Convention did the next best thing: It drew up a form containing only those items of accounts upon which there was no disagreement among the individual states. This is the form to which the Code apparently refers. However, the Convention left a number of blank spaces in the form for the insertion of items, required to be shown by certain states, in that area in which uniformity among all the states is lacking. But whenever an item in that area is added by an insurance company subject to the Code it is not such an item as is required by the Convention Form. This is especially so when the effect of the added item is to neutralize or nullify in whole or in part entries or computations required by the Form.
Under the heading, 'Income', on page 2, item 17, of the Convention Form, the companies are required to show their net premiums written on policies during the year. To obtain this figure, the company must deduct all premiums ceded to reinsurance companies. There can be no question that when the term 'reinsurance' is used on this page it means reinsurance placed with all companies- both admitted and non-admitted. The insurance departments of the various states do not and would not permit a different treatment by the companies. When cash is paid out it is just as much gone from the assets of the company if it is paid to a non-admitted company as when it is paid to an admitted company. There is nothing in the Convention Form to indicate that when the word, 'reinsurance', appears on subsequent pages something less than all reinsurance is meant. The Form contains no items whereby transactions with admitted and non-admitted companies may be distinguished; any showing of such a distinction must be made by a schedule or added explanation, such as a footnote, sub-total or added item. Hence the instruction, 'Deduct reinsurance', appearing in column 5 on page 5 of the Convention Form means deduct all reinsurance. Such an interpretation does not conflict with Sec. 204(b)(1) of the Code, and if followed would assist in both uniformity of reporting in the annual statements and arriving at the companies' true income.
It would seem, therefore, that 'item 32B' added by the taxpayer in its annual statements is not an item required by the Convention Form. That amount of the 'item' appearing as unpaid losses recoverable from non-admitted companies nullifies in part a subtraction previously made on the same page; that part of the 'item' appearing as reinsurance on paid losses recoverable from non-admitted companies is inappropriate, from an accounting viewpoint, for increasing the liabilities if the scheme of the Convention Form is followed. That sum has already been included in the total of item 12 and 'item 12A' under Ledger Assets on page 4 of the annual statements.
Conclusions of Law.
1. This court has jurisdiction over the parties and the subject matter of the actions here involved.
2. The specific provisions of Sec. 204 of the Internal Revenue Code, 26 U.S.C.A. § 204, are to be followed by the taxpayer in computing its underwriting income for income tax purposes, and the Convention Form is to be used as a general guide.
3. The term 'reinsurance' appearing in the Convention Form means all reinsurance, including transactions with non-admitted companies as well as with admitted ones.
4. The taxpayer, in ascertaining its losses for the taxable years involved, properly subtracted from such sums the amounts recoverable from reinsurance companies, both admitted and non-admitted. For income tax purposes, it may not treat insurance risks reinsured with non-admitted companies as business retained by it.
5. The taxpayer was not entitled to have included in its allowable deductions for income tax purposes the increase over the previous year in its reserve for losses recoverable on reinsurance placed by it with non-admitted companies.
6. The amounts sought to be recovered in these actions have not been erroneously collected by the Collector of Internal Revenue for the First District of Pennsylvania; and the taxpayer is not entitled to recover such amounts.
Accordingly, the defendants are entitled to judgment against the plaintiff.