122 F.2d 886 (3rd Cir. 1941), 7632, Keystone Automobile Club Casualty Co. v. Commissioner of Internal Revenue

Docket Nº:7632.
Citation:122 F.2d 886
Party Name:KEYSTONE AUTOMOBILE CLUB CASUALTY CO. v. COMMISSIONER OF INTERNAL REVENUE. KEYSTONE AUTOMOBILE CLUB FIRE CO. v. SAME.
Case Date:September 10, 1941
Court:United States Courts of Appeals, Court of Appeals for the Third Circuit
 
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Page 886

122 F.2d 886 (3rd Cir. 1941)

KEYSTONE AUTOMOBILE CLUB CASUALTY CO.

v.

COMMISSIONER OF INTERNAL REVENUE.

KEYSTONE AUTOMOBILE CLUB FIRE CO.

v.

SAME.

No. 7632.

United States Court of Appeals, Third Circuit.

September 10, 1941

Rehearing Denied Oct. 30, 1941.

Page 887

[Copyrighted Material Omitted]

Page 888

John W. Davis, of New York City (R. Lester Moore, of Philadelphia, Pa., and Todd Daniel, of Philadelphia, Pa., on the brief), for petitioners.

Newton K. Fox, of Washington, D.C., (Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key, Sp. Asst. To Atty. Gen., on the brief), for respondent.

Before BIGGS, CLARK, and GOODRICH, Circuit Judges.

GOODRICH, Circuit Judge.

Tax liability in this case turns upon the mutual or cooperative character of the petitioners. There are involved tax deficiencies of $167, 331.06 for the years 1929 to 1935 inclusive.

The history of the petitioners, Keystone Automobile Casualty Co. and Keystone Automobile Club Fire Co., begins with the organization on March 23, 1925, of the Insurance Exchange of the Keystone Automobile Club. The Club was a cooperative association organized as a non-profit corporation under the laws of Pennsylvania to promote the interest of motorists and to furnish various facilities and services to its members. The Insurance Exchange was organized by the Club with a loan of $25, 000 to write automobile casualty and fire insurance.

On May 31, 1928, the Club in order to accommodate members in New Jersey, where an insurance exchange was not permitted to operate, reorganized the Exchange by the incorporation under Pennsylvania law of a casualty insurance company and a fire insurance company, the petitioners in this case. The Club paid into the treasury of the petitioners $450, 000, the minimum capital requirements for such companies, for which it received the entire capital stock of the petitioners. 1

In November, 1930, the statutory capital of the petitioners was increased from $450, 000 to $750, 000. The increase was made in order to meet the requirements of the Financial Responsibility Law of the State of New York. The increase was effected by the transfer from the contingent reserve to the capital and surplus accounts of the necessary amounts. A stock dividend of $100, 000 was declared by each company and additional shares of stock representing the stock dividends were issued to the Club.

As of December 31, 1935, the capital and surplus of the petitioners amounted to $750, 000 and their contingent reserve amounted to $719, 301.33-- a total of $1, 469, 301.33. The present expectation, however, is that upon the liquidation of the petitioners the Club would receive only $450, 000. 2

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The petitioners in the tax years involved insured members of the club and also members, of two other automobile clubs, the Delaware Automobile Association and the Pittsburg Motor Club. On the average they insured 35, 121 of the 42, 493 members of the Keystone Club and, in addition, 5, 171 members of the other clubs. All policyholders were treated alike-- they were charged premiums at about 10%, until 1932 and thereafter at about 20% less than those of ordinary stock companies and were refunded 25%, until 1932 and thereafter 10%, of the premiums.

The members of the Keystone Club elected the Club's officers and directors. The persons so chosen elected themselves, by proxy from the Club, officers and directors of the petitioning companies. Policyholders of the other two clubs had no power to vote, although it was provided that they could become members of the Keystone Club upon payment of annual dues.

Under these facts it is necessary to determine whether two provisions of the Revenue Acts dealing with mutual insurance companies are applicable to the petitioners. One provision, Sec. 103(11) of the Revenue Acts of 1928 and 1932 and Sec. 101(11) of the Revenue Act of 1934, 26 U.S.C.A.Int.Rev.Code, § 101(11), exempts: 'Farmers' or other mutual hail, cyclone, casualty, or fire insurance companies or associations (including interinsurers and reciprocal underwriters) the income of which is used or held for the purpose of paying losses or expenses;' The other provision, Sec. 208(c)(3) of the Revenue Acts of 1928 and 1932 and Sec. 207(c)(3) of the Revenue Act of 1934, 26 U.S.C.A.Int.Rev.Code, 207(c)(3), permits deductions as follows: 'In the case of...

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