Conway v. Imperial Life Ins. Co.

• Decision Date: 03 November 1941
• Docket Number: 36098.
• Citation: 5 So.2d 314,198 La. 999
• Court: Louisiana Supreme Court
• Parties: CONWAY, Secretary of State, v. IMPERIAL LIFE INS. CO. et al.

5 So.2d 314

198 La. 999

CONWAY, Secretary of State, v. IMPERIAL LIFE INS. CO. et al.

No. 36098.

Supreme Court of Louisiana

November 3, 1941

Rehearing Denied Dec. 1, 1941.[Copyrighted Material Omitted]

Barksdale, Bullock, Clark & Van Hook and Frank J. Looney, all of Shreveport, for receiver.

Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key, and Michael H. Cardozo, IV, Sp. Assts. to the Atty. Gen (Malcolm E. Lafargue, U. S. Atty., and John A. Patin, Asst U. S. Atty., both of Shreveport, of counsel), for opponent, appellant.

McCALEB Justice.

The Imperial Life Insurance Company was an industrial life insurance company organized under the laws of this State and domiciled in the City of Shreveport.As such, it was regularly subjected to an examination of its condition and affairs by the Secretary of State.During the year 1938, the Secretary of State, after making an examination of the company, reached the conclusion that it had failed to comply with the provisions of ActNo. 105 of 1898, as amended, and that, because of its unsound financial condition, it was unable to carry out its contracts.Accordingly, on November 17, 1938, he filed a petition in the District Court for the Parish of Caddo, alleging the insolvency of the company and praying for the appointment of a receiver.On the same day that the petition was filed, the company appeared in court and admitted the charges made against it.Whereupon, a judgment was entered by the court appointing one W. N. Hankins as receiver for the company with full power to take possession of defendant's property and liquidate and settle its affairs.

During the pendency of the receivership proceeding, Guy T. Helvering, Commissioner of Internal Revenue of the United States, levied against Hankins, as receiver of the defendant company, deficiency assessments in a total amount of $41,647.97 for federal income taxes allegedly due by the defendant as transferee of the assets of two companies known as Imperial Protective Union and American Benefit Association.Notices of the deficiency assessments were duly mailed to the receiver and no proceedings were thereafter taken by him for a redetermination of the taxes by the Board of Tax Appeals of the United States.

On April 19, 1939, Hankins, as receiver, filed in the receivership proceedings a tableau of debts due by the defendant company.In this tableau, he failed to list the United States Government as a creditor of the defendant for the amount of the income taxes which had been assessed against it by the Commissioner of Internal Revenue.On April 28, 1939, the United States appeared in the receivership proceedings and opposed the homologation of the tableau of debts on the ground that the company was indebted unto it as transferee of the Imperial Protective Union and American Benefit Association in the sum of $41,647.97 representing income taxes due by those companies for the taxable years 1934, 1935, 1936 and 1937.It further opposed the homologation of the tableau of debts on the ground that it was a creditor of the defendant company in the sum of $1,364.24 for social security taxes which were assessed against it under the Federal Social Security Act, 42 U.S.C.A. � 301 et seq.

The receiver resisted any and all liability to the United States for the tax debts and, after a trial of the issues presented by the opposition, judgment was rendered by the district court recognizing the claim of the United States for social security taxes in the sum of $1,364.24 and rejecting its claim for income taxes.The United States has appealed from the adverse decision and the receiver of the defendant company has answered the appeal praying that the judgment of the lower court be reversed insofar as it recognizes the Government's claim for social security taxes.

The claim of the Government for federal income taxes against the defendant as transferee of the Imperial Protective Union and American Benefit Association presents the following questions for decision:

(1) Were the Imperial Protective Union and American Benefit Association properly assessed for tax purposes as regular corporations by the Commissioner of Internal Revenue or should they be classified as life insurance companies under Section 201 (a) of the Federal Revenue Acts of 1934 and 1936, 26 U.S.C.A. Int.Rev.Code, � 201 (a)?

