Oregon Casualty Ass'n v. Commissioner

OREGON CASUALTY ASSOCIATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Oregon Casualty Ass'n v. Commissioner Docket No. 86401. United States Board of Tax Appeals 37 B.T.A. 340; 1938 BTA LEXIS 1049; February 17, 1938, Promulgated *1049 An insurance rating bureau organized and operated by casualty insurance companies pursuant to an order of the state insurance commissioner, for the purpose of checking the premiums on all policies written to enforce their conformance to established rates, and for compiling statistical information on insurance risks, the expenses of operation being met by assessments against members based on the amount of net premiums of each member, held exempt from income tax under section 103(7) of the Revenue Act of 1932 as a business league not organized for profit and having no net income inuring to the benefit of any private shareholder or individual. Robert T. Jacob, Esq., for the petitioner. W. W. Kerr, Esq., for the respondent. ARUNDELL *341 This proceeding involves a deficiency in income tax of $188.38 for the year 1933. The only issue is whether the petitioner falls within the class of nontaxable organizations defined in section 103(7) of the Revenue Act of 1932. FINDING OF FACT. The petitioner is a corporation organized under the laws of the State of Oregon. It was incorporated under that part of the corporation law relating to religious, *1050 charitable, and other nonprofit corporations. It was organized pursuant to a ruling of the insurance commissioner issued October 5, 1933, which required that casualty companies take steps to have their rates checked in connection with every policy issued so as to enforce compliance with the rate schedules fixed by law. The insurance commissioner's ruling gave the companies the option of having their rates checked through the Oregon Insurance Rating Bureau, or through the National Bureau of Casualty & Surety Underwriters, or through a new bureau to be established by themselves. Since the Oregon Insurance Rating Bureau handled only the checking of rates on fire insurance policies, and the National Bureau of Casualty & Surety Underwriters was an eastern concern, the casualty companies in Oregon elected to set up their own rating bureau, as permitted by the insurance commissioner's order. The articles of incorporation of the petitioner were filed with the Secretary of State of Oregon on November 20, 1933. The purposes of the corporation as set forth in its articles of incorporation are: (1) To check insurance policies issued by its members for the purpose of determining the correctness*1051 of the rates in accordance with the rates and schedules approved by the Insurance Commissioner of the State of Oregon, (2) to tabulate and record statistical information pertaining to risks, (3) in general, to do all things necessary in the accomplishment of these objects and for the betterment of the insurance business. Under the bylaws of the corporation any insurance company or association regularly licensed in Oregon is eligible for membership upon the approval of the other members and upon its agreement to abide by the rules and regulations of the association. A filing fee of $10 is charged every applicant admitted to the association; the expense of conducting the business of the association is to be borne by the members in proportion to the amount of gross policy fees, gross membership fees, and gross premiums, less cancellations, on all business written on risks within the state. An advisory board composed of seven members elected by the members of the association is authorized to levy such assessments as are necessary for the payment of expenses of the association, the *342 assessments being apportioned among the members upon the basis of the net premiums of each*1052 member as shown by the last annual report filed with the insurance commissioner of the state, with annual adjustments by proper additions or deductions to be made at the end of each year to make the assessments accord with the amount of business actually written during the current year. The preamble to the rules and regulations adopted by the association reiterates the purposes of organization set out in the articles of incorporation, viz., rate checking and the compilation of information relating to undesirable risks, stating, however, that it shall not be the purpose of the association for the present to in any manner influence the underwriting practice of any member or the determination of premium rates for insurance risks. The rules and regulations provide that the association shall operate as a nonprofit enterprise, solely for the purpose of serving cooperatively in the interest of its members and the public. The rules and regulations likewise contain the provisions for assessment contained in the bylaws. Under the order of the insurance commissioner the checking of all rates was to begin on December 1, 1933. Accordingly on November 23, 1933, the advisory board of the*1053 petitioner met and levied an assessment to cover "the estimated expense of conducting the business of the association during the first quarter of its history." The amount of the assessment was one-eighth of 1 percent of the 1932 gross premiums, less cancellations, of each member. The finance committee was authorized to furnish office equipment for the office of the association. Since the assessment made on November 23, 1933, covered an estimated three months operating expense, there was on hand at the end of 1933 a cash balance of $504.87. Two more assessments were made in 1934 on the basis of 1933 premiums of the respective members and at the end of 1934 an adjustment of the assessments to date was made on the basis of the actual premiums on policies written in 1934. Thus, some members were debited with underpayments, and some were credited with overpayments, which were applied in reduction of their subsequent assessments. The same practice of adjustment of assessments was followed in 1935 and 1936, as required by the rules and the bylaws. The filing fee of $10 collected upon admission of every member is charged in order to cover the expense of arranging files for the new*1054 member. This sum is not recoverable on any member's withdrawal from the association. None of the officers of the petitioner drew salaries. It has six employees who are salaried. The association owns no property except office furniture and equipment. It has no outstanding stock. *343 OPINION. ARUNDELL: The question here is whether the petitioner is such an organization as is exempted from tax under section 103(7) of the Revenue Act of 1932, which provides as follows: The following organizations shall be exempt from taxation under this title - (7) Business leagues, chambers of commerce, real estate boards, or boards of trade, not organized for profit and no part of the net earnings of which inures to the benefit of any private shareholder or individual. The Treasury regulation 1 issued under this section interprets the statutory provision as requiring that the organization not be engaged "in a regular business of a kind ordinarily carried on for profit." *1055 It was stated by the Board in the case of Produce Exchange Stock Clearing Association, Inc.,27 B.T.A. 1214; affd., 71 Fed.