PENNSYLVANIA CO. FOR INSURANCES, ETC. v. United States

• Decision Date: 16 November 1943
• Docket Number: No. 8219,8220.,8219
• Citation: 138 F.2d 869
• Parties: PENNSYLVANIA CO. FOR INSURANCES ON LIVES AND GRANTING ANNUITIES v. UNITED STATES (two cases).
• Court: U.S. Court of Appeals — Third Circuit

138 F.2d 869 (1943)

PENNSYLVANIA CO. FOR INSURANCES ON LIVES AND GRANTING ANNUITIES v. UNITED STATES (two cases).

Nos. 8219, 8220.

Circuit Court of Appeals, Third Circuit.

Argued May 17, 1943.

Decided November 16, 1943.

Francis H. Bohlen, Jr., of Philadelphia, Pa. (Saul, Ewing, Remick & Harrison, of Philadelphia, Pa., on the brief), for appellant.

Carlton Fox, of Washington, D. C. (Samuel O. Clark, Jr., Asst. Atty. Gen., Sewall Key, Samuel H. Levy, E. E. Angevine, Sp. Assts. to the Atty. Gen., Gerald A. Gleeson, U. S. Atty., and Thomas J. Curtin, Asst. U. S. Atty., both of Philadelphia, Pa., on the brief), for appellee.

Before BIGGS, MAGRUDER, and JONES, Circuit Judges.

JONES, Circuit Judge.

The Pennsylvania Company for Insurances on Lives and Granting Annuities, trustee under an agreement with the Capital Savings Plan, Inc., and the holders of contract certificates issued thereunder, sued to recover from the United States certain payments made by the trustee on account of income and excess profits taxes for the calendar years 1936 and 1938 and capital stock taxes for the fiscal years ending June 30, 1935 to 1938, both inclusive. As trustee under a like agreement with the Wellington Foundation, Inc., and the holders of certificates issued thereunder, it also sued to recover certain payments made by it on account of income taxes for the calendar year 1940 and capital stock taxes for the years 1937 to 1940, both inclusive. The two cases were tried to the District Court upon stipulated facts. The court entered judgment for the defendant in each case, from which the plaintiff took the pending appeals. The legal question being the same in both cases, the appeals were briefed and argued together and will be disposed of in one opinion.

The question involved is whether the trusts under consideration are pure trusts or associations taxable as corporations within the meaning of the Revenue Acts. The provisions of the Revenue Acts pertinent to both cases are Sec. 1001(a) (2) of the Revenue Act of 1936 and Sec. 901 (a) (2) of the Revenue Act of 1938, and also, in the case of the Wellington Foundation, Inc., trust, § 3797(a) (3) of the Internal Revenue Code, each of which defines the term "corporation" as used in the particular Act as including "associations, jointstock companies, and insurance companies".¹ The facts which give rise to the question to be considered are both extensive and detailed and need be summarized in material part.

The Pennsylvania Company for Insurances on Lives and Granting Annuities (hereinafter referred to as Pennsylvania Company) is a bank and trust company organized and existing under the laws of Pennsylvania and having its principal office and place of business in Philadelphia.

Capital Savings Plan, Inc. (hereinafter referred to as Capital) is likewise a Pennsylvania corporation. Its business embraces the issuance and distribution of its savings plans to members of the public under any one of three trust agreements, one of which is now before us. Subsequent to the tax years involved in the case of the Capital trust, to wit, on December 31, 1938, Capital was merged with Independence Shares Corporation (hereinafter referred to as Independence), also a Pennsylvania corporation. Independence is an investment trust. Its trust shares were sold by Capital as vendor or dealer through the trustee to holders of Capital savings plans. Since the merger Independence has continued to furnish trust shares for the purpose of the plans but has not issued or distributed any of Capital's savings plans. Both Capital and Independence have also purchased trust shares which were required to be sold pursuant to the direction of planholders and have resold such shares to other planholders through the trustee.

Wellington Foundation, Inc. (hereinafter referred to as Wellington), is a Delaware corporation, also engaged in the business of issuing and distributing to members of the public its plans under its agreement with the trustee.

