Penn Mut Life Ins Co v. Lederer

Decision Date19 April 1920
Docket NumberNo. 499,499
Citation252 U.S. 523,40 S.Ct. 397,64 L.Ed. 698
PartiesPENN MUT. LIFE INS. CO. v. LEDERER, Collector of Internal Revenue
CourtU.S. Supreme Court

Mr. George Wharton Pepper, of Philadelphia, Pa., for petitioner.

Mr. Assistant Attorney General Frierson, for respondent.

Mr. Justice BRANDEIS delivered the opinion of the Court.

The Penn Mutual Life Insurance Company, a purely mutual legal reserve company which issues level premium insurance, brought this action in the District Court of the United States for the Eastern District of Pennsylvania to recover $6,865.03 which was assessed and collected as an income tax of 1 per cent. upon the sum of $686,503, alleged to have been wrongly included as a part of its gross income, and hence also of its net income, for the period from March 1, 1913 to December 31, 1913. The latter sum equals the aggregate of the amounts paid during that period by the company to its policy holders in cash dividends which were not used by them during that period in payment of premiums. The several amounts making up this aggregate represent mainly a part of the so-called redundancy in premiums paid by the respective policy holders in some previous year or years. They are, in a sense, a repayment of that part of the premium previously paid which experience has proved was in excess of the amount which had been assumed would be required to meet the policy obligations (ordinarily termed losses) or the legal reserve and the expense of conducting the business.1 The District Court allowed recovery of the full amount with interest. 247 Fed. 559. The Circuit Court of Appeals for the Third Circuit, holding that nothing was recoverable except a single small item, reversed the judgment and awarded a new trial. 258 Fed. 81, 169 C. C. A. 167. A writ of certiorari from this court was then allowed. 250 U. S. 656, 40 Sup. Ct. 14, 63 L. Ed. 1192.

Whether the plaintiff is entitled to recover depends wholly upon the construction to be given certain provisions in section II, G(b), of the Revenue Act of October 3, 1913, c. 16, 38 Stat. 114, 172, 173. The act enumerates among the corporations upon which the income tax is imposed 'every insurance company' other than 'fraternal beneficiary societies, orders, or associations operating under the lodge system or for the exclusive benefit of the members of a fraternity itself operating under the lodge system.' It provides—G(b), pp. 172-174 how the net income of insurance companies shall be ascertained for purposes of taxation, prescribing what shall be included to determine the gross income of any year, and also specifically what deductions from the ascertained gross income shall be made in order to determine the net income upon which the tax is assessed. Premium receipts are a part of the gross income to be accounted for.

In applying to insurance companies the system of income taxation in which the assessable net income is to be ascertained by making enumerated deductions from the gross income (including premium receipts) Congress naturally provided how, in making the computation2, repayment of the redundancy in the premium should be dealt with. In a mutual company, whatever the field of its operation, the premium exacted is necessarily greater than the expected cost of the insurance, as the redundancy in the premium furnishes the guaranty fund out of which extraordinary losses may be met, while in a stock company they may be met from the capital stock subscribed. It is of the essence of mutual insurance that the excess in the premium over the actual cost as later ascertained shall be returned to the policy holder. Some payment to the policy holder representing such excess is ordinarily made by every mutual company every year; but the so-called repayment or dividend is rarely made within the calendar year in which the premium (of which it is supposed to be the unused surplus) was paid. Congress treated the so-called repayments or dividends in this way (page 173):

(a) Mutual fire companies 'shall not return as income any portion of the premium deposits returned to their policy holders.'

(b) Mutual marine companies 'shall be entitled to include in deductions from gross incoe amounts repaid to policy holders on account of premiums previously paid by them and interest paid upon such amounts between the ascertainment thereof and the payment thereof.'

(c) Life insurance companies (that is both stock and strictly mutual) 'shall not include as income in any year such portion of any actual premium received from any individual policy holder as shall have been paid back or credited to such individual policy holder, or treated as an abatement of premium of such individual policy holder, within such year.'

