Order of Ry. Emps. v. Comm'r of Internal Revenue
| Citation | 2 T.C. 607 |
| Decision Date | 24 August 1943 |
| Docket Number | Docket No. 110521. |
| Parties | ORDER OF RAILWAY EMPLOYEES, A CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | United States Tax Court |
OPINION TEXT STARTS HERE
A mutual insurance company does not lose its right to be taxes as such under sec. 207(a), I.R.C., merely because its directors, in the exercise of their discretion, accumulated and held, in an account designated ‘surplus,‘ the excess of premiums over cost for eight years of its existence. The test of determining mutuality is the ownership of the company, its earnings and accumulations, by its policyholders. Mutuality not lost merely because holders of lapsed policies forfeit their right share in the distribution of accumulated surplus. Hartley F. Peart, Esq., Howard Hassard, Esq., and Homer H. Tooley, C.P.A., for the petitioner.
Samuel Taylor, Esq., for the respondent.
Petitioner challenges the correctness of the following deficiencies in income tax:
+----------------+
¦1936 ¦$693.69 ¦
+-----+----------¦
¦1937 ¦4,497.44 ¦
+-----+----------¦
¦1938 ¦9,325.93 ¦
+-----+----------¦
¦1939 ¦8,868.39 ¦
+-----+----------¦
¦1940 ¦4,045.87 ¦
+-----+----------¦
¦Total¦27,431.32 ¦
+----------------+
The facts are found to be as stipulated. Other facts appearing in our findings are based upon evidence adduced at the hearing.
The sole issue is whether the respondent erred in holding that petitioner is to be taxes as an insurance company other than life or mutual. Petitioner contends that it is taxable either as a mutual life insurance company or as a mutual insurance company other than life.
Petitioner is a California corporation, incorporated in August 1906. Under its original articles of incorporation petitioner was a fraternal beneficiary society. In March 1919 its articles of incorporation were amended to provide for the issuance to its members of health and accident insurance contracts on the assessment plan. The fraternal and lodge features were eliminated by this amendment.
In May 1926 petitioner's articles were again amended to provide for the issuance to its members of life insurance and annuity or endowment insurance contracts in addition to health and accident insurance. Between 1926 and 1934 petitioner operated as a mutual life, health, and accident insurance company on the assessment plan. During this period its policies contained the following provision:
Mutual Provision: The Order of Railway Employees is a mutual insurance corporation organized and operating under the laws of California. The power is reserved, in the event of and during an emergency, to collect from the members necessary additional amounts to protect this and other like certificates.
On October 18, 1934, petitioner's articles were again amended. The following are excerpts from the articles which were in force during the taxable years:
On October 25, 1934, petitioner was granted a certificate of authority to transact life, accident, and health insurance as a mutual legal reserve insurance company by the Insurance Commissioner of the State of California.
The phrase ‘mutual legal reserve‘ used in petitioner's articles of incorporation as amended in 1934 and its policies thereafter issued refers to provisions of California law which at that time permitted any domestic insurer to convert to a mutual corporation doing an insurance business with a statutory reserve fund for the protection of policyholders in lieu of a provision for special assessments on all policyholders. The California law authorized any domestic insurer having a reserve of at least $200,000 to amend its articles and to elect to operate as a ‘mutual legal reserve company.‘ The $200,000 minimum reserve permits a mutual leg reserve insurer to engage in the business of life insurance. In order to do a health and accident insurance business, an additional $50,000 reserve is required.1
Petitioner's officers are elected annually by its directors and its directors are elected annually by its members. Each policyholder is a member and entitled to vote. Each policy issued by petitioner from October 1934 to 1940, inclusive, contained the following provision:
The Order is a mutual legal reserve insurance corporation, and is owned wholly by its policyholders who are its members. This Policy constitutes the evidence of the Insured's membership in the Order and is the certificate thereof. Membership begins upon the taking effect of this Policy and shall end upon the death of the member, or the lapsing or other termination of this Policy. * * * Any failure to comply with the provisions of this Policy shall render invalid any claims hereunder.
Since its inception petitioner has been primarily an organization of railroad employees. Its officers and directors have always been railroad men and at the time of the hearing approximately 90 percent of its members were railroad employees.