(2) If the Imperial Protective Union and American Benefit Association have been rightly assessed as regular corporations, is the Imperial Life Insurance Company liable as transferee of those companies for the taxes claimed, under Section 311 of the Revenue Act of 1936, 26 U.S.C.A. Int.Rev.Code, � 311, and Article 311-1 of Treasury Regulations 94 promulgated thereunder?

In order that these questions may be intelligently discussed, it is necessary to set forth a brief history of the transferor companies as well as the facts which led up to the levy of the assessments against the defendant.American Benefit Association was organized in 1931 under a certificate of incorporation issued by the State of Colorado.The articles of incorporation state the main purpose of the association to be:

'(a) To pay money benefits to the widows, orphans, heirs and devisees of deceased members of the Association in the amount and to the extent to which they may be entitled according to the by-laws of the Association, which shall not be deemed an Insurance Company.'

Imperial Protective Union was organized in 1934 under a certificate of incorporation issued by the State of Delaware.The nature of its business and the object of its organization were stated in the third paragraph of the certificate in the following words:

'To unite reputable men, women and children into a Society for the purpose of giving aid and assistance to widows, widowers and those depending on its deceased members, and to issue life membership certificates either on one member or a life membership certificate covering the member's whole family group, which shall provide protection and benefits to its members, heirs and dependents after the natural or accidental death of one of its members, and to further aid its members who become injured or totally disabled, and all such aid to be from voluntary contributions (nothing herein shall be construed as to carrying on the business of an insurance company.'

The nature of the business pursued by these two corporations was practically identical.They were not stock companies and were theoretically owned and controlled by the insured members.(In truth, they were controlled by one T. L. Morris, who was President, and his brotherHugh Morris, who was Secretary.These men were also the President and Secretary respectively of the defendantImperial Life Insurance Company.)Membership fees and contributions or assessments were collected from the members in consideration for policies issued by the associations.The membership fees were payable when the application was made and amounted to $5 per $1,000 of benefits applied for.Policies ranging from $250 to $10,000 in face amount were issued.Regular assessments or premiums were to be collected, without change in rate as long as the policies remained in force.The assessments or premiums could be paid annually, semiannually, quarterly or monthly.There were provisions for surrendering the policies after 20 years premiums had beer paid continuously, when 50 per centum of the value, 'determining same as death claims', would be paid.There were certain other provisions typically found in life insurance policies such as an incontestability clause, double indemnity for accidental death, a reinstatement provision and certain restrictions defining the right of members.

With respect to the American Benefit Association, its books reveal that it undertook to distribute the income received by it from its members in various special fund accounts, i. e. an expense fund, a benefit fund, an administration fund, an exchange fund and a contribution fund.The by-laws of the company provided: 'all contributions

received from the members of the Association after the membership fee has been paid shall be allocated and divided between the Expense Funds of the Association on the following basis:

Benefit Expense

Fund Fund

1st year - 4th to 15th

monthly payment 25% 75%

2nd year - 16th to 27th

monthly payment 50% 50%

3rd year - 28th month on,

as long as benefit cer-

tificate is kept in force 60% 40%"

The evidence adduced at the trial is somewhat conflicting as to whether the foregoing provision of the by-laws of the company was strictly adhered to.In the report of Mr. Emile Bienvenu, Chief Examiner of the Insurance Department of this State, of November 4, 1936, he states:

'So far as I have been able to ascertain the above ratios are strictly adhered to.I have found, however, that at times transfers of funds have been made from the Expense Fund to the Benefit Fund, but at no time, so far as I have been able to ascertain, have any funds allocated to the Benefit Fund been used for any other purpose than to pay death claims and health and accident claims.'

On the other hand, Mr. Ralph W. Charlton, an Internal Revenue Agent, who made an examination of the books of the company for the Collector of Internal Revenue, stated that the officers of the company had, on numerous occasions, transferred monies out of the benefit fund into an exchange fund and in some instances had replaced monies taken from the benefit fund with monies belonging to the expense fund.

With regard to the Imperial Protective Union, there is no evidence to show that that concern ever maintained a benefit fund or any other fund as a reserve to meet contingent policy claims.However, the district judge, in his written reasons for...