23 the following deductions to insurance companies shall also be allowed, unless otherwise allowed --
* * *
"(3) Mutual insurance companies other than life and marine. In the case of mutual insurance companies (including interinsurers and reciprocal underwriters, but not including mutual life or mutual marine insurance companies) requiring their members to make premium deposits to provide for losses and expenses, the amount of premium deposits returned to their policy holders and the amount of premium deposits retained for the payment of losses, expenses, and reinsurance reserves."
The Treasury Regulation promulgated in connection with Section 207 of the Act provides as follows: "Art. 207-6. Special deductions allowed mutual insurance companies (other than life or marine). -- Mutual insurance companies (including interinsurers and reciprocal underwriters, but not including mutual life and mutual marine insurance companies), which require their members to make premium deposits to provide for losses and expenses, are allowed to deduct from gross income the aggregate amount of premium deposits returned to their policy holders or retained for the payment of losses, expenses, and re-insurance reserves.In determining the amount of premium deposits retained by a mutual fire or mutual casualty insurance company for the payment of losses, expenses, and re-insurance reserves, it will be presumed that losses and expenses have been paid out of earnings and profits other than premiums to the extent of such earnings and profits. If, however, any portion of such amount is applied during the taxable year to the payment of losses, expenses, or re-insurance reserves, for which a separate allowance is taken, then such portion is not deductible; and if any portion of such amount for which an allowance is taken is subsequently applied to the payment of expenses, losses, or reinsurance reserves, then such payment cannot be separately deducted. The amount of premium deposits retained for the payment of expenses and losses, and the amount of such expenses and losses, may not both be deducted. A company which invests part of the premium deposits so retained by it in interest-bearing securities may nevertheless deduct such part, but not the interest received on such securities. A mutual fire insurance company which has a guaranty capital is taxed like other mutual fire insurance companies. A stock fire insurance company, operated on the mutual plan to the extent of paying dividends to certain classes of policy holders, may make a return on the same basis as a mutual fire insurance company with respect to its business conducted on the mutual plan."
In reply to the plaintiff's contention that it is entitled to the benefits of Section 207 (c) (3), the defendant asserts that that Section is applicable only if the taxpayer can qualify as a mutual insurance company.
In my opinion, the plaintiff's contention that it is entitled to the benefits of Section 207 (c) (3) is without merit.The plaintiff claims this deduction despite the fact that it has already deducted, and the Commissioner has allowed, the full amount of expenses and losses attributable to its underwriting business during the year 1938 in the sum of $74,098.21. To permit a deduction of $51,101.39 for the full year 1938 -- or $28,840.78 for the period from June 8 to December 31, 1938 -- in the face of the allowance of $74,098.21, would be sanctioning a double deduction. Treasury Regulation 101, promulgated under the Revenue Act of 1938, specifically and properly covers this situation by prohibiting such a double deduction. This Treasury Regulation forbidding double deduction has continued in effect, despite later revisions of the 1938 Act, and under the well recognized rule the inference is that Congress approved of this Regulation.
I therefore conclude that, independent of the question as to whether the plaintiff is a mutual company and entitled to be taxed under Section 207(c) (3) of the Revenue Act, the taxpayer here is not entitled to deduct the sum of $51,101.39, representing the full amount of premiums earned during 1938, since it has already taken a deduction for losses and expenses in connection with its underwriting business during the year 1938. The same holds true as to the deduction claimed for the period from June 8 to December 31, 1938.
Section 207(c) (3) of the Revenue Act of 1938, and the Interpretive Regulations (Art. 207-6, Treasury Regulations 101), permit the deduction of excess premium deposits returned to policy holders by mutual companies, and further permit the deduction of premium deposits retained for the payment of losses, expenses and reinsurance reserves. The Regulations, however, specifically provide that if any portion of the premium deposits is applied during the taxable year to the payment of losses, expenses, or re-insurance reserves for which a separate allowance is taken, then such portion is not deductible. In addition, the Regulations provide that if any portion of the premium deposits retained, for which allowance is taken, is subsequently applied to the payment of losses or expenses, then such payment cannot be deducted. Here the taxpayer's accountant, as already pointed out, admitted that the company in 1938 took deductions for losses and expenses as incurred to their full amount, and further that all of the disbursements pertaining to the underwriting income ($74,098.21) were thus taken as deductions in the company's return.
In consonance with my findings, both of fact and of law, I conclude that the Commissioner's determination of the tax in this case was proper, and judgment must be for the defendant.
Accordingly, I state the following
Conclusions of Law
1. Plaintiff is entitled to be classed as an insurance company within the meaning of the Federal Internal Revenue laws.
2. The evidence fails to establish that plaintiff conducted its operations during 1938 as a pure mutual company within the meaning of Section 101(11) of the Revenue Act of 1938.
3. The change in the plaintiff's charter which became effective June 8, 1938, did not affect the proper classification of the plaintiff for income tax purposes, and such change was not sufficient to require the Commissioner to classify the plaintiff as a pure mutual company within the meaning of the tax laws after June 8, 1938, nor would such change in itself bring the plaintiff within the provisions of Section 207(c) of the 1938 act.
4. The plaintiff is not entitled to a deduction under Section 207(c) (3) for any part of the year 1938.
5. Under the evidence and the law, plaintiff has failed to sustain its burden of proof that the Commissioner erred to its detriment in the determination and assessment of the taxes, the recovery of which is sought herein.
6. The motion to dismiss, Action No. 1478, is hereby granted without prejudice in so far as the cause of action in No. 1478 is duplicated in Action No. 2503.
7. The objection of the defendant to the proposed supplemental stipulation of facts which was offered on behalf of the plaintiff, and which supplemental stipulation was neither signed nor agreed to, is sustained on the ground that the unsigned stipulation was not acceptable as evidence of the facts set forth therein.
8. The defendant is entitled to judgment for its costs.
An order may be submitted in accordance with the above.