On the 1st day of March 1931 petitioner distributed to its then members and policyholders a dividend aggregating $53,918.80. This distribution was made pursuant to resolutions of the board of directors of petitioner adopted on November 11, 1930, and February 11, 1931. Immediately thereafter, and for a period of several years, petitioner's losses and expenses exceeded its current income. This resulted from the nationwide economic depression. As a result of this experience the directors decided it would be inadvisable to pay any dividends ‘for the time being.‘ Their ambition and desire, as expressed at the hearing by their president, was ‘to make the financial condition of the Order absolutely solid and impervious to any kind of condition that might arise in the way of strikes, epidemics or those other conditions that cut so heavily into our income as a result of claims and decreased premium receipts.‘ It was expected that this policy would ‘insure the prompt and equitable payment of claims.‘ During 1934 and thereafter petitioner issued policies providing for payments during the lifetime of the insured, if accidentally injured, whereas the earlier policies had provided for payments during not to exceed 24 months. It also increased its payments for illness from 6 months to 16 months. The directors were desirous of building the surplus up to a point where these additional contingencies would be taken care of. In recent years they were also conscious of the uncertainties created by war. While the declaration of a dividend was discussed, none was made or paid by petitioner after 1931.
During the years 1931 to 1940, inclusive, the reserve funds held by petitioner, and the purposes for which they were held, were as follows:
+--------------------------------------------------------------------------+
¦ ¦Life reserve¦Statutory reserve ¦Emergency reserve ¦Surplus in ¦
+----+------------+--------------------+--------------------+--------------¦
¦ ¦(based on ¦fund (held for all ¦fund (held for ¦addition ¦
+----+------------+--------------------+--------------------+--------------¦
¦ ¦American ¦classes of insurance¦contingencies, e.g.;¦to reserves ¦
+----+------------+--------------------+--------------------+--------------¦
¦Year¦Experience ¦outstanding, ¦unusual losses ¦(also held for¦
+----+------------+--------------------+--------------------+--------------¦
¦ ¦Table ¦as required ¦and expenses) ¦contingencies)¦
+----+------------+--------------------+--------------------+--------------¦
¦ ¦at 3 1/2%) ¦by Cal. law) ¦ ¦ ¦
+----+------------+--------------------+--------------------+--------------¦
¦ ¦ ¦ ¦ ¦ ¦
+----+------------+--------------------+--------------------+--------------¦
¦1931¦$37,012 ¦$250,000 ¦$150,000 ¦$15,392.16 ¦
+----+------------+--------------------+--------------------+--------------¦
¦1932¦40,282 ¦250,000 ¦100,000 ¦20,310.77 ¦
+----+------------+--------------------+--------------------+--------------¦
¦1933¦44,199 ¦250,000 ¦50,000 ¦57,199.54 ¦...To continue reading
Request your trial
-
Holyoke Mut. Fire Ins. Co. v. Comm'r of Internal Revenue, Docket No. 51780.
...its policyholders in the future as well as the present and to cover any contingencies that may be fairly anticipated. Order of Railway Employees, 2 T.C. 607, 615 (1943), appeal dismissed (C.A. 9, 1944) 143 F.2d 597. The petitioner's directors are all required to be policyholders (section 77......
-
Oklahoma State Union of the Farmers Educ. & Coop. Union of America v. Comm'r of Internal Revenue
...to the members. There has been absolutely no evidence that the directors have abused their discretion. Cf. Order of Railway Employees v. Commissioner, 2 T.C. 607 (1943). A mutual insurance company may, as respondent concedes, retain earnings for the purpose of meeting contingencies and extr......
-
Modern Life & Accident Ins. Co. v. Comm'r of Internal Revenue
...River Burial Ass'n., supra; Peter Theodore, supra; Mutual Fire, Marine & Inland Insurance Co., 8 T.C. 1212 (1947); and Order of Railway Employees, 2 T.C. 607 (1943). Here, in the years 1959 through 1962, the petitioner was unable to pay any dividends to its policyholders. At the beginning o......
-
Moyer v. Comm'r of Internal Revenue (In re Estate of Moyer)
...secure its policyholders in the future as well as the present and to cover any contingencies that may be fairly anticipated. Order of Railway Employees, 2 T.C. 607, appeal dismissed 143 F.2d 597. Also, the use of high premium rates would enable a company to make returns of premiums, while t......