W. H. Luquire Burial Ass'n v. Commissioner

W. H. LUQUIRE BURIAL ASSOCIATION COMPANY, INCORPORATED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. LIQUIRE FUNERAL HOMES AND INSURANCE COMPANY, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. W. H. Luquire Burial Ass'n v. Commissioner Docket Nos. 79097, 79098. United States Board of Tax Appeals 36 B.T.A. 621; 1937 BTA LEXIS 681; October 7, 1937, Promulgated *681 A corporation issuing burial insurance policies under which, for a stipulated periodical premium, it agrees to furnish a burial to the insured of a certain retail value upon his death, which is required to set aside a reserve for the fulfillment of its contractual obligations, determined by the Insurance Commissioner of the State of Alabama, who regulates its conduct and to whom it is required to file annual reports, is a "life insurance company" within the meaning of the Revenue Acts of 1928 and 1932, as that term is defined in section 201 of said acts. William S. Pritchard, Esq., for the petitioner. Hartford Allen, Esq., and L. W. Creason, Esq., for the respondent. MORRIS *621 The respondent having determined a deficiency in income tax of $1,428.18, in No. 79098, and $567.84, in No. 79097, for the taxable years 1931 and 1932, respectively, these duly consolidated proceedings are for the redetermination thereof. The sole question now urged, others having been abandoned, is whether or not these two petitioners (rendered two by reason of changed name in January 1932) are entitled to classification as life insurance companies under the*682 provisions of sections 201, 202, and 203 of the Revenue Acts of 1928 and 1932. An alternative, related question, which may present itself in the event of an adverse decision in that particular - that is, if we should hold that the petitioners are not insurance companies - is whether they are entitled to deduct the amount of the reserves required by laws of the state to be set apart as a reserve against the maturity of the policies. FINDINGS OF FACT. Petitioner "W. H. Luquire Burial Association Company, Incorporated", was organized and incorporated under the laws of the State of Alabama July 2, 1927, with an authorized capitalization of $5,000 - 50 shares, par value $100 each - for the stated purpose of engaging in an embalming, undertaking, and funeral directing business; to issue certificates or policies to its members, providing for them such funeral and burial benefits as may be prescribed by the rules, laws, and regulations of said corporation and generally to engage in such acts as are usually done and performed in the business of mutual aid, *622 benefit, and industrial companies or associations, under the laws of the State of Alabama, with power to consolidate*683 with one or more like corporations engaged in the business of mutual aid, benefit, and industrial companies or associations, whether incorporated in that state or in some other state, 46 of its said shares being subscribed for at par by W. H. Luquire, its organizer and first president, now deceased. Its articles of incorporation were amended January 2, 1932, changing its name to "Luquire Funeral Homes & Insurance Company, Inc.", hence, the two petitioners. This change was by reason of legislation requiring companies issuing this type of insurance contracts to own and maintain their own facilities for the fulfillment thereof, that is, to furnish undertaking services. Its powers under this amendment included the conduct of a general undertaking business; the right to engage generally in the business of burial associations, with all of the powers conferred by law upon burial insurance companies or associations; and the execution and issuance of certificates granting all benefits conferred upon such burial insurance companies or associations. Both entities will be hereinafter referred to, collectively and individually, as the petitioner. During all of the years since organization, *684 the petitioner has sold insurance policies to applicants therefor payable in merchandise and burial services upon the death of the insured, i.e., a burial for the insured, in consideration of an agreed periodical premium payment. After the charter amendment of January 2, 1932, aforesaid, and until December 31 of that year, it engaged in general undertaking, in addition to its insurance business, at which latter date the two businesses were severed and separately operated as theretofore. The petitioner issued a "membership certificate" to each of its applicants therefor in 1931, bearing the following terms and conditions: It is the purpose of this association to furnish funeral benefits for WHITE PERSONS ONLY, and upon satisfactory proof of death to the association, to render such assistance under the provisions of this certificate as is proper in the conduct of the funeral; and where the association has an office to provide a place where such funeral service may be held. It is also agreed by this association to furnish a casket for member of this association who is in good standing on the books of the association, from the age of eighteen (18) years and up, of the value of*685 Two Hundred Fifty ($250.00) Dollars, and for children of proportionate value; and if death occurs in Jefferson County, Alabama, the association will send for the body and embalm and return same if desired. The association also agrees to furnish transportation to the cemetery; provided, such member is in good standing on the books of the association. If burial is not desired in said County, the association will convey the body to the depot and will pay railway transportation on the train to any point nor more than Two Hundred (200) miles distant from the City of Birmingham, Jefferson