(2d) 142, that * * * Generally speaking, our conception of a business league exempt from income tax is an association of business men or of business enterprises, incorporated or unincorporated, which has for its purpose the furtherance of the interest of its members by way of furnishing of information to its members, or the performance of services which are not ordinarily carried on by businesses for profit, and which is not organized for profit and no part of the net earnings of which inures to the benefit of any private shareholder or individual. The Circuit Court of Appeals in the same case stated that: * * * The numerous subdivisions of section 103 of the Revenue Act of 1928 (26 USCA - Sec. 2103) and the corresponding provisions in the earlier acts, specify organizations which, in the great majority of instances, are evidently granted exemption because of the benefit to be derived by the public from their activities. The respondent contends that the petitioner is not exempt from tax because "it is not in any sense conducted*1056 for the common interest of the community, or a number of persons, or for the good of, or in the interest of the trade", but only as an adjunct to and in the interest of the private business of its members, citing Growers Cold Storage*344 Co.,17 B.T.A. 1279, and Produce Exchange Stock Clearing Association, Inc., supra. He argues further that the type of service rendered by the petitioner is usually rendered in consideration for fees by corporations operated for profit, citing Retailers Credit Association of Alameda County v. Commissioner, 90 Fed.(2d) 47, affirming 33 B.T.A. 1166. Respondent also contends that the net earnings of the petitioner inure to the benefit of its individual members since any excess of the assessment collected in any year over the amount needed for operating expense is used to proportionately reduce the assessment for the following year. We have concluded that the petitioner is entitled to the exemption which it claims since we do not think the arguments advanced by the respondent are valid on the facts of this case. It is clear that there is a substantial public interest in*1057 the checking of the charges for insurance policies in order to assure conformity with established rates. This is shown prima facie in the present case by the fact that this procedure was ordered by the insurance commissioner of the state, under his power to regulate the insurance business in the public interest. The interest of the public in requiring insurance companies to maintain a sound actuarial basis is not limited to the large body of customers of the insurance companies, but extends to the whole community, which would be indirectly at least, if not directly, affected by the failure of its insurance companies. It is to preserve a sound actuarial basis for charges by the insurance companies through the prevention of cut-throat competition that rate checking is required. It is a common thing in the fire insurance field, and has the same justification for existence in other insurance fields where established rates are prescribed. There is a provision of the Oregon statutes which says that "The business of conducting a rating bureau in this state is public service in character and shall be conducted without profit to any party, except that fair and reasonable compensation shall*1058 be paid for all services actually rendered and necessary to the business." (Oregon Code 1930, 46-1605.) While it is not altogether clear from the statute whether this provision is limited to fire insurance rating bureaus, nevertheless, even apart from any statutory designation, we are convinced that the business of a rating bureau is public service in character. Rate checking also operates in the interest of the insurance companies themselves, although because of its expense it might not be undertaken by the companies voluntarily. The petitioner's other function, of furnishing statistical information regarding undesirable risks, likewise operates in he interests of the public as well as of the insurance trade. The petitioner thus comes within the requirements for exemption which are emphasized in Growers Cold Storage Co.,*345 supra, and Produce Exchange Stock Clearing Association, Inc., supra. The other arguments of the respondent merit little attention. His argument that the type of service rendered by the petitioner is usually rendered by corporations operated for profit does not find support in the evidence. On the contrary, it appears that*1059 the Oregon Rating Bureau, which performs for fire insurance companies the same function as the petitioner does in its field, is a nonprofit organization. Also, the evidence regarding the National Bureau of Casualty & Surety Underwriters, while showing that that organization will do rating for nonmembers upon the payment of fees, does not show that it is operated for profit. We can not find from the evidence that the petitioner was engaged "in a regular business of a kind ordinarily carried on for profit." It is of course clear that the petitioner had no "earnings" as that term is commonly understood and there were, therefore, no earnings to inure to the benefit of any private individuals or member corporations. The petitioner was organized and operated as a nonprofit institution and had no capital stock outstanding. Assessments were made as needed to meet the expenses of operating the association apportioned on the basis of the business written by each member. In any period when the assessments exceeded the expenditures there would of course be some cash on hand. This was never distributed to anyone, but was retained for meeting future expenses. *1060 Since the assessments were apportioned on the basis of the prior year's business written by each member and adjusted at the close of the year to conform with the business written during the current year, there were sometimes credits to members which would apply in reduction of subsequent assessments. We do not think that these credits inured to the benefit of private individuals in the sense which would require the denial of the exemption provided for in section 103(7), supra. Cf. King County Insurance Association,37 B.T.A. 288. Decision will be entered for the petitioner. Footnotes 1. ART. 528 (Reg. 77). Business leagues, chambers of commerce, real estate boards, and boards of trade.↩ - A business league is an association of persons having some common business interest, the purpose of which is to promote such common interest and not to engage in a regular business of a kind ordinarily carried on for profit. It is an organization of the same general class as a chamber of commerce or board of trade. Thus its activities should be directed to the improvement of business conditions or to the promotion of the general objects of one or more lines of business as distinguished from the performance of particular services for individual persons. An organization whose purpose is to engage in a regular business of a kind ordinarily carried on for profit, even though the business is conducted on a cooperative basis or produces only sufficient income to be self-sustaining, is not a business league. An association engaged in furnishing information to prospective investors, to enable them to make sound investments, is not a business league, since its activities do not further any common business interest, even though all of its income is devoted to the purpose stated. A stock exchange is not a business league, a chamber of commerce, or a board of trade within the meaning of the law and is not exempt from tax.