*1127 The petitioner insures railway employees against loss of their jobs through (a) discharge; (b) retirement on account of disability; and (c) retirement on account of age. Most of its policies provide that in the case of the death of the insured while in service a funeral benefit of a given amount or equal to the amount of premiums which have been paid on the policies, whichever is greater, shall be paid to the beneficiary. It maintains a "retirement reserve," and also a "death reserve" where provision is made for the payment of a death benefit. During the years 1935 and 1936 the retirement reserve was several times greater than the death reserve. Held, that the petitioner is not a life insurance company within the meaning of section 201(a) of the Revenue Acts of 1934 and 1936.
*365 The respondent has determined income tax deficiencies against the petitioner for 1935 and 1936 of $23,195.78 and $20,768.71, respectively. The petitioner alleges error in the respondent's determination that it is not a life insurance*1128 company within the meaning of section 201 (a) of the Revenue Acts of 1934 and 1936. It is stipulated that, if the petitioner is a life insurance company within the meaning of that section, it had no net income for either 1935 or 1936 and, hence, no *366 income tax liability. The petitioner has offered no evidence to prove error on the part of the respondent in the determination of the deficiencies provided the petitioner is not a life insurance company within the meaning of the statutes.
FINDINGS OF FACT.
1. The petitioner is a corporation, organized under and by virtue of the insurance laws of the State of Michigan, with its principal office in the city of Detroit. It filed its income tax returns for 1935 and 1936 with the collector at Detroit.
2. The petitioner was incorporated on September 16, 1915, under the Insurance Code of the State of Michigan (Comp. Laws of Michigan, 1929, Title XXIV, ch. 242), and specifically under section 14 of Part III, chapter 1, subdivision 4 of the Insurance Code (Comp. Laws of Michigan, 1929, § 12,402), under the name of Conductors Protective Assurance Co.:
To insure railway conductors, railway engineers and railway officials*1129 against loss of position resulting from discharge or retirement, including the taking over of the business, and reinsuring other companies engaged in a similar business.
The articles of incorporation provided for a capital stock of $25,000, consisting of 250 shares of a par value of $100 each. The capital stock was paid in at the date of incorporation.
Under date of October 17, 1916, the articles of incorporation were amended to increase the authorized capital stock to $50,000. Under date of January 15, 1918, the articles of incorporation were again amended to change the authorized and paid-in capital stock to $100,000 and to restate the nature of the business:
To insure railway conductors, railway engineers and railway officials, first, for loss of position resulting from discharge or retirement; second, against bodily injury or death by accident or against disability on account of sickness.
The articles of incorporation were again amended on July 17, 1923, to increase the authorized capital stock to $250,000, consisting of 5,000 shares at $50 each and to amend the purposes of the corporation as follows:
First: - To insure railway employees against loss of position*1130 resulting from discharge or retirement;
Second: - To insure any person against bodily injury or death by accident or or against disability on account of sickness.
Third: - To insure the lives and health of persons and every insurance pertaining thereto and to grant, purchase or dispose of annuities.
Under date of January 17, 1933, the articles of incorporation were again amended, to provide for a change in the name of the corporation from Conductors Protective Assurance Co. to "C.P.A. Company."
3. The business of petitioner at all times material here was confined *367 exclusively to issuing policies of insurance to railway employees. The policies were all described on the face thereof as "Job Insurance For Railroad Men."
4. The petitioner is the only corporation operating under those provisions of the statutes of the State of Michigan under which it was organized.
5. During the taxable years 1935 and 1936 the petitioner had outstanding and in force nine different types of insurance policies. These included preferred policy (exhibit B), guarantee policy (exhibit C), new special policy (exhibit D), and standard policy (exhibit E), all of which provided for*1131 a discharge benefit and a retirement benefit due to disability or old age, the amount of which was dependent upon the length of time the policy had been in force. All four of these policies provided for death or burial benefits upon death due to natural causes, either in a stated amount (exhibits B and E), or the return of all premiums paid (exhibits C and D). The preferred, guarantee, and standard policies provided for payments in the event of accidental death.
6. The death or burial benefits set forth in the policies had no connection with the discharge or retirement benefits, the payment of which was dependent upon the time the policies were in effect. Upon the insured reaching the retirement age he received the amount definitely set forth in the policy.
