Untitled Texas Attorney General Opinion

Honorable %alter C. Woodward, Chairman Board of Insuranoe Cnrnoissioners Austin, Texas

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Opinion No. O-2265 Re: Construction of Artiale 4769, Revised Civil Statutes of Texas, 1925.

This will acknowledge reoeipt of your letter of April 16, 1940, in which YOU seek the opinion of this Department on the questions there- in presented. We deem it essential to set out your letter in full except for the following parts thereof. It iar

"Mutual life insuranas companies generally, and certain hook life insurance companies, issue in this and in other state policy oontraots providing for a partioipation on the 'part of the insured in the profits of the company. The participation provided is usually in the form of dividends as apportioned and deolard by the Board of Directors of the company from the profits of the business. The usual dividend provisions contained in polioy contracts grant four options to the insured for the disposition of suoh dividends to whioh he may become entitled. These are (1) payable to the insured in cash, (2) applied to pay renewal premiums under the contra&, (3) used to purohase additional insuranoe at net premium rates, and (4) left with the aompany to aooumulate at interest.

'Foreign life insurance compmies operating in the State of Texas are taxed on thej~rgross premium receipts in acoordanoe with the provisions of Article 4769, Chapter 4, Title 70, Revised Civil Statutes of 1925, as amended by House Bill 6. Chapter 495, Artiole IV, Srd Called Session, Forty-fourth Legislature, 1936, as amended Acts 1937 Forty-fifth Legis- lature, Rouse Bill 441. Article 4769 provides in part 'Each life insurance company not organized under the laws of this State, transacting business in this Stats, shall annually, on or before the 1st day of Maroh, make a report to the Comnis- sioner, which report shall bs sworn to by either the president or vice president and secretary or treasurer of suoh company, which shall show the g ross aroomrtof premium collected during the year ending on Decomber 31st, preceding, fron citizens of

-’ . Honorable Walter C. Woodward, Page 2 O-2265

this Stats upon policies of insurance. Some years ago this Department interpreted 'gross amount of premiums collected' to msan the total amount of premiums specified in the poliay contract, without deduction for any dividends paid or appljed, and attempted to collect taxes on dividends applied under the third option referred to above.

"The State Life Insuranoe Company of Indiana instituted a suit against R. L. Daniel, Commissioner of Insurance of the State of Texas, to recover certain taxes it had paid under protest, and in a decision rendered by the Distriot Court of the United States for the Western District of Texas, Austin Division, on June 15, 1936, adjudged that the Stats Life Insurance Company was entitled to a refund of the taxes it had paid under protest, together with interest.

"In the Plaintiff's Seoond Amended Original Petition it was stated *Plaintiff alleges that the sole issue in this case is whether a dividend pursuant to a request theretofore made, which,is automatically converted into additional in- surance under the dividend option of the respective policies issued to policy-holders, residents of the State of Texas; which acts of conversion take place in the Stats of Indiana, and ars not moneys collected from citizens of Texas, are the lawful subjeot-matter of the aforesaid Texas Statutes imposing a tax upon 'the gross amount of premiums collected' from citizens of Texas.

"Following this decision it was the then opinion of this Department that all dividends paid by such companies ware thereafter deductible from taxable income. Inasmuch as the decision rendered was apparently based upon the Plaintiff's Second Amended Original Petition and upon the agreement as to certain facts, ns ars now questioning the interpretation which ws have heretofore made, and inasmuch as a considerable amount of money is involved this matter is being suhnitted to you for your consideration. In the event that we allow as deduotion form taxable income only those dividends applied to purchase additional insuranae there will, undoubtedly, ensue law suits from various companies. If ma allow as a deduation all dividends paid ne may be granting a deduotion not contem- plated by our lam, and the State of Texas therefore would necessarily be losing certain taxes to which it is entitled.

• • we ars enclosing copies of the Plaintiff's Second Amended Original Petition in the case of State Life Insuranas Company vs. R. L. Daniel, the agreement as to aertain Pa&S in the sama ease, and judgment as rendered by the court. TFs are also snolosing a copy of a memorandum furnished us by the General Counsel for the Prudential InStranCe Company of America,

Honorabls Walter C. Woodward, Page 3 O-2266

and your opinion is respectfully requested as to whether or not, first, dividends payable in cash; secon,d,applied to pay renewal premiums, and: third, left with the company at interest, should be allowed as a deduction from taxable premium income."

Article 4769 of the Revised Civil'Statutes of Texas, 1925, levies a tax upon foreign life insurance companies doing business in Texas. The pertinent parts of said Article ares

"Each life insurance company not organized under the laws of this State, transaoting business in this State, shall annually, on or before the 1st day of arch, make a report to the Commissioner, which report shall be sworn to by either the president or vice president and secretary or treasurer of such company, which shall show the gross amount of premiums collected during the year ending on December 31st. preceding, from citisens of this Stats upon policies of insurance. 0 0 . ." (ilnderscoring ours.)

