*2251 1. From the evidence, held that the petitioner is entitled to personal service classification for the years 1920 and 1921.
2. Assessment and collection of taxes held not barred by the statute of limitations.
3. Where the petitioner accepted membership fees on an annual and also for a three-year period for services to be rendered subscribers to a reciprocal insurance association, held that the fees thus collected must be accounted for as gross income in the year in which received.
*1160 In these proceedings, which have been consolidated for hearing and decision, the petitioner seeks a redetermination of its income-tax *1161 liability for the calendar years 1920 to 1923, inclusive, for which years the respondent has determined deficiencies of $9,684, $8,232.01, $674.23, and $2,788.50, respectively.
The petitioner alleges (1) that the respondent erred in denying personal service classification for the years 1920 and 1921; (2) that the deficiencies for the years 1920 and 1921 are barred by the*2252 statute of limitations; (3) that for all four years the respondent erred by including in petitioner's gross income the total amount of fees received by petitioner from subscribers to a reciprocal insurance association in the year in which they were paid when they should have been reported as income over the period covered by the membership.
FINDINGS OF FACT.
The petitioner is a corporation which was organized under the laws of the State of Indiana on April 1, 1917, with an authorized capital of $25,000. During the years under consideration it maintained offices in Indianapolis, Ind., and Columbus, Ohio. Its business, since incorporation, has been that of acting as agent and of soliciting insurance for the State Automobile Insurance Association, a reciprocal insurance organization engaged in exchanging automobile insurance among its subscribers. Each automobile owner so insured pays a membership fee to the petitioner for services to be rendered by it and a premium to the State Automobile Insurance Association sufficient to cover his pro rata share of losses. The rights, powers, and duties of all three parties are specified in the subscriber's application. In it he designates*2253 the petitioner as his attorney in fact with power to exchange insurance with other subscribers in the association and to perform every act which the insured himself could do in relation to such exchange.
The petitioner is not an insurance company. It does not carry the insurance, does not issue policies, and is not liable for losses on the policies. All policies are issued by and in the name of the State Automobile Insurance Association and signed by the petitioner as attorney in fact for the subscribers.
The initial contracts of the petitioner during the years involved were procured by over 150 subagents employed by the petitioner. These agents solicited the applications for membership in the Reciprocal Insurance Association and for insurance policies and were paid on a commission basis. Each applicant for membership and insurance paid the agent a fee which was to cover the services of petitioner as attorney in fact for the subscriber. This fee was in addition to the premium for the actual insurance coverage.
Subscriptions were taken for liability and property damage - collision, fire and theft and cyclone insurance on a one-year membership *1162 for $5 or a three-year*2254 membership of $7.50, for each type of coverage except cyclone, which was written on the basis of $2 and $3, respectively, all payable in advance.
The following is a typical instance of a transaction. If an individual subscribed for a fire insurance policy to cover his automobile for a term of three years he paid the agent of the petitioner a membership fee of $7.50. The premium on his fire insurance policy to cover his automobile was entirely separate from this membership fee and was usually paid semiannually. This insurance premium went to the State Automobile Insurance Association and not to petitioner. The agent retained his commission, generally amounting to $3.50 for each membership fee of $7.50, and forwarded the $4 to the petitioner, who retained it. These net membership fees are the chief sources of income of the petitioner. In addition it received certain small fees for the transference and reinstatement of policies.
In consideration of the net payment, the petitioner agreed that during the period of membership it would make the exchange of insurance, adjust the insured losses, and perform all services incidental to the management and operation of the association. *2255 During the years 1917 to 1923 the membership fees received by the petitioner for these services were as follows:
| Year | One-year membership fees | Three-year membership fees |
| 1917 | $14,085.70 | |
| 1918 | 42,644.63 | |
| 1919 | $10,418.48 | 79,794.48 |
| 1920 | 9,043.33 | 92,395.14 |
| 1921 | $8,438.80 | $76,865.53 |
| 1922 | 12,568.92 | 106,456.38 |
| 1923 | 22,928.76 | 146,391.44 |
The petitioner kept its books and made its returns on the accrual basis. The total number of stockholders of the petitioner has never exceeded four, all of whom have devoted their time exclusively to the conduct of its business. During the years 1920 and 1921 the stockholders of the petitioner and the number of shares held by each were as follows: J. M. Dalrymple, 15 shares; A. W. Early, 83 shares; Arthur Wolf, 83 shares; W. E. McKee, 83 shares.
Mr. Dalrymple was president of the petitioner. His duties consisted of signing policies and checks. Mr. Early had charge of sales promotion. He opened the mail in the morning, distributed it, wrote letters and visited agents. Mr. McKee was the treasurer. He signed checks, answered correspondence and supervised the management of the office at Indianapolis. Mr. Wolf*2256 had charge of the claims department.
The petitioner commenced operations without any paid-in capital.