County, Alabama. *623 If member is in good standing on the books of the association and dies outside of Jefferson County, Alabama, or in any territory where the association is operating and has an office, upon request of any one having the authority, the association will furnish a casket, of the value of Two Hundred Fifty ($250.00) Dollars for members over the age of eighteen (18) years and of proportionate value for children, and deliver same, express prepaid, to the railway station nearest the place of death, not exceeding a distance of two hundred (200) miles from the City of Birmingham, *686 Alabama. If the member dies outside of Jefferson County, Alabama, and the body is to be shipped back to the City of Birmingham, Alabama, for burial in said City, the association agrees to transport the body directly from the railway station to any cemetery in said City of Birmingham, Alabama. All funeral arrangements must be made by one in authority and through the office of the association. The casket may be selected by the person named in the certificate, or by any other person having authority. The dues of this certificate shall be on a weekly basis, and are due each Monday in advance at the Home Office of the association, but may be paid to any duly authorized representative of the association, or at the Home Office or at any Branch Office of the Association. Such payments to be recognized, must be entered at the time of payment in the receipt book provided by the association and bearing the same number as this certificate. If for any reason the dues are not called for, it shall become the duty of the member to bring or send said dues to the Home Office or any Branch Office of the Association. The schedule of dues for this certificate are as follows: For persons eighteen*687 (18) years of age or over, twenty-five (25c) cents per week; over ten (10) and under eighteen (18) years of age, fifteen cents (15c) per week; under ten (10) years of age, ten (10c) cents per week. In the event an entire family should desire membership, the following schedule shall apply: father or husband, twenty-five (25c) cents per week; wife, fifteen (15c) cents per week; other members of the family as above schedule. No obligation is assumed by the association prior to the date of this certificate, nor then unless the member is alive and in good health, and has paid the first dues. Any Certificate holder who has paid their dues for fifteen years continuously from date of Certificate shall become a member for life and shall be entitled to the attention, aid and assistance herein provided without further payment of dues. The association shall not be liable for any benefits under this certificate when the dues on same are more than four (4) weeks in arrears, and the certificate shall become lapsed and all dues paid thereon shall be forfeited to the association; provided, however, that should this certificate become lapsed for non-payment of dues, it may be reinstated upon*688 acceptance through the Home Office of the association and upon payment of all dues thus in arrears, and furnishing satisfactory evidence that the member is alive and in good health. This certificate and application blank, when properly signed and accepted, contains the entire agreement between the association and the member and owner hereof. No alterations or changes in the terms may be made except by written agreement by the president or secretary of the association. In 1932 the petitioner issued a 15-year paid up policy, containing said provisions for a casket and funeral for the insured, at the retail value of $250; provisions for a period of grace, for reinstatement, incontestability; a statement that 30 percent of the retail value of the policy should be known as the face value thereof, and that reserves *624 were to be computed upon such face value; also the following two terms for settlement: SETTLEMENT NO. 1, FUNERAL BENEFIT - If the policyholder's death should occur within forty miles of the funeral home of the Company the Company will furnish a funeral consisting of a casket, embalming the body, if desired for the Insured, furnishing a place where the funeral*689 memorial or other services may be had and transportation to the place where such services are to be held and to the cemetery, and the performance at the cemetery of the Mortician's services incident to the burial thereat. If the Insured should die within, but is not to be buried within, said territory, the Company, in lieu of transportation of the body to the cemetery and the performance at the cemetery by the Mortician of services, usually incident to burials thereat, will convey the body to the railway depot and pay one first class fare (when body is accompanied by an escort) a distance not to exceed two hunndred miles from the Company's funeral home where the services were first started. Caskets for children under sixteen years of age are furnished at a proportionate value. If the body is to be shipped to any other town or city where the Company has an office, upon the Company being notified, they will meet the remains at the depot, and furnish transportation to church, chapel or cemetery, for a distance not to exceed ten miles from the funeral home of said Company. Upon the acceptance of this Settlement No. 1, as to funeral benefits, this entire contract becomes fulfilled*690 and is terminated. SETTLEMENT NO. 2, FUNERAL BENEFIT WHEN CASKET IS SHIPPED - If death occur outside of forty miles from the nearest funeral home of the Company, upon the Company's receiving satisfactory proof from a Coroner or the physician who last attended the Insured, of the said death, the Company will ship a casket by railway express to any express office in the United