*618 1. Petitioner is a nonstock association of employees of Swift & Co., created under a deed of trust and carrying on a business in Illinois of writing insurance upon its members under noncancelable life contracts and combined life, health, and accident upon the level premium plan. Its trustees are required by its deed of trust to hold all of its funds in excess of its actual cost of operation for the protection of its policy risks and such funds are held in an account entitled "reserve." Twice each year petitioner computes the value of its life risks upon a recognized and accepted actuarial basis using the American Experience Table of Mortality, with interest at 3 1/2 percent, to determine the sufficiency of its reserve for such risks. For each of the years 1935 and 1936 the amount of such reserve funds held was in excess of the amount so computed and this was in excess of 50 percent of the total reserve. Petitioner is not controlled or supervised by the Insurance Department of the State of Illinois and is not required by the laws of that state to maintain reserves. Held:
(1) Petitioner is not a life insurance company within the definition of section 201(a) of the Revenue*619 Acts of 1934 and 1936 and, consequently, is not entitled to computation of its tax under section 203 of those acts. Standard Industrial Life Insurance Co.,42 B.T.A. 1011">42 B.T.A. 1011.
(2) Petitioner is not a mutual insurance company other than life under section 207 of those acts, but is taxable as an insurance company other than life or mutual under section 204.
2. in computing petitioner's tax under section 204, (a) there may not be included in gross income the amount collected by petitioner from its members and from Swift & Co., and by it paid to the Aetna Life Insurance Co., as the premium upon a group policy issued by that company upon petitioner's members with respect to which insurance petitioner has no liability, and (b) petitioner is entitled to the deduction of its unearned premiums represented in each year by the increase in its computed reserve maintained for the protection of its life risks.
*1012 Respondent has determined deficiencies in income tax of $57,520.49 and $72,192.91 for the years 1935 and 1936, respectively. The issues*620 are (1) whether the deficiencies determined are barred from assessment and collection by the limitation of section 275 of the Revenue Acts of 1934 and 1936, 1 (2) whether respondent erred in failing to classify petitioner as a life insurance company under sections 201(a) of those acts 2 and to compute its tax liability as such, and, in the alternative, *1013 if it is not subject to classification as a life insurance company, (3) whether it is entitled to classification as a mutual insurance company, and (4) if it is taxable as an insurance company other than life or mutual under section 204 of those acts, 3 as determined by respondent, whether error was committed in computing its gross income by inclusion of premiums paid by its employees for group insurance issued by another company and failure to allow it a deduction for unearned premiums. By amended answer respondent has asked an increase in the determined deficiencies if it be held that the premiums paid for group insurance were not includable in petitioner's income.
*621 *1014 other, life insurance. The combined membership policy, including both disability and death benefits, is in force only while the member is in the employ of Swift & Co. When such employee leaves such employment the disability coverage ceases, but the member may, upon application, continue the life insurance feature of his policy, provided he has been a member of the association for one year and in the service of Swift & Co. for three years.
Petitioner's policies are issued upon the level premium plan and, in so far as the death benefit is concerned, are not subject to cancellation. Petitioner has never reinsured any of its risks. The premiums are paid by weekly deductions from the members' pay on the pay rolls of Swift & Co. Petitioner's total number of members at the end of 1934, 1935, and 1936 was as follows:
| Combined membership | Death benefits only | |
| 1934 | 47,805 | 3,561 |
| 1935 | 46,562 | 3,678 |
| 1936 | 51,625 | 3,828 |
The total amounts of death benefits carried by the members at the close of the years 1934, 1935, and 1936 were as follows:
| 1934 | $34,448,400 |
| 1935 | 34,689,000 |
| 1936 | 38,918,700 |
At the close of each year petitioner*622 carries over the difference between its gross receipts and cost of operation into a fund designated on its books as "reserve." The total amount of the reserve so held at the ends of the years 1935 and 1936 was as follows: 1935, $11,227,267.15; 1936, $11,926,295.17.
Petitioner twice each year computes the value of its outstanding death benefits to determine the amount of the reserve necessary to be held for the fulfillment of these risks. These computations are made from the individual card records showing the amount of coverage by ages and the total amount is computed according to the American Experience Table of Mortality, with interest at 3 1/2 percent. This computation showed the amount of reserve necessary for the fulfillment of the policies covering death benefits, only, at the beginning and end of the taxable years 1935 and 1936 to be as follows:
| Beginning of year | End of year | |
| 1935 | $7,090,722.54 | $7,382,830.39 |
| 1936 | 7,382,830.39 | 8,002,748.93 |
*1015 The amounts of the death benefits, sick benefits, and accident benefits paid by petitioner for each of the years 1935 and 1936 were as follows:
| Death benefits | Sick benefits | Accident benefits | |
| 1935 | $300,740.24 | $259,038.16 | $328,826.22 |
| 1936 | 366,166.50 | 272,722.82 | 374,031.29 |
*623 The amounts of the premiums paid petitioner by its members in the two years involved were as follows: 1935, $980,997.77; 1936, $1,089,810.03.
