Pontiac Employees Mut. Ben. Asso. v. Commissioner

PONTIAC EMPLOYEES MUTUAL BENEFIT ASSOCIATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Pontiac Employees Mut. Ben. Asso. v. Commissioner Docket Nos. 14738, 14739, 19407. United States Board of Tax Appeals 15 B.T.A. 74; 1929 BTA LEXIS 2928; January 25, 1929, Promulgated *2928 1. The petitioner is a local mutual benefit association wholly voluntary in character. Its primary purpose is the mutual relief of its members in times of sickness, accident, or death. Funds with which to provide such relief were secured through the payment to the association of dues and assessments by its members. The affairs of the petitioner were managed by a board of trustees, with the aid of certain officers appointed by them. Held, that the petitioner is not an organization which is exempt from income and profits taxes under sections 231 and 304 of the Revenue Acts of 1918 and 1921, and that it is an association taxable as a corporation. Philadelphia & Reading Relief Association,4 B.T.A. 713, followed. 2. Held, further, that it is a mutual life insurance company and thus not entitled to deduct from gross income, under section 234(a)(13) of the Revenue Acts of 1918 and 1921, amounts credited to an account set up in its books as "reserve for health, accident, and death risks." Nor is it entitled to the deductions provided for in section 234(a)(10) and section 234(a)(11) of the same Acts. W. C. Magathan, Esq., and J. Marvin Haynes,*2929 Esq., for the petitioner. W. F. Wattles, Esq., for the respondent. SIEFKIN *75 These proceedings were consolidated for purposes of hearing and decision. They are for the redetermination of deficiencies in income tax for each of the fiscal years ended February 29, 1920, February 28, 1921, and February 28, 1922, amounting to $4,905.94, $5,181.57, and $222, respectively. The petitioner alleges that the respondent erred, (a) in holding that the petitioner is not an organization exempt from income and profits taxes under sections 231 and 304 of the Revenue Acts of 1918 and 1921; (b) in holding that it is an association taxable in the same manner as a corporation; (c) in including in its gross income dues received from members; and (d) in disallowing the deduction from gross income of an addition to its reserve for losses. FINDINGS OF FACT. The petitioner is a mutual benefit society located at Pontiac, Mich. It was formed at Pontiac on March 3, 1919, its object being the mutual relief of its members in cases arising out of disability caused by accidents, sickness and death while in good standing and not engaged in any unlawful act. It is not incorporated*2930 and it has no capital stock. It is strictly local in character and operations. Membership therein is voluntary and without medical examination and is restricted to persons in the employ of the business or industrial institutions of Pontiac. Petitionerhs management is vested in a board of trustees composed of one representative from each industry in Pontiac connected with the Association. A trustee must be a member of the petitioner and an employee of the industry he represents except one trustee who, though a member and an employee, may be chosen at large. The members of the board are elected by the membership of the petitioner for a term of two years, a portion of the trustees being elected at each annual meeting. Membership in the petitioner is evidenced by a booklet which includes the constitution and by-laws of the organization, and the following agreement: THE PONTIAC EMPLOYEES MUTUAL BENEFIT ASSOCIATION, of Pontiac Michigan, in consideration of the weekly dues, payable from the date of employment and each two weeks in advance from his first pay day, does hereby Admit to Membership, the employee whose name and clock number appears on the front page of this booklet, *2931 which booklet was issued to said employee at the time he was employed by the institution indicated upon the front page of this booklet; such membership to continue in force from pay day to pay day, provided said employee continues in employment in the City of Pontiac, and provided his dues are paid each pay day in advance, in accordance with rules of the organization, and provided also that sanction of the Board of Trustees is given authorizing membership of the institution of which applicant is an employee. *76 IN WITNESS WHEREOF, the Pontiac Employees Mutual Benefit Association has caused this agreement to be signed by its President and Secretary. Signed, CLAYTON SPRINGER, President. S. S. SKELTON, Managing Sec'y. Membership is terminated upon the happening of the following: (A) Suspension or expulsion. (B) Ceasing to be employed in the City of Pontiac. (C) Absence from the city for more than thirty days without notifying the managing secretary. (D) Failure to pay dues. Dues are payable by members semimonthly in advance, at the following rates: Class A $ 0.30 per week. Class B 0.21 