7. In the event the insured died prior to the date of retirement the beneficiary received only the death or burial benefits, regardless of how much the insured had paid into the petitioner corporation as premiums. In other words, the beneficiary would not receive the amount indicated on the face of the policy as discharge or retirement benefits. On the new special and guarantee policies (exhibits C and D), upon death*1132 due to natural causes prior to discharge or expiration of the retirement period the beneficiaries of the insured received only the actual amount of the premiums paid in on the policy. In the preferred policy (exhibit B), upon death due to natural causes the beneficiary of the insured received $500 or the premiums paid, whichever was greater.
8. Three other policies, designated new regular policy (exhibit F), master policy (exhibit G), and no age limit policy (exhibit H), provide for the payment of $5 a day for a stipulated number of days in the event of discharge of the applicant. The new regular policy provides for a funeral benefit of $250 and double indemnity in case of death by accident of $500. The master policy provides for a funeral benefit of $250. The no age limit policy carries no provision for a funeral or death benefit. Two other policies, designated old regular and old special, provided the same type of insurance as those set forth hereinabove.
*368 9. The insurance covered or the benefits provided by the policies above described provide for a single annual premium; that is, the premium does not provide for a charge for the death or other benefit separate*1133 from the retirement benefit. Ninety percent of the policies issued and outstanding during the taxable years embraced a provision for the payment of a specified sum of money upon the death of the insured as well as for the payment of a specified amount upon the retirement of the insured.
10. Railroad employees are retired generally at the age of 65 or 70 unless earlier retired by reason of disability.
11. All of the policies in general provide that the premium is based on an annual payment of a stated amount payable in advance but that it might be paid in monthly installments on or before the last day of each month; that the payment of any premium or monthly installment shall not continue the policy in force longer than the time for which payment is made; that in the event of default, upon the subsequent reinstatement of the policy, it shall cover only indemnities under the policy from causes occurring after the reinstatement.
The policies in general further provide as follows:
Indemnity for loss of job by retirement on account of disability shall be payable only in event the Insured survives a period of sixty (60) days from the commencement of the disability and shall*1134 furnish to the Company due proof that he has failed to pass the physical examination required by the railroad company by which he has been employed. No indemnity for retirement on account of disability, unless caused by accident, will be paid until after this Policy has been continued in force five years, but in such case the Company will return to the Insured all premiums and installments of the annual premium which have been paid.
If, while this Policy has been continued in force, the Insured shall furnish to the Company due proof that, after attaining the age of at least sixty-five (65) years, he has been retired on account of old age by the railroad company by which he has been employed, the Company will pay the amount in the manner as set forth in the schedule of indemnities.
If the Insured is retired or shall resign his job or is discharged for a cause not covered by this Policy before attaining the age of sixty-five (65) years, he may continue this Policy in force, by the payment of premiums as herein provided, in which event, discharge and retirement indemnities, provided by this Policy shall be cancelled, and in lieu thereof the Company will pay the amount specified*1135 in the above schedule of indemnities, when the Insured shall attain the age of sixty-five (65) years.
No indemnity will be paid the Insured for loss of job on account of larceny or embezzlement, participation in strikes or lockouts, use of intoxicating liquors or insubordination.
It shall not be deemed to be discharge or retirement within the terms of this Policy, if the Insured shall be demoted, reinstated, lose his job on account of discontinuance of the operation of the railroad or any portion thereof or by reduction in force.
*369 Written notice, signed by the Insured, of loss of job due to discharge or retirement, for which claim may be made upon this Policy, setting forth the grounds of loss, must be given the Company at its home office within thirty (30) days after the date of discharge or retirement. The Company, upon receipt of such notice, will furnish blanks for filing proofs of loss. Affirmative proof of loss must be furnished to the Company at its home office within ninety (90) days after the date of discharge or retirement on account of old age, or within sixty (60) days after retirement on account of disability, as defined in paragraph three (3), has*1136 been established. Such proofs must be accompanied by the Policy, together with a statement from the Insured's employer, setting forth the cause of discharge or retirement, and satisfactory proof showing that a reasonable effort was made for reinstatement. The cause assigned by the employer for discharge or retirement shall be the sole basis of determining the liability of the Company. Written notice for loss of life on which claim may be based must be given the Company within thirty (30) days after the death of the Insured. The Company, upon receipt of such notice, will furnish to the Claimant blanks for filing proofs of loss. No suit or action on this Policy, for the recovery of any claim, shall be sustainable in any court of law or equity unless all the requirements of this Policy shall have been complied with, nor unless commenced within two years after the liability shall have accrued. * * *
12. The reserves set aside from the premiums and maintained by the petitioner during the taxable years 1935 and 1936 were held exclusively against its unaccrued and contingent liability for either the death benefit or retirement benefit payable under the policies in force during said*1137 years. The petitioner maintained no reserve for the discharge benefit payable under said policies. The petitioner computes and maintains its retirement reserve and its death benefit reserve separately, which is contrary to the practice of life insurance companies generally.
