Grange Ins. Asso. v. Commissioner

The Grange Insurance Association of California, Petitioner, v. Commissioner of Internal Revenue, Respondent Grange Ins. Asso. v. Commissioner Docket No. 87495 United States Tax Court 37 T.C. 582; 1961 U.S. Tax Ct. LEXIS 2; December 29, 1961, Filed *2 Decision will be entered under Rule 50. Petitioner, organized and operated at cost to enable members of the California State Grange to contribute to each other's fire losses by means of premiums and assessments, held not qualified for exemption under section 501(c)(8) of the 1954 Code as paying "life, sick, accident or other benefits." Thomas E. Smail, Jr., Esq., for the petitioner. William T. Ivey, Jr., Esq., for the respondent. Opper, Judge. OPPER *582 Deficiencies in income tax were determined for the years 1956, 1957, and 1958 of $ 450.72, $ 654.44, and $ 1,214.88, respectively. Certain adjustments are now conceded by respondent. The sole issue is whether petitioner, an assessment fire insurance organization composed of Grange members, qualifies for exemption in the years in issue under section 501(c)(8) of the 1954 Code. FINDINGS OF FACT. Some of the facts were stipulated. They are hereby found. Petitioner filed Forms 990, Return of Organization Exempt from Income Tax, for the years 1956 to 1958, inclusive, with the district director of internal revenue, San Francisco, California. Petitioner was organized on April 28, 1916, under the name "The Grange Fraternal Fire Insurance Association of California" for the purpose of enabling members of the California State Grange to bind themselves to contribute to each other's loss by fire. Petitioner is only authorized to act in California and only between *4 Grange members. As soon as a Grange member becomes delinquent in dues, he immediately loses his policy and is dropped from membership in petitioner. *583 Any member of the Grange upon becoming insured by petitioner becomes a member of petitioner and only policyholders are members. Only members of petitioner have the right to elect its officers. All officers of petitioner must be Grange members in good standing. Petitioner has no capital stock and is a nonprofit corporation. It operates on the assessment system in that if its payments should exceed its premiums and reserve, it is permitted to assess its Grange members to make up the loss. Petitioner adjusts the premiums paid by the members according to its losses and if the losses for the previous year are high, then the rates rise accordingly, and if the losses are low, the rates are adjusted downward. The Grange fire insurance is sold to members at actual costs on a nonprofit basis. In 1957 petitioner had total losses of $ 34,193.29 and in the year 1958, petitioner had total losses of $ 76,053.37. Petitioner levied an assessment on members on one occasion in the early 1930's. As of December 31, 1960, the total assets of petitioner, *5 including reserves, realty, and all other assets without reduction for liabilities, was $ 352,825.93. In 1944 the Internal Revenue Service requested petitioner to make application for exempt status. In response thereto, the Internal Revenue Service ruled in 1945 that petitioner was exempt under the provisions of section 101(11) of the 1939 Code, which is a predecessor section to section 501(c)(15) of the 1954 Code. During the first 32 years of petitioner's operation, it had no separate office but was operated out of a home of one of the Grange members who was at that time the secretary of petitioner. The operation was conducted out of homes of members in the cities of San Jose, Napa, Rio Linda, and Sacramento, California. In 1948 petitioner acquired a small residence at a cost of approximately $ 6,000 in which to conduct its operations. Subsequently, petitioner acquired another residence in which it is presently located at a cost of $ 14,500. Petitioner has five full-time employees consisting of four girls and the secretary of the association. Petitioner's operations have not changed since 1944. The exemption application submitted in 1944 was prepared without any legal assistance*6 to petitioner but was prepared with the assistance of the local office of the Internal Revenue Service. There are over 300 lodges of local Granges in the State of California and the majority of these have a member of the local Grange who acts as an insurance agent. Local members of the Grange act as insurance agents as a service to their Grange members. The agents are paid only a small commission *584 which is considered to cover their actual expenses in estimating and investigating the property of their fellow Grange member to be insured. None of the insurance agents receives any salary and all agents must be members in good standing of the Grange. The State of California chief counsel of the Department of Insurance has determined that petitioner could not at any time be recognized as a mutual insurance company in the State of California. Petitioner has never employed the practice of mutual insurance companies of returning part of premiums paid; in fact, petitioner has never paid a cash dividend. Agents of mutual insurance companies in the State of California are required to be licensed. Petitioner's agents are not licensed. Petitioner has been an organization exempt from*7 income taxation in the State of California from the time of its origin. Nonfraternal insurance companies are subject to income taxation in the State of California. Petitioner is a fraternal insurance association and is not subject to the regular insurance laws of the State of California. Regular insurance companies are subject to the regular insurance laws of the State. Petitioner pays no taxes whatsoever to the State of California, except on real property. The State of California has classified petitioner as a benevolent institution. In each of the years involved herein, petitioner had gross receipts in excess of $ 75,000. Neither the purposes nor the operations of petitioner changed from the time of its organization through the years in question. OPINION. Although petitioner did not itself operate "under the lodge system" within the meaning of section 501(c)(8) of the 1954 Code, 1 it is clear that it conforms to the exemption provision of subsection (A) because it operates "for the exclusive benefit of the members of a fraternity [the Grange] itself operating under the lodge system." This is, in effect, conceded by respondent. As will presently appear, we need not deal with*8 his contention