*1163 Prior to January 1, 1920, it declared stock dividends of $25,000, which amount constituted its capital from January 1, 1920, to December 31, 1921. Its financial statements at the close of 1920 and 1921 are as follows:
| December 31, | December 31, | |
| 1920 | 1921 | |
| Resources | ||
| Accounts receivable | $3,970.57 | |
| Automobiles | $3,000.00 | 1,500.00 |
| Furniture | 4,818.55 | 4,810.66 |
| Notes receivable | 7,668.34 | |
| Cash on hand | 952.49 | 2,470.45 |
| Life insurance (cash value) | 1,317.28 | 1,335.78 |
| Stocks | 2,749.00 | |
| German marks | 2,155.65 | |
| U.S. bonds | 49,122.98 | 77,700.00 |
| 71,784.29 | 91,787.46 | |
| Liabilities | ||
| Capital stock | 25,000.00 | 25,000.00 |
| Accounts payable | 1,496.31 | 5,085.50 |
| Reserves | 38,426.38 | 40,878.00 |
| Surplus | 6,861.60 | 10,498.76 |
| Reserve for taxes | 1,240.78 | |
| Depreciation bonds | 9,084.42 | |
| 71,784.29 | 91,787.46 |
Petitioner's income-tax return for the year 1920 was filed on March 15, 1921, and for the year 1921 on March 15, 1922. On January 27, 1926, assessment waivers on the customary form to remain in effect until December 31, 1926, were*2257 filed with the Bureau of Internal Revenue. Deficiency letter covering the years 1920 and 1921 was mailed to petitioner November 1, 1926. On behalf of the petitioner these waivers were signed "Automobile Underwriters, Inc., Taxpayer, A. W. Early, Vice President," with the corporate seal affixed, and for the Commissioner, "D. H. Blair, L. G. Commissioner." The initials "L. G." were affixed by Leslie Gillis, an employee of the Bureau of Internal Revenue, who acted on written authority from the Commissioner.
The respondent denied the petitioner personal service classification for the years 1920 and 1921 and for all the years under consideration treated the entire amount of membership fees as income in the years in which they were received, denied as a deduction certain additions to reserves which taxpayer had made in 1922 and 1923, and made other adjustments of income not here in dispute, resulting in the following deficiencies: for the years 1920 to 1923, inclusive, $9,684, $8,232.01, $674.23, and $2,788.50, respectively.
OPINION.
BLACK: The petitioner is contending that as to the years 1920 and 1921 assessment is barred by the statute of limitations, as the waivers *1164 *2258 for these years were not signed by D. H. Blair, the then Commissioner, in person. A similar contention was made in , in which case we held that, in the absence of evidence to the contrary, it will be presumed that the respondent discharged his official duty in a proper and legal manner when he delegated the signing of his name to waivers. Accordingly, as to these years the time for assessment is not barred. Cf. .
A "personal service corporation" is defined in section 200 of the Revenues Acts of 1918 and 1921 as a corporation "whose income is to be ascribed primarily to the activities of the principal owners or stockholders who are themselves regularly engaged in the active conduct of the affairs of the corporation and in which capital * * * is not a material income-producing factor." In the instant case all the stockholders were actively engaged in the conduct of the affairs of the corporation and capital was not a material income-producing factor. The membership fees, after the deduction of the soliciting agent's commission, represent to a large extent the total income of the petitioner. *2259 These fees were paid to the petitioner for one thing, namely, the service of the corporation in acting as the attorney in fact for the subscribers to the reciprocal State Automobile Insurance Association. The four stockholders, who were the officers of the petitioner and who served on the advisory board of the association, performed this service. They rendered all the service which was paid for and their knowledge, planning, and skill produced the results obtained. We hold that in the taxable years 1920 and 1921 petitioner was a personal service corporation and respondent erred in denying petitioner personal service classification for those years. Cf. ; ; ; and .
The other error alleged is that the fees charged by the petitioner for services rendered subscribers to a reciprocal insurance association should be reported as income over the period covered by the membership and not all of it in the year in which received. While the books of the petitioner*2260 were kept on an accrual basis, they did not accurately reflect a segregation of yearly dues from those accepted for a three-year service.
Petitioner used the method of setting up a reserve for the unearned portion of the fee collected. The respondent disallowed additions to these reserves as deductions from gross income. Under authority of ; ; *1165 and , this action of the respondent was correct. In fact, petitioner in his appeal concedes that its method of setting up a reserve to take care of the unearned portion of the fees received was error and that respondent committed no error in refusing to allow such deductions. Petitioner contends, however, that in view of the fact that its books were kept on the accrual basis, these fees should be properly allocated to the years when earned and that petitioner should be taxed on this basis during the years involved rather than on the cash receipts basis.
Section 213 of the Revenue Acts of 1918 and 1921, which govern the taxable years involved in this proceeding, requires the amount of all*2261 items of gross income to be included in the taxable year in which received by the taxpayer, unless under methods of accounting permitted under section 212 any such amounts are to be properly accounted for as of a different period. Black defines the word "accruing" as meaning inchoate, in process of maturing, that which may or will at a future time ripen into a vested right, an available demand, or an existing cause of action. Words and Phrases, vol. 1, second series, p. 56.
What petitioner wants to do in the instant case is to treat one-third of the amount of these three-year membership fees received in any particular year as income accrued for that year and the remaining two-thirds as income in the process of accruing, and which will ripen into income during the two years following the collection thereof. For example, in 1923 the receipts of petitioner from one-year membership fees, as shown in findings of fact, were $22,928.76, and from three-year membership fees were $146,391.44. Under petitioner's contention, its books being on the accrual basis, it should render as income for 1923 the $22,928.76 collected from one-year fees and $48,797.14, being one-third of the $146,391.44*2262 collected from the three-year fees, and then accrue as further income for 1923 from the prior years of 1922 and 1921 the portion of three-year membership fees collected in those years but properly attributable to income for 1923. We know of no authority of law which would permit petitioner to thus treat these three-year membership fees. The cash received from them has already ripened into gross income in the year in which received and must be accounted for under the statute as gross income for that particular year. Petitioner's contention that the amounts collected therefrom should be spread over a period of three years is therefore denied.
Judgment will be entered under Rule 50.