General Life Ins. Co. v. Com'r of Internal Revenue, 10628.
| Decision Date | 08 July 1943 |
| Docket Number | No. 10628.,10628. |
| Citation | 137 F.2d 185 |
| Parties | GENERAL LIFE INS. CO. v. COMMISSIONER OF INTERNAL REVENUE. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Robert Ash, of Washington, D. C., for petitioner.
Willard H. Pedrick, Sewall Key, and Samuel H. Levy, Sp. Assts. to Atty. Gen., Samuel O. Clark, Jr., Asst. Atty. Gen., and J. P. Wenchel, Chief Counsel, Bureau of Internal Revenue, and John W. Smith, Sp. Attorney, Bureau of Internal Revenue both of Washington, D. C., for respondent.
Gerald C. Mann, Atty. Gen., and Grover Sellers, both of Austin, Tex., for State of Texas as amicus curiae for petitioner.
Percy C. Fewell, of Dallas, Tex., amicus curiae for petitioner.
Before HUTCHESON, HOLMES, and WALLER, Circuit Judges.
The Tax Court held that petitioner was not a life insurance company within the purview of Sections 201(a) and 202(b) of the Revenue Act of 1936, 26 U.S.C.A. Int.Rev.Code, §§ 201(a), 202(b), and also that the petitioner was not taxable as a mutual insurance company under Section 207 of the Revenue Act of 1936, 26 U.S.C. A. Int.Rev.Code, § 207. We are asked to review that holding.
The taxpayer (petitioner) is a corporation under the laws of the State of Texas, writing policies for the payment of benefits in case of sickness, physical disability, accident, or death. The corporation was without capital stock and its articles of incorporation provided that it would be conducted for the benefit of its members and not for profit. Its principal business was the writing of life insurance policies in amounts not to exceed $1,000.00. It issued some combined life, health, and accident policies, but such policies constituted a small portion of the taxpayer's business. The company operated on the assessment plan and made stipulated assessments at regular intervals and had the right to make additional assessments if needed. The tax years involved are 1937, 1938, and 1939. In 1939 the Legislature of Texas enacted a statute1 requiring assessments to be divided into at least two funds, one known as the Mortuary Fund, from which claims under policies or certificates were to be paid and to a limited extent the cost of defending contested claims. The other fund was the Expense Fund from which expenses were to be paid.
Prior to the enactment of the statute, and prior to the tax years in question, the Board of Insurance Commissioners of Texas had promulgated rules and regulations, under statutory authority, requiring each assessment company to adopt by-laws providing that sixty per cent of all assessments received should be placed in a Mortuary Fund, which fund could be used only to pay policy claims and expenses incident to the defense, settlement, or payment of contested policy claims. The assessments for the first three months under a policy were to be considered as membership fees and not required to be placed in the Mortuary Fund. The taxpayer complied with the regulations of the Board of Insurance Commissioners, adopted the requisite by-laws, established the Mortuary Fund of sixty per cent of its assessment income, less the first three monthly assessments, and never made an additional assessment and had never failed to pay the face amount of any valid policy claim.
Under Texas law, the Board of Insurance Commissioners has full and complete supervision of assessment insurance companies. Associations of this character are required annually to secure from the Board certificates of authority to do business, and these certificates of authority can be issued only if the association: (1) files an annual statement that shows compliance with the law; (2) files, and has approved by the Board, by-laws that comply with the regulations; (3) files, and has approved, each policy form used; (4) furnishes evidence that it has on deposit in some bank or trust company a sum equal to the face value of the maximum loss insured in any individual policy. The by-laws of the taxpayer provide: "No part of the reserve or mortuary fund shall ever be used for the purpose of operating said company, but shall be used to pay policy obligations, as hereinafter provided." All operating expenses were charged to the Expense Fund. Membership fees (the first three monthly assessments), and forty per cent of all assessment income, were placed in the Expense Fund. The by-laws further provide that: "If the sum realized by the Company from such premiums or assessments shall be insufficient to pay its policy claims in full for which it is liable then the Company may call for additional premiums or assessments, and the payment of the full amount realized by the Company from said premiums less the amount deducted for expense as herein provided shall discharge the Company from all liability as to said claims, except that in no case shall payment be less than fifty per cent of the amount due under said policy contracts." It is further provided in said by-laws:
The order of the Board of Insurance Commissioners of the State of Texas, adopted February 8, 1934, among other things provided:
Section 201(a), Revenue Act of 1936, 26 U.S.C.A. Int.Rev.Code, § 201(a), provides:
Section 202(b) of the Revenue Act of 1936, 26 U.S.C.A. § 202(b), is as follows:
If the predominant business of petitioner was life insurance, and if it was maintaining the requisite reserve fund for the fulfillment of its contracts as defined in Section 201(a) supra, it would be entitled to be taxed as a regular "old line" life insurance company operating on a fixed-premium and appropriate legal reserve basis, but being an assessment company doing a life insurance business, it was taxable under Sec. 202(b) identically as would a fixed-premium life insurance company, provided the reserve funds required by law were "actually deposited by any company or association with State or Territorial officers pursuant to law as guaranty or reserve funds", or provided a reserve fund was "maintained under the charter or articles of incorporation of the company or association exclusively for the payment of claims arising under certificates of membership or policies issued upon the assessment plan and not subject to any other use."
The taxpayer here is unquestionably issuing policies on the "assessment plan" and it is necessary that we first determine whether or not the taxpayer was, during the years in question, maintaining a reserve fund which was either, deposited with a state officer, or "maintained under the charter or articles of incorporation of the company exclusively for the payment of claims."
It is argued that the Company was required under Section 202(b) to actually deposit its reserve with State or Territorial officers pursuant to law, or that it must have maintained the reserve under provisions of its charter or articles of incorporation, for the exclusive payment of claims arising under policies, and that the taxpayer did not deposit its funds with any State officer, nor was there any provision in its charter or articles of incorporation which required the maintenance of any reserve. It is true that the funds were not deposited with a State officer nor was there any express provision in its articles of incorporation for the maintenance of such reserve. However, orders or regulations of the Board of Insurance Commissioners of the State of Texas, pursuant to authority of the statute, did, in 1934, require that sixty per cent of the assessment receipts be placed in a Mortuary Fund for the payment of claims arising under policies.
Postponing for the time the question as to whether or not the Mortuary Fund was a reserve fund as contemplated by the Federal Statute, we will first inquire whether or not the requirements of the Texas law, and regulations and orders made pursuant thereto, are a part and parcel of petitioner's charter, or articles of incorporation, so as to bring it within the requirements of Sec. 202(b).
There seems to be scant, if any, difference in the effectiveness of a reasonable regulation or order promulgated under the authority of a valid statute and the effectiveness of a statute embodying the contents of the regulation or order. Reasonable regulations or orders promulgated under statutory authority usually have the force and effect of law. It also seems well settled that pertinent parts of the law of the State of creation of a corporation are as much...
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