*1538 DEDUCTIONS - PREMIUM DEPOSITS - MUTUAL FIRE INSURANCE COMPANY. Petitioner, a mutual fire insurance company, assessing its members for deposits to provide for losses and expenses and subject to taxes imposed by sections 230 of the Revenue Acts of 1924 and 1926, received in the taxable years 1924 to 1927, inclusive, certain amounts from such assessments, which amounts were retained, all losses and expenses being met each year out of other income. The premium deposits retained were not otherwise allowed as deductions in the taxable years. Held, that all the requirements of sections 234(a)(11) of the Revenue Acts of 1924 and 1926 are met, and that the deduction of the premium deposits for the several years, as claimed by petitioner, is allowable.
*1103 This proceeding seeks redetermination of deficiencies in income taxes in amounts and for years as follows:
| 1924 | $3,077.62 |
| 1925 | 11,739.62 |
| 1926 | 9,701.30 |
| 1927 | 8,427.74 |
Petitioner claims that deductions claimed in the returns for each of these years, *1539 and disallowed by respondent in determining the above deficiencies, which represented premium deposits exacted from its members by assessment for payment of losses and expenses, and retained for such purposes, represent proper deductions in computing net income.
FINDINGS OF FACT.
Petitioner, The Mutual Assurance Society Against Fire on Buildings of the State of Virginia, is a corporation organized and existing under a special act of the Legislature of Virginia of December 22, 1794, together with amendments thereto. Its business is that of a mutual fire insurance society conducted within the State of Virginia, and with principal office at Richmond. Operations of the petitioner are authorized and conducted pursuant to statute upon the assessment plan, so-called "perpetual" policies of fire insurance being issued to its members, conditioned upon their abiding by the constitution, rules and regulations of the society.
Pursuant to petitioner's constitution, rules and regulations, an annual meeting of the members is held, at which a governing committee of eight members of the society known as the "Standing Committee" and a principal agent are elected. This standing committee*1540 manages the affiairs of the corporation for the following year in a manner generally similar to a board of directors of an ordinary business corporation. The principal agent acts as a combined president, general manager and treasurer.
This standing committee, under authority granted by an act of the Legislature of Virginia of December 19, 1857, determines the amount which it deems proper to exact by assessment upon its members for payment of losses and expenses for the current year, and makes *1104 assessment upon each member of his or her proportionate amount as of January 1 of that year.
Assessments or quotas were determined in the manner detailed above for the taxable years here involved, as follows:
| 1924 | $54,565.94 |
| 1925 | 97,699.17 |
| 1926 | 53,999.34 |
| 1927 | 57,334.91 |
Petitioner's constitution, rules and regulations provided during the taxable years here involved, pursuant to an act of the Legislature of Virginia of January 17, 1900, for the investment under direction of the standing committee of surplus funds of the society.
Petitioner was authorized to write ordinary term policies for fixed fees or premiums and did business in these, the premiums*1541 amounting as follows:
| 1924 | $2,682.80 |
| 1925 | 3,563.55 |
| 1926 | 2,768.64 |
| 1927 | 1,853.14 |
The outstanding insurance written by petitioner amounted as follows:
| January 1, 1924 | $42,849,611 |
| January 1, 1925 | 45,022,509 |
| January 1, 1926 | 46,913,104 |
| January 1, 1927 | 48,311,488 |
The assets of petitioner according to its books were as follows:
| January 1, 1924 | $3,086,002.19 |
| December 31, 1924 | 3,208,230.36 |
| December 31, 1925 | 3,395,963.97 |
| December 31, 1926 | 3,585,478.87 |
| December 31, 1927 | 3,781,760.59 |
Petitioner does not reinsure its risks or write perpetual policies upon single flat payment therefor. upon single flat payment therefor.
Pursuant to the provisions of the act of the Legislature of Virginia of 1857, the property insured by petitioner is pledged and bound for the payment of the hereinbefore described assessments by the standing committee and since 1900 the liens of petitioner upon the property of its members have been recorded, and surplus of petitioner has been invested pursuant to the above mentioned act of the Virginia Legislature of January 17, 1900, and has been retained as a reserve for the payment of losses and expenses. *1542 No dividend or other distribution of surplus has ever been made to the members of the society.
*1105 In each of the taxable years here involved the income of petitioner from interest, rents, and miscellaneous gains on investments exceeded the aggregate of the losses and expenses, as follows:
| Item | 1924 | 1925 | 1926 | 1927 |
| Gross Income | ||||
| Interest and rent | $275,697.94 | $273,122.71 | $320,076.02 | $312,645.51 |
| From term insurance | 2,682.80 | 3,563.55 | 2,768.64 | 1,853.14 |
| Subtotal | 278,380.74 | 276,686.26 | 322,844.66 | 314,498.65 |
| Quotas assessed | 54,565.94 | 97,699.17 | 53,999.34 | 57,334.91 |
| Miscellaneous including profits attributed to investments | 1,263.22 | 8,233.95 | 2,296.01 | 2,895.90 |
| Total | 334,209.90 | 382,619.38 | 379,140.01 | 374,729.46 |
| Losses and expenses | ||||
| Losses | $60,967.41 | $29,264.83 | $44,416.17 | $32,638.76 |
| Underwriting expense | 36,753.50 | 41,742.90 | 36,629.36 | 37,008.17 |
| Investment expenses | 108,989.24 | 110,932.94 | 69,846.52 | 108,331.94 |
| Subtotal | 206,710.15 | 181,940.67 | 150,892.05 | 177,978.87 |
| Losses attributed to investments | 15,099.88 | 21,000.32 | 1,726.00 | |
| Total | 221,810.03 | 202,940.99 | 152,618.05 | 177,978.87 |
| Excess of gross income over losses and expenses | $112,399.87 | $179,678.39 | $226,521.96 | $196,750.59 |
| Net excess after eliminating from gross income the quotas assessed | $57,833.93 | $81,979.22 | $172,522.62 | $139,415.68 |
*1543 In the return filed by petitioner for 1924, income from quotas or assessments and fees was reported in the amount of $57,248.74 and a deduction was claimed for quotas retained for losses and expenses in the amount of $21,784.07, and in determining the deficiency for that year respondent has disallowed the deduction taken of this amount of $21,784.07.
