Duffy v. Mutual Ben Life Ins Co

• Decision Date: 29 November 1926
• Docket Number: No. 108,108
• Citation: 47 S.Ct. 205,71 L.Ed. 439,272 U.S. 613
• Parties: DUFFY v. MUTUAL BEN. LIFE INS. CO
• Court: U.S. Supreme Court

272 U.S. 613

47 S.Ct. 205

71 L.Ed. 439

DUFFY

v MUTUAL BEN. LIFE INS. CO.

No. 108.

Argued Oct. 21, 22, 1926.

Decided Nov. 29, 1926.

The Attorney General, and Mr. Alfred A. Wheat, of Washington, D. C., for petitioner.

Messrs. Charles E. Hughes, of New York City, and John O. H. Pitney, of Newark, N. J., for respondent.

Mr. Justice SUTHERLAND delivered the opinion of the Court.

This case arises under the Revenue Act of 1917, c. 63, 40 Stat. 300, 302-306, imposing upon every corporation partnership and individual a war excess profits tax. The pertinent provisions of the act are as follows:

'Sec. 201. That in addition to the taxes under existing law and under this act there shall be levied, assessed, collected, and paid for each taxable year upon the income of every corporation, partnership, or individual, a tax (hereinafter in this title referred to as the tax) equal to the following percentages of the net income:

'Twenty per centum of the amount of the net income in excess of the deduction (determined as hereinafter provided) and not in excess of fifteen per centum of the invested capital for the taxable year. * * *

'Sec. 203. That for the purposes of this title the deduction shall be as follows, except as otherwise in this title provided—

'(a) In the case of a domestic corporation, the sum of (1) an amount equal to the same percentage of the invested capital for the taxable year which the average amount of the annual net income of the trade or business during the prewar period was of the invested capital for the prewar period (but not less than seven or more than nine per centum of the invested capital for the taxable year), and (2) $3,000. * * *

'Sec. 207. That as used in this title, the term 'invested capital' for any year means the average invested capital for the year, as defined and limited in this title, averaged monthly.

'As used in this title 'invested capital' does not include stocks, bonds (other than obligations of the United States), or other assets, the income from which is not subject to the tax imposed by this title nor money or other property borrowed, and means, subject to the above limitations:

'(a) In the case of a corporation or partnership: (1) Actual cash paid in, (2) the actual cash value of tangible property paid in other than cash, for stock or shares in such corporation or partnership, at the time of such payment (but in case such tangible property was paid in prior to January first, nineteen hundred and fourteen, the actual cash value of such property as of January first, nineteen hundred and fourteen, but in no case to exceed the par value of the original stock or shares specifically issued therefor), and (3) paid in or earned surplus and undivided profits used or employed in the business, exclusive of undivided profits earned furing the taxable year. * * *' Comp. St. §§ 6336 3/8 b, 6336 3/8 d, 6336 3/8 h.

By section 200 (Comp. St. § 6336 3/8 a) it is provided that the term 'corporation' includes joint-stock companies or associations and insurance companies and we assume that this includes nonstock mutual insurance companies as well as those having capital stock

Respondent is a mutual company having no capital stock; and its policyholders constitute its members. Its business has always been conducted upon the 'level premium plan,' under which the estimated annual cost of the insurance is averaged and the maximum annual contribution of each member is uniform throughout the life of the policy. The annual contributions during the early years of the policy are in excess of the natural premiums, and such excess premiums, augmented by interest thereon, are held as a reserve to maintain the insurance in the later years. These contributions (or premiums), together with the increment derived from their investment, constitute the sole assets of the company. A more complete statement of the plan will be found in the opinion of the District Court in this case, 295 F. 881, and cases cited in that opinion at page 883.

The company is required by state laws, as a condition of continuing business, to maintain its assets at a sum not less than the amount of the 'legal reserve' required by such laws. For the year 1917 the legal reserve amounted to something over $186,000,000. In addition to the legal reserve, the company maintained a second or 'contingent reserve' as a margin of safety to meet contingencies. The two reserves are not segregated in any way or separately identified or invested. The funds therein, constituting the company's entire assets, are invested in its office building and in government bonds and other securities. The income resulting from the investments is returned for federal taxation and is taxed. For the year 1917 the sum of the two reserves was returned by the company as invested capital for that taxable year. The net income shown for the year was $1,808,339.33, upon which the company paid an income tax of $108,500.36, but no excess profits tax. The Commissioner of Internal Revenue amended the returns and, thereupon, levied an additional assessment against the company amounting to $83,779.70. This was accomplished, so far as necessary to be now considered, by deducting from the amount of invested capital as returned the sum of $186,258,796, being the exact amount of the legal reserve, and reducing the company's invested capital for the year to the sum of $14,719,043.76. It is agreed that if, instead of this latter sum, the company's...