The above Article was last amended by dots of 1937, 45th Legis- lature, p. 525, Ch. 258, para. lb.

Article 7064 of the Revised Civil Statutes of 1925 found in Chapter 2, Title 122, dealing with taxes based upon grcss receipts, levies a tax upon insurance companies other than life companies. The pertinent parts ares

"Svsry insurance corporation, Lloyd's, or reciprocals, and any other organieation or concern transacting the business of fire, marine, marine inland, accident credit, title live- stock, fidelity, guaranty, surety, casualty, or any other kind or character, or insurance business other than the business of life insurance, and other fraternal benefit associations, within this State at the time of filing its annual statemsnt, shall report,to the Board of Insurance Commissioners the gross amount of premiums received upon property located in this State or on risks located in this State or on risks located in this State during the preceding year, and each of such insurance carriers shall pay an annual tax upon such gross premium receipts as follcwst shall pay a tax of three and twenty-five one hundredths (3.28) per cent, provided, that any such insurance carriers doing two (2) or more kinds of insurance business herein referred to shall pay the tax herein levied upon its gross premiums received from each of said kinds of business; and the gross premiums receipts where referred to in this lam shall be the total gross amount of premiums received on each and every kind of insurance or risk written, exscpt premiums received from other licensed oompanies for reinsurance, less return premiums and dividends paid policyholders, but there shall be no deductiLen for prsmiums paid for reinsuranoe. . 0" (Underscoring ours)

Honorable Walter C. Wocdnard, Page 4 O-2266

This Article was likerise amended by Acts of 1937, supra. It was again amended by House Bill 666, Acts 1939, 46th Legislature, in a respect with which we are not here ooncerned.

Article i064a of the Revised Civil Statutes of Texas levivsa tax upon domestic life insuranoe companies, sooieties, and associations. It was likewise amended by Acts of 1937, supra, and again by House Bill 556, supra. Ifeare not here ooncerned with the latter amendment.

A review of the above mentioned statutes as they appear in Vernon's Annotated Statutes reflects this situation% Article 7064 refers to and fully defines "gross premiums." Articles 7064a and 4769 refer to gross premiums, but do not attempt to define the same.

House Bill 441, Acts of 1937, 45th Legislature, p. 525, Ch. 256, above referred to, is a comprehensive sot designed to clarify the Articles levying taxes against insurance companies. Section 1 thereof amends Article 7064. Section la repeals an existing statute with which ws ars not here ooncemed. Section lb amends Artiale 7064a. Section lc amends Article 4769.

Section lb, amending Article 7064, contains the language "... and the gross receipts where referred to in this law shall be the total gross amount of premiums received on each and every kind of insuranae or risk written. . . less return premiums and dividends paid policy-holders...." (Underscoring ours).

Ws believe that the words "in this law" oontained in the above definition would neoessarily make such definition applicable not only to Section 1, but to Sections lb and lo as well. This being true, Articles 7064a and 4769 should be so construed as to contain the same definition as .nom appears in Article 7064.

There ars many decisions in other jurisdictions tending to sup- port the proposition that even in the absence of definition by the Legislature, the term "gross premiums" would be ncnstrued so as to ex- olude premiums returned to pclioyholders in the form of dividends. See State v. Wilson, 172 Pac. 41 (Sup. Ct. Kan.) and Penn Mutual v. Insurance Ccmmissioner, 70 So. 462 (Sup. Ct. Miss.) Ravin,~oonstrued the above Article so as to include such definition, it is however, un- necessary to rely upon these authorities.

We have likerise carefully considered the pleadings and judgment in the case of the State Life Insurance Cc. V~ R. L. Daniels, Commissioner of Insurance of the Stats of Texas, et al, cause No. 1359 at law, tried in the District Court of the United States for the Western District of Texas, Austin Division. Article 4769 was hers involved and the court eonoluded that the company had the right to deduot from their gross premiums dividends .whichwsre automatically converted into additional insnranoe by virtue of an option in favor of the policyholders. The

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Honorable Walter C. Woodward, Page 5 O-2265

specific questions submitted by you were nof directly before the court in this case, but we can conceive of no difference b&wean a policyholder converting his dividends into additional insurance and from using the same to pay renewal premiums, accepting the same in cash, or loaning such dividends to the company at interest.

For all the reasons herein given, it is our opinion that all your qUeStiOnS should bs ansmtred in the affirmative to the effect that divi- dends, whether payable in cash, applied to renewal premiums, used to purchase additional insurance, or loaned to the company at interest should be allcwsd as deductions form taxable premium inoome.

All papers in connection with the Stats Life Insurance Company case, submitted with your request, are returned herewith.

Yours very truly

ATTORi'EYGE!GXRALOF TEX4S

By s/Lloyd Armstrong Assistant

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ENCLOSURES

APPRGVED MAY 21, 1940 s/Gsrald C. Mann ATTORNEY GENERAL OF TEXAS

Approved Opinion Committee By RWF Chairman