Northwestern Mut Life Ins Co. v. Fink

• Decision Date: 07 November 1917
• Citation: 248 F. 568
• Parties: NORTHWESTERN MUT. LIFE INS. CO. v. FINK, Collector.
• Court: U.S. District Court — Eastern District of Wisconsin

248 F. 568

NORTHWESTERN MUT. LIFE INS. CO. v. FINK, Collector.

United States District Court, E.D. Wisconsin.

November 7, 1917

John Barnes and Sam T. Swansen, both of Milwaukee, Wis., for plaintiff.

H.A Sawyer, U.S. Atty., of Milwaukee, Wis., for defendant.

GEIGER District Judge.

Plaintiff has brought this action for recovery of taxes alleged to have been illegally assessed and exacted under Corporation Excise Law Aug. 5, 1909, c. 6, § 38, 36 Stat. 112. The facts are not controverted, and such as give rise to the controversy may be thus summarized:

The plaintiff, in its attempt to comply with law, made return of its gross income for the years 1909 and 1910, making therein such deductions as it conceived were permitted. The Commissioner of Internal Revenue made a reassessment for each of the years, and added to the gross income on each of the returns certain items which he asserted--and which defendant now asserts--were and are items of taxable income, and he disallowed, on the other side of each return, items which were, and now are, asserted not to be proper items of deduction, under the law. Stated in greater detail, this may be said:

In its return for the year 1909, plaintiff stated its gross income at $43,297,167.27, ascertaining it, so the defendant claims by deducting from the gross income return made for that year to the Wisconsin and New York insurance commissioners, viz. $49,445,142.94, the following items:

(1) Dividends applied to purchase paid-up additions to policies
held by members ..............................................	$1,215,878.56
(2) Dividends applied to pay renewal premiums of policies held by members ....................................................	4,896,319.72
(3) Dividends left with company ......................................	1,999.78
(4) Adjustment of assets ............................................	33,777.61
	-------------
Making a total of ...............................................	$6,147,975.87

--which, when deducted from the insurance commissioner's return above noted, leaves the revenue return of $43,297,167.27 returned as stated. From this latter the company made deductions as follows:

(1) For expenses ..................................	$5,253,153.46
(2) For losses .........................................	2,308.92
(3) For payments on policy and annuity contracts ..	18,637,141.76
(4) Addition to reserve ...........................	14,156,093.96
(5) Taxes paid .......................................	870,490.77

--making a total of deductions claimed in such return, $38,919,188.87, which, being deducted from the gross return of $43,297,167.27, left $4,377,978.40 as the net income, and upon which (less $5,000 exempted) the plaintiff paid the statutory 1 per cent. tax.

Thereafter the Commissioner of Internal Revenue proceeded to make a revision of the return and a reassessment of taxable income for the year 1909. It resulted in his adding to the gross income returned by the plaintiff the items of dividends paid for additions and renewal premiums, the amount of accrual of discount, two items, "interest income" and "premium income," due and accrued but not actually received, respectively. This brought the gross income to approximately the figure contained in the insurance commissioner's return for that year. Against this were allowed the items of expense, losses, payments on policy and annuity contracts, taxes, claimed by plaintiff; also an item, "depreciation" (covering in fact the annual reduction necessitated against securities purchased at a premium). He reduced the amount of "net addition to reserve funds," basing it upon disallowing funds set aside to meet contracts having deferred payments after death. He also disallowed the dividend disbursement; and hence, without giving the figures in detail, he cast as a balance a taxable net income of $10,795,118.58--an excess of $6,381,140.18 over the plaintiff's return. Upon this he levied, and plaintiff, under protest, paid a tax of 1 per cent.--$63,811.40.

For the year 1910, plaintiff company's return was made in a similar manner. This, too, was revised, and, excepting in certain minor respects, the revision and reassessment of income thereon presents the same questions as arise respecting the 1909 income and assessment. The excess upon such 1910 return and reassessment, found by the Commissioner of Internal Revenue, was $8,153,134, the 1 per cent. tax whereon was paid by plaintiff under protest.

