*1054 1. Under section 103(11) of the Revenue Act of 1928, the exemption from taxation of "farmers' or other mutual * * * casualty * * * insurance companies", is not limited to farmers or similar organizations operating in a particular locality, but applies to all mutual casualty insurance companies whose income is used or held for the purpose of paying losses or expenses.
2. Whether a certain security is preferred stock or a debt depends upon the facts in each case.
3. The guaranty fund units issued by the petitioner were not preferred stock giving the holder an interest in the corporation, but an obligation on which interest was accrued and paid, and, as the petitioner was operated upon the mutual plan, the circumstances surrounding the fund, and the payment of interest on the units, which was clearly an expense, do not preclude the petitioner from exemption under section 103(11).
*666 The Commissioner determined a deficiency of $3,186.50 for the year 1931. The errors assigned are that the Commissioner failed*1055 (1) to hold that the petitioner was exempt from tax under section 103(11) of the Revenue Act of 1928; (2) to allow a deduction of $14,000 representing interest on borrowed money; and (3) to carry forward a net loss of 1930.
FINDING OF FACT.
The petitioner was incorporated in 1923 under the laws of New Hampshire. Its sole business has been to insure members of the National Grange, a national fraternal organization of farmers, against liability arising from the use of automobiles. The petitioner in 1931 was authorized to transact its insurance business in ten different states of the United States. Its articles of incorporation *667 were amended several times prior to the year 1931. In May 1930 these articles were amended to provide in part as follows:
ARTICLE IV
The amount of the authorized Guaranty Fund of this Company shall be two hundred fifty thousand ($250,000.) Dollars to consist of twenty-five hundred (2500) units of the value of One Hundred ($100.00) Dollars each. Said Guaranty Fund shall be subject to taxation in accordance with the provisions of the Public Statutes of New Hampshire. The Guaranty Fund shall not be liable to be applied to the payment of*1056 losses and expenses until after the Company shall have exhausted its cash and invested assets, exclusive of uncollected premiums, and any such impairment of said Guaranty Fund may be restored in whole or in part in accordance with Article VII of the By-Laws (i.e., by assessment or assessments levied upon the contingent funds of the Company by order of the Board of Directors).
The units of the Guaranty Fund shall be issued in exchange for the shares of preferred Guaranty Capital Stock now outstanding, on the basis of one unit of the Guaranty Fund for one share of said Preferred Guaranty Capital Stock or shall be issued from time to time for such price, not less than $100.00 per unit and in such amounts as the Board of Directors shall determine.
In the event that the company shall have and be in possession of a surplus equal to ten per centum (10%) or more of its gross annual premium income, the holders of the Guaranty Fund units shall be paid interest at the rate of seven per centum (7%) per annum and no more, subject, however, to the regulations and the laws of the authorities of the various states in which the Company is licensed to do business. Such interest shall be cumulative*1057 so that if in any year or years interest upon the outstanding Guaranty Fund units at the rate of seven per centum (7%) per annum shall not have been paid, the deficiency shall be paid before any dividends may be declared and paid to the policyholders. Such interest, if paid, shall be payable semi-annually on such days as the Directors shall determine. The holders of the Guaranty Fund units shall not be entitled to vote at any of the meetings of the Company.
Whenever all interest on the Guaranty Fund units for all previous years shall have been declared and paid, and a sum sufficient for such interest as may have been accrued shall have been set aside for the payment thereof, dividends to the policyholders may be declared and paid out of the remaining surplus and net profits of the Company.
The Guaranty Fund units as an entirety or any part thereof shall be subject to redemption and in the event that the Company shall have and be in possession of a surplus equal to ten per centum (10%) or more of its gross annual premium income, such units may be redeemed by a majority vote of the Directors by payment or tender for each unit so to be redeemed of One Hundred Ten Dollars ($110.00) *1058 per unit and all accrued and unpaid interest up to and including the year, 1932, and at any time thereafter of One Hundred Five Dollars ($105.00) per unit and all accrued and unpaid interest, and in the event that the Company shall not have and be in possession of a surplus equal to ten per centum (10%) or more of its gross annual premium income, such units may be redeemed in the manner and upon the terms above provided, subject, however, to the permission of the New Hampshire Commissioner of Insurance first obtained, and subject, further, to the regulations and laws of the authorities of the states in which the Company is licensed to do business.
In the event of any liquidation or dissolution, whether voluntary or involuntary, of the company, the holders of the Guaranty Fund units shall be entitled *668 to be paid in full both the amount of their units and any unpaid interest thereon before any payment shall be made to the policyholders of the Company, but the holders of the Guaranty Fund units shall not be entitled to share further in the assets of the Company or in the proceeds of liquidation. After the payment in full to the holders of the Guaranty Fund units of the*1059 amount of their units and the unpaid interest accrued thereon, if any, and the payment to the policyholders of any dividends declared, the remaining assets of the Company shall be distributed pro rata to the policyholders of the Company.
The bylaws of the corporation were changed at the same time to provide, inter alia, that the policyholders would be the only members of the company and the only persons entitled to voting power; the holders of guaranty fund units would have no voting power; the directors would have the right to assess each policyholder such amount, not exceeding twice the total cash premium on his policy, as they might deem necessary to pay losses and expenses and to declare dividends to policyholders; and all interest of a member in the profits and surplus of the company ceases when he ceases to be a policyholder. Immediately after these changes were made $200,000 par value of guaranty fund units were issued, mostly in exchange for preferred guaranty capital stock theretofore outstanding. Seven percent on $200,000 par value of guaranty fund units was accrued monthly from June 1, 1930, and was paid semiannually on December 1, 1930, June 1, 1931, and December 1, 1931. *1060 Certificates for guaranty fund units were issued. Each stated that it was for fully paid and nonassessable units and was transferable only on the books of the corporation upon surrender properly endorsed.
