Mutual Ben. Life Ins. Co. v. Herold

• Citation: 198 F. 199
• Parties: MUTUAL BENEFIT LIFE INS. CO. v. HEROLD, Internal Revenue Collector.
• Decision Date: 29 July 1912
• Court: United States District Courts. 3th Circuit. United States District Courts. 3th Circuit. District of New Jersey

198 F. 199

MUTUAL BENEFIT LIFE INS. CO. v. HEROLD, Internal Revenue Collector.

United States District Court, D. New Jersey.

July 29, 1912

John O H. Pitney, John R. Hardin, and David Kay, Jr., for plaintiff.

John B Vreeland, U.S. Dist. Atty., and H. P. Lindabury, Asst. U.S Dist. Atty., for defendant.

CROSS District Judge.

This action was instituted in the Supreme Court of this state, and removed by certiorari to this court, where the same was tried without the intervention of a jury, which was waived pursuant to the statute. Testimony in the case having been taken counsel for the respective parties agreed upon a statement of facts, which they requested the court to find in the nature of a special verdict, and direct the same to be entered of record as such, with which request the court has complied.

The plaintiff seeks to recover from the defendant certain taxes which it alleges were illegally assessed against it, under and by virtue of the provision of the act of Congress entitled 'An act to provide revenue, equalize duties and encourage the industries of the United States, and for other purposes,' approved August 5, 1909 (36 Stat. 112, c. 6, Sec. 38 (U.S. Comp. St. Supp. 1911, p. 946)), which taxes so assessed amount to $61,853.98. The statement of facts admits that the taxes were paid under protest and duress, and that the plaintiff has complied with all of the prerequisites necessary to entitle it to recover so much of said taxes as it may be adjudged herein were erroneously or wrongfully assessed and collected. The plaintiff was incorporated by a charter granted by the state of New Jersey in 1845 (P.L. 1845, p. 25) for the insurance of life risks. It is a mutual company, without capital stock or stockholders. Its policy holders are its only members, and they select its directors from their own number. Its business is conducted on the mutual level premium plan.

Pursuant to section 38 of the act of Congress above referred to, the plaintiff duly filed the return thereby required for the years 1909 and 1910, showing the gross income received by it during those years, respectively, and other matters required by that act, and the excise tax assessed thereon against the plaintiff for those years was duly paid. Subsequently, and in the year 1911, the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury, amended the return for the years above mentioned, and levied an additional assessment against the plaintiff for the year 1909 of $26,789.83, and for the year 1910 an additional assessment of $35,064.15, which sums the plaintiff alleges were illegally assessed and seeks to recover by this action.

The portions of section 38 of the act above referred to especially applicable to this case may be found in paragraphs 1 and 2. Paragraph 1 provides that:

' * * * Every insurance company now or hereafter organized under the laws of the United States, or of any state or territory of the United States, * * * shall be subject to pay annually a special excise tax with respect to the carrying on or doing business by such * * * insurance company, equivalent to one per centum upon the entire net income over and above five thousand dollars received by it from all sources during such year, exclusive of amounts received by it as dividends upon stock of other corporations, joint stock companies or associations, or insurance companies, subject to the tax hereby imposed. * * * '

And paragraph 2 provides that:

'Such net income shall be ascertained by deducting from the gross amount of the income of such * * * insurance company received within the year from all sources (first) all the ordinary and necessary expenses actually paid within the year out of income in the maintenance and operation of its business and properties, including all charges such as rentals or franchise payments, required to be made as a condition to the continued use or possession of property; (second) all losses actually sustained within the year and not compensated by insurance or otherwise, including a reasonable allowance for depreciation of property, if any, and in the case of insurance companies the sums other than dividends, paid within the year on policy and annuity contracts and the net addition, if any, required by law to be made within the year to reserve funds; * * * (third) interest actually paid within the year on its bonded or other indebtedness, etc.; * * * (fourth) all sums paid by it within the year for taxes, etc.; * * * (fifth) all amounts received by it within the year as dividends upon stock of other corporations, joint stock companies, or associations, or insurance companies, subject to the tax hereby imposed. * * * '