This suit seeks recovery of the amounts so paid upon such reassessment for both years. A summary of items involved appears to be:

On the charge side of the return:
(1) The dividends for both years aggregate .....................	$12,827,602.38
(2) The addition to premium income (accrued, but not paid).........	395,284.46
(3) The addition to interest income (accrued, but not paid) for the year 1910 only ..........................................	169,649.54
(4) Interest on policy loans to members (paid out of reserve) for the year 1910 ...............................................	111,819.02

On the credit side of the return:
(1) Deductions made by Commissioner from the reserve claimed permissible on account of deferred or supplementary contracts, also on account of lapsed or canceled policies ..................	958,220.94
This covers both years.
(2) Difference between plaintiff's and Commissioner's valuation of policies (1908)...............................................	38,687.38

And the case presents the controversy over the action of the Commissioner in adding to the one side, and disallowing as proper deductions from the other side, of the return, these items respectively.

The plaintiff is a mutual life insurance company, conducting its business upon what is known as the level premium plan; and with respect to its character, its plan of doing business, the practice relating to the fixing and collection of premiums, the origin and character of its income, the method and means of securing a fund applicable to its maturing obligations from year to year, the testimony in this case is in close accord with the facts stipulated in the case of Mutual Benefit Life Ins. Co. v. Herold (D.C.) reported in 198 F. 199 (pages 202, 203 and 204). It will conduce to brevity to permit a reference to that case to stand for a narration of the pertinent facts.

The act under which the taxes in question were levied contains as specific provision the following:

" * * * Every insurance company now or hereafter organized under the laws of the United States, or of any state or territory of the United States, * * * shall be subject to pay annually a special excise tax with respect to the carrying on or doing business by such * * * insurance company, equivalent to one per centum upon the entire net income over and above five thousand dollars received by it from all sources during such year, exclusive of amounts received by it as dividends upon stock of other corporations, joint stock companies or associations, or insurance companies, subject to the tax hereby imposed.

"Such net income shall be ascertained by deducting from the gross amount of the income of such * * * insurance company received within the year from all sources (first) all the ordinary and necessary expenses actually paid within the year out of income in the maintenance and operation of its business and properties, including all charges such as rentals or franchise payments required to be made as a condition to the continued use or possession of property; (second) all losses actually sustained within the year and not compensated by insurance or otherwise, including a reasonable allowance for depreciation of property, if any, and in the case of insurance companies the sums other than dividends, paid within the year on policy and annuity contracts and the net addition, if any, required by law to be made within the year to reserve funds; * * * (third) interest actually paid within the year on its bonded or other indebtedness, etc.; * * * all sums paid by it within the year for taxes, etc.; (fifth) all amounts received by it within the year as dividends upon stock or other corporations, joint stock companies, or associations, or insurance companies, subject to the tax hereby imposed. * * * "

Obviously, in the pecuniary aspects of the case the important question, both to the government and to the plaintiff company, is that arising on the Commissioner's inclusion of dividends as income. On behalf of plaintiff, the general contention is that they are not in any sense dividends arising as a profit in a business venture, but are in truth, obediently to the plan which is at the foundation of its business, an abatement to the policy holder of the excess premium as it may develop in the company's experience during the life of the policy; and the fact that they are carried upon the books of the plaintiff company and are disbursed as an ordinary dividend may be carried and disbursed is not at all relevant in determining their status, in view of the character of plaintiff's business and its legal and contractual relations with its members.

The question thus presented has been so thoroughly considered and determined in the case above referred to, as well as the other cases now to be cited, that it would savor of affectation to restate it, or attempt a consideration or elucidation productive either of greater clearness or any different result than that reached in such cases. Mutual Ben. L. Ass'n v. Commonwealth, 128 Ky. 174, 107 S.W 802; Commonwealth v. Penn. M.L.I. Co., 252 Pa. 512, 97 A. 677; ...