Source: https://supreme.justia.com/cases/federal/us/252/523/
Timestamp: 2019-04-23 04:48:42+00:00

Document:
"shall not include as income in any year such portion of any actual premium received from any individual policyholder as shall have been paid back or credited to such individual policyholder, or treated as an abatement of premium of such individual policyholder, within such year,"
and that "there be deducted from gross income . . . the sums other than dividends paid within the year on policy and annuity contracts." Held that money derived by a mutual company from redundancy of premiums paid in previous year, and paid to policyholders during the tax year as dividends in cash, not applied in abatement or reduction of their current premiums, should not be deducted from premium receipts in computing gross income. P. 252 U. S. 527.
No aid in construing an act of Congress can be derived from the legislative history of another passed six years later. P. 252 U. S. 537.
insurance, brought this action in the District Court of the United States for the Eastern District of Pennsylvania to recover $6,865.03 which was assessed and collected as an income tax of one percent upon the sum of $686,503, alleged to have been wrongly included as a part of its gross income, and hence also of its net income, for the period from March 1, 1913 to December 31, 1913. The latter sum equals the aggregate of the amounts paid during that period by the company to its policyholders in cash dividends which were not used by them during that period in payment of premiums. The several amounts making up this aggregate represent mainly a part of the so-called redundancy in premiums paid by the respective policyholders in some previous year or years. They are, in a sense, a repayment of that part of the premium previously paid which experience has proved was in excess of the amount which had been assumed would be required to meet the policy obligations (ordinarily termed losses) or the legal reserve and the expense of conducting the business. [Footnote 1] The district court allowed recovery of the full amount with interest. 247 F. 559. The Circuit Court of Appeals for the Third Circuit, holding that nothing was recoverable except a single small item, reversed the judgment and awarded a new trial. 258 F. 81. A writ of certiorari from this Court was then allowed. 250 U.S. 656.
"fraternal beneficiary societies, orders, or associations operating under the lodge system or for the exclusive benefit of the members of a fraternity itself operating under the lodge system."
It provides -- G(b), pp. 172-174 -- how the net income of insurance companies shall be ascertained for purposes of taxation, prescribing what shall be included to determine the gross income of any year, and also specifically what deductions from the ascertained gross income shall be made in order to determine the net income upon which the tax is assessed. Premium receipts are a part of the gross income to be accounted for.
(a) Mutual fire companies "shall not return as income any portion of the premium deposits returned to their policyholders."
"shall be entitled to include in deductions from gross income amounts repaid to policyholders on account of premiums previously paid by them and interest paid upon such amounts between the ascertainment thereof and the payment thereof."
"shall not include as income in any year such portion of any actual premium received from any individual policyholder as shall have been paid back or credited to such individual policyholder, or treated as an abatement of premium of such individual policyholder, within such year."
"the net addition, if any, required by law to be made within the year to reserve funds and the sums other than dividends paid within the year on policy and annuity contracts."
rule that, in figuring the gross income, there shall be taken the aggregate full premiums received by the company less the aggregate of all dividends paid by it to any policyholder by credit upon a premium or by abatement of a premium, and also of all dividends whatsoever paid to any policyholder in cash, whether applied in payment of a premium or not. The noninclusion clause (c), above, excludes from gross income those premium receipts which were actually or in effect paid by applying dividends. The company seeks to graft upon the clause so restricted a provision for what it calls nonincluding, but which in fact is deducting, all cash dividends not so applied. In support of this contention, the company relies mainly not upon the words of the statute, but upon arguments which it bases upon the nature of mutual insurance, upon the supposed analogy of the rules prescribed in the statute for mutual fire and marine companies, and upon the alleged requirements of consistency.
entered at the full rate and the abatement (that is, the amount by which it was reduced) is entered as a credit. The financial result both to the company and to the policyholders is, however, exactly the same whether the renewal premium is reduced by a dividend or whether the renewal premium remains unchanged, but is paid in part either by a credit or by cash received as a dividend. And the entries in bookkeeping would be substantially the same. Because the several ways of paying a dividend are, as between the company and the policyholder, financial equivalents, Congress doubtless concluded to make the incidents the same also as respects income taxation. Where the dividend was used to abate or reduce the full or gross premium, the direction to eliminate from the apparent premium receipts is aptly expressed by the phrase "shall not include," used in clause (c) above. Where the premium was left unchanged, but was paid in part by a credit or cash derived from the dividend, the instruction would be more properly expressed by a direction to deduct those credits. Congress doubtless used the words "shall not include" as applied also to these credits because it eliminated them from the aggregate of taxable premiums as being the equivalent of abatement of premiums.
"should not be confused with dividends declared in the case of a full-paid participating policy, wherein the policyholder has no further premium payments to make. Such payments having been duly met, the policy has become at once a contract of insurance and of investment. The holder participates in the profits and income of the invested funds of the company."
"not because we wish to suggest disapproval, but merely because no opinion about these matters is called for now, as they do not seem to be directly involved."