States; and upon receiving a copy of the express receipt for the transportation of said casket the Company will reimburse the beneficiary the charges paid thereon for a distance not to exceed three hundred miles from the shipping point. In the event the body of the deceased is shipped back into a town or city where the Company has a funeral home the Company will, upon being notified, meet the body at the depot and furnish transportation to church, chapel or cemetery, for a distance not to exceed ten miles from the funeral home of the Company. Upon the acceptance of this Settlement No. 2, as to funeral benefits, when casket is shipped this entire contract becomes fulfilled and is terminated. It also issued a 20-year paid up policy, in that year, containing substantially the same terms, conditions, and*691 settlements aforesaid - with some unimportant exceptions - and the following additional provision for settlement: SETTLEMENT NO. 3, CASH - If death occurs outside a radius of three hundred miles of the nearest funeral home of the Company or of a Mortician with whom the Company has contracted, the Company will, upon satisfactory proof of death being made out on the blanks furnished by the Company and upon the written statement of the beneficiary of the deceased Insured that he or she does not desire Settlement No. 2, as hereinabove set forth, the Company will pay to the beneficiary for persons over sixteen years of age One Hundred Dollars ($100.00), and for children under sixteen years of age in proportionate value as shown in the table herein set forth, upon the beneficiary receiving and *625 delivering this policy to the Company and upon a full compliance by the beneficiary with the provisions of this policy. By the acceptance of Settlement No. 3 in cash, this contract becomes fulfilled and discharged and is terminated. The petitioner was under the jurisdiction and supervision of the Insurance Commissioner of the State of Alabama. It was required to and filed the conventional*692 form of annual statement with the insurance commissioner for the years 1931 and 1932, entitled "ANNUAL STATEMENT of the W. H. Luquire Burial Ass'n. Co., Inc., LIFE INSURANCE COMPANY of Birmingham in the State of Alabama to the INSURANCE COMMISSIONER of the State of Alabama." Reserves were required to be set aside the same as in the case of ordinary life insurance companies, which were computed by the actuary of the insurance department of that state according to standard industrial tables of mortality, with interest not to exceed 4 percent. The petitioner wrote about $250,000 face value of its policies in 1931 and about $500,000 in 1932. At the end of 1931 it had approximately $750,000 of such policies outstanding and $1,000,000 at the end of 1932. The issuance of such policies has increased considerably since that year. For 1928, 1929, and 1930 the petitioner reported its taxable income on form 1120, "Corporation Income Tax Return." The legal reserve established by the Insurance Commissioner of the State of Alabama and carried in the petitioner's financial statements appended to each of its returns, form 1120, for the calendar years 1931 to 1932, was $26,601.18. The amount*693 of increase in such reserve, as computed by the state actuary, and as set aside, was shown to be $12,427.18 and $4,717 in said respective returns and was deducted in the computation of net taxable income. Its total reported income according to said returns was derived from the following sources: [1932] Premiums $88,465.14 $90,365.11 Interest 199.46 857.55 Funeral sales $50,712.94 Cost of goods sold 16,851.85 1 33,860.89 Purchase discounts 35.52 256.12 Miscellaneous 95.31 Total 88,795.43 125,339.67 The respondent disallowed the increases in reserve of $12,427.18 and $4,717, deducted in 1931 and 1932, respectively, "for the reason that there is no provision of the law or regulations, as affecting insurance companies other than life or mutual, under which such deduction is permissible." *626 OPINION. MORRIS: 1 Did the issuance of burial insurance contracts constitute the petitioner a "life insurance company" under the provisions of section 201 of the Revenue Acts of 1928 and 1932? The term "life insurance company" as defined in subdivision (a) of that section "means*694 an insurance company 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 centum of its total reserve funds." We do not understand the petitioner to urge, nor could it seriously, that its business is the issuance of annuity or combined health and accident insurance. Nor, if we find that the petitioner is a life insurance company, do we understand that there is any serious doubt that its reserve funds held for the fulfillment of its contracts "comprise more than 50 per centum of its total reserve funds", since its reserves, other than those so held, are negligible. While there are many accepted definitions of what constitutes life insurance, in the generally accepted sense, Cooley says that the following, in Commonwealth v. Wetherbee,105 Mass. 149, has been approved by the courts and writers as the clearest: * * * A contract of insurance is an agreement by which one party for a consideration, which is usually*695 paid in money, either in one sum or at different times during the continuance of the risk, promises to make a certain payment of money, on the destruction or injury of something in which the other party has an interest. In fire and marine insurance, the thing insured is property; in life or accident insurance, it is the life or the health of a person. All that is requisite to constitute such a contract is the payment of the consideration by the one and the promise of the other to pay the amount of the insurance upon the happening of injury