For 1925 petitioner filed an original and an amended return. In both of these returns petitioner reported income from assessments or quotas in the amount of $101,262.72 and claimed a deduction of the same amount. In determining the deficiency for that year respondent has disallowed this deduction.
In the 1926 and 1927 returns filed by petitioner, assessments or quotas were not included in the taxable income reported and no deductions were claimed therefor. However, these assessments were reported in the reconciliation of net income provided for in the returns as nontaxable income and the amounts thereof have been added to income by respondent in determining the deficiencies, these amounts being for 1926, $56,767.98 and for 1927, $59,188.05.
OPINION.
TRAMMELL: Petitioner claims with respect to all of the taxable years the*1544 right under sections 234(a)(11) of the Revenue Acts of 1924 and 1926, to deduct, in computing net income, certain premium deposits paid in by its members and retained for the payment *1106 of losses and expenses. The parties accept the rule of administrative procedure set out in articles 571 of Regulations 64 and 69 and followed by the Bureau of Internal Revenue since 1920, of presuming, in the absence of specific corporate action to the contrary, that losses and expenses have been paid out of earnings and profits other than premium deposits to the extent of such earnings and profits. This presumption we think is especially sound in the present case, where the other earnings and profits consisted largely of rents and interest clearly to be anticipated and their approximate amounts estimated and might reasonably have been considered as contemplated by the standing committee in determining the amount of assessments upon members. Under these facts it is not a strained presumption that the premium deposits exacted from the members were intentional provisions in excess of current requirements.
The pertinent provisions of the Revenue Acts of 1924 and 1926 are identical and as*1545 follows:
SEC. 234. (a) In computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions:
* * *
(11) In the case of mutual insurance companies (including inter-insurers and reciprocal underwriters, but not including mutual life or mutual marine insurance companies) requiring their members to make premium deposits to provide for losses and expenses, there shall be allowed, in addition to the deductions allowed in paragraphs (1) to (9), inclusive, unless otherwise allowed, the amount of premium deposits returned to their policyholders and the amount of premium deposits retained for the payment of losses, expenses, and reinsurance reserves.
A comparison of the facts here proven with the statutory provisions shows that the petitioner meets every requirement of the quoted sections, it being (1) a mutual fire insurance company; (2) it required its members to make premium deposits to provide for losses and expenses; (3) the deduction now claimed is not otherwise allowed by statute; and (4) the amount for which the deduction is claimed consists of premium deposits retained for the payment of losses and expenses.
The respondent*1546 contends that if the deduction is allowed it will amount to a double deduction in that the losses and expenses incurred during the taxable years have already been allowed as deductions and that another deduction should not be allowed on account of retained premium deposits. But the statute provides that in addition to other deductions, these premium deposits to provide for losses and expenses should be deducted. It seems clear that the statute intended to make provision, not only for a deduction for actual losses and expenses, but also for the retained premiums to provide for other losses anticipated. They are to provide for losses and expenses. We can not say that such premium deposits are not in fact *1107 retained for the payment of losses and expenses, because the company had other funds out of which it could pay the actually sustained known losses during the year. The record discloses that these quotas or premium deposits were determined according to the best judgment of the standing committee; that they were made in good faith for the purpose of providing for losses and expenses; and that the amounts were retained for such purpose.
The deduction in section*1547 234(a)(1) on account of such retained premium deposits for the payment of losses and expenses is not allowable if those same losses and expenses are otherwise allowed under other subdivisions of section 234. Only losses and expenses paid or incurred are allowed as deductions. The premium deposits were placed in a reserve and reported in income-tax returns as reserves. They can be retained for payment of losses and expenses anticipated in the future without actually being paid out in the taxable years, and meet, literally, the language of the statute. The statute provides that if they are retained for such purposes they are deductible. We see no reason why they may not be retained during the entire year.
Respondent raises the question as to difficulties of administration in some future period if and when the deposits retained are availed of for the payment of the losses and expenses of future periods. We are not now, however, faced with that problem, if it in fact should be one in the future. This, however, is apparently provided for in article 571 of Regulations 69. We see no conflict between our views here expressed and the regulations of the Commissioner.
We conclude*1548 that the premium deposits under consideration fall within the class provided for in the quoted sections and are subject to deduction in computing taxable income for the years in question.
Judgment will be entered pursuant to Rule 50.