13. The number of policies in force on December 31, 1935, and December 31, 1936, and the reserves maintained in relation thereto are as follows:
| December 31, 1935 | |||
| Number of policies | Retirement reserve | Death reserve | |
| Old regular | 1,319 | $281,574 | |
| Old special | 26 | 16,656 | |
| New special | 3,928 | 896,752 | $7,852 |
| Preferred | 3,028 | 342,742 | 9,084 |
| Standard | 510 | 118,121 | 2,040 |
| Guarantee | 853 | 475,069 | 4,720 |
| Funeral benefit | 134 | 600 | |
| New regular | 2,933 | 8,799 | |
| Master | 344 | 1,032 | |
| No age limit | 445 | ||
| Total | 13,520 | 2,130,914 | 34,127 |
| 2,130,914 | |||
| Total reserves | 2,165,041 |
| December 31, 1936 | |||
| Number of policies | Retirement reserve | Death reserve | |
| Old regular | 1,202 | $272,440 | |
| Old special | 25 | 17,076 | |
| New special | 3,760 | 950,748 | $8,402.20 |
| Preferred | 3,696 | 451,519 | 11,096.00 |
| Standard | 611 | 140,300 | 2,444.00 |
| Guarantee | 826 | 512,498 | 4,926.60 |
| Funeral benefit | 129 | 5,850.00 | |
| New regular | 3,962 | 7,924.00 | |
| Master | 737 | 1,106.00 | |
| No age limit | 605 | ||
| Total | 15,553 | 2,344,581 | 41,748.80 |
*1138 *370 Total of reserves used in 1936 statement is:
| Death reserve | $41,748.80 |
| Retirement reserve | 2,344,581.00 |
| D.I. reserve | 3,100.70 |
| Total | $2,389,430.50 |
14. The Commissioner of Insurance for the State of Michigan made an examination of the petitioner corporation, its business, and the valuation of its reserves on four different occasions between 1916 and 1936. In the case of all life insurance companies it was the practice of the Commissioner of Insurance to issue certificates of valuation where the reserves of said companies were verified and examined in connection with outstanding policies. In the case of this petitioner such a certificate has never been issued.
15. Prior to 1937 the petitioner computed the reserves set up and maintained by it against the liability for retirement and death benefits under the issued and outstanding policies on the basis of the American Experience Table of Mortality, with an assumed rate of interest of 4 percent, as required by the Department of Insurance of the State of Michigan. The reserve used on the retirement feature of the policies was computed in the same manner as a pure endowment reserve maturing at the*1139 age of 70 for the amount of the retirement benefit payable under each individual contract at that age. The death benefit (life) reserve was considered a yearly renewable term insurance and was computed and set up on that basis.
16. The total reserve set up and maintained by the petitioner against outstanding policies at the beginning and at the end of each of the *371 taxable years, and the mean of the reserve funds for each of the taxable years, were as follows:
| 1935 | 1936 | |
| Beginning of year | $1,975,882.00 | $2,167,663.00 |
| End of year | 2,167,663.00 | 2,399,430.50 |
| Total | 4,143,545.00 | 4,567,093.50 |
| Mean | 2,071,772.50 | 2,283,546.75 |
17. None of the policies of insurance issued by this petitioner carried provisions for a cash surrender value.
18. The petitioner has always filed its annual statement with the Insurance Commissioner of the State of Michigan on the "Miscellaneous Form" instead of on the form required to be filed by all life insurance companies. It followed this practice prior to and subsequent to the years in issue before the Board.
19. The reserve funds held by petitioner to fulfill its life insurance contracts are less than 50*1140 percent of its total funds.
OPINION.
SMITH: The narrow question presented by this proceeding is whether the petitioner is a life insurance company within the provisions of section 201(a) of the Revenue Acts of 1934 and 1936. If it was, it admittedly had no income tax liability for the years 1935 and 1936. Section 201(a) reads as follows:
SEC. 201. TAX ON LIFE INSURANCE COMPANIES.
(a) DEFINITION. - When used in this title the term "life insurance company" means 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.