to the subject by the contingency contemplated in the contract. Briefs on the Law of Insurance - Cooley, vol. I, p. 15. Section 8341 of the Code of Alabama, 1923, defines a "contract of insurance" to be "an agreement, expressed or implied, by which one party, for a consideration, promises to pay money, or its equivalent, or to do some act of value to the assured, upon the destruction or injury of something in which the other party has an insurable interest." Were the contracts issued by the petitioner "life insurance" contracts? Cooley's answer (vol. VI, p. 6) to this query is that "A corporation executing contracts to furnish members a*696 funeral and all necessary requisites is engaged in writing life insurance." Citing State ex rel. Fishback, Insurance Commissioner v. Globe Casket & Undertaking Co.,82 Wash. 124; 143 Pac. 878; and Renschler v. State ex rel. Hogan,90 Ohio St. 363; 107 N.E. 758. Couch, in a *627 similar work, says that "burial or funeral benefit insurance is valid, and being determinable upon the cessation of human life, and dependent upon that contingency, constitutes life insurance." I Couch on Insurance, sec. 32, pp. 46, 47, footnote 3. In State ex rel. Fishback, Insurance Commissioner v. Globe Casket & Undertaking Co., supra - a case arising in the Supreme Court of the State of Washington - an action was brought, on the relation of the state insurance commissioner, to enjoin the operation of appellant's business, on the ground that it was in violation of the insurance laws of the state. In a very substantial sense its objects and purposes were the same as in the case of the petitioner, to wit, to engage in the undertaking business and to issue burial certificates guaranteeing the insured "a decent*697 and respectable burial." Holding the contract entered into there to be an "insurance contract", the court said: * * * The contract evidenced by the certificate has all of the elements of a life insurance contract. It is an agreement to perform a service which can become obligatory only on the death of the certificate holder. While no beneficiary of the promise is named, in reality one exists, and may be ascertained with as much certainty as if directly and specifically named. It is the person who would otherwise be obligated to pay the expenses of the burial. This may be the heir of estate of the decedent, his relatives, or the state; but, whoever such person may be, he is relieved of his obligation to the extent of the value of the service agreed to be performed by the terms of the certificate. There is therefore a promise by one person to perform a valuable service on the death of another, a valuable consideration paid for the promise, and a person to whom the benefit of the promise will inure. Had the ordinary insurance nomenclature been used to designate the person making the promise, the person to whom the promise is made, the person who will receive the benefit of the*698 promise, and the consideration paid for the promise, no one would question that it was an insurance contract. But a contract is to be determined from its nature and effect, not by the terminology used to characterize it. Here there is an "insurer," and "insured," a "premium," and a "beneficiary," and we think the contract nothing else than a plain, ordinary insurance contract. * * * That contracts of the nature of the contract here in question are insurance contracts, and subject to control under the insurance statutes, is the general trend of authority. * * * In another case, arising under the laws of the State of Kansas, State ex rel. Attorney General v. Wichita Mutual Burial Association,84 Pac. 757, cited with approval in State v. Globe Casket & Undertaking Co., supra, the supreme court of that state held an association, organized for the purpose of securing to its members a burial worth $100 in consideration of certain assessments to be paid by its members, during lifetime, to be an insurance association, saying: We conclude, from the foregoing facts, that the business, designed to be transacted under the plan of the Wichita*699 Mutual Burial Association, is plain, *628 ordinary insurance. Membership in this association insures to each member, above 10 years of age, that which is equivalent to $100 cash, payable at the death of such member, to whoever would other wise defray the burial expenses of such decedent. If the certificate of membership issued by this burial association be designated "policy," the assessment "premium," and those who are relieved from paying the funeral expenses of the deceased member "beneficiaries," this association, both in general plan and phraseology, will be a substantial duplicate of the ordinary mutual insurance company. The fact that no beneficiary is specifically named deserves little consideration, since in reality one exists, and may be ascertained with as much certainty as if directly and specifically mentioned. Whoever would otherwise pay the burial expenses of the deceased member is, by being relieved of that burden, as directly benefited to the amount of such expenses, as if the cash was paid immediately to such person. If the deceased member leaves an estate, the whole thereof, undiminished by the burial expenses which would otherwise be paid therefrom, *700 will be received by his heirs. If he leaves no estate, then his immediate relatives and friends, who would otherwise have furnished the expenses of his burial, will be benefited by being relieved of that burden. True the court in that case merely said, except by clear inference, that the business engaged in was "ordinary" insurance and did not specifically say that it was "life" insurance, but since the contracts, as in all of such cases, are predicated upon the death