that petitioner was *585 a "Mutual insurance [company] * * * other than life or marine" 2 under section 501(c)(15) and, as such, could not also qualify for exemption under subsection (8). *9 The real issue is limited to the difficult question whether protection against loss by fire is included in the phrase "payment of * * * accident, or other benefits" as employed in subsection (8)(B). Although the legislation has not changed materially since the 1909 Corporate Excise Tax Act, this question appears to be one of first impression. The difficulty is that, whatever may be the dictionary definition, 3 in insurance language the term "accident" is restricted to mishaps to the person of the insured. By accident insurance is generally meant a contract whereby one for a consideration agrees either to indemnify another against personal injury resulting from accident, or, in case death results, to pay a fixed sum as compensation therefor; i.e., to indemnify the insured in the amount stipulated in case of bodily injury not resulting in death, and, in case death results from the injury, to pay a fixed compensation. 1 Couch, Insurance, sec. 1:16, p. 43 (2d ed.). The same thought is expressed in Vance, Insurance 942-943 (3d ed.): Accident insurance is similar in most respects to life insurance, of which it is properly a branch * * * and a large portion of the accident insurance*10 business is written by life insurance companies. * * * * Accident insurance is so closely akin to life insurance 3 that it is generally held that statutes which have been enacted for the regulation of the business of life insurance, or for the purpose of fixing the rights of parties under contracts of life insurance, apply equally well to those of accident insurance. [Footnote omitted.] In Miller v. Maryland Casualty Co., 193 F. 343, 348*11 (C.A. 3, 1912): With a view to harmonizing state and federal decisions and producing uniformity in the Pennsylvania system of insurance, * * * the act of 1885 [referring only to policies "of life insurance" was held to be] * * * applicable to accident policies. Although this case was decided after the passage of the 1909 Corporate Excise Tax Act, it was prior to the first general income tax legislation adopted in 1913. The decision might well have come to the *586 knowledge of Congress and the committees concerned with the enactment of that statute. Since Congress was dealing in the section under consideration with life insurance, 4 its intent to restrict the meaning of "accident" to its technical insurance usage appears to us probable. 5*13 And the rule of ejusdem generis would also require us to limit the meaning of "other" to benefits that are similar in character to the personal bodily mischance involved in life, health, and accident insurance. 6Lyman v. Commissioner, 83 F. 2d 811, 813 (C.A. 1, 1936). See also Consumers Credit Rural Electric Cooperative Corp., 37 T.C. 136 (1961); I.T. 3261, 1939-1 C.B. 122;*12 Rev. Rul. 58-442, 1958-2 C.B. 194, 196. There is nothing to the contrary in the extensive legislative history discussed at great length by both parties in their excellent briefs. Finally, while it may be true, as petitioner contends, that the legislative intent was to have reference to State law with respect to the type of association or organization involved, 7 we are unable to conclude that anything in the Federal legislation was intended to permit the State of California to determine whether petitioner could qualify under section 501(c)(8)(B), supra. For the reasons stated, we regard the deficiency*14 as correctly determined in this respect. Decision will be entered under Rule 50. Footnotes 1. SEC. 501. EXEMPTION FROM TAX ON CORPORATIONS, CERTAIN TRUSTS, ETC. (c) List of Exempt Organizations. -- The following organizations are referred to in subsection (a): * * * * (8) Fraternal beneficiary societies, orders, or associations -- (A) operating under the lodge system or for the exclusive benefit of the members of a fraternity itself operating under the lodge system, and (B) providing for the payment of life, sick, accident, or other benefits to the members of such society, order, or association or their dependents.↩ 2. (15) Mutual insurance companies or associations other than life or marine (including interinsurers and reciprocal underwriters) if the gross amount received during the taxable year from the items described in section 822(b) (other than paragraph (1)(D) thereof) and premiums (including deposits and assessments) does not exceed $ 75,000.↩ 3. The dictionary definitions are not overlooked by authorities in the insurance field. For example, Vance, Insurance 948 (3d ed.), takes note of the fact that "'accident' is defined by Webster as follows: 'An event which takes place without one's foresight or expectation; an event that proceeds from an unknown cause, or is an unusual effect of a known cause, and therefore not expected.' In Bouvier's Law Dictionary an accident is said to be, 'An event which, under the circumstances, is unusual and unexpected. An event the real cause of which cannot be traced, or is at least not apparent.'"↩ 4. That this type of protection is the foundation of the early forms of life insurance has long been recognized: "In fact, the plan here carried out is in essence the assessments for death charges made by the ancient guilds on their membership, from which the origin of life insurance has been traced, 9 Encyc. Soc. Sc. 462; Encyc. Britannica 1948, tit. Life Insurance, and still employed by mutual benefit and fraternal societies, though their popularity has diminished in the last half century." Commissioner v. Treganowan, 183 F. 2d 288, 291 (C.A. 2, 1950), reversing 13 T.C. 159 (1949), certiorari denied 340 U.S. 853; and see Estate of William E. Edmonds, 16 T.C. 110, 117↩ (1951). 5. In Philadelphia & Reading Relief Association, 4 B.T.A. 713, 725↩ (1926), the words were treated as synonymous with "relief of members in case of sickness, injury or death." 6. Of course, certain limited fire risks might be included without affecting the present issue: "Another particular hazard which many accident policies cover is death or injury sustained as the result of the burning of a building while the insured is therein." Vance, Insurance 964 (3d ed.).↩ 7. "Mr. Cummins. And whether a particular organization is an insurance company is to be decided by the laws of the state in which the company is organized. "Mr. Flint. I take it the Senator is correct." 44 Cong. Rec. 3937.↩