the following dates respectively: $1,010.20 on March 13, 1939; $1,010.20 on June 10, 1939; $1,010.20 on September 13, 1939; $1,010.18 on December 8, 1939.
A true copy of the income tax return of the plaintiff for the calendar year 1938 is attached hereto and made a part hereof, and marked Exhibit 4.
7. By letter dated March 18, 1940, from the Internal Revenue Agent in Charge at Philadelphia, Pennsylvania, addressed to plaintiff, a deficiency in tax was proposed for the year 1938 in the amount of $5,620.93. This proposed deficiency arose in part from the disallowance of the deduction claimed by plaintiff of $28,840.78. The Commissioner of Internal Revenue approved the deficiency proposed by the Agent in Charge and assessed the same against the plaintiff in November, 1940. The following grounds were assigned for such disallowance: "It would appear that the taxpayer is mutual in form only. The amendments to the Charter and acceptance of the provisions of the Insurance Code of 1921, which were accomplished in the year under review, are not considered sufficient changes to bring the taxpayer under Section 207(c) (3) of the Act, since no change was effected in the taxpayer's actual operations."
On November 4, 1940, the plaintiff paid the additional tax in the amount of $5,620.93, together with interest in the amount of $552.46, to the Collector of Internal Revenue at Philadelphia, Pennsylvania.
8. On November 15, 1940, and December 3, 1940, plaintiff filed duplicate claims for refund in the amount of $4,758.73, representing the amount of tax due on the disallowance of $28,840.78 claimed as a deduction for premiums retained, and set forth as grounds for its claim that the deduction of $28,840.78 was allowable to plaintiff as a mutual insurance company other than life and marine, under the provisions of Section 207(c) (3) of the Revenue Act of 1938. A copy of the claim filed on November 15, 1940, is attached hereto and made a part hereof, and marked Exhibit 5.
9. By letter dated March 27, 1941, the Commissioner of Internal Revenue notified the plaintiff that said claim for refund had been disallowed in full. A true and correct copy of said letter is attached hereto and made a part hereof, and marked Exhibit 6.
10. On December 6, 1941, and February 6, 1942, the plaintiff filed further duplicate claims for refund of tax for the year 1938 in the amount of $9,661.71, together with interest paid thereon in the amount of $552.46, or a total of $10,214.17. The grounds for refund as set forth in said claims for refund were (a) that the plaintiff under and by virtue of Section 101(11) was a corporation wholly exempt from the payment of tax upon its net income, and (b) that if it was not exempt from income tax under Section 101(11) of the Revenue Act of 1938, then it was a mutual insurance company of the character described in Section 207(c) (3) of the Revenue Act of 1938, and as such it was entitled to a deduction of $51,101.39, being the amount of premium deposits alleged to have been retained by the plaintiff during the entire year 1938 for the payment of losses, expenses and reinsurance reserves. A true copy of the claim filed on December 6, 1941, is attached hereto and made a part hereof, and marked Exhibit 7.
11. By letter dated March 30, 1942, the Commissioner of Internal Revenue notified the plaintiff that said claim for refund had been disallowed in full. A true and correct copy of said letter is attached hereto and made a part hereof, and marked Exhibit 8.
12. The plaintiff has at no time made any assessments against or distributions to its policyholders by way of dividends or otherwise except that during the year 1873 scrip, payable in insurance, was issued to policyholders in the amount of $36,377.43.
13. During the year 1938 plaintiff issued contracts of insurance of three separate kinds, as follows:
3. Perpetual policies on the note plan.
4. Extended coverage clauses added as endorsements to the policies.
True copies of said policies are attached hereto and made a part hereof, and marked Exhibits 9, 10, and 11 respectively.
14. The plaintiff filed annual statements with the Insurance Commissioner of the Commonwealth of Pennsylvania summarizing its business operations for each calendar year. True copies of certain portions thereof, including schedules of income, disbursements, assets, liabilities, contingency fund and underwriting and investment exhibits, for the years ended December 31, 1932, to December 31, 1938, ...