Petitioner is not required by law to file reports of its business with the Insurance Department of the State of Illinois and that department exercises no supervision over its activities.
Subsequent to its organization petitioner, by amendment to its deed of trust, was given authority to contract for the procuring of group insurance for such of its members as desired to subscribe therefor, it being expressly provided that such insurance should not represent a liability against the funds of petitioner. Under this authority petitioner procured from the Aetna Life Insurance Co. a group policy available to its membership. Any member of petitioner desiring to may make application for this group insurance, and everyone so doing, is issued by the Aetna Life Insurance Co. a certificate, signed by it, evidencing the fact that the insured is protected under the policy in a designated amount, with payments to be made to a named beneficiary. The premiums paid by the individual members for their group insurance are collected by weekly deductions*624 on the pay rolls by Swift & Co. Co. These collections are paid to petitioner, who in turn pays the premium due the Aetna Life Insurance Co. on the policy. In accordance with an understanding with Swift & Co. any deficit in the collection is made up by contribution from that company of the amount necessary to meet the premium required on the group policy.
Petitioner filed its income tax returns for 1935 and 1936 on Form 1120L, prescribed by respondent for companies issuing life and annuity contracts including combined life, health, and accident insurance. The return for 1935 was filed on March 16, 1936, and the return for 1936 was filed on March 15, 1937. In its return for 1935 petitioner reported that at the beginning of that year it held a reserve for outstanding policies in the amount of $7,090,722.54 and at the end of that year it held $7,382,830.39 for such purpose. It reported a mean of these reserve funds for that year of $7,236,776.46 and deducted as 3 3/4 percent of such mean the sum of $271,379.12. In its return for 1936 petitioner reported its reserve for outstanding policies at the beginning of that year in the amount of $7,382,830.39, and at the *1016 *625 end of that year in the amount of $8,002,748.93, and a mean of these funds for that year of $7,682,789.66, and it deducted from gross income as 3 3/4 percent of this mean the sum of $288,104.61. In determining the deficiencies the respondent disallowed these deductions, holding that petitioner was not a life insurance company or taxable as a life insurance company within the definition of section 201(a) of the Revenue Acts of 1934 and 1936. He held petitioner to be taxable under section 204 of those acts.
Petitioner's returns, filed as a life insurance company on Form 1120L, were made in reliance on a ruling by respondent in a letter addressed to petitioner on January 28, 1931, advising it that it was subject to classification as a life insurance company and entitled to the deduction of 3 3/4 percent of the mean of its reserve funds under section 203(a)(2) of the Revenue Act of 1928. Since the receipt of that letter petitioner has consistently filed its returns as a life insurance company.
In determining the deficiencies for each of the years involved respondent, in computing tax liability under section 204, has included in petitioner's gross income in each year the amounts*626 collected from its members representing premiums on the group insurance written by the Aetna Life Insurance Co. This sum was $1,122,343.38 for 1935 and $1,264,251.96 for 1936, the sum for this last year including an amount of $62,179.97 contributed by Swift & Co. to make up a deficit in collections. In computing gross income of petitioner for each of the years under section 204(b), respondent made no deduction for "unearned" premiums.
OPINION.
LEECH: The first issue, involving the statute of limitations, is necessarily decided by the conclusion reached on the second issue as to whether petitioner is taxable as a life insurance company under section 203. The notice of deficiency is conceded to have been mailed more than three years after the date of each return, but within the five-year period which applies under section 275(c) if its gross income was understated to the extent of 25 percent. Petitioner computed its net income under section 203 and consequently did not include in gross income its premium receipts. It is apparent, and the fact is not contested, that if this was incorrect and the computation should have been under section 204 or section 207, with such receipts*627 included, then petitioner has omitted an amount largely in excess of 25 percent and the notice of deficiency was timely. We accordingly pass to the second issue.
Petitioner is manifestly an insurance company. Respondent concedes this in his classification of it for taxation under section 204 as an insurance company other than life or mutual. It is also clear *1017 that petitioner issues life insurance policies, including those combining life, health, and accident insurance and issued on the weekly payment plan. Moreover, we are convinced from the record that petitioner maintains a reserve for its life risks, which it computes actuarially on the American Experience Table of Mortality, with interest at 3 1/2 percent, and that this reserve in the two taxable years was more than 50 percent of its total reserves. The existence of these factors would necessarily bring it within the literal wording of the definition of a life insurance company carried in section 201(a).