The surplus of the company was as follows:
| December 31, 1929 | $32,079.58 |
| December 31, 1930 | 36,209.34 |
| December 31, 1931 | 71,112.86 |
The gross annual premium income of the company was $154,363.36 for 1930 and $191,370.46 for 1931.
The petitioner during the year 1931 was a mutual casualty insurance company, the income of which was used or held for the purpose of paying losses or expenses.
OPINION.
MURDOCK: The first issue is whether or not the petitioner was exempt from tax under section 103(11) of the Revenue Act of 1928. 1 The respondent contends that farmers' mutual insurance companies are a well-known class of small companies operating within a limited territory; the word "other", under the rule of ejusdem generis,*669 should be interpreted to include only such other companies as are similar in character to the farmers' companies, thus excluding mutual companies which are not of a purely local character; the petitioner operates in a number*1061 of different states and is not of a purely local character similar to the farmers' companies; and, therefore, the petitioner is not exempt from tax under the above quoted section. He claims that the legislative history of this provision of the act and its predecessors indicates that Congress intended to exempt only a class of small local companies which were well known and recognizable. The petitioner points to the legislative history of this provision to show that Congress, in enacting section 103(11) of the Revenue Act of 1928, did not intend to limit the exemption to mutual casualty insurance companies of a purely local character.
The precursor of section 103(11) of the Revenue Act of 1928 was section 11(a) Tenth of the Revenue Act of 1916. It was reenacted with a slight change in phraseology as section*1062 231(10) in the Acts of 1918 and 1921, as follows:
Farmers' or other mutual hail, cyclone, or fire insurance companies, mutual ditch or irrigation companies, mutual or cooperative telephone companies, or like organizations of a purely local character, the income of which consists solely of assessments, dues, and fees collected from members for the sole purpose of meeting expenses.
See . The Committee on Ways and Means struck out the words "of a purely local character" in its draft of the Revenue Bill of 1924 and explained:
The words "of a purely local character" in paragraph (10) have been omitted, since all these mutual organizations should be exempt if their income consists solely of assessments, dues, and fees collected from members for the sole purpose of meeting expenses. [Report 179, 68th Cong., 1st sess., p. 24.]
This draft was thereafter changed in other respects, but the words "of a purely local character" were left out as the Ways and Means Committee had recommended and these words have been left out of all subsequent acts. See S. Rept. 398, 68th Cong., 1st sess., p. 29; sec. 1013(b), *1063 Revenue Act of 1924, and 65th Cong. Rec., pt. 8, pp. 8104-8108; sec. 231(11) of the Revenue Act of 1926. The debates and reports on as well as the provisions of the various acts indicate that Congress intended no such limitation as the respondent now contends for. The language of section 103(11) was intended to exempt from tax mutual casualty insurance companies the income of which is used or held to pay losses or expenses. The rule of ejusdem generis may not be used to misinterpret the intention of Congress when once ascertained. ; ; ; .
*670 The only other alleged bar to exemption of the petitioner from tax which the respondent has suggested is that the guaranty fund was in fact preferred stock, the so-called interest thereon was a dividend, the payment of this dividend was not an expense, thus income was used or held for purposes other than paying losses and expenses, and the petitioner was a stock company. Cf. *1064 . There are a number of tests to assist in the decision of the question of whether a certain security is a preferred stock or a debt, but each case turns upon its own facts. Debts and preferred stock sometimes have common characteristics, but in some respects they differ. If a security carried voting power it would, no doubt, be preferred stock. But the absence of voting power would not show conclusively that it was evidence of a debt, because preferred stock does not always have voting power. The terminology used by the parties is important evidence but not conclusive. It was called interest. In case the fund was impaired, it was to be restored by assessments upon the policyholders, the only members of the corporation. Preferred stockholders usually take the risk of losses. The payment of the interest did not have to be made from earnings. Dividends on preferred stock usually come out of earnings. The interest was cumulative and had to be paid eventually before the policyholders could receive any distributions. Owners of the fund had no voting powers. *1065 The date for payment of the principal was not fixed, but could be fixed by the directors. No feature of this fund which would be absolutely foreign to a debt upon which interest accrues has been called to our attention. Cf. ; , and cases therein cited. Although in many respects the fund was not distinguishable from preferred stock, the facts in this case lead to the conclusion that this guaranty fund was not in reality preferred stock giving the owner an interest in the corporation, but was an obligation of the corporation on which interest accrued and was paid during the period in question. Thus the petitioner originally borrowed the money to establish its guaranty fund to meet extraordinary losses, but if any part of this fund was ever used to pay a loss, it was to be restored through assessments on the policyholders. Interest upon the money borrowed was an expense. The petitioner operated upon the mutual plan, and the circumstances surrounding the guaranty fund do not prevent it from being the kind of a mutual company which Congress exempted from tax.
The deduction*1066 and net loss questions need not be decided, since the petitioner is exempt from tax.
Reviewed by the Board.
Decision will be entered for the petitioner.
Footnotes
1. SEC. 103. EXEMPTIONS FROM TAX ON CORPORATIONS.
The following organizations shall be exempt from taxation under this title -
* * *
(11) Farmers' or other mutual hail, cyclone, casualty, or fire insurance companies or associations (including interinsurers and reciprocal underwriters) the income of which is used or held for the purpose of paying losses or expenses. ↩