per week. Class C 0.15 per week. Members*2932 are entitled to the following benefits: Sickness or accident Death Class A $ 2.50 per day. Class A $ 175.00 Class B 1.50 per day. Class B 125.00 Class C 1.00 per day. Class C 75.00 Beginning May 2, 1921, the above scale of death benefits was discontinued and in lieu thereof life insurance policies in the Detroit Life Insurance Co. for $500 were given members. Petitioner paid the premiums on these policies from its funds as provided by article VI, section 2, "Applications," of the by-laws. The membership of the petitioner at the close of each of the taxable periods was as follows: Feb. 29, 1920 7,274 Feb. 28, 1921 2,748 Feb. 28, 1922 3,860 The Insurance Department of the State of Michigan did not supervise the activities of the petitioner during the taxable periods here under consideration. The statutes of the State of Michigan relating to and requiring the incorporation of and supervision of insurance companies by the insurance department, viz, Part 2, ch. 4, sec. 29, Act 256, Public Acts of 1913, Act No. 135, Public Acts of 1919 amendatory to preceding Act and Act No. 124, Public Acts of 1921 likewise amendatory*2933 to the sections of Act 256 Public Acts of 1913 first mentioned above, specifically exempt the petitioner. The gross receipts during the periods were as follows: Periods ended - Feb. 29, 1920 Feb. 28, 1921 Feb. 28, 1922 Dues from members $64,462.25 $82,494.02 $57,925.46 Interest 54.96 1,435.92 2,206.77 Dividends 201.46 815.74 Rentals 100.00 275.00 200.00 Profit from sale of automobile 3.43 Receipts from the Benefactor, a periodical published by the petitioner for members 109.40 64,617.21 84,406.40 61,260.80 *77 The interest, dividends and rentals shown in the above statement of receipts were received from the investment of the surplus fund maintained for the payment of benefits to members in accordance with article IV of the by-laws of the Association. "Dues from members" are receipts of dues paid by members in accordance with the provisions of the constitution and by-laws. The disbursements and depreciation during the periods were as follows: Periods ended - Feb. 29, 1920 Feb. 28, 1921 Feb. 28, 1922 Benefits paid members: Sick $17,853.40 $22,206.60 $13,317.01 Accident 13,486.63 18,254.85 15,137.55 Death 1,625.00 4,202.05 350.00 Premium for insurance of death risks 13,520.06 Salaries, office and other expenses 7,960.10 12,708.75 13,137.87 Contributions and donations 31.00 400.00 303.00 Depreciation 146.18 613.83 851.34 41,102.31 58,386.08 56,616.83 *2934 Of the above disbursements "Benefits paid members" were those made in accordance with the constitution and by-laws. "Premium for insurance of death risks" was for premiums paid by the association on behalf of its members to the Detroit Life Insurance Co. of Detroit, Mich., for life insurance taken in that company in accordance with article VI of the by-laws of the Association as amended. "Salaries, office and other expenses" are those expenses incurred in the management of the Association. "Contributions and donations" represent disbursements claimed by the petitioner to have been made under authority of article IV of the by-laws of the Association as amended. The deduction of these amounts has been disallowed the petitioner in the Commissioner's determination of the deficiencies herein. "Depreciation" is the amount of wear, tear and exhaustion sustained on the depreciable assets of the Association. *78 No part of the excess of gross receipts over the disbursements, both as set forth above, was distributed among the members except as benefits provided for in the constitution and by-laws. During the taxable period under review the excess of the gross receipts over*2935 the disbursements, both as shown above, was as follows: Period ended Feb. 29, 1920 $23,514.90 Period ended Feb. 28, 1921 26,020.32 Period ended Feb. 28, 1922 4,643.97 These amounts were carried and credited to an account on the petitioner's books set up as "Reserve for health, accident and death risks." Petitioner filed returns for the periods ended February 29, 1920, February 28, 1921, and February 28, 1922, showing no taxable income and no tax due. The Commissioner determined that the petitioner was not exempt from taxation and found deficiencies as set forth in the several deficiency notices. For the taxable periods under review the Commissioner found the taxable net income to be as follows: Period ended February 29, 1920 $23,545.90 Period ended February 28, 1921 26,218.86 Period ended February 28, 1922 4,131.23 These sums are the gross receipts of the petitioner as set forth above, exclusive of dividends, less the disbursements set forth above, exclusive of the items of contribution and donations. The petitioner's books of account were kept and its returns were made on the accrual basis during the taxable periods under review. *2936 OPINION. SIEFKIN: These proceedings present for our determination