Respondent, however, points to the fact that petitioner is not subject to the insurance laws of the State of Illinois, is not required by those laws to maintain a reserve, and its business is in no way supervised*628 or controlled by the director of insurance of that state. He contends that the reserve as maintained by petitioner is a purely voluntary reserve not required by law and that the term "reserve funds," appearing in section 201(a) of the applicable acts, has the same meaning as the term "reserve funds required by law" as that term is used in section 203(a)(2) of those acts. He argues then that such reserve funds are limited to those required either by express statutory provision or by rules and regulations of the insurance department of a state, territory, or the District of Columbia when promulgated in the exercise of a power conferred by statute. Respondent's position is bases upon the express wording of his interpretation of sections 201 and 203 of the acts in question, by articles 201(a)-1 and 203(a)(2)-1 of his Regulations 86 and 94.
Petitioner argues that, although the regulations cited so construe sections 201(a) and 203(a)(2), such construction is unreasonable and arbitrary. It insists that the intent of Congress in enacting the cited sections was to tax companies carrying on a life insurance business and maintaining actuarial reserves to meet its life insurance risks when*629 such reserves are in excess of its other reserve funds. It is argued that the term "reserve funds required by law" is used to designate merely the particular type or character of reserve which is recognized as a life insurance reserve under the general law of insurance and that the actuarial reserve which it maintains complies with that requirement. It is urged that to hold otherwise is to deny petitioner the benefit of a provision of the Federal statutes merely on the ground that the state has not seen fit to apply certain regulations to it, even though its business and its reserves are identical in character and computed upon the same basis as other companies subject to state supervision and consequently granted that privilege.
The definition of a life insurance company as set out in section 201 (a) and the provision for computation of its tax liability as provided in section 203 of the applicable revenue acts were first carried in the *1018 Revenue Act of 1921. They have appeared with no material change in each revenue act since that time. The respondent's regulations construing these acts have been the same and have interpreted the language of those acts to have the*630 meaning to which he here gives effect in denying the petitioner classification as a life insurance company. Aside from the weight to be given this consistent administrative interpretation by reason of repeated reenactment of these sections, the regulations in question have received definite judicial approval. ; . The decisions of this Board have approved these regulations as a correct interpretation. ; . We hold that petitioner may not be classified as a life insurance company within the definition of section 201(a). The decision of this question concludes petitioner on the first issue.
Petitioner's contention on the third issue is that if not entitled to classification as a life insurance company it is entitled to classification as a mutual insurance company. This position has no merit. The characteristics of its organization are not those of a mutual insurance company. Its members*631 paid fixed and level premiums and not contributions to a reserve in which they had an interest and a right to participate beyond the specific insurance risk for which petitioner is obligated. It is apparent that they stand in relation to petitioner upon the same basis as that of a policyholder who obtains nothing more than insurance for his premium payment. The mere fact that the individual members of petitioner have some voice in the management of its business through an advisory committee selected from the membership certainly does not change that condition. .
Moreover, petitioner, if taxable as an insurance company, must come within the three general classes as set out in sections 201, 204, and 207 of the Revenue Acts of 1934 and 1936. We have held that petitioner is not within section 201, since it is not within the definition therein of a life insurance company. It is manifest that it does not come within section 207 as a mutual insurance company other than life, because that classification applies to companies engaged in an insurance business different in character from life insurance, *632 whereas petitioner is unquestionably engaged in the life insurance business, although not a life insurance company under section 201.
It necessarily follows that petitioner has been classified correctly by respondent and is taxable under section 204 as an insurance company other than life or mutual. This brings us to the question as to *1019 whether respondent, in computing gross income under that section, has committed error as petitioner contends.
In computing the deficiencies for each taxable year respondent has included in petitioner's gross income, premiums paid by its members for protection under a group policy of insurance issued by the Aetna Life Insurance Co. These premiums were collected by petitioner from its members and paid to that company. These premium collections were insufficient in each taxable year to meet the total cost of the group policy and the deficit was, by agreement, contributed by Swift & Co. Respondent also included this contribution in income of petitioner. The propriety of this action is the first branch of the fourth issue.
Petitioner assumed no liability whatever to its members under this group policy. It merely acted as agent*633 for them in contracting for the policy and collecting and transmitting to the Aetna Life Insurance Co. these collections in payment of the group premium. It is quite evident that the amounts collected by petitioner from its members and from Swift & Co., the premium on the group policy, did not constitute income to petitioner. It was only the agent or conduit through which these funds passed to the Aetna Life Insurance Co., which was the insurer. We hold that these amounts were improperly included by respondent in petitioner's gross income in each year. See ; .
Petitioner also contends, in this issue, that respondent has erroneously failed to compute unearned premiums under section 204(b)(5) and to deduct these in determining gross income under section 204(b)(1).