The noninclusion clause in the Revenue Act of 1913(c) above, was doubtless framed to define what amounts involved in dividends should be "nonincluded," or deducted, and thus to prevent any controversy arising over the questions which had been raised under the Act of 1909. [Footnote 5] The petition for writ of certiorari applied for by the government was not denied by this Court until December 15, 1913 (231 U.S. 755) -- that is, after the passage of the act.
cases is such as may well have seemed to Congress sufficient to justify the application of different rules of taxation.
more than it was assumed they would when the policy contract was made, or because the expense of conducting the business was less than it was then assumed it would, be or because the mortality -- that is, the deaths -- in the class to which the policyholder belongs proved to be less than had then been assumed in fixing the premium rate. When, for any or all of these reasons, the net cost of the investment (that is, the right to receive at death or at the endowment date the agreed sum) has proved to be less than that for which provision was made, the difference may be regarded either as profit on the investment or as a saving in the expense of the protection. When the dividend is applied in reduction of the renewal premium, Congress might well regard the element of protection as predominant, and treat the reduction of the premium paid by means of a dividend as merely a lessening of the expense of protection. But, after the policy is paid up, the element of investment predominates, and Congress might reasonably regard the dividend substantially as profit on the investment.
did not persist in premium payments to the end of the contract period.
Third. The noninclusion clause here in question, (c) above, is found in § IIG.(b) in juxtaposition to the provisions concerning mutual fire and mutual marine companies, clauses (a) and (b) above. The fact that, in three separate clauses, three different rules are prescribed by Congress for the treatment of redundant premiums in the three classes of insurance would seem to be conclusive evidence that Congress acted with deliberation, and intended to differentiate between them in respect to income taxation. But the company, ignoring the differences in the provisions concerning fire and marine companies respectively, insists that mutual life insurance rests upon the same principles as mutual fire and marine, and that, as the clauses concerning fire and marine companies provide specifically for noninclusion in or deduction from gross income of all portions of premiums returned, Congress must have intended to apply the same rule to all. Neither premise nor conclusion is sound.
insurance companies, applies whether the company be a stock or a mutual one. There is good reason to believe that the failure to differentiate between stock and mutual life insurance companies was not inadvertent. For, while there is a radical difference between stock fire and marine companies and mutual fire and marine companies both in respect to the conduct of the business and in the results to policyholders, the participating policy commonly issued by the stock life insurance company is, both in rights conferred and in financial results, substantially the same as the policy issued by a purely mutual life insurance company. The real difference between the two classes of life companies as now conducted lies in the legal right of electing directors and officers. In the stock company, stockholders have that right; in the mutual companies, the policyholders who are the members of the corporation.
persists in its determination to differentiate between life and other forms of insurance.
"And life insurance companies shall not include as income in any year such portion of any actual premiums received from any individual policyholder [within such year] as shall have been paid back or credited to such individual policyholder, or treated as an abatement of premium of such individual policyholder, within such year."
the year, and which it paid out mainly on account of premiums received long before the tax year. What it seeks is not a noninclusion of amounts paid in, but a deduction of amount paid out.
If the terms of the noninclusion clause (c) above, standing alone, permitted of an doubt as to its proper construction, the doubt would disappear when it is read in connection with the deduction clause (d) above. The deduction there prescribed is of "the sums other than dividends paid within the year on policy and annuity contracts." This is tantamount to a direction that dividends shall not be deducted. It was argued that the dividends there referred to are "commercial" dividends like those upon capital stock, and that those here involved are dividends of a different character. But the dividends which the deduction clause says, in effect, shall not be deducted are the very dividends here in question -- that is, dividends "on policy and annuity contracts." None such may be deducted by any insurance company except as expressly provided for in the act, in clauses quoted above, (a), (b), and (c) -- that is, clauses (a), (b), and (c) are, in effect, exceptions to the general exclusion of dividends from the permissible deductions as prescribed in clause (d) above.
be resorted to as an aid to construction. Caminetti v. United States, 242 U. S. 470, 242 U. S. 490. But no aid could possibly be derived from the legislative history of another act passed nearly six years after the one in question. Further answer to the argument based on the legislative history of the later act would therefore be inappropriate.
We find no error in the judgment of the circuit court of appeals.
The manner in which mutual level premium life insurance companies conduct their business and the nature and application of dividends are fully set forth in Mutual Benefit Life Ins. Co. v. Herold, 198 F. 199; Connecticut General Life Ins. Co. v. Eaton, 218 F. 188; Connecticut Mutual Life Ins. Co. v. Eaton, 218 F. 206.
The percentage of the redundancy to the premium varies, from year to year, greatly in the several fields of insurance, and likewise in the same year in the several companies in the same field. Where the margin between the probable losses and those reasonably possible is very large, the return premiums rise often to 90 percent or more of the premium paid. This is true of the manufacturers' mutual fire insurance companies of New England. See Report Massachusetts Insurance Commissioner (1913) vol. I, p. 16.
A separate account is kept by the company with each policyholder. In that account, there is entered each year the charges of the premiums payable and all credits either for cash payments or by way of credit of dividends, or by way of abatement of premium.
"After this policy shall have been in force one year, each year's premium subsequently paid shall be subject to reduction by such dividend as may be apportioned by the directors."
"Reduction of premiums as determined by the company will be made annually beginning at the second year, or the insured may pay the full premium and instruct the company to apply the amount of reduction apportioned to him in any one of the following plans: [Then follow four plans.]"
Substantially the same questions were involved also in Connecticut General Life Ins. Co. v. Eaton, 218 F. 188, and Connecticut Mutual Life Ins. Co. v. Eaton, 218 F. 206, in which decisions were not, however, reached until the following year.
The alleged unwisdom and injustice of taxing mutual life insurance companies while mutual savings banks were exempted had been strongly pressed upon Congress. Briefs and statements filed with Senate Committee on Finance on H.R. 3321, Sixty-Third Congress, First Session, vol. 3, pp. 1955-2094.

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