the following issues: (1) Whether the petitioner is an organization exempt from income and profits taxes under sections 231 and 304 of the Revenue Acts of 1918 and 1921; (2) whether it is an association taxable in the same manner as a corporation; (3) whether it is entitled to deduct from gross income amounts credited to an account set up in its books as "Reserve for health, accident and death risks"; and (4) whether the dues received from its members should be included in its gross income. We have decided the first and second issues adversely to the petitioner in a prior case. Philadelphia & Reading Relief Association,4 B.T.A. 713. In that case we considered the issues involved at length and the decision there is controlling here as far as it is applicable. *79 Under the third issue counsel for the petitioner contends that as an insurance company it should be accorded the benefits of sections 234(a)(10), (11), and (13) of the Revenue Acts of 1918 and 1921, or otherwise be permitted to deduct the annual additions to its reserve for losses. It is admitted on brief, however, that*2937 the requirements of section 234(a)(11) can not be met in the instant case any more successfully than they were met in Philadelphia & Reading Relief Association, supra, where our decision on this point was adverse to the petitioner's contention. Section 234(a)(10) of the Revenue Act of 1918, provides, relative to deductions allowed corporations, as follows: (a) That in computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions: * * * (10) In the case of insurance companies, in addition to the above: (a) The net addition required by law to be made within the taxable year to reserve funds (including in the case of assessment insurance companies the actual deposit of sums with State or Territorial officers pursuant to law as additions to guarantee or reserve funds); and (b) the sums other than dividends paid within the taxable year on policy and annuity contracts. The corresponding section of the Revenue Act of 1921 reads: (a) That in computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions: * * * (10) In the case of insurance*2938 companies (other than life insurance companies), in addition to the above (unless otherwise allowed): (A) The net addition required by law to be made within the taxable year to reserve funds (including in the case of assessment insurance companies the actual deposit of sums with State or Territorial officers pursuant to law as additions to guarantee or reserve funds); and (B) the sums other than dividends paid within the taxable year on policy and annuity contracts. After December 31, 1921, this subdivision shall apply only to mutual insurance companies other than life insurance companies. It is clear that the petitioner is not entitled to a deduction under the provisions of section 234(a)(10), since it was not required by law to make any addition to reserve funds. Cf. Employes' Benefit Association of American Steel Foundries,14 B.T.A. 1168. Section 234(a)(13) of the Revenue Act of 1918 and section 234(a)(13) of the Revenue Act of 1921, respectively, read as follows: (a) That in computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions: * * * (13) In the case of mutual insurance companies*2939 (other than mutual life or mutual marine insurance companies) requiring their members to make premium deposits to provide for losses and expenses, there shall be allowed, in addition to the deductions allowed in paragraphs (1) to (10), inclusive, (unless otherwise allowed under such paragraphs) the amount of premium deposits returned to their policyholders and the amount of premium deposits retained for the payment of losses, expenses, and reinsurance reserves. *80 (a) That in computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions: * * * (13) In the case of mutual insurance companies (including interinsurers and reciprocal underwriters, but not including mutual life or mutual marine insurance companies) requiring their members to make premium deposits to provide for losses and expenses, there shall be allowed, in addition to the deductions allowed in paragraphs (1) to (10), inclusive, and paragraph (14), unless otherwise allowed, the amount of premium deposits returned to their policyholders and the amount of premium deposits retained for the payment of losses, expenses, and reinsurance reserves. The*2940 petitioner is a mutual insurance company within the meaning of the regulations of the Commissioner. Article 1508, Regulations 45 and Regulations 65. It is also a mutual insurance company within he decision of the courts. See Citizens' Life Insurance Co. v. Commissioner of Insurance,128 Mich. 85; 87 N.W. 126. As a mutual insurance company it is entitled to deduct from gross income the amount of the premium deposits retained for the payment of losses, expenses, and reinsurance reserves, within the meaning of subdivision (13) of section 234(a) of