Respondent answers that there are in fact no unearned premiums held by petitioner; that the amount deducted each week from the pay of each member merely represented payment for protection during the preceding week. This position, we think, is untenable in view of the fact that petitioner's policies were*634 issued upon the level premium plan, the basis of which is that in the earlier policy years an excess premium is collected which exceeds the current cost of the insurance risk and is held or reserved against the period when, at an advanced age, such cost exceeds the premium payment.
Respondent argues, however, that petitioner does not actually maintain a reserve against its life insurance risks. But this contention can not be reconciled with the evidence. Not only has the testimony of competent and informed witnesses established the fact of the maintenance of the reserve, but it is shown that petitioner semiannually computed such reserve on the basis of the American Experience Table of Mortality, with interest added at the required rate and that the reserve held to meet its life insurance obligations was in *1020 the amount so computed. Respondent insists that the account on petitioner's books entitled "reserve" was no more than a surplus account, since it was composed of the excess of its total accumulated receipts over its expenditures in operation. We do not agree. It is not a surplus account but is definitely held for the protection of its insurance contracts. Respondent*635 overlooks the fact that petitioner is a nonstock company in which there are no distributions of profits and no necessity, therefore, to segregate and establish a true surplus account.
The increase in each of the taxable years in petitioner's actuarially computed reserve against its life insurance risks constitutes its unearned premiums. These increases have been found as facts. Petitioner is entitled to their deduction in each year in determining gross income and the computation of the net income upon which petitioner is taxable. .
Respondent's request for an increase in deficiencies asserted by his amended answer appears to be upon the theory that if under our decision the amount of the premiums collected by petitioner from its members, including the contribution of Swift & Co. for payment of the premium on the group policy issued by the Aetna Life Insurance Co., is eliminated from petitioner's income, there should be a proportionate decrease in the allowance for expenses of petitioner, upon the ground that some portion of these expenses is allocable to the servicing of that insurance and consequently does not*636 constitute an expense deductible by petitioner. Respondent has the burden on this issue. There is no evidence that the collection and payment of these funds to the Aetna Life Insurance Co. entailed any expense to petitioner over and above that regularly borne in connection with the business from which its income arises. Moreover, it may be that were there some expense to petitioner in connection with the group policy it would constitute a reasonable and necessary expense to petitioner and would be deductible as such. The group insurance in question was available only to petitioner's members and the right to participate under this policy gave an added value to such membership, reflected directly in a specific benefit to petitioner.
Decision will be entered under Rule 50.
Footnotes
*. Prior to October 22, 1942, this report was approved for promulgation. ↩
1. SEC. 275. PERIOD OF LIMITATION UPON ASSESSMENT AND COLLECTION.
Except as provided in section 276 -
(a) GENERAL RULE. - The amount of income taxes imposed by this title shall be assessed within three years after the return was filed, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period.
* * *
(c) OMISSION FROM GROSS INCOME. - If the taxpayer omits from gross income an amount properly includible therein which is in excess of 25 per centum of the amount of gross income stated in the return, the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time within 5 years after the return was filed.
* * * ↩
2. 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. ↩
3. SEC. 204. INSURANCE COMPANIES OTHER THAN LIFE OR MUTUAL.
* * *
(b) DEFINITION OF INCOME, ETC. - In the case of an insurance company subject to the tax imposed by this section -
(1) GROSS INCOME. - "Gross income" means the sum of (A) the combined gross amount earned during the taxable year, from investment income and from underwriting income as provided in this subsection, computed on the basis of the underwriting and investment exhibit of the annual statement approved by the National Convention of Insurance Commissioners, and (B) gain during the taxable year from the sale or other disposition of property, and (C) all other items constituting gross income under section 22;
(2) NET INCOME. - "Net income" means the gross income as defined in paragraph (1) of this subsection less the deductions allowed by subsection (c) of this section;
(3) INVESTMENT INCOME. - "Investment income" means the gross amount of income earned during the taxable year from interest, dividends, and rents, computed as follows:
To all interest, dividends and rents received during the taxable year, add interest, dividends and rents due and accrued at the end of the taxable year, and deduct all interest, dividends and rents due and accrued at the end of the preceding taxable year;
(4) UNDERWRITING INCOME. - "Underwriting income" means the premiums earned on insurance contracts during the taxable year less losses incurred and expenses incurred;
(5) PREMIUMS EARNED. - "Premiums earned on insurance contracts during the taxable year" means an amount computed as follows:
From the amount of gross premiums written on insurance contracts during the taxable year, deduct return premiums and premiums paid for reinsurance. To the result so obtained add unearned premiums on outstanding business at the end of the preceding taxable year and deduct unearned premiums on outstanding business at the end of the taxable year;
* * * ↩