The trust agreements in the case of both Capital and Wellington are in the form of an undertaking between the distributor of the plans (Capital or Wellington, as the case may be), the trustee (Pennsylvania Company), and members of the public who became parties thereto by acquiring plans. A prospective planholder first signs an application for a plan acceptable to the distributor and to the trustee and accompanies his application with his first payment, either periodic or in full, depending upon the plan selected. Upon the distributor's acceptance of the application and the trustee's approval thereof, a contract certificate in the case of the Capital savings plan and a certificate in the case of the Wellington plan is issued to the planholder.

The certificates issued under the trust agreements are of three types, viz., (1) those under which the investor agrees to make 120 monthly payments (usually $10 per month) without insurance benefits, (2) same as type (1) but with insurance benefits, and (3) fully paid contract certificates.

Upon issuance of the approved contract certificate in the case of Capital or the certificate in the case of Wellington, the trustee enters on its registry the name of the investor for whom a separate account is opened by the trustee. Certain authorized deductions (for services, etc.) are made by the trustee from the amount paid in by the purchasers of the plans and the balance of such payments is applied, under the Capital plan, to the purchase of Independence Trust shares or, under the Wellington plan, shares of the Wellington Fund, Inc., an investment trust. Concurrently the trustee records on the individual investor's "account card" the number of shares purchased for him and also records the balance of the trust shares then held for the investor. The trustee's practice has at all times been to purchase on each business day with the funds available from payments and distributions received, after making the authorized deductions, the number of trust shares which could be purchased with the funds at the asked price for the trust shares in effect on the date of purchase.

In the periodic payment plan neither the trustee nor the distributor has any right to terminate the plan of any planholder so long as he makes his periodic payments when due. The planholder, however, is not bound to continue making payments for the full period of his plan. He may, under either the periodic or the full payment plan, terminate his plan at any time and receive at his option all of the shares purchased for him to date or the proceeds of the sale thereof.

After the planholder has completed all of his payments, he can, under the Capital plan, require the administration of the plan for ten more years and, under the Wellington plan, for a period of twenty-five years from its original date. Thus, the Capital plan contemplates a ten to twenty year term, and the Wellington plan a ten to twenty-five year term.

Once the plan is issued, neither the planholder, nor the distributor, nor the trustee can disturb the trusteeship except in the case of default under the periodic plan or in the very remote contingency under the Wellington plan that the present trustee becomes incapable of acting or has its affairs taken over by a governmental agency.

Under the fully paid Capital plan the planholder has the right to require the trustee to pay him the dividends received by the trustee instead of having the trustee reinvest them in additional shares. Under the periodic payment plan the dividends are reinvested in additional shares. Under the Wellington plan the dividends are distributed currently to the planholders unless they direct otherwise.

Under the Capital plan the shares specified for investment by the trustee are Independence Trust shares, which, as already indicated, are shares of an investment trust, being of the fixed or deposit unit type. The distributor may substitute for purchase by the trustee "* * * shares of a similar fixed investment trust having underlying securities of a standard nature and diversified in character, which said underlying securities are reasonably comparable to the securities underlying said Independence Trust Shares * * *."² The power so to substitute becomes exercisable when Independence Trust shares are not available or their purchase is impracticable. In such event receipts of banks, trust companies, or banking institutions, or certificates of deposit or of interest or of participation issued by banks, trust companies, or banking institutions evidencing a deposit of or representing blocks of underlying securities comparable to the securities underlying Independence Trust shares may be substituted by the distributor.³

If the distributor fails or refuses for a period of sixty days to provide other trust shares for the trustee's purchase and Independence Trust shares are not available for purchase, or, if available, are purchaseable only at a price which the trustee deems unreasonable, then the trustee may elect to exercise the power of substitution. If that be done, it is necessary for the planholders to consent to the trustee's proposed action within thirty days of notice thereof. Failing such consent, no substitution of shares can be made for those not consenting and their contract certificates become subject to termination in accordance with the trust agreement.⁴

The specified investments under the Wellington plan are shares of the Wellington Fund, Inc., an investment trust incorporated under the laws of Delaware, wholly separate and distinct from Wellington Foundation, Inc. The Wellington Foundation trust agreement provides that "* * * the Foundation may, at any time, at its option, substitute for Trust Shares * * * (either * * * theretofore delivered * * * or * * * thereafter to be acquired * * * or both) Trust Shares or other divisible interests of any investment trust (incorporated or unincorporated) having securities in its portfolio of...