110 F.2d 485 (3rd Cir. 1940), 7221, Driscoll v. Washington County Fire Ins. Co., Washington, Pa.

Docket Nº:7221.
Citation:110 F.2d 485
Party Name:DRISCOLL, Collector of Internal Revenue, v. WASHINGTON COUNTY FIRE INS. CO., WASHINGTON, PA.
Case Date:February 27, 1940
Court:United States Courts of Appeals, Court of Appeals for the Third Circuit

Page 485

110 F.2d 485 (3rd Cir. 1940)

DRISCOLL, Collector of Internal Revenue,



No. 7221.

United States Court of Appeals, Third Circuit.

February 27, 1940

Rehearing Denied April 2, 1940.

Page 486

Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key and Carl J. Marold, Sp. Assts. to Atty. Gen., for appellant.

Wm. G. Heiner, of Pittsburgh, Pa., for appellee.

Page 487

Before BIGGS, CLARK, and JONES, Circuit Judges.

BIGGS, Circuit Judge.

Upon December 8, 1873, the appellee, Washington County Fire Insurance Company, was incorporated pursuant to the provisions of Act No. 236, 1 p. 211, Laws of Pennsylvania, Session of 1856, in conjunction with the provisions of Act. No. 27, p. 44, Laws of Pennsylvania, Session of 1867. The charter of the company (Section 2), issued by the Court of Common Pleas of Washington County, provided, 'The business of the said Company shall be transacted upon the mutual principle, exclusively, and the said Company is allowed to insure on the cash or annual premium system, the sum so received to be paid into the common treasury of the Company, and in consideration thereof the said Company to be responsible for all losses occurring to property thus insured according to the terms of their policies. Insurance thus effected shall not entitle the insured to membership in said Company, nor subject them to the payment of assessments ' Paragraph IX of the by-laws of the appellee provides: 'Every person wishing to become a member of this Company, shall previous to being insured, deposit his application and premium note with the Secretary of said Company, and if approved, the policy shall bear date on that day, and take effect at at noon, unless directed by the applicant to be dated on a future date. A sum equal to at least 5% of the premium note shall be paid at the time of making the application.'

It appears from the agreed statement of facts that beginning in 1873, when the appellee was incorporated, all insurance policies were issued in consideration of a cash premium and a contingent liability represented by a deposit note. This course was continued until July, 1911, when the by-laws were amended to provide that an insured should execute a deposit note only when the property insured was not rated. Beginning in January, 1914 and until the present time (with the exception set forth in the next paragraph) insurance has been issued upon rated property and unrated property alike for an annual cash premium payable in advance without the execution of deposit notes.

The exception referred to is as follows. During the period involved in this litigation (1928 to 1936, inclusive) the sixteen persons who were or are in charge of the management of the company did execute deposit notes in accordance with the practice which prevailed prior to 1911. During this period the average number of policyholders was 3,000. The agreed statement of facts (Paragraph 12) states, 'Only those persons executing deposit notes are members. The use of the deposit notes has been continued since 1914 for the purpose of providing for the membership entitled to elect the managing officers of the corporation. The personnel of the deposit note makers since 1914 has been determined by the directors of the plaintiff company. Every deposit note maker is a policyholder. ' The corporation has prospered and no assessments have ever been made.

If the charter provisions alone constitute the contract between the appellee and its members, putting to one side for the time being the provisions of the Act under which the appellee was incorporated, only deposit note makers are members. If is clear that throughout the taxable period only the sixteen deposit note makers voted to elect directors, thereby fulfilling one of the functions of membership in a mutual association. All the other policyholders performed none of the duties of members. If the provisions of Section 2 of the charter are to be deemed valid they are not subject to assessment for losses, and policies of insurance were issued to them precisely similar to those issued by stock companies to those whom they insured. These policyholders, as distinguished from the deposit note makers, merely paid a fixed premium for which they obtained a contract of insurance.

The question presented for our determination is whether the appellee was exempt from the payment of income taxes during the years 1928 to 1936 inclusive. The Federal Acts 2 provide:

Page 488

'The following organizations shall be exempt from taxation under this title (chapter)--

* * *

'(11) Farmers' or other mutual hail, cyclone, casualty, or fire insurance companies or associations * * * the income of which is used or held for the purpose of paying losses or expenses.'

Was the appellee a mutual company? The court below held that it was, believing that its membership could not be limited to the deposit-note makers despite the provision of the charter to such effect. The argument in favor of this conclusion may be stated as follows. Section 11 of the Pennsylvania Act of 1856 3 provides that membership in the company may be obtained by payment of a premium or contracting to pay it and...

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