142 F.2d 344 (3rd Cir. 1944), 8472, Mutual Fire Ins. Co. of Germantown v. United States

Docket Nº:8472.
Citation:142 F.2d 344
Case Date:April 28, 1944
Court:United States Courts of Appeals, Court of Appeals for the Third Circuit

Page 344

142 F.2d 344 (3rd Cir. 1944)




No. 8472.

United States Court of Appeals. Third Circuit.

April 28, 1944

Argued Feb. 10, 1944.

Page 345

Robert T. McCracken, of Philadelphia, Pa. (Horace Michener Schell and Montgomery, McCracken, Walker & Rhoads, all of Philadelphia, Pa., on the brief), for appellant.

Paul R. Russell, of Washington, D.C. (Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key and Helen R. Carloss, 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 MARIS, GOODRICH, and McLAUGHLIN, Circuit Judges.

MARIS, Circuit Judge.

This is an appeal from a judgment of the District Court for the Eastern District of Pennsylvania in favor of the United States denying the taxpayer's claim to the recovery of alleged overpayments of its 1938 income tax. The taxpayer claimed that it was a mutual fire insurance company which used or held its income for the payment of losses or expenses and consequently that it was entitled to be treated as a tax exempt corporation by virtue of Section 101(11) of the Revenue Act of 1938, 26 U.S.C.A.Int.Rev.Code § 101(11). 1 In the alternative it claimed that if it were subject to tax it would be entitled to the benefit of Section 207(c)(3) of the Revenue Act of 1938, 26 U.S.C.A.Int.Rev.Code, § 207(c)(3), 2 which authorizes mutual fire insurance companies to deduct from their gross income the amount of premium deposits retained by them for the payment of losses, expenses and reinsurance reserves

The District Court denied the claim to tax exemption because it found that the taxpayer was not a mutual fire insurance company. It also concluded that the taxpayer was not entitled to the special deductions allowed mutual insurance companies by Section 207(c)(3). 50 F.Supp. 665. The taxpayer contends that each of these conclusions is erroneous.

Neither the Revenue Act of 1938 nor the prior revenue laws define what is meant by a 'mutual' fire insurance company nor do they specify the tests to apply in determining whether a taxpayer is a mutual fire insurance company. The taxpayer urges that when the taxing act is silent the local law must determine and that by the

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law of Pennsylvania it is a mutual fire insurance company. 3 When to apply the local law in construing federal taxing acts and when not to do so is a problem which continues to perplex the courts. 4 It is settled that local laws are determinative if the taxing act so provides, either expressly or by inference. 5 Subject to this exception the admonition in Burnet v. Harmel, 1932, 287 U.S. 103, 110, 53 S.Ct. 74, 77, 77 L.Ed. 199, that the taxing act 'is to be interpreted so as to give a uniform application to a nation-wide scheme of taxation' still holds good. 6 Acting upon this principle of uniformity in interpretation of the tax laws the Supreme Court has applied general rather than local law in determining whether a taxpayer was an insurance company. 7 We think the District Court in the present case properly looked to the general law rather than the local law to determine whether the taxpayer was a mutual company within the meaning of the taxing act. Relying upon the general law the District Court held that one of the essential characteristics of a mutual company is that it provide fire insurance protection to its policyholders substantially at cost. It found that the taxpayer lacked this characteristic

In no case, urges the taxpayer, has any court denied a mutual fire insurance company the status of a tax exempt corporation solely upon the ground that it did not provide insurance to its policyholders at cost. So far as our research discloses this is so. There are, however, several cases in this circuit in which it has been clearly indicated that this is one of the fundamental characteristics of a mutual company. The earliest of these cases, Mutual Benefit Life Ins. Co. v. Herold, D.C.N.J. 1912, 198 F. 199 involved a life insurance company. In that case the question before the court was whether the taxpayer, a mutual life insurance company, was subject to tax under the Corporation Excise Tax Act of 1909 upon so much of the premiums as it returned or credited to its policyholders. The court's ruling was that such amounts represented payments by the policyholders and not profits of the company. Judge Cross gave a lucid exposition of the manner in which level-premium mutual insurance companies operated and, referring to the portion of the premium paid in excess of the actual cost of insurance, said (page 205): 'This excess payment represents, not profits or receipts, but an overpayment-- an overpayment because, being entitled to his insurance at cost and having paid more than it cost, he is equitably entitled to have such excess applied for his benefit. ' This decision was affirmed by this court in a per curiam opinion, 201 F. 918, and certiorari was denied by the Supreme Court, 231 U.S. 755, 34 S.Ct. 323, 58 L.Ed. 468.

That this was a correct description of the manner in which a mutual insurance company operates may be concluded from Justice Brandeis' statement in Penn Mutual Co. v. Lederer, 1920, 252 U.S. 523, in which he said at page 525, 40 S.Ct. 397, at page 398, 64 L.Ed. 698: 'In a mutual...

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