It is the petitioner's position that, since about 90 percent of its policies carry a provision that in the case of the death of the insured some amount will be paid to his beneficiary, the policy contract is a life insurance contract within the purview of the statute and that it is immaterial that the greater part of the reserves set up by it are to meet its obligations for the payment to the insured of a specific amount*1141 upon his discharge or retirement through disability or age. Petitioner furthermore contends that its retirement contract is in effect an endowment contract comparable with endowment contracts issued by life insurance companies. It submits that it is generally recognized that endowment insurance policies providing for the payment of a stated sum at the expiration of a fixed number of years, with a further provision for the payment of a stated sum in the event of the death of the *372 insured prior to the maturity of the policy, constitute life insurance. See ; 37 C.J. 361, 362; .
It is the respondent's position, on the other hand, that the definition of a life insurance company contained in section 201(a) of the Revenue Acts of 1934 and 1936 embraces only such a company as is 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 said contracts comprise more than 50 per centum of its total reserve*1142 funds", and that the petitioner does not come within the definition. In the instant case the petitioner did not issue annuity contracts. Neither did it issue contracts of "combined life, health, and accident insurance." The respondent submits that the element of life insurance or the liability of the petitioner to pay an amount of money upon the death of the insured is small compared with its liability to pay retirement insurance. He therefore submits that the reserve fund of the petitioner designated "retirement reserve" is not a reserve fund held for the fulfillment of life insurance contracts.
It is to be noted that the petitioner is not incorporated as a life insurance company under the laws of the State of Michigan. It is incorporated under section 12,402 of the Compiled Laws of the State of Michigan, 1929, which reads as follows:
Sec. 12402. Corporation to insure against loss of position by railway employes, accidents, disability, life, health and to deal in annuities; incorporators. Sec. 14. Any number of persons, not less than thirteen (13), may associate together and form an incorporated company for the following purposes, to-wit:
First, To insure railway employees*1143 against loss of position resulting from discharge or retirement;
Second, To insure any person against bodily injury or death by accident, or against disability on account of sickness;
Third, To insure the lives and health of persons and every insurance pertaining thereto, and to grant, purchase or dispose of annuities.
The statutes of the State of Michigan make many requirements of life insurance companies which are not made of the petitioner, such as provisions for loans to policyholders and for a return to the policyholder of a stipulated form of insurance after the policy has been in effect for three full years without the payment of further premiums.
The record shows that the petitioner was originally organized not for the purpose of paying any death benefits whatever, but for the purpose of insuring an employee against a loss of job through discharge or retirement either by reason of disability or of age. The provision of later policies issued by the company whereby the petitioner agreed to pay the beneficiary of the policy an amount for a funeral benefit or a death benefit was strictly subsidiary to the original *373 purpose for which the company was organized. *1144 It furthermore appears that in a great majority of cases the liability of the petitioner to pay a retirement indemnity was much greater than to pay a funeral or death benefit. Thus its preferred risk policy (exhibit B) shows that the retirement indemnity increased from $500 to a total amount of $5,000 provided the insured had been employed by a railroad company and had kept his policy in force for a period of 45 years. The death benefit in the policy designated "Funeral Benefit" was to be either $500 or the return of all premiums and installments of the annual premium which had been paid up to the time of death, whichever is greater.
With respect to the petitioner's contention that its retirement contract is in effect an endowment contract comparable with endowment contracts issued by life insurance companies, all that needs to be said is that there are many differences between the endowment contract of a life insurance company and the retirement contract of the petitioner. In the case of a life insurance company the insurance company guarantees the payment of the face amount of the policy in case of death prior to the expiration of the endowment period. The endowment policy*1145 is a true life insurance policy, payable on the contingency of death. That is not true with respect to the policies issued by the petitioner; for in case of the death of the insured the petitioner guarantees to pay only a funeral or death benefit which in most instances is much less than the amount payable upon the retirement of the insured.
We think that the definition of a life insurance company contained in section 201 does not contemplate reserve funds which are set aside to satisfy the liability of the petitioner to pay a stated amount upon the retirement of the insured. Both the petitioner and the Insurance Department of the State of Michigan have recognized that the retirement reserve maintained by the petitioner was something entirely different from its liability to make payments contingent upon the death of the insured. The retirement reserve was at all times during the years 1935 and 1936 many times as large as the death reserve. The petitioner does not come within the definition of a life insurance company contained in the statute. Cf. *1146 ; ; .
The determination of deficiencies by the respondent is approved.
Reviewed by the Board.
Decision will be entered for the respondent.