of the insured, we conceive of no other classification into which it might logically fall. In still another case - cited with approval in State ex rel. Fishback, Insurance Commissioner v. Globe Casket & Undertaking Co., supra, arising under the laws of the State of Indiana - State v. Willett,86 N.E. 68 - the state supreme court, considering a similar question, said: * * * The contract was issued by an association whose declared object is to secure, or make certain, by a system of mutual contribution, to each member of the association, at death, the specific benefit of $75 for application to his burial service. This was indemnity, or security, that at the cessation of*701 the life of the member a certain sum of money should be payable by the association for his burial, whether the deceased had paid one assessment or a thousand. The controlling elements of the contract, as interpreted by the by-laws, are in all material respects similar to those of an ordinary mutual life insurance company. * * * It is simply a business enterprise in which the contract holder is promised a definite thing, in consideration of his performance of a definite undertaking on his part. The contract is determinable by the cessation of a human life, and belongs to that extended class of agreements dependent upon such contingency, and commonly known as "life insurance." In fact the authorities generally hold, wherever such funeral or burial contracts are entered into, that they constitute life insurance and that such corporations or associations are engaged in the life insurance business. State ex rel. District Attorney General v. Mutual Mortuary Association, Inc. (Tenn.), 61 S.W.(2d) 664; State ex rel. Landis, Attorney General v. De Witt C. Jones Co. (Fla.), 147 So. 230;*702 *629 Sisson, Attorney General ex rel. Nardolillo v. Prata Undertaking Co. (R.I.), 141 Atl. 76; State v. Willett (Ind.), supra; Renschler v. State ex rel. Hogan (Ohio), supra; State v. Wichita Mutual Burial Association (Kans.), supra; State v. Beardsley (Minn.), 92 N.W. 472; Oklahoma Southwestern Burial Association of Ardmore v. State ex rel. Read, Insurance Commissioner (Okla.), 274 Pac. 642; Pennsylvania Railroad Co. v. Roydhouse (Pa.), 110 Atl. 277; Fikes v. State (Miss.), 39 So. 783; Smith v. Bullard,61 N.H. 381; State ex rel. Fishback, Insurance Commissioner v. Globe Casket & Undertaking Co. (Wash.), supra. While not called upon to rule specifically upon the exact question, the Court of Appeals of Alabama, on March 16, 1937, in Booker T. Washington Burial Insurance Co. v. Williams,173 So. 269 - wherein a burial insurance policy was brought into question - very clearly indicated by its reasoning, and references to the term "life insurance" in applying the law to the circumstances of that*703 case, that it considered such contracts and such businesses as life insurance under the laws of the State of Alabama, and the firms engaged in the issuance thereof as in the life insurance business. See also Jordan's Mutual Aid Association v. Asberry (Ala.), 154 So. 120. We had the benefit of the undisputed testimony of the man who was the insurance commissioner of the State of Alabama during the period under consideration, who testified that his office regarded and treated burial insurance organizations as "industrial life insurance businesses, operating under what was known as "mutual aid laws" of the state. The respondent makes a point of the fact - citing, among others, a certain definition from I Couch on Insurance, 1929 ed., p. 49, par. 34, to the effect that only the payment of a "sum of money" upon death will suffice - that payment under the contracts here were to be made in merchandise and services. Cooley, in his Briefs on the Law of Insurance, vol. I, p. 5, recognizes the inaccuracy or incompleteness of the definitions of insurance wherein, after setting forth one, he says, "Perhaps a better definition is that a contract of insurance is an agreement*704 by which one party for a consideration promises to pay money or its equivalent or to do some act of value to the assured upon the destruction or injury of something in which the other party has an interest", clearly recognizing that the "equivalent" of money would suffice. In this connection it should be noted, supra, that Alabama has adopted this as its statutory definition of what constitutes a "contract of insurance", recognizing the payment of money "or its equivalent." In conclusion, finding as we do that the petitioner was organized to engage in the burial insurance busines ; that it so engaged; that it not only was recognized as an insurance company by the Insurance *630 Commissioner of the State of Alabama, but was supervised by and required to file annual reports with him in the same manner as ordinary life insurance companies; that it not only established reserves for the fulfillment of its contractual obligations but those reserves were actually determined by actuaries of the insurance commissioner; and that a contract was entered into between the petitioner, insurer, and the insured, whereby for the payment of a stipulated sum, over a period of time, the petitioner*705 would pay, in merchandise and services, a sum measured by the retail value of a complete funeral, upon proof of death of the insured (cf. West Virginia & Kentucky Insurance Agency,18 B.T.A. 715), we are convinced that the petitioner issued "life insurance" contracts and that it meets the test of the statute defining life insurance companies. Having so decided, the alternative question presented need not be considered. Reviewed by the Board. Judgment will be entered under Rule 50. Footnotes 1. Slight error unaccounted for. ↩ 1. This report was prepared during Mr. Morris' term of office. ↩