(d) For all insurance companies, whatever their field of operation, and whether stock or mutual, the act provides that there be deducted from gross income 'the net addition, if any, required by law to be made within the year to reserve funds and the sums other than dividends paid within the year on policy and anunity contracts.'

The government contends, in substance, for the rule that in figuring the gross income of life insurance companies, there shall be taken the aggregate of the year's net premium receipts made up separately for each policy holder.3 The Penn Mutual Company contends for the rule that in figuring the gross income there shall be taken the aggregate full premiums received by the company less the aggregate of all dividends paid by it to any policy holder by credit upon a premium or by abatement of a premium and also of all dividends whatsoever paid to any policy holder in cash, whether applied in payment of a premium or not. The noninclusion clause (c), above, excludes from gross income those premium receipts which were actually or in effect paid by applying dividends. The company seeks to graft upon the clause so restricted a provision for what it calls nonincluding, but which in fact is deducting, all cash dividends not so applied. In support of this contention the company relies mainly, not upon the words of the statute, but upon arguments which it bases upon the nature of mutual insurance, upon the supposed analogy of the rules prescribed in the statute for mutual fire and marine companies and upon the alleged requirements of consistency.

First. The reason for the particular provision made by Congress seems to be clear: Dividends may be made, and by many of the companies have been made largely, by way of abating or reducing the amount of the renewal premium.4 Where the dividend is so made the actual premium receipt of the year is obviously only the reduced amount. But, as a matter of bookkeeping, the premium is entered at the full rate and the abatement (that is, the amount by which it was reduced) is entered as a credit. The financial result both to the company and to the policy holders is, however, exactly the same whether the renewal premium is reduced by a dividend or whether the renewal premium remains unchanged, but is paid in part either by a credit or by cash received as a dividend. And the entries in bookkeeping would be substantially the same. Because the several ways of paying a dividend are, as between the company and the policy holder, financial equivalents, Congress, doubtless, concluded to make the incidents the same, also, as respects income taxation. Where the dividend was used to abate or reduce the full or gross premium, the direction to eliminate from the apparent premium receipts is aptly expressed by the phrase 'shall not include,' used in clause (c) above. Where the premium was left unchanged, but was paid in part by a credit or cash derived from the dividend, the instruction would be more properly expressed by a direction to deduct those credits. Congress doubtless used the words 'shall not include' as applied also to these credits because it eliminated them from the aggregate of taxable premiums as being the equivalent of abatement of premiums.

That such was the intention of Congress is confirmed by the history of the noninclusion clause (c), above. The provision in the Revenue Act of 1913, for taxing the income of insurance companies is in large part identical i th the provision for the special excise tax upon them imposed by the Act of August 5, 1909, c. 6, § 38, 36 Stat. 112. By the latter act the net income of insurance companies was also to be ascertained by deducting from gross income 'sums other than dividends, paid within the year on policy and renewal contracts'; but there was in that act no noninclusion clause whatsoever. The question arose whether the provision in the act of 1913 identical with (c) above prevented using in the computation the reduced renewal premiums instead of the full premiums, where the reduction in the premium had been effected by means of dividends. In Mutual Benefit Life Insurance Co. v. Herold, 198 Fed. 199, decided July 29, 1912, it was held that the renewal premium as reduced by such dividends should be used in computing the gross premium; and it was said (page 212) that dividends so applied in reduction of renewal premiums 'should not be confused with dividends declared in the case of a full-paid participating policy, wherein the policy holder has no further premium payments to make. Such payments having been duly met, the policy has become at once a contract of insurance and of investment. The holder participates in the profits and income of the invested funds of the company.' On writ of error sued out by the government the judgment entered in the District Court was affirmed by the Circuit Court of Appeals on January 27, 1913 (201 Fed. 918, 120 C. C. A. 256), but that court stated that it refrained from expressing any opinion concerning dividends on full paid policies, saying that it did so 'not because we wish to suggest disapproval, but merely because no opinion about these matters is called for now, as they do not seem to be directly involved.' The...

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