Mutual Fire Ins. Co. of Germantown v. United States
Court | United States Courts of Appeals. United States Court of Appeals (3rd Circuit) |
Citation | 142 F.2d 344 |
Docket Number | No. 8472.,8472. |
Parties | MUTUAL FIRE INS. CO. OF GERMANTOWN v. UNITED STATES. |
Decision Date | 28 April 1944 |
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.
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 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 Mutual Ben. Life Ins. Co. v. Duffy, D.C.N.J.1924, 295 F. 881, affirmed by this court in a per curiam opinion, 3 F.2d 1020, affirmed by the Supreme Court on another point, 272 U.S. 613, 47 S.Ct. 205, 71 L.Ed. 439, the court held that the legal reserve of a mutual life insurance company, consisting of premiums paid by the members and earnings upon premiums, was invested capital within the war excess profits tax of the Revenue Act of 1917. In its opinion the District Court said at page 887 of 295 F.:
The principle that mutuality involves insurance at cost has likewise been applied by this court to fire insurance companies. In MacLaughlin v. Philadelphia Contributionship, 1934, 73 F.2d 582, 584, certiorari denied 294 U.S. 718, 55 S.Ct. 544, 79 L.Ed. 1251, this court was called upon to construe Section 231(11) of the Revenue Act of 1926, 26 U.S.C.A. Int.Rev.Code § 101 (11), which accorded to mutual fire insurance companies a tax exempt status. The court held that the taxpayer was not entitled to tax exemption because it did not use or hold its income solely for the payment of losses and expenses but rather for investment for the benefit of its members. Commenting upon the section which provided the tax exemption we said:
In Driscoll v. Washington County Fire Ins. Co., 1940, 110 F.2d 485, certiorari denied 311 U.S. 658, 61 S.Ct. 12, 85 L.Ed. 421, this court held that the taxpayer was not a mutual company because it lacked democratic control, since but 16 of its more than 3,000 policyholders were entitled to vote to elect directors. Judge Biggs in the course of his discussion upon another aspect of the case, namely, whether the taxpayer used or held its income solely for the payment of losses or expenses, reiterated that it is of the essence of mutual insurance that the excess in the premiums over the actual cost as ascertained shall be returned to the policyholders, in other words, that mutuality implies insurance at cost.
In Keystone Mut. Casualty Co. v. Driscoll, D.C.Pa.1942, 44 F.Supp. 658, the taxpayer claimed to be a mutual fire insurance company entitled to tax exemption by virtue of Section 101(11) of the Revenue Acts of 1936 and 1938, 26 U.S.C.A. Int.Rev. Code, § 101(11). This claim was denied. Judge Gibson said: "The consensus of the opinions is that the section contemplates an association of individuals whose sole object is to obtain insurance for themselves at cost, and, if amounts greater than necessary cost have been collected, that excess was to be returned to members in some form." Upon appeal this court denied the claim for exemption upon the ground that the income of the company was not held solely for the payment of losses and expenses. Judge Biggs pointed out, however, that the taxpayer was not a mutual company such as was contemplated by Congress because of its failure to provide insurance at cost. 1942, 137 F.2d 907.
It will thus be seen that this court has consistently adhered to the view that one of the essential characteristics of a mutual insurance company is that it provide insurance to its members substantially at cost.
We think that the history of the early development of mutual insurance companies justifies this view. The earliest mutual insurance companies...
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