the Revenue Acts of 1918 and 1921, unless it is a mutual life insurance company within the meaning of those Acts. The question is whether the petitioner has lost the benefit of this provision by reason of the payment or agreement to pay death benefits on the lives of members in good standing. It is our opinion that a benefit insurance association of the character of the petitioner is a mutual life insurance company within the meaning of the Act, because it pays a death benefit to members in good standing. It undertakes to pay benefits to its members in case of sickness, accident and death, and the history*2941 of the association is that during the taxable years most of its funds were paid out either for sick benefits or for payment of premiums to a life insurance company upon the lives of its members. The petitioner was a mutual life insurance company within the meaning of the taxing acts, and is excepted, by the language of the statutes, from the benefits of section 234(a)(13) of the Revenue Acts of 1918 and 1921. In its brief the petitioner makes an extended argument that the dues and assessments received by it from its members were not income within the meaning of the Sixteenth Amendment. It argues that they were contributions of capital and that under the statutes of the State of Michigan the members had an undivided interest in the assets of the Association. We can not grant the soundness of this argument. Under the taxing statute the petitioner is to be regarded the same as a corporation. The dues paid by the members become the property of the Association. They may be paid out for benefits or *81 for expenses or for any other legal purpose. We think that the dues thus derived from the conduct of a business constitute taxable income of the Association. Reviewed by*2942 the Board. Judgment will be entered under Rule 50. LANSDON dissents. SMITH SMITH, dissenting: Granted that the petitioner is not an association exempt from income and profits tax under the provisions of section 231 of the Revenue Acts of 1918 and 1921, I can not believe that a benefit association of the character of the petitioner is a mutual life insurance company within the contemplation of the taxing act. In the construction of a taxing statute it is of the utmost importance to interpret it according to the intent of the legislative body enacting it. Under the decision of the Board in this case the petitioner is subject to a large income and profits tax for the fiscal years ended February 29, 1920, and February 28, 1921, upon the contributions of members. For the latter year the petitioner is subject to the provisions of the Revenue Act of 1921. Section 242 of the Act defines a life insurance company as - * * * engaged in the business of issuing life insurance and annuity contracts (including contracts of combined life, health, and accident insurance), the reserve funds of which held for the fulfillment of such contracts comprise more than 50 per*2943 centum of its total reserve funds. Although there appears to be no provision of the Michigan statutes which requires any part of the amounts of money on hand at the close of the taxable year to be reserved for the fulfillment of its contracts, nevertheless, it is apparent that the entire amounts on hand are reserved for the fulfillment of such contracts and for the payment of its operating expenses. The term "life insurance company," as used in all of the incometaxing statutes, appears to apply to the ordinary life insurance company which writes insurance and annuity contracts. The petitioner is, as stated in the majority opinion, a "local mutual benefit association." It undertakes to pay benefits to its members in case of sickness, accident, or death. If it were not for the provision that a benefit was to be paid in case of death, there would apparently be no ground for contending that the company was a life insurance company. But it is to be noted that the benefit paid in case of death in no case exceeded $175, which is presumably little more than enough to pay funeral expenses. It does not seem to me that the petitioner loses the benefits of section 234(a)(13) of the taxing*2944 statutes merely by reason of the fact that it pays such death benefits. A *82 member is entitled to the death benefit only upon the condition that he is in good standing with the company at the date of death. If for any reason he should leave the employ of manufacturers in the City of Pontiac prior to the date of death his estate receives no benefits and he loses all right to contributions made to the association. It seems to me that a contract between the member and association is not a life insurance contract but merely a contract for limited benefits. For the foregoing reasons I am of the opinion that the petitioner was a mutual insurance company, not a mutual life insurance company, within the contemplation of section 234(a)(13) of the Revenue Acts of 1918 and 1921.