At the outset it may be remarked that a statute providing for the imposition of taxes is to be strictly construed, and all reasonable doubts in respect thereto resolved against the government and in favor of the citizen. This principle is so well established that the citation of any considerable number of authorities in its support is unnecessary. In Spreckels Sugar Co. v. McClain, Collector, etc., 192 U.S. 397, 416, 24 Sup.Ct. 376, 382 (48 L.Ed. 496), Mr. Justice Harlan quoted with approval the following language of Judge Gray:

'Keeping in mind the well-settled rule that the citizen is exempt from taxation, unless the same is imposed by clear and unequivocal language, and that, where the construction of a tax is doubtful, the doubt is to be resolved in favor of those upon whom the tax is sought to be laid.'

In Benziger v. United States, 192 U.S. 38, 24 Sup.Ct. 189, 48 L.Ed. 331, it was held, with reference to a classification under the tariff act, that the provision of the statute--

'should be liberally construed in favor of the importer, and, if there were any fair doubt as to the true construction of the provision in question, the court should resolve the doubt in his favor.'

That case cited with approval American Net & Twine Co. v. Worthington, 141 U.S. 468, 12 Sup.Ct. 55, 35 L.Ed. 821, and United States v. Wigglesworth, 2 Story, 369, Fed. Cas. No. 16,690, in which latter case it was held that:

'It is * * * a general rule, in the interpretation of all statutes levying taxes or duties upon subjects or citizens, not to extend their provisions by implication beyond the clear import of the language used, or to enlarge their operation so as to embrace matters not specifically pointed out, although standing upon a close analogy. In every case, therefore, of doubt, such statutes are construed most strongly against the government, and in favor of the subjects or citizens, because burdens are not to be imposed, nor presumed to be imposed, beyond what the statutes expressly and clearly import.'

Four points have been raised and argued by counsel: First, whether certain so-called dividends are or are not 'income * * * received' within the meaning of the statute; second, whether certain so-called 'supplementary policy contracts' should be represented in the reserve funds; third, whether for the purpose of taxation the corporation's statement should be made on a 'cash' or on a 'revenue' basis; and lastly, whether expenditures for replacing furniture, etc., should be considered as an investment or an expense.

These questions, of which the first is the most important, will be considered in the order named. Before proceeding, however, to determine whether 'income * * * received' includes, not only cash receipts, but also deductions from renewal premiums allowed on account of overpayments of previous years, it seems both advisable and necessary to quote at some length from the statement of facts:

Paragraph 4 thereof, after describing the three methods employed in mutual life insurance of securing from members, contributions to meet losses, proceeds as follows:

'The level premium plan is the one in general use by all insurance companies, including plaintiff. Under this plan the maximum annual contribution which any member can be called upon to pay is uniform throughout the life of the policy. The member pays during his early years a sum in excess of the current cost of his insurance. This excess is applied to the creation of a reserve or self-insurance fund, which serves to maintain the insurance in the later years, when the stipulated level premium would be insufficient to meet the current cost of insurance on the mutual premium plan.

'Whether a mutual company be conducted on the assessment plan, the natural premium plan, or the level premium plan, the member receives his insurance at cost. The assessment company collects its premiums after the death has actually occurred and the cost is thereby ascertained. The mutual level premium company collects its estimated premiums in advance and adjusts the actual cost afterwards.

'The calculation of premium rates for life insurance involves, first, the adoption of a table of mortality, showing the probable death rate for each age of life; second, the adoption of an assumed rate of interest such as the company may safely expect to realize upon its invested assets during the lifetime of the policy. These two factors determine what is technically known as the net or mathematical premiums, which are the sums sufficient and necessary to pay all outstanding policies as they become claims, provided deaths occur exactly in accordance with the table of mortality and the rate of interest earned on the investment of such premiums is exactly equal to the rate assumed. To the net or mathematical premiums there is added a sum, technically known as 'loading,' for the purpose of meeting the expense of conducting the business, as well as any unforeseen contingencies, such as an abnormal death rate due to war or pestilence. The net or

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